Flotek Industries, Inc.

Greetings and welcome to Flowtech Industries' fourth 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 afternoon, everyone. Joining me today and participating on the call are John Gibson, Chairman, CEO, and President, Michael Borton, Chief Financial Officer, Cheng-Beng Coyd, President of Global Business, and Ryan Newell, President of Team 3 Technologies. On today's call, we'll first provide prepared remarks concerning our business and the results for the quarter and full year 2020. Following that, we will answer any questions you may have. This morning, we released our earnings announcement for the fourth quarter and full year 2020, 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 air and filing with the SEC. Also, please refer to the reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. With that, I will turn it over to John.

Thank you, Danielle, and good afternoon to everyone. Before we dive into the quarter and the year, I wanted to provide a quick operational update following last month's severe weather storm. The vast majority of our employees based in Texas, Oklahoma, and Louisiana were impacted by the storm, many without electricity and water for days, including myself. And it was truly a miserable experience for everyone that was impacted. We did sustain damage to several of our facilities. We were unable to access our headquarters for nearly a week. due to damage to our fire suppression system, which has subsequently been repaired. In addition, we've been impacted by the broad declarations of force majeure across the entire petrochemical supply chain. The first time we have seen such widespread impacts of this nature. As a result, there is a rising price environment and limited supplies of certain raw materials. We are fortunate to have trusted supplier relationships and a strong supply chain sourcing strategy, which will help us to continue to survive service to our important customers, and we are hopeful supply will begin to resume to a normal state in the coming weeks. This is a kind of a somber moment here. Before really discussing our results, I would like to give you an update on the board. I'm deeply saddened to report that Kevin Brown, a director who joined our board in June of 2020, following the accident of JP3, passed away unexpectedly in January. Kevin was a strong contributor to our board and to the Audit Committee, and I value his counsel and his insights, and he is missed. We express our deep condolences to Kevin's family and friends, and we mourn his loss together. Harsha Gadi was appointed to the Audit Committee to replace Kevin, and additionally, we just announced that our director, Michelle Adams, has notified the board she will not stand for re-elections as a result of existing time commitments outside of a flow tech board responsibility. Let me tell you, Michelle is a superstar. There's been a steadfast advisor to the board since 2017, including serving as compensation committee chair. She gave us wide counsel in matters of cloud-based technologies and the JP3 activities, compensation strategies, and business development methodologies. We are fortunate to be able to continue to work with Michelle for the next few months We will miss her presence in the boardroom. I truly believe her career is on a rocket ship, that she's incredibly talented, and I look forward to watching her continue to have great achievements. As a result of that, we have engaged Hydrocon Struggles to initiate a search process for new directors. We will keep you apprised of her progress. Additionally, we've created a new board committee, the Risk and Sustainability Committee. Last year, through our board assessment process, we identified the need to enhance our risk oversight to build a resilient and sustainable business. While financial risks are typically overseen by the Audit Committee, we have a much broader view of the risks we face as a company today and in the future to include human capital, ESG, cybersecurity, and sustainability. We are excited that the risk and sustainability ability committee is going to be chaired by our student director, Mike, which is going to be a really exciting time to work with Mike. As we look back at 2020 performance, I am inspired by the resilience of our people, our business, and the industries we serve. The challenges are extraordinary, but we remain focused and opportunistic in the face of the pandemic and an extremely volatile microenvironment. There's a transformational year for Ploy Tech for multiple reasons. I'm proud of the leadership team we've built, an innovative, accountable, and results-oriented team who is building Flowtech sustainably for the future. Second, we entered the digital transformation space with the acquisition of JP3, which further diversified our revenue stream and represents an excellent long-term growth opportunity. Third, early in the year, we made a quick and nimble decision to reduce our structural costs and improve our processes to run our business more efficiently. and to protect that liquidity. Fourth, we expanded our chemistry portfolio to include cleaning, disinfecting, and sanitizing product lines. Following our philanthropic efforts in the communities where we operate, through this business, we are utilizing our existing supply chain, existing personnel, existing facilities to generate margin accretive revenue. Through all of these actions, we increased our focus on our environmental, sustainability, and governance initiatives and culture. And we've prioritized our efforts to protect the environment, health, safety, and