Flotek Industries, Inc. (FTK)

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Flotek Industries Inc (FTK)

Q4 2007 Earnings Call

March 17, 2008 11:30 am ET

Executives

Jerry Dumas - Chairman and CEO

Lisa Meier - VP and CFO

Analysts

Joe Hill - Copia Capital

Thomas Escott - Pritchard Capital

Terese Fabian - Sidoti

Megan Bissell - Fig Partners

William Conroy - FMH Capital

Presentation

Operator

Good morning and welcome to the Flotek Industries Incorporated conference call. (Operator Instructions)

At this time, I would like to turn the conference call over to Mr. Jerry Dumas. Mr. Dumas, you may begin.

Jerry Dumas

Good morning, everybody. Thank you for joining us today. I want to remind everyone that this call may contain forward-looking statements about future financial results. Any actual results may differ materially as a result of factors that are outlined in our filings with the SEC.

Flotek delivered a strong performance in '07 and we had earned net income of $16.7 million or $0.88 per fully diluted during 2007 compared to $11.4 million or $0.61 per fully diluted share in '06. Our net income increased 47% and fully diluted earnings per share increased 45% in '07 versus '06. All amounts reflect a 2-for-1 split we completed in July of '07.

Our focus has been clearly on expanding sales and rentals, our proprietary technology-driven products. Because of this company-wide, we increased our gross profit margins from 41% in 2006 to 43% in 2007. Operating income margin remain constant at 19% in 2007 and 2006.

We generated total revenues of $158 million compared to $101 million in 2006 despite adverse weather and lower gas prices due to the lack of pipeline outlets in the Rocky Mountains. Our organic sales growth makes approximately 64% of our year-over-year growth. The acquisition of Triumph Drilling Tools, Sooner Energy Services and CAVO Drilling Motors made up the bounce.

The Chemicals and Logistics segment increased revenue 71% year-over-year of the result of 117% growth in our biodegradable, environmentally benign green chemical sales.

In the latter part of 2007, we completed our state-of-the-art research and development lab north of Houston in the Woodlands. This lab is directed by Dr. Kaufman who has had over 15 years of research, patent development and publication experience.

The company also signed a five-year agreement to build and operate a liquid chemical distribution facility for a major service company. And this construction of our liquids and chemical facility was completed during the fourth quarter of 2007 and is expected to double our throughput service revenue in '08.

The new liquid chemical distribution facility and our existing cement handling and blending facility will provide a broad range of blending and logistical services to our customer for cementing and stimulation products used offshore, in the Gulf of Mexico and along the entire Gulf Coast.

In September of '07, the company acquired Sooner Energy Services to establish a platform for expansion into production chemicals. Sooner develops, produces and distributes specialty chemical products and services for the drilling and production of natural gas. The Sooner acquisition contributed approximately $2 million in revenue in '07. Our plan for this firm is to move our bio-safe products from CESI to that organization.

Our drilling products revenues grew 55% year-over-year despite significantly drilling price competition. The acquisition of Triumph Drilling Tools and CAVO Drilling Motors contributed approximately $18 million in incremental revenue in 2007.

The focus in this segment is continued integration of business acquired, product line expansion and moving from sub-renting products to owning them to increase the profitability on those rentals. The acquisition of Teledrift in February of '08 will promote these core objectives.

Our artificial sales grew 11.7% year-over-year. Low gas prices and pipeline capacity constraints significantly reduced our coal bed methane production activity in the Powder River Basin in '07 versus '06. The opening of various pipelines in this region should promote higher activity levels in 2008.

Our corporate costs were $9.7 million in '07 versus $5.8 million in '06. The primary increase in this relates to the expansion of our accounting and the support personnel for our growing company, our IT initiatives, our IT equipment and IT personnel, as well as compensation expense for equity granted to officers, directors and employees.

At this time, I will turn the call back over to the operator for any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Joe Hill from Copia Capital. Please go ahead with your question or comment.

Joe Hill - Copia Capital

Good morning, Jerry.

Jerry Dumas

Good morning, Joe.

Joe Hill - Copia Capital

How are sales of the micro-emulsion tracking for the first quarter?

Jerry Dumas

Well, with exception of some heavy slow turns, we feel like we're tracking reasonably well.

Joe Hill - Copia Capital

Okay. And what is your outlook for pricing in the mud motors business for this year?

Jerry Dumas

At this point, we haven't run into a great deal of pricing pressure in the motors. The pricing pressure has been primarily on what I would call the dumb iron or the [main two] products. Interestingly enough, the pricing pressure is coming from some of our larger competitors. At this point, Flotek Downhole Tools is arguably one of the largest among the two others. And we've resisted pricing reductions, but there seems to be some pricing pressure out there. Let me restate, Joe, definitely some pricing pressure out there, but not in the motors.

Joe Hill - Copia Capital

But not in the motors, so can you give more specific as to what product categories or what tools are seeing the pressure?

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