Good morning and welcome to the Flotek Industries Inc. First-Quarter 2014 earnings conference call. (Operator Instructions) This conference is being recorded. At this time I would like to turn the conference over to Mr. Rob Schmitz Vice President and Corporate Controller for Flotek Industries. Mr. Schmitz you may begin..

Thank you and good morning. Today's call is being webcast and a replay will be available on Flotek's website. Our earnings and operational update press release as well as our quarterly report with the US Securities and Exchange Commission were filed and distributed last evening and are also available on the Flotek website.

Before we begin our formal remarks, I wish to remind everyone participating in this call, listening to the replay, or reading a transcript of this call, of the following.

Some of our comments made during this teleconference may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. And other applicable statutes reflecting Flotek's views about future events and their potential impact on performance.

Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements on this call.

These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the US Securities and Exchange Commission. Now I would like to introduce Mr.

John Chisholm, Flotek's Chairman of the Board, President and Chief Executive Officer..

Rob thank you. I would also like to welcome each of you to Flotek's First-Quarter 2014 conference call. We are glad you are here.

With me today are Rich Walton, Flotek's Chief Financial Officer; Steve Reeves, Executive Vice President of Operations, Chris Edmonds, our Senior Director of Corporate Finance and Strategy; Josh Snively, Executive Vice President of Research and Innovation and President of Florida Chemical; and you just heard from Rob Schmitz, Flotek’s Vice President and Corporate Controller.

Last evening, we filed our quarterly report with the US Securities and Exchange Commission. I won't take your valuable time to regurgitate those filings. We will provide a summary of the results, attempt to add some color regarding current operations as well as a sense of our future, and then be happy to answer your questions.

However, before doing so, a couple of overarching comments. Since we last visited to discuss our year-end results, Flotek has expanded its presence and enhanced oil recovery with the closing of two acquisitions.

First about the time of our year-end earnings call, Flotek completed the acquisition of Eclipse IOR Services or EOGA, a leader in polymer injection technology in enhanced oil recovery and a pioneer in EOR chemistry. Under the leadership of Jay Portwood, EOGA has already had an impact for Flotek's presence in the EOR community and on Flotek's results.

Not only is Jay continuing to see growth in the company's polymer systems in the United States, EOGA's business is rapidly growing in Canada. In addition, opportunities in South America are also accelerating with the company currently operating its first job in Columbia.

In addition, Jay is an advanced planning for use of our polymer conformance technologies in the Middle East including potential projects in Oman. We cannot be more pleased with the integration of EOGA into the Flotek family, and are looking forward to the value Jay and his team can add for Flotek's shareholders.

More recently we announced the closing of our acquisition of SiteLark, LLC, a Dallas-based petroleum reservoir modeling firm. Led by Dee Biswas, SiteLark has become a key player in the reservoir modeling in conventional and unconventional reservoirs. And as importantly, an enhanced oil recovery project design and evaluation.

We were introduced to Dee and SiteLark by Jay Portwood who through EOGA has partnered with Dee on a number of EOR projects. Providing Jay with key reservoir modeling services that have led innovative EOR project designs that's helped expand EOGA's reach.

We believe combining EOGA with SiteLark inside of Flotek will continue to build on our goal of creating a leading EOR services firm. Offering a broad spectrum of EOR services from design to evaluation, including best-in-class execution and chemistry technologies to maximize returns from EOR projects.

While not large in scale, this acquisition has the potential to be very large in scope and to the future of Flotek. Dee's expertise in modeling and reservoir evaluation not only fits with our EOR focus but also has important application in our primary completion efforts.

We believe Dee and his team will have an immediate impact on Flotek's performance. In fact, he already has had an impact as Dee's expertise on display with Flotek at a recent EOR conference in Tulsa, led to a number of new opportunities from Flotek's EOR team. We welcome Dee and SiteLark to the expanding Flotek family.

In addition, we most recently announced the acquisition of certain intellectual property from Tony Rea and ARC Fluid Technologies.

Tony, a preeminent innovator of drilling fluid systems, pioneered the use of Flotek's patented CnF chemistry in drilling fluid systems which allow for the use of water-based drilling muds in projects which formerly required oil-based muds.

In addition to the intellectual property, Tony has agreed to work side-by-side with Flotek in building awareness of this transformational technology which not only addresses a number of challenges in unconventional drilling programs but also improves efficiency and reduces the environmental impact of drilling in many drilling programs.