security of our operations through our goal of zero incidents. No one should ever go home injured. As a result of these initiatives, we've improved our adjusted EBITDA by more than $7 million year-over-year to a loss of $26 million despite revenue deplaning by more than half. Now, from a macro perspective, the energy industry faced an extraordinarily challenging year across the full hydrocarbon stream, between the all-price crash, COVID-19 demand disruption, and the resulting oversupply of hydrocarbons. Subsequently, capital budgets for domestic producers declined dramatically by more than 40% here in the year, according to a report by NRVS, and our customers prioritized their focus to accelerate the adjustment. More recently, we see added uncertainty domestically related to the administration's pleas on new drilling on federal land and water, along with the cancellation of the Keystone XL pipeline as a part of a new climate change initiative. However, we are seeing reasons for more optimistic outlook for the second half of 2021. As COVID-19 stay-at-home restrictions ease more broadly, vaccination adoption rates increase, and more businesses open. Although overall capital budgets are projected to remain flat, which is 2020, for some operators, activity is increasing from the lows of Q2 2020. The market around activity levels is one of our key strategies, and we are targeting EMTs with consistent programs through 2021 focused on producing the highest margination. Many of these producers have sustained spending throughout 2020. Additionally, food pricing continues to show signs of improvement from last quarter, with the U.S. Energy Information Administration revising its 2021 forecast to an average price of $61 per barrel for the year. While refinery utilization remains weak overall, rates have been steadily trending up since 2021, and one we anticipate will continue to improve as communities open around the world. We have seen broad signs of recovery in gasoline demand, according to the EIA. In mid-January, gasoline demand saw the largest one-week increase since June 2020, with demand just over 6% behind the five-year average. In the Middle East, amid optimism related to strengthening oil prices, we have seen increased demand for speciality, simulation chemicals, and opportunities for adoption of our digital technology. Coyote will cover that in a bit. Our energy chemistry business in particular had a very strong year in the Middle East with a 31% growth over 2019, and we intend to build on that foundation. As we look at the dance and market, we believe there's a permanent change occurring in the mindset of businesses and consumers that will create a continuous demand for professional chemistry firms. As the world begins to come back together for social interactions, increased travel and business events, we believe demand for cleaning and sanitizing supplies will remain high as business strengthens their protocols to reestablish trust with consumers while also maintaining vigilance against new variants of the coronavirus that are emerging. And finally, with increased business commitments related to ESG, we are well-positioned to partner with businesses seeking to improve their ESG performance. We do this by helping customers improve the safety, reliability, and efficiency of their operations. by increasing natural gas production through the energy transition and deploying digital real-time technologies that enable process and operational efficiencies, minimize waste, and reduce food processing. Furthermore, we offer greener chemistry alternatives to toxic chemicals used in parts of the energy production lifecycle today, and our solution helps reduce health and environmental risk. As you can see, we're excited to elevate our discussions about ESG, and we look forward to telling you more throughout the year. Now, if you look at the quarterly results, just briefly for the fourth quarter, as we discussed at the close of the last earnings call in November, we expected two-point earnings to be down as our chemistry technologies was impacted by the year-end capital budget in Boston, the impact of the resurgence of COVID-19 on business. EMT consolidation of softness of international activity, and the general view that leaving after Thanksgiving and coming back in the new year was the right direction. As those predictions played out, we generally performed in line with our expectations, with quarterly revenue and adjusted EBITDA slightly down from Q3. I'm pleased we saw sequential improvement in our data analytics segment in Q4 as we evolved our commercial model and executed on our sales strategy. 53 is monetizing new opportunities, and we remain excited about the growth ahead, particularly in international markets. We have achieved a significant milestone securing one of our first international pilots, which same day Floyd said to highlight his comment. Now, if we move on to liquidity and cost measures, we continue to take decisive actions guided by our strategic pillars to best position FlowTech for the future. Throughout the quarter, we continue to work with our suppliers to negotiate cost over all materials. renegotiate risk of leasing, and reduce the break-down. Protecting our balance sheet remains among our high priorities, and we have extensive options for evaluating and pursuing to bolster our financial flexibility. For additional details on the program, I'm going to turn it over to Faye Bain-Foy for further discussion of our data analytics segment. Then to Ryan Ewell, who will give us an update on the chemistry technology segment. And