Flotek Industries, Inc. (NYSE:FTK) Q4 2018 Earnings Conference Call March 7, 2019 10:00 AM ET
Danielle Allen - SVP, Global Communications & Technology Commercialization
John Chisholm - Chairman, President & CEO
Elizabeth Wilkinson - CFO
David Nierenberg - Member of the Board of Directors
Conference Call Participants
George Venturatos - Johnson Rice
Michael Urban - Seaport Global Securities
David Sachs - Hocky Management Company
Scott Scher - LMJ Capital
Alan Mitrani - Sylvan Lake Asset Management
Greetings, and welcome to the Flotek Industries Fourth Quarter and Full Year 2018 Earnings Conference Call. All this time, all participants are in a listen-only mode. A question-and-answer session will follow managements prepared remarks. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce Danielle Allen, Senior Vice President, Global Communications & Technology Commercialization for Flotek. Thank you, Madam. You may begin.
Thank you, and good morning, everyone. We appreciate your participation. With me on today's call is John Chisholm, Flotek's Chairman, President and Chief Executive Office and Elizabeth Wilkinson, Chief Financial Officer.
Our earnings press release was distributed yesterday afternoon, which is available on our website. In addition, today's call is being webcast, and a replay will be available on our website.
Before we begin formal remarks, I would like to remind participants that during this call, some of the comments made may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other applicable statutes reflecting Flotek's views, comments or expectations about future events and their potential impact on performance. Words such as expects, anticipates, plans, believes, estimates or similar expressions or variations of such words are intended to identify forward-looking statements, but are not an exclusive means of identifying such forward-looking statements. These matters involve risks and uncertainties that could cause our actual results to differ from such forward-looking statements.
Risks are discussed in our SEC filings, including our Form 10-K. Also please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. Finally, after our prepared remarks, we will answer any questions you may have.
So with that, I'll turn it over to John.
Thanks Danielle. We appreciate everyone joining us for today's call. I'll begin today with a high-level review of 2018 and then discuss our results for the fourth quarter in more recent events in additional detail.
2018 was both a challenging and exciting year for Flotek given the continued dynamic backdrop of the industry. Operator's ongoing demand for improved well economics and pricing transparency is driving a paradigm shift in the business model to decouple the completion process. This evolution to self sourcing consumables first began with diesel, moved heavily to proppant in 2018 and is undeniably gaining momentum in chemistry as ENPs ranging from private operators to large independence to the majors are expanding and accelerating our efforts to source chemistries directly.
In recognition of this environment we've invested significantly to expand our unique portfolio of proprietary products and further enhance our in-house technical understanding accumulated over more than a decade of fluid system design and applications. This clearly sets us apart from our competitors.
Most operators today optimize their completion designs on a region-by-region basis, which is why we have deepened our in basin technical knowledge base, fluid applications expertise and logistics capabilities. As such in 2018 we transition the majority of our business from an FOB docs seller through traditional channels into a full service provider of reservoir-centric fluid systems directly to our clients at the well site.
This holistic and direct to well site approach, which is our prescriptive chemistry management or PCM platform allows us to work directly with our clients to achieve the full value of our chemistry offerings. In turn, this partnership approach accelerates our own development of optimal designs and applications of our fluid systems.
I would note that the effectiveness of our fluid systems has been strong as evidenced by the fact that PCM revenue was the majority of our domestic revenue in 2018 compared to less than 25% in 2017 and importantly, we continue to see increased pull-through of our proprietary value added chemistries via our PCM platform as well as an uptick in our revenue per client.
To be sure our full service delivery model has impacted our near-term operating margin profile as we have sought to seize the market opportunity in a dynamic and increasingly fragmented environment. However, we expect to begin to see increased efficiencies in our logistics and other aspects of our operations during the second half of the year as a result of strategic changes we are implementing in the first half of 2019.
While transitioning our business model during 2018, we currently undertook significant efforts into adjusting our cost structure. We clearly still have more work to do, but I'm pleased to report that for the full year 2018, we reduced collective spending on G&A and research and innovation by $13 million or 23% from full year 2017 levels.
We continue to adjust our cost structure to meet our evolving business and ensure our long-term success. All costs have been and will continue to be closely scrutinized, including executive compensation in relation to the company's financial performance. As you will see in our proxy statement that will come out in the coming weeks, my personal total compensation was 70% lower in 2018 as compared to 2017.
Complementing our cost-cutting initiatives for 2018 was the enhancement of our corporate governance. Last year we welcomed two new strategic and independent directors to our board following the departure of three long-standing directors. We also changed the leadership of our Board Committees in 2018 and each Board Committee now has a new chairperson. Importantly, we restructured and enhanced our executive leadership team including the addition of Elizabeth as CFO at the end of December. The Board of Directors and the Executive Team will continue to work closely together as we focus on further leveraging our core strengths in an environment of enhanced financial discipline.
Turning attention of the fourth quarter as Elizabeth will discuss in her prepared comments shortly, the year-end 2018 financials in our press release present our CICT segment as a discontinued operation for all periods. As you've likely seen, the sale of Florida chemical company was completed last week and the speed at which we moved from beginning to end of the transaction is an absolute testament to the quality of our people. Given that backdrop let's take a look at some financial and operational highlights for Q4.