We also welcome Tony to the Flotek team and look forward to extending the reach of our cutting edge Complex nano-Fluid chemical technologies across the lifecycle of the well. As we noted last night, Flotek posted revenue of $102.6 million for the quarter ended March 31, 2014.

Quite simply, that is a record quarterly revenue for Flotek and is the direct result of the effort and determination of every member of the Flotek team. Moreover, for the first time in Flotek's history, we posted two consecutive quarters of $100 million plus in revenue, a trend we expect to continue and grow in the coming quarters.

Moreover, we not only work harder, we continue to work smarter. In 2014, we are on track to generate over $800,000 of revenue per employee, nearly double that Flotek produced for employee in 2008.

That impressive statistic is not only the result of better overall efficiency in Flotek facilities, but more importantly the result of hard work and dedication of Flotek employees that believe as a team we can create unique value for Flotek shareholders.

I do not believe that it is a coincidence that efficiency improvement has incurred at the same time that ownership of Flotek shares has increased among our team. Today, nearly 50% of Flotek employees are also Flotek shareholders. And that number continues to grow.

I'm very proud of the fact that the Flotek team believes enough in the Flotek vision to invest in our company. I truly believe that while our stock compensation expense may be slightly higher and ahead of our peers, its unique investment in the hands of so many of our team members directly and positively impacts our productivity.

And as a result, your returns. In short, I'm incredibly proud of the contribution each and every employee has made to the Flotek Renaissance. Our team is motivated by their drive to be best-in-class in everything we do.

Our focus on growing our business in a sustainable, efficient way, and an acute desire to provide the best returns possible for our shareholders.

Finally, I'm pleased with the fact that Flotek has accelerated its reporting schedule and is reporting its quarterly results including the filing of our 10-Q with the FCC nearly three weeks ahead of previous years. The commitment of our financial team led by Rich Walton and Rob Schmitz has worked nonstop to meet our reporting schedule.

Moreover, our investment in best-in-class financial and accounting systems has allowed us to have near real-time access to data, providing better and more timely financial reports but also serving as a resource for our sales and service personnel in the field to be more responsive and better serve our customers.

These are significant events and milestones for Flotek and show the continued evolution of your company. They also lead me to be more enthusiastic about our future than ever before.

While I'm pleased with our efforts to date, as I've said three months ago, Flotek is not willing to rest comfortably in the past, but rather your company will strive to reach for a future where our industry-leading innovation can create more value each and every day for all of our stakeholders.

As I've said on each call since I took the helm now over four years ago, it continues to be my privilege to serve as President of your company.

I remain immensely proud and humble by the commitment and support of members of the Flotek team that believe as a group, it could make a difference for the future of Flotek and believed in our vision to restore stability and growth to the company and continue to be enthused that through the efforts of our people, the future is filled with opportunities to create value for our shareholders.

With that, I'd like to turn the call over to Rich Walton, to review our first-quarter financial highlights and provide some additional color on certain financial issues.

Rich?.

John, thank you. As John mentioned, Flotek filed its quarterly report on Form 10-Q for the quarter ended March 31, 2014 with the US Securities and Exchange Commission yesterday afternoon. Flotek reported that revenue for the quarter ended March 31, 2014 was $102.6 million compared to $78.2 million for the quarter ended March 31, 2013.

Consolidated revenue for the three months ended March 31, 2014 increased $24.3 million or 31.1% relative to the comparable period of 2013. The increase in revenue was primarily due to the acquisitions of Florida Chemical in May of 2013, and EOGA on January 1, 2014. These acquisitions contributed incremental revenue of $16.8 million during the quarter.

Excluding the impact of acquisitions, revenue for the quarter ended March 31, 2014 increased by $7.5 million or 9.6%. For the quarter ended March 31, 2014, the company reported net income of $12 million or $0.22 per share on a fully diluted basis.

Compared to net income of $7.8 million, or $0.15 per share on a fully diluted basis for the quarter ended March 31, 2013. Earnings before interest, taxes, depreciation and amortization or EBITDA for the quarter ended March 31, 2014 was $23.1 million compared to $15.5 million for the quarter ended March 31, 2013.

Back compensation expense for the quarter ended March 31, 2014 totaled $2.3 million compared to $2.2 million dollars for the quarter ended March 31, 2013. For the first quarter of 2014, nonstock compensation expense represented approximately 10.8% of total selling, general and administrative expense.

SG&A for the quarter increased by $3.6 million dollars or 19.7% compared to the same period of 2013. Excluding the incremental SG&A cost of acquired companies, SG&A cost increased $1.2 million or 6.7% compared to the same period of 2013.

