FTK
#Thank you, and good morning.
Our press release was distributed last evening and is available on Flotek's website.
In addition today's call is being webcast and a replay will be available on our website as well.
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 the 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 Exchange Act of 1934, and other applicable statutes, reflecting Flotek's views about future events and our 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 the 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.
<UNK> <UNK>, Flotek's Chairman of the Board, President and Chief Executive Officer.
<UNK>.
Thank you, <UNK>.
Thank you all for joining today's call which is being hosted from our new global research and innovation headquarters in Houston.
Joining me today is <UNK> <UNK>, our Chief Financial Officer who you just heard from; <UNK> <UNK>, Florida Chemical President and Executive Vice President of Research and Innovation; <UNK> <UNK>, Executive Vice President Performance and Transformation Officer.
I will begin by giving a summary of our quarterly results and attempt to add some color regarding current operations as well as a sense of our future followed by <UNK> who will share our fourth quarter highlights and provide additional financial context.
<UNK> will then talk about our work with data and analytics and I will end with some corrosion remarks before taking your questions.
Before we get into the numbers, I will just briefly mention that during the fourth quarter of 2016 we confirmed the strategy ---+ strategically repositioning of our enterprise [playing] to the strengths of our core businesses in energy, chemistry and consumer and industrial chemistry.
We are in the process of divesting our joint technologies and production technologies segment, and as <UNK> will explain these businesses are now classified as discontinued operations.
Given for some the complexity of this accounting treatment, if we do not answer the questions in the type of detail you would like we will be glad to take one-on-one calls next week to give you further explanation.
All of the results we will share today are for our continuing operations which consist of our energy chemistry technologies and consumer and industrial chemistry technology segments.
Flotek's revenue was up 9.7% sequentially and down 2.6% year-over-year, a remarkable outcome in the face of a 43% drop in completion activity in 2016 according to the US EIA, which also followed a 38% drop from the previous year.
For the full year, revenue was $262.8 million compared with $270 million from 2015.
Results were in line with expectations we outlined in December 2016.
In 2016, a key part of our business strategy focused on expanding our global footprint.
For the first time in Q4, we shipped products to China, the Ukraine and Iraq extending the reach and application of our technology to potentially key growth markets.
We see a meaningful opportunity for Flotek to continue to expand globally.
As part of this global opportunity, I was recently appointed to the Board of Directors of Anton Oilfield Services Group based in China, an important business partner for Flotek.
Anton has operations in the Middle East and the Americas in addition to China and it is worth noting that Schlumberger also holds a significant investment in Anton.
I see this Board position as complementary to my responsibilities at Flotek as it enables me to help guide the way our technology is used in a region that is currently witnessing intense innovation and growth in the oil and gas sector.
It also gives me a new vantage point to observe the challenges and needs of producers in these key regions and extend our network.
This partnership is mutually beneficial and I am honored to be included on their Board.
Turning to our businesses, we reported continued strong results from energy chemistry technologies which includes our patented suite of complex nano-Fluid products.
Sequentially quarterly revenues increased 22.4%, primarily because of a 12.4% increase in CnF sales volumes.
Margins in the fourth quarter were lower by 4.1% resulting primarily from higher freight costs and field services costs associated with the start-up of our new PCM service line, increased citrus terpene costs and a product mix.
Margins are expected to recover during 2017 as the Company implements price increases, product reformulations and optimizes our PCM service offering.
Although year-over-year energy chemistry technology revenue decreased 11.9%, gross margin increased 1.2 percentage point.
Most notably CnF sales volumes increased 14.7% year-over-year which is impressive as this took place during the worst industry activity slump to-date.
This means the energy chemistry segment as a whole clearly outperformed the broader completion market as key sales volumes rose despite US well completions plunging by more than a third in 2016.
CnF has and will remain a consistent and significant percentage of revenue.
Flotek clients are reporting success raising EURs or expected ultimate recovery using our patented chemistry technologies that facilitate better flows in conventional and unconventional wells.