As previously disclosed and reflected in our most recent guidance for the fourth quarter, we expected ECT revenue to be down for the fourth quarter due to an approximate $12 million Middle East CNF order in the third quarter, which did not recur in the fourth quarter. However, for perspective, our fourth quarter 2018 international revenues were 45% higher than the average quarterly revenues achieved in the first half of the year.
Even more encouraging, despite the broader industry activity slowdown during the fourth quarter, our domestic revenue grew 6% from the third quarter, primarily on continued strength in our MidCon operation. During the fourth quarter we also spent a considerable amount of time on the negotiations and due diligence activities surrounding the sale of Florida Chemical.
With the closing of the transaction last week, Flotek has now established itself as a pure play and leading provider of high-performance chemistry solutions to the upstream oil and gas industry. While there are many benefits of the transaction, one which is key is the opportunity to work closely with ADM to jointly explore and develop next-generation chemistry technologies for the oil and gas and agricultural industries.
Our initial focus is on development of high-value volume-based chemistries that complement our current technology portfolio and could include sustainable surfactants and oils. We have also significantly increased our financial flexibility as a result of closing the transaction. After transaction fees and working capital adjustments, as well as paying off all of our outstanding debt and associated accrued interest, net proceeds from the transaction were approximately $111 million including $17.5 million held temporarily in escrow to cover any post-closing adjustments.
We previously announced the formation of a strategic capital committee, which is comprised of key members of the board and executive management. The committee is focused on thoroughly evaluating and making recommendations to the full board on how to best deploy our significant cash balance as a result of the transaction. These options could include returning capital to shareholders, executing share buybacks, funding previously identified organic growth projects, making additional investments in the business that increase long-term shareholder value and exploring other alternatives.
The members of our Board and the committee realized the importance of the opportunity in front of us and they will take the necessary time to determine what is in the best interest of our shareholders. In this context, we are pleased to announce that the company has engaged City to serve as financial advisor. The committee has also started having meetings and is establishing a framework for decision-making including assessing growth strategies, evaluating benchmark metrics and selecting methodologies for evaluating alternative uses of the proceeds from the sale of FCC.
In light of the recent announcements related to the committee, I've asked the Chairman of the Committee, David Nirenberg to be available during the question-and-answer portion of this call to address any specific questions about the committee's activities.
With that, I'll turn it over to Elizabeth to discuss our financial results in more detail.
Thanks John. As John mentioned, the financial tables in our press release present the operations of our CICT segment as a discontinued operation for all periods. As such I will focus my discussion today on quarterly results for our continuing operations, which includes our energy business as well as our supporting research and innovation center and our corporate functions.
Given the broad industry slowdown and completions activity for US onshore and the significant decrease in average WTI price in the fourth quarter, as compared to the third quarter, our overall top line results were impacted by industry conditions. However as John mentioned, we saw a 6% increase in revenue for our domestic business, which was primarily driven by continued strength in a MidCon operations.
Our operating expenses as a percentage of revenue for the fourth quarter of 2018 increased quarter-over-quarter primarily due to higher freight expenses and a broader mix of chemical sold. Corporate G&A decreased 9% to $6.8 million for Q4 2018 from $7.5 million for Q3 2018 due to the impact of cost cutting efforts on the reversal of a $0.4 million bonus accrual.
For the full year 2018 corporate G&A of $31.5 million was down $10 million or 24% from the full year 2017 total of $41.5 million. Research and innovation costs fell slightly to $2.3 million for Q4 2018 from $2.4 million for the third quarter. For the full year 2018 R&I expenses were $10.4 million a decrease of 21% from the $13.1 million level in 2017.
Moving down the income statement we recorded miscellaneous other expense of $2.4 million, primarily associated with the write-off of certain assets determined to be no longer core to our long-term business and not warranting continued investment to achieve commercialization. For the fourth quarter of 2018 we also reported a tax benefit of $22.7 million. This was primarily a result of the sale of Florida Chemical closing before we actually issued our year-end financial statements. Doing so allows us to reverse the majority of the valuation allowance previously taken against our deferred tax asset, related to our balance of carried forward net operating losses or NOLs.
Following anticipated use of our NOLs, to offset our Q1 estimated tax gain on the sale of Florida Chemical totaling $117 million we expect to have a little more than $10 million of NOLs left over and available to offset for our future earnings in 2019 and beyond. The combined result was fourth quarter 2018 net income from continuing operations of $9.9 million or $0.17 per diluted share as compared to a net loss of $4.9 million or $0.08 per diluted share for the third quarter of 2018.
Turning to the balance sheet as of December 31, our net debt was $46.7 million including $3 million of cash and $49.7 million of borrowings on our credit facility. Finally, our working capital position as of December 31 was $110.5 million including net assets held for sale of $109.3 million and the outstanding balance of the credit facility as of that date.
In conjunction with the closing last week of our sale of Florida Chemical, we paid off our revolver balance and terminated that credit facility, which we expect will save nearly $3 million in annual cash interest expense from year-end 2018 debt levels. Net of transaction fees and working capital adjustment and following the paydown of our credit facility, the remaining net proceeds received by Flotek totaled approximately $111 million including amounts to be temporarily held in escrow totaling $17.5 million. These proceeds will be subject to customary post-closing adjustment. Moving forward we anticipate meaningfully lower level of working capital, including international accounts receivable, which typically carry longer payment periods.