While overall dollars of SG&A increased as a percentage of revenue, SG&A declined from 23% to 21% in the first quarter of 2014 when compared to the first-quarter of 2013. The copy recorded an income tax provision of $6.4 million reflecting an effective tax rate of 34.7% for the three months ended March 31, 2014.

Compared to an income tax provision of $4.2 million reflecting an effective tax rate of 35.3% for the comparable period in 2013. Accounts Receivable at March 31, 2014 were $65.9 million compared to $65 million as of December 31, 2013. The companies allowance for doubtful accounts was 1.4% at March 31, 2014.

Flotek continues to generate strong operating cash flows. During the first quarter of 2014, the company generated $15.5 million of operating cash flow, an amount in excess of $1 million dollars per week.

During the first three months of 2014 the company invested $5.3 million in the cash portion of the acquisition cost for EOGA and spent $4.1 million on capital expenditures. In addition, the company reduced its outstanding debt by $7.1 million. We expect further reductions in outstanding debt from cash flows throughout the balance of the year.

Now I would like to turn the call over to Steve Reeves to discuss recent operating trends.

Steve?.

Rich, thank you. As noted earlier, consolidated revenue for the three months ended March 31, 2014 was $102.6 million compared to $78.2 million for the three months ended March 31, 2013. First-quarter enterprise wide gross margins equal 42.6% compared to 41.7% in the first-quarter of 2013 and 39.5% in the fourth-quarter of last year.

EBITDA margins for the quarter were 22.5% compared to 19.8% in last year's first-quarter and 21.7% in the fourth-quarter of 2013. Energy chemical technology revenue in the first quarter was $62.4 million an increase of $17.7 million or 39.7% compared to last year and 9.6% above fourth-quarter levels.

Quarterly gross margins in the segment were 46.8% compared to 42.8% a year ago, and 47.4% in the fourth quarter. Sales of CnF chemistry continue to grow in the quarter both domestically and internationally. A result of our continued marketing efforts and growing adoption of specially in key domestic basins.

In the US, we continue to see solid growth in South Texas with new customers adopting Flotek's CnF completion chemistries as well as new opportunities in both West Texas and the mid-continent. In addition, use in the Rockies remains robust and has recovered from disruptions from flooding in the second half of last year.

In Canada, the first-quarter saw a significant increase in the number of customers adopting CnF completion chemistries. A trend the company believes will continue. Resulting in volume growth at the conclusion of the spring break-up season. The Canadian thaw, as typically the case, will have an impact on April and early May revenues in Canada.

Internationally, Flotek continues to make progress on several fronts. CnF completion chemistry sales into Argentina, increased consistently in the quarter. Our Middle Eastern initiatives continue to yield steady results with opportunities in Oman, the United Arab Emirates and Saudi Arabia continuing to grow.

Of special note, through our major service company partners, we have seen meaningful growth in multiple chemistry sales including CnF completion chemistries in the Saudi Aramco.

Our international markets continue to contribute to overall chemical sales including Mexico, the Netherlands and Turkey with additional opportunities in those nations as well as Guatemala, Ecuador, and elsewhere in Latin and South America, the Middle East and Europe.

As John mentioned earlier, the closing of the EOGA acquisition has also provided tangible benefits to our EOR and chemistry business. A trend we expect will accelerate throughout the year.

We believe we will be able to leverage the expertise of both EOGA and SiteLark to increase not only EOR revenues but also revenues in our core chemistry business over time. While commercial growth is good, profitable growth is even better. And energy chemistry technologies margins remain strong in the quarter. The result of a trio of items.

Continued increases in CnF chemistry sales, the benefits of efficiency improvements at our Marlow, Oklahoma chemical manufacturing and blending facility, and supply chain improvements as a result of last year's acquisition of Florida Chemical.

We believe chemistry margins should remain strong in the coming months but can fluctuate as a result of product mix. As we have noted before, we are focused on building both debt and breadth in our chemistry offerings.

As such, we will continue to market and introduce products that are complementary to our core CnF chemistries that may carry slightly lower margin than our hallmark products. However, the overall impact of additional products and revenues should also lead results in more robust client relationships. Ultimately leading to additional CnF market share.

The consumer and industrial chemical technology segment or CICT was born in the second quarter of 2013 with the acquisition of Florida Chemical. Segment revenues in the first quarter were $13 million. CICT gross margin for the three months ended March 31, 2014 contributed $4 million.

Gross margin for the quarter was favorably impacted by proportionally higher sales of high-margin flavor and fragrant afterwards. Sequentially, CICT revenue for the quarter decreased $1.9 million, or 12.9%. Gross margin for the quarter increased to 31% up from 22.6% for the prior quarter.