lastly, to Mike Gorton, who will provide a more in-depth discussion of the financial results. With that, I am pleased to turn it over to Sangbeng Boyd. Boyd. Thank you, John. In the past quarter, we've been focused on executing against our business strategy in the data analysis pattern. We continue to demonstrate the value we bring to our customers to meaningfully transform their businesses through real-time data and analysis. As a result of our efforts, we are pleased to deliver a 91.8% increase in revenue sequentially, which was driven by new sales in North America and maintenance and support services. In Q4, we also made progress on advancing our international market entry plan. As we discussed last quarter, we recently hired an executive based in the Middle East who's leading our international business development efforts. They're encouraged by the meaningful engagement and positive responses we are receiving in the Middle East, Africa, and Asia. Notably, we are pleased to announce that we have secured our first international pilot. We are a leading oil and gas company in the Middle East, which we have begun planning for deployment. We are rating our products and systems to meet the expectations and requirements for international deployment. We are making significant progress against key milestones. While international sales require longer lead times, penetration in this market is an important component to our growth strategy. We are pleased with the achievement of an important milestone and optimistic about our opportunities over the near to long term. During the quarter, we need software development enhancements by accelerating our artificial intelligence and machine learning capabilities. One of the first applications we were planning to launch in Q2 is the use of machine learning algorithms to further improve the time it takes to cut batches and hence further reduce the transmit. Transmix, by the way, is the natural mixing between adjacent batteries of different fuels being shipped in a common pipeline. Reprocessing or downgrading of products due to transmission is costly. Customers who implement our technology could potentially save millions through this reduction in transmission. Additionally, in the fourth quarter, we identified an opportunity to streamline our sampling process improve our operational efficiencies reduce cost to our customers and accelerate commissioning of our systems over the past years jpc has built a robust library with more than 30 000 hydrocarbon samples which are essential to the accuracy of our real fine hydrocarbon analysis given the expansiveness of our samples we do not need to collect many new samples As a result, we have streamlined our process so that we are sampling as needed rather than sampling to build up our library. The result is higher profitability and greater speed . Hence, we are making significant progress to sample less, i.e. no samples, or sample less, i.e. less samples. During the fourth quarter, we added a number of new customers in the U.S. and in Canada. While new customers generally would purchase the system to try out the technology, it will normally result in additional systems in the future once the technology is proven in their environment. One of the new customers we added in Q4 is one of the largest midstream companies here in the U.S., and since then, they have purchased four additional systems. I'm excited about our prospects for the future as we continue to enhance our offerings increase our efficiency in delivering our solutions while seeking new customers and markets. JPC technology is game-changing and helps our customers make more money and or increase the safety of their operations. We are headed in the right direction to grow this business. With that, I'm going to pass along the Paul DeLange is out to discuss our chemistry technology segment. Paul DeLange. Thanks, Roy. In discussing our chemistry technology segment's performance, I'll first provide highlights on our energy chemistry technologies, followed by highlights on our professional chemistries, which includes our newly launched EPA and FDA registered cleaning, disinfecting, and sanitizing product lines. 2020 has been a transformative year for our energy chemistry business, as we effectively drove down operational costs, renegotiated logistics and supplier contracts, and accelerated efficiency in our business processes. As a result, we have built a leaner business that can meet the needs of the oil and gas market of today and the future. During the fourth quarter, we began to reintroduce flow sector and market to elevate visibility of our enhanced value proposition that focuses our efforts on becoming the chemistry partner of choice in delivering operational cost efficiency and improved wealth production. We're refining our sales strategy to complement a range of domestic and international customers that include both EMP operators as well as oilfield service companies. Domestically, we are targeting a customer base with a sustainable activity and operational program, particularly an international shale market whose strategic objectives align with Flowtech's proven performance and value proposition of cost-effective chemistry solutions that can improve production at lower cost for barrel produce. In a recent example, Flowtech provided an independent operator a customized solution to boost traditional acid simulation results for wells being brought back online in Andrews County, Texas, using its proprietary reservoir-centric chemistry. In this remediation application, a 20% increase in production was