By way of illustration and December 31, working capital from continuing operations would be $51 million if you exclude net assets held for sale and you exclude the balance of our credit facility at that date. If we would then include the roughly 10 million of citrus terpene inventory we reflected in assets held for sale as of December 31, but actually retained when we sold Florida Chemical, we end up with approximately $60 million of working capital. This is at the high-end of the range of working capital we expect to carry going forward, but it is far less than the amount we carried when we were combined with Florida Chemical.
As John mentioned while we made important progress in 2018, I am now pleased to announce that we have continued to drive further cost out of the business since the announcement of our pending sale of Florida Chemical back in January. Since then, we have identified a number of additional cost-cutting opportunities that will result in incremental and sustainable cost savings. As a result we are targeting corporate G&A level of slightly less than $5 million quarterly and research innovation and innovation expense of $2 million quarterly. We expect to achieve the full run rate levels of these lower cost target in the latter half of 2019.
Supplementing these savings are targeted operational cost improvements, centered on headcount reduction and improved logistics efficiency which at Q4 2018 activity levels would move us back to double-digit operating margins and put us on a path to reaching positive quarterly adjusted EBITDA by year-end. In total at Q4 2018 activity levels with our overhead and operating cost savings initiatives we are targeting taking approximately $15 million annually out of our cost structure and this is incremental to the $5.5 million we mentioned in our conference call in January.
Looking more specifically at the first quarter of 2019, consistent with the broader industry backdrop and limited visibility due to the overall delay in capital budget setting by operators, we see our top line results for Q1 likely to be slightly down from the fourth quarter of 2018 as January and February activity got off to a slow start. That said, despite that, we're seeing our proprietary value-added product sales are currently trending up in Q1.
I would also note that for the first quarter of 2019, we are expecting slight product margin improvement. However we are not expecting overall margin improvement as we continue to implement additional operational efficiencies that will have greater impact over subsequent quarters.
And now I will turn it back to John for his closing comments. John?
Thank you very much, Elizabeth. While we've been pleased oil prices improve since the beginning of the year, we expect continued periods of volatility. As such we are focused on managing our business in a $50 per WTI barrel price environment. Operators are facing diminishing returns as mechanical variables have reached in some cases exceeded both their economic and technical limits in completion designs. The steady drumbeat for efficiency must evolve to a more holistic approach, which looks at both efficiency and effectiveness in completions and well performance.
In the pursuit of performance, chemistry customized to the reservoir is critical to driving true capital efficiency. Core to our value proposition is a deep base of technical expertise and fluid designs across multiple basins. More specifically, we responded by further integrating our team of technical experts ranging from chemist to reservoir engineers, to geoscientist into our sales process to streamline the sales cycle and feedback loop of our value-added product and service offerings.
More than ever our clients are bringing a broad cross-section of technical disciplines to the table to evaluate our chemistries and we are leveraging our growing knowledge in understanding the performance of our chemistries, which have now been applied over thousands of wells across a wide variety of basins and reservoirs. This is paramount as we develop long-term relationships with our clients and continue to work closely with them to identify and apply the best customized solutions to meet their needs.
In short, our business centers around leveraging the powerful role that custom chemistry can play in the industry's pursuit of lower cost per BOE produced. Relevant now more than ever our fluid designs are increasing production rates, improving child well performance across development programs and ensuring continuous and improved production levels in enhanced water flooding programs and we'll continue to expand upon our deep base of experience in our broad portfolio of innovative solutions.
In closing in the new normal of anticipated and ongoing commodity and completion activity volatility, we bring to bear our best in class chemistry technologies in a strong financial position. With this as our foundation, we are unwaveringly focused on driving higher returns for our clients, while remaining aggressive in our own efforts to build a profitable through the business cycle long-term benefit for our stakeholders.
So with that, we will now open up for questions, Operator, we'll turn it back to you Nancy.
[Operator Instructions] The first question comes from Mr. George Venturatos from Johnson Rice. Please go ahead.
John, first congrats on unwrapping up the Florida Chemical sale. I just wanted to start off on that and I think you said you had David on the line as well. Just given you've now got look nearly $2 per share in net cash post the debt paydown, just wanted to get a couple items update on is there any sort of key timing or date that we should be aware of in terms of decision-making on the strategic capital side?
And then secondarily, as we look at opportunity set I know previously you talked about $20 million to $30 million and sort of organic logistical efficiency opportunities, is that expanded or contracted and then how do you weigh that versus, some of your larger acquisition and new product line opportunities?
First we would like to share with everybody, we recognize -- company the size of Flotek with this type of capital cash is in a very unusual situation and for that reason primarily is why we asked David to be involved which is a bit unusual in itself, but that being said, really it's a collaborative effort between the leadership and the Board. Elizabeth heads up relief from the financial side, the effort on that strategic capital committee and we've not set a line in the sand as to have a decision by X to allow it to fully progress but I'll let Elizabeth chime in and then certainly she can ask David to chime in as well.
I would agree, we definitely with regard to the timing of decision-making, intend to take a very disciplined and measured approach to going through a full gamut of evaluation about the company and its conditions and opportunities and so forth. As regards the $20 million to $30 million that we had mentioned as potential capital growth projects, honestly as we see it this company and the opportunities that we have are pretty capital light, that number was probably a bit on the high side.