Drilling technologies revenue for the quarter totaled $24.9 million. Down $4 million relative to the same period in 2013. Drilling technologies gross margin for the quarter was 39.3%. An increase from 39.2% compared to the same period 2013.

Gross margin percentage increased due to the right cost control including lower employees, supplies and travel expenses in the first quarter of 2014. Sequentially, margins improved significantly from 32.6% in the fourth quarter.

As noted, several weeks ago, the decline in revenue is partly the result of a decline in Teledrift rentals in the mid-continent and southern regions due to seasonal weather patterns and transient employee, employment, and logistics issues. Both regions regained momentum in the latter part of the quarter and are continuing to show strength.

Internationally, Teledrift continues to gain traction with key class. Revenues from Saudi Aramco continue at record levels with additional growth expected throughout the year. While seasonal weakness in Argentina had an impact, we continue to experience new opportunities in Kazakhstan.

In the Middle East, a number of new opportunities are developing including new tools headed to Iraq which should be working in the coming months. Flotek's expects Teledrift to continue to post international growth throughout the balance of the year.

In addition, although the Stemulator agitation tool experienced the slower than expected start in January, rentals ended the quarter strong with March providing the strongest monthly rental revenue to date. A trend Flotek expects to continue in the second quarter. The company continues to tweak the Stemulator design to ensure optimal performance.

For example, Flotek recently adjusted the pulsing frequence in the tool to minimize interference with signals from directional drilling technologies.

Additionally, in the mid-continent, the company is currently running its largest single customer job with the Stemulator and if it's successful, expects significant growth in the region beginning in the late second quarter, or in the second half of the year.

While increased competition presents challenges in many basins, Flotek continues to experience growth in the Permian basin and is seeking new opportunities in the Eagle perm and mid-continent regions with Rockies activity remaining stable.

More important, drilling technology margins were strong in the quarter, a metric on which the company remains focused. As noted on our year-end call, we made a decision late last year to more formally reposition our Artificial Lift segment.

At the time we announced the appointment of David McMahon, a professional with two decades of experience in the business with a major integrated service company to lead the transition to a new platform focused on added value production technology.

As a result of David's efforts and internal planning, we are recasting the segment as Production Technologies. A name we believe better defines the future of our business. We are looking at a number of strategic growth opportunities both intrinsic and extrinsic. As a result, our quarterly results are likely to be somewhat variable in the coming months.

However, we believe the future is bright with David at the helm. Revenue for the Production Technology segment for the quarter was $2.3 million. A decrease of $2.4 million compared to the same period in 2013. International valve sales decreased year-over-year due to a contract fulfilled in the first quarter of 2013.

Electrical submersible pump sales have also decreased as a result of continued decline in coalbed methane activity. These decreases were partially offset by increases in revenue with linear lifts systems and rod valve sales in the Powder River and Williston basins, unconventional oil markets.

While we remain vigilant in our careful watch of commodity prices and drilling activity, we believe we are well-positioned to continue to gain market share across segment and across geographies in the months ahead. With that, I'd like to turn the call back to John Chisholm.

John?.

Steve, thank you very much. Before we take questions I'd like to add a couple of concluding thoughts. Last quarter, I spent a portion of these comments discussing our commitment to research and specifically how our applied research addresses specific challenges and specifically the efficacy of CnF chemistry in the Bakken.

As noted then, while we've had success with CnF in many Bakken wells, we also found that some Bakken completions aren't as responsive to CnF chemistry as similar completions in other basins.

As we've said, there could be a variety of reasons for the wide range of results in the Bakken including rock type, water saturation, reaction to certain demulsifiers, frac design, or actually a number of other valuables.

Since that time, our world-class chemistry team has worked tirelessly with our clients to understand the challenges and address them with new formulations that take into account a number of unique Bakken attributes.

While we still have validation were to complete it appears the use of these new formulations should further crack the stimulation code unique to the Bakken.

In short, our intense commitment to both molecular and practical chemistry, our deep partnerships with our clients and our quest to provide the best chemistry solutions available, will in short order provide a new level of completion efficacy for Williston basin wells. Something we believe in time will become the standard there of Bakken producers.

The key measure of the productivity of our research team is the development of intellectual property. For the first time in Flotek's history, the company has established an internal patent committee to streamline the invention and application process. Flotek researchers are working on multiple unique patent applications which should be filed in 2014.