achieved utilizing our customized chemistry with acid treatment versus just the acid treatment alone. Additionally, the 20% increase in production has been sustained through time when comparing it to the control case of sole acid. Execution of our value proposition proves to be not only economical by having a positive return on investment, but technically it demonstrates that customized chemistry can impact every single variable of the capital equation by increasing the efficacy of more traditional and repetitive applications that are being implemented to raise production cases to mitigate decline in this particular field. The complementary charge of message strategies our energy chemistry business continues to focus on international growth opportunities, which are driving upside in the business, particularly in the Middle East. We mentioned last quarter that we were named the chemistry partner of choice in the Middle East to provide a broad range of full-tuning stimulation additives to amaze the NOC through partnership with in-market international service companies. And while we are in a multi-stage process, we are excited to see the growth in the Middle East evolve from this opportunity. Our international business is more than 25% of our current chemistry sales, and we continue to see significant growth opportunities there. Now, lastly, as John touched upon, we're focused on accelerating our ESG solutions for customer efficacy and profitability. Since 2011, Flowtech has utilized its green set chemistry scorecard to evaluate, track, and report our ESG profile and impact of products. Our patented chemistries are built upon highly effective, plant-based solvent offering safer, sustainable alternatives to toxic chemicals made from products containing benzene, toluene, ethylbenzene, and xylene, commonly referred to as BTEX compounds. These compounds are very harmful to people, soil, and groundwater, and our greener chemistry solutions mean a safer environment for our employees, customers, and the community. We see a strong market opportunity to deliver cost-effective, environmentally-friendly, safer chemistry solutions that will diversify our product portfolio while helping operators increase production at a lower cost per barrel. Now, moving to our professional chemistry product line, I want to take a moment to reflect on what we have seen and what has been accomplished at a rapid pace. In the second quarter of 2020, we launched Lotex's line of FDA quality and sanitizers for industrial and consumer applications, which has now been expanded to more than 10, differentiated products in the janitorial and sanitizing sector, thus diversifying our corporate revenue stream into a rejuvenated high-growth potential market. And by leveraging our chemical production capabilities and ISO certified facilities, we applied our world-class R&D footprint to deliver an expanding line of high-quality FDA and EPA registered products that are a natural extension of our chemistry technology portfolio. And today, I'm pleased to report on three important milestones for our professional chemistry product line. The first being is a newly executed strategic agreement with a major global manufacturer of specialty and intermediate chemicals. After an extensive evaluation and audit process, Float Tech has been approved to produce and package EPA encoded enlist registered disinfectants and wipes as one of a select group of sub-registers. This agreement also enables Float Tech to build upon EPA-approved formulations as part of this innovation pipeline. Secondly, we've invested in building our channel to market to establish a long-term sustainable business strategy by partnering with the strategic advisor and former Clorox executive Matt Laszlo. Matt brings more than 25 years of experience and has served in senior business, sales, and marketing roles across consumer, commercial, retail, e-commerce, and industrial markets for us. His insights are helping us to accelerate our loans and leverage our strengths as we build our business for the long term. And lastly, in the fourth quarter, we're pleased to announce the launch of our new professional chemistry brand, Flowtech Protocol, which includes a robust line of surface cleaners, wipes, disinfectants, green degreasers, and sanitizers that are manufactured and produced in the USA and focus on applications of our proprietary green chemistry to the Janssen world. We invite you to visit our website and explore our new product offerings. In closing, we are pleased that the transformation of our chemistry technology business is taking hold, and we're improving the efficiency of the business as we meet the new needs of our customers. Now, I'll turn the call over to Mike Hilton to discuss our financial results. Thank you, Ryan. As John mentioned previously, our fourth quarter is generally aligned with our expectations despite the difficult market environment in the third quarter. In Q4, we faced challenges of over demanding industry pressures impacting both segments. Still, our losses handled from last year as we manage our business more efficiently and focus on new ways to create, diversify, and grow popular revenue streams. First of all, I'd like to address the fourth quarter impairment in the chemistry technology segment. We reported a loss of 9.4 million for the amended propane agreement due to adjustments in the company's expected usage of terpene. The terpene being purchased is related to a take-for-pay contract that was part of the 2018 investor reported chemical company to ABM. The earnings per share impact associated