There are some opportunities that would require some capital expenditures and they are certainly in the queue along with many other alternatives, but I just wouldn't want to overemphasize that. There are some potential organic growth opportunities out there but I think we have a lot of other areas that we plan to evaluate so forth coming to our conclusions.
And George we'll always give you a follow-up if you want to, but let me just interject one thing, when we asked David to come on the Board last summer, we didn’t know this would be the outcome of this amount of capital, but we do knew very well what his background was as a partner at [indiscernible] Capital for a big part of his career were making decisions like this were probably never routine but for heaven sakes they made hundreds of them in different investments.
So we feel really fortunate to evolve this way and David even certainly chime in you want to on your assessment as to how we put together this committee and your participation in it.
Thank you, John and Elizabeth and good morning, George. I hope you're recovering from [indiscernible]. As Elizabeth just said, that that $20 million to 30 million number that had been previously mentioned was really more of possible example rather than a commitment. We are looking at all possibility in our process and before I talk about process let me just correct one little thing John just said, I wasn’t at [indiscernible] Capital. I am such an old person, I was there before [indiscernible] Capital. I was a partner at [indiscernible] Consulting, joining the firm in '78 and leaving in '85 to get into the investment business.
So let's talk about what the committee is doing and it's process because George I think that will give you some sense of what we are already doing because I heard the port of your question about timing. The management and the board took the initiative to create this committee. Once we knew that Florida Chemical is highly likely to happen and the committee was charged by the board with the right mission, which was to determine what to do with the net proceeds of the sale?
That of course requires a thorough reassessment, reconsideration of the company's strategy and the ability to execute that strategy. The committee was populated with senior members of the management and three independent members of the Board two of whom are operators and we are working together as a team. I am the Committee's Chair because I'm an Independent Outside Director but operationally the Committee is co-led by Elizabeth and me. Why the two of us as co-leaders? Well, we're both new and independent. We're both financial professional. We have extensive turnaround experience both of us and then my experience is in strategy and my extensive work in government with the Millstein Center at Columbia Law School.
The Committee already has developed a detailed work plan of key questions, which must be and are in fact being answered and also determining the right metrics to use to assess the value of all possible uses of cash and to benchmark how they might be used and how they might benefit stakeholders one against the other. I guess what I really want to emphasize George this morning and to everybody listening is that the company is not waiting until the committee's process of the liberation is completed before it takes action.
For instance what you've just heard from Elizabeth and John about the depth and pervasiveness of cost reduction efforts at the company reflect our understanding our evolving understanding of the new business model for a single business company under which we are committed as Elizabeth said to get as fast as we can to cash flow breakeven if not better and while we will consider possible capital expenditure, we will do it with the right degree of professional skepticism and deliberation being very selective about which base information we choose to compete in and where we don't and even when we need equipment.
We will be very shrewd about thinking about alternative ways to drive the capital cost as well as possible, spending the company money just for our own. In addition to that Danielle Allen and her team are doing excellent work on market and customer segmentation and customer targeting, which is relevant to capital allocation decision and R&I under James Silas' leadership is focused on several key projects that can help us to produce product costs and improve efficacy.
So I want to leave with the comment that good stuff is already happening even before the committee finishes its work and until we do complete our work, it's almost impossible to say specifically what strategies will be pursued operationally and what strategies will be pursued financial. We are regardless, we are committed to not earning the cash that we have to where the company did in the past. This is the process of the liberation, I emphasize the word process, to pressure test, to built volume and to arrive at the right answer.
The cube [ph] family funds are a large shareholder in Flotek and we like others on the call are for underwater. We therefore do want to get to the right answer as rapidly as possible. We genuinely share the sense of urgency of other stakeholders, but if we artificially rush this process or assume our way to the right answer, the flay will not rise. So we want to reach the right answer with the right process driving the right possible outcome for all stakeholders of this company.
Thanks David, George follow-up.
Yeah just a couple I appreciate that update across the board and David thanks for that as well and just understand the patience that's needed to make that decision. So certainly understand that timeline. John maybe operationally, just had a couple quick ones, one I recognize that the 1Q guidance, I know your topline talk about slightly lower sequentially, can you speak maybe to domestically versus internationally looking out at least into in 1Q in the first half and then I guess on the international side, you did mention traction in the Middle East and I know that we're not going to have the contribution as we did in the third quarter, but is there any visibility or line of sight to any future larger orders of a similar magnitude?
Yes so, I think we want to leave it as slightly down for the first quarter although we talked about our value added chemistries are increasing in that percentage of the revenue, which is kind of contracts of the narrative out there of this just relentless cost-cutting I think us and other companies that can show value of value added are able to assuage the clients to spend the capital on that.
The Middle East as we talked about late last year, this is a -- this is a brand-new experience for many people there in the Middle East. I was at a conference over the last couple of days and some of them really actually surprised that now the majority of completions are actually hydraulically fractured. That just didn’t happen three years ago, four years ago. So the predictability of the usage of the chemistry as you're going into kind of a new environment is very difficult and I know people have felt we're not the world's greatest predictors. We accept that. We do the best we can in an environment where now there's new fracturing going on over there, not only in Saudi Arabia but other countries like Oman and others, which is why the folks look back the last couple years I've always said we think that is the number one international area for us.