Indeed, we are serious about not only creating value through research, but also making certain we protect that unique value of these assets. We made significant progress on the international front in the first three months of the year.

In the Sultanate Oman, corporate infrastructure for our joint venture with cold energy is maturing which will result in a state-of-the-art chemistry and manufacturing and research facilities to serve key markets in the Middle East and Africa.

We are currently vetting global engineering firms that will lead us in the engineering, permitting and construction of these facilities and are confident we will quickly identify the right partner for this important task. While we'll have to move quickly, we are still focused on completing construction of our manufacturing facility by year-end.

Even without formal infrastructure in the region, we're making significant commercial inroads across our business segments. In Oman, for example, we recently held a three day teach-in on our chemistry capabilities with a focus on enhanced oil recovery for petroleum development Oman, the largest producer of hydrocarbons in the Sultanate.

We also exhibited as Flotek Gulf, LLC the official name of the joint venture at the largest MENA regional energy exhibition, OGWA, which led to a host of inquiries from interested parties. The inquiries, a result of that initiative, we feel will lead to a number of commercial opportunities in the months ahead.

All of this is boosted by our recent announcement of the appointment of Amerr Mahgoub to lead our regional operations in the Middle East. Prior to joining Flotek, Amerr spent 25 years in various positions with Schlumberger. The last 20 in the Middle East, most recently as a key relationship contact with Saudi Aramco.

Amerr's understanding of the region, its business culture and his long tenured contacts will be invaluable as we continue to deepen our relationships in the region of Oman, the Saudi and beyond.

Amerr has immediately had a positive impact on relationships in the kingdom and Sultanate and is a primary driver behind increased opportunities in the UAE and the introduction of Teledrift into Iraq. An opportunity that has the potential to grow meaningfully over time.

Recently, we received a number of inquiries regarding the health of the Florida orange crop and the impact on Florida Chemical and Flotek's operations. While we continue to watch the impact of disease and drought on Florida orange production, Flotek is well positioned with adequate supplies of raw material for its core energy chemistry.

Interestingly, this type of citrus squeeze was exactly the rationale behind our purchase of Florida Chemical in 2013. Whether competition, natural challenges, or other potential supply challenges, we believe that owning this portion of our supply chain would be advantageous to Flotek.

In fact, we believe that had we not purchased Florida Chemical, our chemistry input cost would be 30% to 40% higher than they are today.

Under the leadership of Josh Snively we've been proactive in building inventory at advantageous prices and continue considering strategies to stabilize and yet maximize the profits and value from our non-energy chemistry businesses. As Steve mentioned, we continue to make progress in reimagining our Production Technologies segment.

First and foremost by recasting it with a headline that speaks to exactly what we hope to do. Assist our clients with unique technologies that addresses a variety of production challenges.

His first three months of the job, David McMahon has proven he is up to this task, showing vision, solid decision-making, and an uncanny ability to think strategically about the future of this rapidly evolving business.

Along with his former colleague Mark Ole, we are excited about the future of Production Technologies and believe we will see a significant progress and success as the year progresses. Finally, I hope each of you will take a moment to review our 2013 annual report, which should arrive in your mailbox very soon.

In it we outline our business and discuss in more detail our thoughts about the future of our industry and the challenges and opportunities ahead. A core tenet of our view of the future is our renewed and intensified focus on our industries environmental stewardship.

While profitability will always remain the key objective of any commercial (inaudible), responsible profits should be a priority objective of any company.

With recent advances in technology, led by Flotek's core environmentally friendly citrus-based chemistries, there is reason for oil and gas producers around the globe to re-examine their chemistry profile. Eliminating environmentally damaging chemistry in favor of greener alternatives.

Quite simply, our core citrus terpene chemistries, which are as effective and in many cases more so, than harmful chemicals such as Xylene, should be considered by all producers as they pledge to become better stewards of the environment.

In the case of our CnF completion chemistry, not only will producers be improving their environmental stewardship, they will realize an improvement in the production of their wells and be able to meaningfully reduce water usage in the completion process resulting in overall completion cost savings.

Over the course of the next several weeks, Flotek will become much more vocal in the quest to help our industry improve its environmental image. Not only do we think it's the right thing to do, we think it makes good business sense for our clients both at home and abroad.

As I said in our annual report to you, Flotek is today, more than ever before in its history, positioned to be the leader in an energy services renaissance that will be driven by a new technology, focused on creative chemistry and grounded in our belief that innovation is essential to accelerating the quest to ensure oil and natural gas exploration can coexist with a heightened sense of environmental awareness.