with the 13 entries is a loss of $0.16 per diluted share and a total loss of $0.30 per diluted share. Now, let's go through the income statement in more detail. During the fourth quarter, consolidated revenue was $12.1 million, down 5% to $12.7 million in the third quarter, and below the $19.5 million of revenue during the same period last year. The decline that we saw in the fourth quarter was primarily driven by the volatility of the microenvironment for U.S. on-church loans and completion activities. which is impacted by political and economic events in foreign markets, as well as product mix in the chemistry technology segment. By segment, we saw a 10% decline in revenue sequentially from the chemistry technology segment to 10.8 million, which is close to 19.5 million in revenue in the fourth quarter of last year. The decline was largely due to the typical fourth quarter seasonality on lower activity levels year-over-year as a result of ongoing market volatility. The data analytics segment saw a 90, 1.8% increase in sales sequentially driven by an increase in new product sales in North America. Consolidated operating expenses for 24.3 million in the fourth quarter of 2020 is 17.4% decline sequentially and decreased 42.6% from last year's level of 42.4 million in the fourth quarter. Corporate G&A declined 5.2 million to 3.7 million $9 million in the fourth quarter last year to a reduction in overall completion, compensation spending, lower discretionary spending, including professional fees, partially offset by 1.97 charges and discretionary bonuses. Corporate expenses were higher for 20.3% in accrual for discretionary bonus payments which impacted adjusted EPS by less than one cent for deletion. Our depreciation and amortization expenses declined 1.8 million to approximately $235,000 in the fourth quarter versus $2 million last year. Research and development costs were $1.5 million in the fourth quarter, generally in line with the third quarter and down from $2.2 million from last year. We reported a loss in operations of $17.7 million, or $0.30 loss per share in the fourth quarter of 2020. A sharp improvement in the loss of $36.9 million, or $0.64 loss per share last year. Our adjusted EBITDA for the fourth quarter is a loss of 6.8 million, which is notably better than last year's fourth quarter loss of 8.5. The improvement in adjusted EBITDA is primarily due to lower operating expenses driven by headcount adjustment. As we look into 2021, our goal is to maximize stock efficiencies, grow our top line, and securing the necessary working capital to execute our growth strategy. In doing so, we intend to execute our Opportunities to grow our energy-focused products and services internationally. Increased domestic market share of our price as the energy market is covering the latter half of 2021 and expand our green chemistry and ESG-related product offerings. Now, let's move on to the balance sheet performance. Our cash position remains healthy. We are focused on preserving our liquidity. At the end of the fourth quarter, we had cash for $38.7 million versus $49.2 million in the third quarter. to bridge that decline to the four key factors that impacted our cash provision. Operating losses, a $2.5 million earned off the division related to the acquisition of J3. Capital improvements related to our packaging and bottling equipment for our chemistry technology segment, as well as . The company had a combined $5.7 million of loans outstanding pursuant to the paid check protection program related to the CARES Act. We called out that one of our priorities was to better manage our inventory position and reduce our fees by 35%. We have taken a small further reduction this quarter and continue to expect that speed reduction will result in an annual savings between 1.1 to 1.3 million range and inventory in the top. At this point, I will pass the call back to John for his final remarks. Thank you, Mike. Around this time last year, I shared with you that I would only take the bonus in 2020 if the company achieved break-even or better. We did not. While I certainly could not have fathomed the events that would lie ahead when I made that commitment, it did not change our ambitions or the goal. As a result, I declined the bonus in keeping with my promise. Make no mistake, while we didn't achieve the outcome we set our sights on in 2020, I'm very pleased with the 2020 accomplishments and the year-over-year improvement in adjusted EBITDA in spite of lower revenue levels. And I'm very grateful to have the support of our board and our management team and our employees, and particularly the board who recognized my leadership and our achievements in the face of this most challenging circumstances I've ever experienced in my career. On January 6th, I celebrated my one-year anniversary with Flowtech, and While I'm optimistic by nature, I will admit that there were times when my optimism wavered, but it was fleeting because no sooner did a challenge arise than an opportunity presented itself. I cannot tell you how grateful I am for our customers who have entrusted us to support them through this unprecedented year, as well as my deep appreciation for the support I received from our shareholders, many of whom have opened doors and resources for us as we've begun our business transformation. It was our employees who inspired me daily with their courage, ingenuity, and skill. Most importantly, I will always cherish the calls and emails of encouragement that came in at just the right moment. Thank you, guys. With that, I'd like to open it up to questions.