So it would be a mistake for me to say when we think there'd be another significant order certain different things are in play George and we expect the Middle East to continue to build through the rest of the year I think is the way we like to leave it. It's going to be lumpy. There could be a bigger order, but I think we continue to see that it will continue to grow throughout the rest of the year and hopefully that helps for you.
I was at a conference, were also a couple of the public companies talked about what their vision out was and they were meaningfully size companies that they say that there calendar at best looks 6 to 8 weeks out and so I think for everybody to level set, that's the new normal now with the volatility of the pricing, the volatility of the in many cases excess supply 6 to 8 weeks is even what the visibility is of companies that are in this business on the pumping side that are much larger than us.
So we see it continue to build through the second quarter and I think we'll leave it at that for right now and we'll share with folks as we see a change in that as we move through the quarter, fair enough.
Appreciate that John and last one for me and then I'll re-queue, just on the cost, I don't want to miss that side, but you talked about corporate G&A target quarterly, can you just run through I know and Elizabeth mentioned a few, but just kind of the key items that get us there variance relative to where we were this quarter for example.
Sure I'll turn that over to Elizabeth.
Yeah so I mean obviously headcount is a significant part of the picture and in addition I think there's some different contract cost, IT related cost a number of different areas where we've been able to find a little bit here and there to bring that about where we think we'll be able to bring that about.
The next question comes from Michael Urban with Seaport Global. Go ahead please.
Wanted to stick with the guidance here a little bit, I think I may have misheard it, so talk about the revenues being down slightly than the margins say there's some modest underlying margin improvement that the overall margin is down and that because of some of the money spent to drive the profitability efficiency improvement that you're targeting for the second half, did I hear that right or if you can provide a little more color.
Sure, we want to call a distinction between product margin and overall gross margin. The product margin we believe should increase slightly due to the product mix of more value added chemistries in the first quarter is what our internal metrics are showing us. So we wanted to call that out. We didn't want any confusion that well the reason those are being purchased is they're discounting them actually. We're not so that margin should increase slightly and the overall I'll call it operational component of the gross margin we believe will be flat through the quarter, but that's an area that we're targeting in more efficient from a cost standpoint that we think will improve through the second and third quarter. Does that give you better clarity Mike? And Elizabeth sounds like she wants to chime in.
And will also be impacted by severance cost for example right to the comparable headcount reductions.
And presently you would call that out though.
And then how much do you have to spend in order to drive the margin, I guess excluding cost severance and things there are other investments that you would have to make and cost you would have to incur to drive the operating margin from I guess excluding the incremental investment that the committee is not putting there.
It could be some contract terminations that would prove to be worthwhile so that some of the things that we've contemplated related to logistics.
And I think to maybe everybody a little bit additional color on that what Elizabeth is talking about and I think probably as you talk to other people, you cover Mike. This whole logistics thing and in particular the last mile in many cases can be the Achilles' heel of your margin or you can use it as an opportunity and we have elected at this point in time not to have an internal fleet of drivers at Flotek and so once you've made that decision, then you can look at either a committed drivers or on the call as you get them drivers of third parties to handle that and we've evolved the process from having less committed drivers to more flex drivers from third-party people for a couple reasons.
A, the way the activity is, the logistics costs are going down and so we're trying to take advantage of that, but we also think we're getting a much better handle on the ordering of this new business model that we didn't, we do not need this assurance of committed drivers that we looked at very closely and utilization was somewhere only around 50% or so and so by removing that was of the contract she's talking about will be part of this cost component that will improve the margins as we move through the first half of the year, does that help?
Yeah that's helpful and is that what was driving the margin issue in Q4 as you did have and I guess do you have those dedicated drivers in the contract associated with that and you'll be moving to the outsourced model, what do you think that will kind of drive the improvement in probability?
Yes so there's two things on the situation of the margins in Q4, what you just identified is one and then when you have a as we called out a meaningful order of CNF in Q3 that's a high value, higher margin product and if that doesn't repeat itself, than the margins itself will come down slightly just because of the margin differential that's in those higher-margin premium chemistries, does that answer that for you?
The next question comes from David Sachs from Hocky Capital. Go ahead please.
Good morning. First I think for shareholders and thank David for his involvement in the company and hopefully that will lead to a robust conclusion for the process and appropriate allocation of capital. So couple of questions on the operation, if we can talk about the topline of the business you're indicating was down modestly in the first quarter ballpark $50 oil, the business should be sequentially improving through the year and the X bridge will be modestly higher than Q1 10% higher? Just kind of a general guide post of the direction of the business as you see it today?
And then your goal to get to EBITDA breakeven by the end of the year just trying to make sure I understand what the revenue model to get to that number?
Sure thanks for acknowledging the involvement to David. He is perhaps one of the more visible but we really do like all of our directors, he plays a unique role which is why we asked him to participate on this call, so thanks for acknowledging that. As I mentioned with George and this is something that people are very just I don't want to say uncomfortable with, but the visibility for everybody is probably as difficult as it's ever been in this industry.