Simply, we believe that our ability to imagine a future where hydrocarbon development can coexist with rigorous environmental standards through reimagining the future of oil and gas chemistry, will be at the heart of Flotek's success in 2014 and beyond.

Along with Flotek's commitment to make a difference as good environmental stewards, is our pledge to make a difference in the communities in which we live and work.

As a such, resulting from a realization of travel is such an important part of our own business success, the Flotek family has pledged an initial amount of $50,000 to MD Anderson Children's Cancer Center to be earmarked to provide travel stipends to children and their families that need acute treatment but can't afford the journey.

For its far-reaching reputation, MD Anderson is in demand from children around the country, many of whom could benefit from the exceptional care if only they could afford to travel to Houston to receive the treatment. There's little doubt that finding the resources to transport those children to Houston would make a difference in so many lives.

We're happy to provide more information on this developing program and invite you to join us as the Flotek team continues its tradition of making a difference in the communities we serve.

What I pledge to you today as I did on my very first call now over four years ago, is that my team and I will come to work each and every day knowing that you've placed your confidence and trust in us as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust. Let me be clear.

The success of Flotek is the result of the hard work and untiring efforts of a group of people who believe they can shape the future. As a leadership team, it is incumbent on us to communicate our vision, challenge the spirit, and ensure our team has the tools to exceed even their wildest expectations. Thank you for your interest in Flotek.

I'm glad to be here. And we look forward to sharing our journey with you in the coming year. William, we will now open the call to questions..

Thank you. (Operator Instructions) And our first question comes from the line of Michael Marino with Stephens Inc. Please go ahead with your question. Michael Marino – Stephens Inc. Thanks. Good morning, John, and the rest of the team..

Good morning, Michael. Michael Marino – Stephens Inc. John, I wanted to dig in a little bit on the Middle East and the growth potential you got for Flotek that you see. I guess you've been spending a lot more time in the region presumably working with the guys from Gulf and the JV.

I guess, maybe help us out a little bit with where you are today from a – just from a revenue standpoint in the region and mix, chemicals versus maybe drilling tools and kind of help frame up how we should think about that region for Flotek over the next year or two..

No, sure. A great question. Let me step back for just a second and give some context. For a company the size of Flotek, we need to look at -- we think these international regions individually as kind of geographic pods.

We made a decision that there was a big difference between working with Oman and working in Oman, and that's why we had made the capital commitment to be there in a very US-friendly Middle Eastern country. Now to get directly to your question.

Our estimation is that by the end of this year, we should have the Middle Eastern chemistry run rate similar to what it is at the current time in Canada, and Canada is about in the range of $2 million a month. We think the chemistry should somewhere be approaching that by the end of the year.

That would have at about, not quite twice as much but certainly more than the downhole tools. The downhole tools right now is driven by Teledrift in Saudi Aramco. That number is going to increase because Saudi Aramco has requested gamma capability on our Teledrift tools.

The Teledrift tools now have been outfitted for that, so we'll have more rig exposure inside Saudi Aramco and as we mentioned we’re moving Teledrift into Iraq. We didn't mention it, we're also moving it into Egypt as well. So, hopefully that provides some additional color for you.

Specifically there, I think from the other service companies that you follow, they are keenly dialed in to the increase of completions of unconventional gas in the area, in Oman, in Saudi Arabia, and of course we feel that fits quite well with our completion chemistries.

Does that help you?.

That's very helpful. Thank you John. And as a follow-up, you mentioned in some of the remarks, I guess specifically in the press release, that over the course of the next several weeks, we would become – or some efforts you guys have made would become clearer to us.

I was curious if you could maybe give us some hints as to what that might mean and is that something around the international prospects of the Company or is it domestically something on the horizon that we should keep an eye out for?.

Yes. So we've – we're going to have planned in June a couple of opportunities to share that with you. One of them will be Investor Day opportunity like we've had in the past. The other one is we're pleased to say that we’ve been asked to be a keynote speaker at the IPAA Media Conference.

But that information then will flow out of there as to how we feel we've had a different level of validating the CnF performance..

Okay. Fair enough. I'll reach you and let others get in..

Our next question comes from the line of Georg Venturatos with Johnson Rice. Please go ahead with your question..

Hey, good morning, guys..

Hi George..

I wanted to touch on the chemical side of the business. Obviously, impressive margins there continue, gross margins nearly 47%.

But I guess as you looking forward, and I know you’ve mentioned things fluctuate quarter to quarter with product mix, but if we think about potential upside to margins here, how would you kind of characterize the drivers in terms of ranking them from increased CnF product mix to the additional supply chain improvements as well as what you highlighted with the increased efficiency out of the Marlow facility, just wondering how we should kind of think about those drivers going forward?.

