Flotek Industries, Inc. (FTK) Earnings Call Transcript & Summary

Greetings, and welcome to Flotek Industries 2021 Annual Meeting of Shareholders. Our host for today's call is John Gibson, Flotek's Chairman, CEO and President. [Operator Instructions] I'll now turn the call over to your host, Mr. Gibson.

Well, thank you, and good morning, everyone. It's my pleasure to welcome you to the Flotek 2021 Annual Meeting of Shareholders. We've chosen to have our annual meeting entirely virtual this year in light of the virus, even though the infection numbers and official guidelines are encouraging. While we are virtual this year, we do welcome questions from our shareholders. So we will be having a Q&A portion. You can submit your questions through the text box located on your screen. I want to take the opportunity to introduce the Flotek Board of Directors, who are participating in our meeting today. In addition to myself, the members of our Board present are Harsha Agadi, former CEO of Crawford & Company; Ted Brown, CEO of Confluence Resources; Mike Fucci, Former Chairman of Deloitte USA; Paul Hobby, CEO of Genesis Park; and David Nierenberg, the President of Nierenberg Investment Management Company and our Lead Independent Director. All of our directors are standing for election this year other than Michelle Adams. Michelle let us know earlier this year that due to other demands on her time, as she's working on an IPO, she preferred not to stand for election to the Board for the coming year. On behalf of the Board and the company would like to thank Michelle for her hard work and service, especially for tenure as Chair of the compensation committee. With Michelle's departure, we've undertaken a search prioritizing gender diversity, financial acumen, digital transformation and executive experience plus chemistry with our existing directors. We've had the opportunity to meet with some great candidates, and I'm hopeful that we'll be able to announce a new director shortly after today's meeting. The members of our executive team are also with us today. They are Danielle Allen, Senior Vice President and Chief of Staff; Nick Bigney, Senior Vice President, General Counsel and Chief Compliance Officer; Michael Borton, CFO; Ryan Ezell, President of Chemistry Technologies; TengBeng Koid, President of Data Analytics; and James Silas, Senior Vice President, Research and Development. Finally, we have representatives of BDO, our independent public accounting firm for 2020 on the line as well. Welcome, BDO. We will call the meeting to order shortly, but before that I'd like to review the past year and talk about our direction. I'll probably have a few forward-looking statements. And as usual, please be reminded that actual results can differ materially, and you should review our filings with the SEC for factors that cause results to differ from our projections. Now with that said, 2020 was a year not to repeat. It was difficult, not just in economic terms, but in human terms. More than 550,000 lives were lost to the virus in just the United States, and many of them alone without loved ones. This has been a terrible tragedy, and we may be just beginning to understand the impacts to both humanity and business. The lesson that was reinforced for so many of us was that the only real choice in the face of such a crisis is to endure and adapt. As a company, I feel we've done that. When we set our ambitions for 2020 before the virus, we focused on achieving breakeven results, but we could not have fathomed the events that would lie ahead. I promised that I would not take a bonus for 2020 unless we reach breakeven results. And in keeping with that promise, I've declined any bonus and received no additional equity beyond my contract and shares I purchased in 2020. Still, even with the unprecedented challenging, we ended 2020, improving our adjusted EBITDA by more than $7 million compared to 2019, despite revenue declining by more than half. This was a minor victory in an environment with reduced oil and gas demand due to the virus and economic and political volatility. And importantly, we never compromised on safety, which is about lives more than numbers. Zero injuries is the only safety record that will satisfy us. It's about people. In any period of disruption, such as we saw last year, the challenges bring opportunity, and we are excited about our future. However, as the market shifts and recovers, market consolidation has accelerated and that does put us at risk of losing customers or delaying planned activity. Two of our most significant customers have changed ownership during Q2. Having spent the whole of my career in the energy industry, I've consistently observed a pause in activity while integration occurs, sometimes as long as 6 to 12 months, as companies assess combined resources, integrate cultures, choose leadership and evaluate which vendors to retain and which to release. But I am optimistic by nature. I came to Flotek with an over-the-top enthusiasm to turn the company around. And while the confluence of changes presented in 2020 could shatter most anybody's optimism, it gave us time to change. We are emerging from the virus focused on ESG Solutions supported by digital and green chemistry. I am very grateful to our shareholders, our employees and our Board for their contributions through these challenging times. Our emphasis for the rest of 2021 will be executing our recovery strategy and growing our business. Our vision is to create solutions to reduce the environmental impact of energy on air, water, land and people. As I've talked with customers, shareholders and CEOs of other companies, the need for sustainable, environmentally friendly solutions to meet today's energy challenges is ever apparent. We provide products and services that help improve the efficiency and reduce the environmental impact of our customers' operations. And we intend to continue developing and offering solutions that enable our customers to quantify and achieve their ESG goals. We will continue to make a difference for our customers and the environment in 2021. Well, I will now move to the formal business items for the annual meeting. I'll now call the meeting to order. We will first present the 3 proposals submitted for approval, and then we'll open the voting and take questions. Nick is acting as our secretary and inspector of the election for the meeting. Nick, can you please describe the meeting notice and quorum requirements?