As I mentioned the CFO of one of the largest pumping companies at a conference talked about a six week to eight week calendar on their pumping schedule. They would not even start to talk about what is the third and fourth quarter of 2019 look like. So that's the backdrop with which we're dealing in, but the reason we are saying the year will continue to trend up and then I'll turn it over to Elizabeth is our internal metrics that we follow, part of which we shared with on this call is that we are gaining more revenue per client on PCM. PCM is becoming a majority of the business and we along with many others believe the industry will continue to evolve to more sourcing of the consumables directly and that's the backdrop as to why we believe the revenue will continue to increase even in an environment of where the completion activity may be flat or slightly up, the movement of the way the completion process is being done is continuing to move in the direction we felt it would for the last period of time.
But Elizabeth can give you some more context of that keeping in mind we don't outwardly give complete guidance on what the year revenue will look like.
I am just trying to determine where the base is if we're going to achieve EBITDA breakeven? What does it mean based on the cost structure you said topline?
So here's what the backdrop was on the cost-cutting and the driver for the order of magnitude that we're presenting and that's that we're looking at improving EBITDA under prevailing market conditions and we're trying to avoid any innuendos about increasing revenues, but to be more focused on what is the cost structure of our company as it is today and what does it need to be under our current prevailing weak market conditions for us to turn our business into a condition where it can produce a positive EBITDA and that's what…
So you are base budgeting the cost model to $160 million $170 million of revenue and we need to show positive EBITDA at $160 million to $170 million of revenue and to the extent we can drive work experience better revenue, we should be coming close to profit.
I don't want to go into that high degree of detail and specifics but I will just say that just in the generally prevailing conditions that is our goal to get to positive to make the cuts deep enough to get us to a positive EBITDA condition, positive adjusted EBITDA.
And what would you estimate the cash cost that you identified would be $20.5 million in cost production, the additional $50 you mentioned today that the $5.5 that you had identified earlier.
Essentially all cash cost. It's essentially all cash cost. It's headcount.
Let me rephrase that, what's the cash burn to protect to achieve that there might be severance, there might be lease termination, just trying to understand what the one-time cost will be?
The severance is there is it's very small in the scheme of things. The severance is going to be in the hundreds of thousands, the cost-cutting as we said is over $15 million on an annualized basis and a little bit less than that in the current year.
Okay. but the cost to achieve is single digits, both single digit million to achieve $15 million to $20 million in cost savings.
Not even. Thank you for that. And then what would you estimate your normalized capital spending excluding these growth projects, the new and improved Flotek.
Including organic growth type projects that you may be thinking of we're in the sort of $4 million to $9 million range for maintenance type CapEx.
And last question, we had this tremendous success last year penetrating the client's ability, they had this currently tested on their own dollar, the efficacy your product for your longer and before they needed determination to pick your product. It's now been applied and it's since used in the field, is there anything you can update us in terms of the performance, is there well since they started using Flotek Chemistry and if there are milestones along the way for this typical reorder pattern that you would anticipate seeing with that client and that possibly even the press release you mentioned that you're seeing additional traction with other Middle East accounts, just if you can expand upon that beyond just mentioning that thanks?
Those for those series of questions David. As most who follow the progression of our discussion of client activity we allow the clients to talk about the performance as they see it. We don't want to get ahead of where they want to talk about things. I think in the past we may have and that didn't serve anyone well weather ourselves or shareholders. So I think at this point in time as frustrating as it may be for some on the call, we want to just stay with where we are and we'll let the next six months turn out in whatever fashion they do and that could very well be frustrating, but it's the path we've selected to not only protect the integrity of our client relationships, but also to provide some protection from any type of competitive environment. Thank you on that line of questioning.
[Operator Instructions] The next question comes from Scott Scher from LMJ Capital. Go ahead please.
Thanks guys, I appreciate. Thank you to David as well for being on the call and the John and team congratulations on [indiscernible] fantastic. So Elizabeth I had a question on the accounts receivable and the inventory, the 8-K you put out the other day showed the pro forma for this chemical it showed $45 million of accounts receivable and $45 million of inventory. What do we think inventory turns are going to be in the new business and what do we think accounts receivable, DSO is likely to be and then I have a follow-up, thank you?
So for inventory turns, at the moment as I mentioned earlier, we think we're going to be a little bit at the higher end of our overall working capital range that we would typically expect. So I think it's going to be lower than the sort of 5 to 7 that I had anticipated coming in the earlier part of this year. Sales outstanding I think that we do just tend to have a little longer statistic for this company. I'm hoping that we are going to see it go down because of the lower amount of international -- the lower percentage of international receivables but still like the specific number for you, I'm not sure I can give you a number there.
But are we managing through 90-day DSO or is that kind of we were managing to.
I certainly don't plan to manage. So we are about to be working to get that down absolutely.
And what's in that $22 million of other current assets? I'm just curious -- I'm staring it for the first time in a really long time you have a clean balance sheet, goodwill is gone, lots of things have gone, the debt has gone, this is like the cleanest balance sheet this company has had in a decade that is something to understand. So the balance sheet the pro forma the other day and $21.9 million of other current assets, what's in there?
I don't have that if from of me. Other current assets are you -- what is the number that you're looking at?
I'm staring at the September 30, 8-K pro forma that was put out in the 8-K two days ago, pro forma balance sheet adjusted for the sale of our Florida Chemical and it shows 101 cash, 45 AR, 45 inventory, two fold income tax receivable and then there is a line item other current assets of $21.9. I just want to know what was in that because it's a current asset which means kind of become cash shortly.