Well, you hit on the three key ones. One isn't talked about a lot, but the variable compensation of our chemistry sales guys is a driven towards CnF sales as you might expect. And that's another way that we can try to influence the behavior of the penetration of that.

I think one thing that we stepped back and looked at, and again I think in your understanding of a lot of the service companies’ calls prior to us, there was this disruption in the first quarter of frac sand through rail traffic through Chicago that is even extended into April, and the fact that we were able to increase the CnF revenue by nearly 10% over the fourth quarter in the middle of that sand disruption gives us some real encouragement of our visibility not only through the second quarter, but through the remainder of the year.

But you hit on the high points.

As you know, there's still – there's pricing overhang due to oversupply of hydraulic horsepower, so our margin improvement that we see coming is not predicated on a price increase, it's on those areas that you talked about that the more CnF sales we get drives the margin, and we've – it is not that you can always see run out of all of the efficiency that you can out of Florida Chemical's supply chain into Flotek.

We're still working on that. We think we've got a lot of it embedded into the current margin. But I think all of this feel there is probably another 100, maybe 150 basis points through the course of this year that just by being more efficient we could improve on that.

Does that help?.

Yes. No, that's helpful. And second one for me, just to clarify.

You'd mentioned obviously the seasonal spring break up impacting chemicals revenue, but it sounds like obviously the positive commentary and the continued activity levels we've seen domestically as well as internationally, we think that will offset any decline for looking at sequential growth opportunities?.

Yes. And to be specific on that I think overall you've been around this industry long enough to know that April for everybody as kind of a unique month. It's not just Flotek but whether it's anybody involved in the central North American area. April is always kind of a challenge.

But that comment was specifically directed to the spring break up in Canada, which depending on how the year goes, is typically a four-week to six-week event. We haven't seen anything that makes us think it would be any longer than that. That was all baked into our internal planning.

So, yes, the visibility we have right now for the second quarter and on we're comfortable with our ability to further penetrate the market..

Great. Appreciate the answers, guys..

(Operator Instructions) And our next question comes from Mark Brown with Global Hunter Securities. Please go ahead with your question..

Hi. Good morning. Just wanted to check....

Hi, Mark..

Hello. Just wanted to check the mix of the CnF versus other energy chemicals in Q1..

Sure. Fine question. The kind of color we put around that is right around 50% of the penetration of the revenue, or actually 50% of the revenue is CnF derived, which is pretty much about what it has been. Just kind of a bit of an increase in visibility and looking ahead. More and more companies are figuring out how to use recycled water.

That is a great environmental initiative. However, that recycled water also has what's called a high salinity residual and our friction reducer that we developed a nearly to have years ago actually a little bit ahead of its time, we're having increasing interest in business from that as more and more folks get to this whole recycling of water.

We believe there'll be an increase in that in the quarter ahead. So we'll have to see the end of the second quarter how the CnF stacks up from total chemistry sales. But again as we mentioned in our remarks, more people are using CnF today than ever before..

Okay. Thank you. I was wondering if you could – and I know you talked about the different markets, but if you could quantify how much of your mix is from Canada, the US kind international, and energy in Q1..

Sure. So overall, Canada is a little bit less than 10%. International is 5% on that and the rest is domestic. Roughly, those are kind of broad areas for you..

Very helpful. Thank you. And just one final question. What are your thoughts in terms of some of the recent news around some of the large pressure pumping service providers disclosing the chemicals used in the frac fracturing process.

How does the impact your business?.

Well, folks that have been familiar with the Flotek story for the last three or four years know that we are advocates of responsible environmental stewardship and practice. We feel that the recent announcement in particular and you're probably referring to Baker Hughes, is a step in that direction.

There's certain things that we have protected, as you know, from intellectual property including patents, other trade secrets. We're comfortable with the approach they've taken that it will not diminishing the value in time we spend on our research and innovation of new products. So we are encouragers of that transparency..

Excellent. Thank you very much..

Our next question is a follow-up question from the line of Michael Marino with Stephens. Please go ahead with your question..

Thanks. John, I just wanted to digging a little bit more on the weather impact in the quarter. I guess I assume it was – weather was a bigger issue for the drilling technology business, versus chemicals, but I guess you all held margin in drilling technologies.

So maybe just tell me understand kind of – Q1, what were the big moving parts and what's more normalized if we think about that drilling business specifically from a margin standpoint, and maybe from a revenue run rate as you exit the quarter?.