Thanks, John. This meeting is being held pursuant to a notice mailed on or about April 22, 2021, to each stockholder of record at the close of business at April 8, 2021. As of that date, we had 72,685,562 shares outstanding. Today, we have stockholders representing more than 54% of our shares in person or by proxy. The bylaws require a majority of our shares to be present. So we do have a quorum today, and the meeting can proceed to transact business. Our proxy statement, annual report and shareholder list are available for inspection on the virtual platform as well.

Well, thanks, Nick. Now we will consider the 3 business items on the agenda. Item 1 is a proposal to elect 6 directors to serve until the next annual meeting of shareholders, which I hope it's in person. The Board of Directors recommends voting for each of the candidates. Item 2 on the agenda is an advisory proposal to approve the compensation of our named executive officers as described in the proxy statement. The Board recommends voting in favor of this proposal as well. Item 3 on the agenda is approval of the amendment to the company's 2018 long-term incentive plan as described in the proxy statement. The Board recommends voting in favor of this proposal. If there are no other items on the agenda or properly brought before the meeting today, the polls are now open. If you haven't previously voted online, please do so at this time. We will do a brief Q&A session, after which I will close the polls, and Nick will report the preliminary results. [Voting]

So let me now turn it to Danielle to take any of the questions. And remember, you can put the questions in on the bottom of your screen, if you'd like to submit. Danielle?

John, we have received a couple of questions. The first question, as you mentioned, market consolidation. Can you specifically talk about how that's impacting Q2 and the remainder of the year for Flotek?

Let's see if I can follow-up on that, Danielle. The acquisition of 2 of our key customers is going to impact our current forecast for the remainder of the year. And that said, I believe it will catalyze our shift to ESG, and that is our future. We believe that we will create a lot stronger demand for the ESG Solutions, and it will provide better margins. So I'm glad that it's catalyzing us to really get out and sell where we're going instead of trying to stay on the path we were on.

Okay. Thank you. The next question is, what more can you tell us about the international opportunities for JP3 and Chemistry?

Well, I really look forward to communicating to our shareholders the Verax international release schedule as soon as the supply chain uncertainty normalizes, which we expect to happen in the next couple of months. We've got a really good pipeline of opportunity internationally from our Data Analytics team, and it is completing that international version and getting it shipped. And I look forward to giving you some schedule on that as we go forward. We also need to outline the metrics that we're going to share with the Board and our shareholders on the conversion over to ESG with our current products and really focusing on helping our customers achieve their sustainability goals. And so we'll need to announce that as well, that's both domestically and internationally. We're finding really strong interest in this in the international market as well.

So good segue for the third question we received here. As I said, this year, we are hearing a lot about ESG in the market, and the company is clearly repositioning itself to an ESG Solution company. Why do you believe now is the right time?