Right, I am sorry, I just I don't have pro forma in front of me and I just don't have it off the top of my head but happy to take that offline and I'll have to look at that, it's just not coming to me.
Where I was ultimate going is the current assets are now $216 million and conveniently the accounts payable are $16 million. So we basically have $200 million of net current asset, $100 million of which is cash, $45 million they are which we presume are good, these are good claims and $45 million of inventories that were clean and build process. So you have $200 million of net current assets and no debt on the company, and you know where I am going of course and the stock is trading in evaluations that have $170 million.
So with all due respect to David and Dave and I have spoken forward all with all due respect to John to you to wait for this process, why would we not over the next two, three months while the stock is cheap buy back some stock and I know you want to wait for the process, but if you come out announcement 90 days from now, let's say we're going to do a $50 million buyback, you will not be buying back stock at $3, you will be buying back at $4.50. So as a shareholder I would love to understand why we have to wait for that process, under almost all scenarios, I can't imagine that we would need the entire $100 million.
No I think that's a fair observation one that we've heard from other folks, Scott David do you want to chime in on that question?
Unidentified Company Participants
One of the great thing about have Scott and David on this call is that I share their impatient. Sometimes they even make me look moderate by contrast, but I absolutely appreciate their suggestions and their sense of urgency and I want to move this process along as rapidly as we can. There are other people who from time to time, don't talk about a repurchase. Other people talk to us from time to time about special dividend. Scott David we all know that the consequences of one or a short term benefit for everybody, the consequences of the other or a potentially powerful mid to longer term benefit for those people who are longer-term stakeholders.
So there is a judgmental process that we are going through as rapidly as we can to determine the proper mix of those two strategy as well as to figure out what is needed for ongoing maintenance and what is needed for the pursuit of any possible growth strategy we may consider. Not trying to dodge the bullet here but the repurchase is not the only thing that we've been hearing about and so we are trying to approach it through an integrated and holistic process and to move it along as quickly as we can.
One more question if I may and I understand it's a little more complicated, so obviously over the last two years, John you guys have done an unbelievable job within a downturn industry to completely pivot this business from an indirect model to a direct model and I guess amount of credit for recognizing it and doing it. Let's imagine the two three years on the business isn't annualized $160 million let's say it's annualizing it $225 million or $250 million unless hypothetically that you're doing 15% EBITDA margin, probably about $40 million EBITDA.
Even if we get our corporate G&A down to $20 million we would be consuming half of our EBITDA by being a public company, just simple math and I am putting a lot of credit in Elizabeth she is very talented, just a corporate G&A of $20 million. So let's presume we can do that arguably the benefit of the doubt and I'm giving you the benefit of the doubt, you can get the business from a revenue standpoint back to levels we haven't seen in years and I'm giving you things from an EBITDA margin. Can you just comment and Dave you can comment that within your strategic process will come up with some level of what we feel we're comfortable with the corporate G&A consuming the EBITDA, I am sure you see the math, can you just comment on that? At what level of EBITDA we're willing to spend in being a public company?
I think that all forward-looking options are on the table with the strategic committee I don't want to preempt Davis commentary on this and I certainly haven't visited with him not anticipating that question, but again you represent Scott not just yourself, but other people that have A, offered up your question regarding share buybacks. B, a question that Lee is leading to with Flotek be better off private. Those questions come up regularly and so they're all being analyzed in this view of what's the best return in the future for the Flotek shareholders that are here today and I can't exactly tell you how much of our EBITDA is directed towards being a public company.
If you look at the shared dollars, it's a couple of million, if you look at the amount of time it takes every quarter, is greater than that sure, but David you're welcome to chime in, but I just want to assure you and others that the whole spectrum of those options are being processed by this committee.
Unidentified Company Participants
Thank you, John, David what John is absolutely right about the mandates and the committee. Had the management of this company not executed on the sale of the Florida Chemical and given the collapse in the price of oil probably around August September, October of last year, this company probably would have busting loan covenants with PNC in the first quarter and about to make its 11th or 12th amendment of the loan agreement and that would not have been a comfortable place to be.
So David you could appreciate in a circumstance like that it might have even been necessary in a situation like that to sell the rest of the company simply to provide a beneficial outcome of parole stakeholders rather than a bad outcome. Fortunately with sale of Florida Chemical and the net proceeds and financial strength we now hove, we have the opportunity to ask and enter the necessary question. You are quite right that over the medium term, even the long-term perhaps it should not be an independent company, perhaps it should not be a public company. We don't know the answers to those questions yet. We're pondering them but let's assume just for the sake of illustration that several years down the road, perhaps something might happen.
If something were to happen the very best thing that we could do to maximize value for all stakeholders happened to be the very thing that the company is working on now. First of all, to make sure that we right size our cost structure across the board, not just SG&A, but also cost of goods, final mile to get that down as low as possible. So any possible subsequent owner would not be scared about taking on a bleeder if I can put it that way.
Secondly, the segmentation of customers and the segmentation of channel to build a reliable, recurring revenue model, which is also something that we're working on and continuing to strengthen the quality of the management team. All of those are the things that we're doing because fortunately we are not in a situation where we are compelled to do anything substantially because of the busting covenant. So we're focusing on those things that will build both short-term and long-term value and it will give us even more optionality about what we want to be when we grow up.