I'll answer that for just a second, but then it will turn it over to Steve. But with your familiarity of the Flotek, you know that's from a drilling technology standpoint, we've got to that target of a 40% gross margin that's embedded in our DNA with that segment.

Our objective is to be over that's, but certainly as causes we can be the first quarter got us right there there versus the fourth quarter. In terms of additional context on the quarter, Steve can help you there..

We had a little bit on that. We had a little bit at the beginning of the year. In January the things that slow down for a because of the bad weather, so January, rates were down a little bit. We do expect the revenue rates, the run rates to improve from first-quarter.

And we do expect to the margin holding up almost a 40% margin in the drilling product side is a pretty ambitious goal and we expect to be able to hold of those tight margins. One of the things that is affected us quite a bit in the first quarter of quarter-over-quarter comparisons.

As you gone into all of the horizontal drilling, Teledrift, which makes it very solid margins for us, we've had to adjust our minimum days the we were on a well. Before was always five days and up that we could charge for minimums on it.

Now, with them going down and pushing down to get to the band quicker and putting the directional companies down, or a major part we're looking at three days and after the deterrents of these wells.

So we're doing the same amount of work, we're doing the same number of jobs the but we've had a revenue fall back and a pretty good margin fall back because of the good margins of Teledrift – because of that.

As we've gone – as we're going forward holding 40% and increasing our run rate or revenues, we expect to do be to both of those in the second quarter and on an ongoing basis..

And as....

As part of that – yes, a lot of that is the international opportunities. International opportunities become very – we talked about Iraq.

One of the things that will be doing in Iraq is not only will we introduce Teledrift as the year goes on, and set of our market, we also start – we're starting to look at putting our other downhole tools drilling technology tools there and that will help us as we go along also..

Okay.

So from kind of maybe exit rate levels, Iraq or international exposure of Teledrift as well as maybe the Stemulator or kind of the big growth growth drivers I should think about?.

Yes. Those are the things that will push us up in the future and probably in Iraq we won't see it until the end of the second quarter, but we should see some more Aramco start to build as the gamma starts coming in at the end of the second quarter. It's just we're never satisfy sitting here with the timelines. We want them to be today, today.

But it just pushes out a little bit. Of on the Stemulator, we had a in March, was our best revenue month, looks like Aprils going to max that. But because we're not happy with where we're at, and because – and that's not to be that were unhappy, just that were never satisfied.

Maybe that's a better terminology, there is a great growth expectation and that as the are goes on for the Stemulator..

And on the same lines of – weather in Q1 – how did that impact the chemical technology business, if at all?.

Well, yes. I think the way to look at that Michael, is there were two things that affected everyone's business in the first quarter that's connected to the completion side of things. It was the destructiveness of the rail in Chicago. And the slow start in January. That's why – Steve said it right. We may be happy but never satisfied.

A 10% first-quarter over fourth-quarter increase in the chemistry sales in lieu of that were certainly happy with but not satisfied. But I think as we mentioned in our commentary a couple of weeks ago, and then here again that was a to our three-week event and the first part of January.

I know people have talked about how cold the weather was in February, but we seem to work right through that and March just continue to build. So that's looking at us in kind of the rear view mirror. Like I mentioned, our visibility through the second quarter and the rest of the year is good..

Great. Thank you..

And our last question is from the line of Richard Dearnley with Longport Partners. Please go ahead with your question..

Good morning. The basin supply agreement is now three years into that agreement.

Have you exceeded the base revenues, and have you paid out any warrants for the stretch sales goals?.

No. Short answer to your question is we've not exceeded the revenue and we have not paid any warrants, nor do we expected to..

Okay.

Any reason why?.

Yes. I think the overarching region reason for that is that the infrastructure – you know I don't think it's any different than what we've experience. The infrastructure that we put into place from an international penetration standpoint takes you longer than what you many times think and plan for.

It was no different with the basin supply infrastructure and the revenue is not able to ramp as quickly as they're best minds tell them what happened. So that's why we not exceeded the revenue. And that's why I say there'll be no warranty distribution for the agreement..

And Mr. Chisholm, there are no further questions at this time. I'll now turn the call but back over to you. Please continue with your presentation or closing remarks..

William, thank you for a great job. Again, thank you for your support of Flotek. We're in the early stages of planning. As I mentioned just be clearly our annual June investor meeting and will communicate more details soon and we look forward to seeing you that and talking to with our second quarter progress.

As always, we appreciate your interest and are pleased you joined us. Have a good Tuesday..