Yeah and if I just wrap up on that line of questioning and thanks Scott, one of the real benefits that Elizabeth brought to us was a long-standing relationship with City. City is deeply involved in this entire analysis. They've done it hundreds of times and that's one of the roadside benefits that we want to make sure everybody remembered from our prepared remarks that even our own team is not doing this in a silo environment and thank you for the compliments of turning the whole business model around we appreciate that.
The next question comes from Alan Mitrani from Sylvan Lake Asset Management. Go ahead please.
Hi. Thank you. and I appreciate and echo all the comments from David and from Scott as a impatient shareholder even though I haven't been there as long as those guys all David I too also just echo, I appreciate the focus on cost cuts and reporting also in a clean environment. You had multiple divisions and it's been difficult to parse the data give an example. I went through the 8K, it seems like your nine month gross margin was 24.3% on the business that remained through nine months from what your filed the other day that's down couple 1,000 basis points from the 40s where it had been in the 11, 12, 13 and 14th. So you stopped reporting your gross margin for the division.
I can't find your gross margin in your press release today. Can you tell me what it was for the remaining division in this quarter?
So the main reason why we moved away from gross margin and moved more to operating margin Alan was it became an increasing target on our back in terms of not only with the previous business model of the distributors realizing and I'm talking about the pumping guys that our gross margin was actually higher than theirs and I think it also created a environment to have more competitors enter into the chemical segment than otherwise might have happened and if you or if anyone cares to the margins of everybody in this segment have moved at about that type of pace from where they were in '14 period to where they are now.
That being said the gross margin is certainly in a range of what we have represented or presented in the past and we're just hopeful people understand we want to focus into the EBITDA, we want to focus to the operating cash flow, we want to focus to operating income and we want to stay away from calling out that gross margin number. It does us absolutely no good as a company and hopefully people will appreciate that.
I understand it but now that you have one division left, I think according to the SEC, you have to report gross margin, whether it's in your Q or your K or your press release I mean you can't it, you want to be a division of a bigger company, great. Sell the business hide the gross margin be one product, but now that we're shareholders of one division, I would really appreciate it if you would actually report giving us the normal standard.
So maybe what you're looking at is a certain amount of the segment SG&A is part of -- is added to cost of revenues in our new reporting structure with a single segment and so where you had the segment SG&A grouped together with different segments, you're now -- we now have ECT segment G&A, I mean segment SG&A added to the operating expenses in our operating expense line but you will see that breakout in our K when it comes out.
And I would appreciate that and look I don't mean to be hostile from this, but the bottom line is if you want to be -- if you want to sell the company, be part of a different company, that's fine, but as of where you are now you got to report your business, so that your shareholders can see it and you can't hide cost, because I think what seemingly got the company in trouble was that you had a lot of cost being allocated across multiple divisions and it was unclear, the fact that the company with this size is running the cost that you have and the number of employees you have, without having made the cost cuts already in the last year and quicker than even you have and I give you credit for making cuts and recognizing that, but the truth is you have one shot left with the money on your balance sheet and none of your shareholders and clearly none of your management want you to waste it. So sooner, quicker, better, we would appreciate it. One other question on CapEx you said $4 million to $9 million was that the level you said Elizabeth?
That's a very wide range but when I add up -- when I look at your previous CapEx in previous years, oftentimes it never came close to those numbers except when you're building the R&D center, why is the number so high?
It may not be, $4 million I think is pretty well expected, there are some additional capital projects that we're going to be looking at that we may or may not do, but they're not mandatory. So we just need to look at the benefits of those and that's really what's going to determine if there's more than sort of lower level.
And then lastly, one last question, as it relates to compensation for calendar '19 and maybe David can chime in on this too, what specifically are the executives going to be paid on? Is it getting revenues up stabilizing it as a cost cut? Can you just give us a couple metrics that we can pay attention to throughout the year so that we could see how you're doing and how we're doing?
Would you like me to speak to that John.
I am a member of the Boards Committee, I joined it in the middle of the year and Michelle Adams is our excellent relatively new Committee Chair doing a terrific job. As you heard a few minutes ago Alan, operators and contractors are saying that they may have only six to eight weeks of visibility and therefore one of the things that the committee has been doing is changing from using annual objective to actually setting quarterly objective and then reassessing them every quarter and updating them.
I think that it would be best not be more specific about what the new goals are at this time because it won't be long from now when the proxy will come out and there will be a new CDNA discussion by a new comp committee setting forth our new product in numbers and I believe that those on the call will find it to be a very stakeholder friendly new approach which is appropriate for the time that we live in.
This concludes our question-and-answer session. I would like to turn the conference back over to John Chisholm for closing remarks.
Thanks Nancy and again we just want to thanks -- say thanks again for everyone joining us on today's call. I think we nearly had a record number of people dialing in. These are clearly transformative times in our industry but we believe we have proactively transitioned our company for future success as a result of our unique product and localized service offerings and the balance sheet position that the company is currently in.
We appreciate everyone's interest in our company and the support of our shareholders and all the questions we received today. I'd like to everyone have a great day thanks again. We'll talk to you soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.