A growing number of operators in the Permian Basin of Texas has spoken to investors recently about their successful use of nano-Fluids and their plans to use them in a larger number of wells.
More specifically, we would like to congratulate two of our clients, Brigham Resources and Silverback Exploration for their recent asset sales in the Delaware Basin.
Brigham in particular worked with us to determine the optimum concentration amount of CnF by changing only the CnF concentration in their completion recipe for multiple wells.
All other variables in the completion technique including perforation design, proppant concentration, flow back rates, et cetera, were held constant while testing concentration of CnF up to 2.5 gallons per 1000 gallons of fluid pumped.
Though an economic analysis in this case proved that more is not necessarily the optimum strategy, Brigham observed their maximum return at 1.5 gallons per 1000 and it was clearly evident that the CnF was superior to other industry products and was a significant contributor to their expected ultimate recovery uplift.
To quote, Eric Hoover, Brigham's Executive Vice President of Operations ---+ Flotek's nanotech technology was a game-changer for us in the Southern Delaware Basin.
Without a doubt it was an important driver in making our Pecos County acreage a huge success.
Silverback has also been one of our premiere clients and we would like to congratulate them as well on their recent transaction of selling their acreage in company.
Their COO Steve Lipari sent me a note thanking us for the collaboration between our two organizations.
Steve specifically felt that our prescriptive chemistry approach used in their completion program was important in maximizing their expected ultimate recovery.
Silverback took the time to use chemical tracers to help validate our chemistry prescriptions and were also open to using CnF in non-traditional applications in their completion process that will benefit us and our clients in the future.
Their technical curiosity created a true chemistry experience that benefited both of us.
Consumer and Industrial Chemistry Technologies or CICT reported record revenue of $74.6 million, up 32.3% year-over-year.
Importantly, we received ISO certification for food grade activities and added two small distillation units to expand our capacity and variability to manufacture high flavor compounds.
Increased costs for raw materials drew down our quarterly gross profit by 32%, but our gross profit for the year increased by $1.7 million or 11.9% from 2015.
Drilling technologies had the best quarter of the entire year with revenue up 5.6% from Q3 to Q4 though as part of our ongoing plans to transform our business, we have an active divestiture process under way and are now treating the business as a discontinued operation for our financial reporting purposes.
<UNK> will have more on that in just a moment.
Revenue for our production technologies segment increased 5.3% sequentially to the highest quarter of the year while gross margin for the year was down 12.1%.
Quarterly margins grew by 4.4% on increased revenue and improved pricing.
This segment is also treated as a discontinued operation for financial reporting purposes.
I would also like to note that despite our decision to discontinue these two segments, our team managed to deliver special results for the quarter exhibiting the utmost work ethic and professionalism.
The Flotek store continues to drive transparency in the market for accurate pricing of prescriptive chemistry solutions.
We are pleased to tell you that about 30%, 40% of our energy chemistry and revenue now comes through the virtual store.
The store brings us closer to our clients while offering them greater control and direct benefits.
When I reflected on 2016, I am proud that despite the most significant activity downturn ever in both depth and duration, Flotek has done remarkably well by continuing to grow sales volumes of products during each succeeding quarter of 2016 at a pace that has outperformed changes in activity levels in the broader US onshore market.
I will now turn it over to our CFO <UNK> <UNK> to deliver our financial results.
<UNK>.
Thank you, <UNK>.
As <UNK> mentioned in the fourth quarter, we began a strategic repositioning to focus on our core businesses and energy chemistry and consumer and industrial chemistry.
The Company is executing a plan to divest our drilling technologies and production technologies segments.
We have retained an investment bank adviser to assist us with the sale and will update the market once we have additional information to share.
Effective December 31, 2016 the Company classified the assets, liabilities and results of operations for these two segments as discontinued operations.
Beginning with this Form 10-K and going forward, Flotek is reporting the results in two business segments, energy chemistry technologies and consumer and industrial chemistry technologies as continuing operations.
I will refer you to our 10-K filing made available yesterday afternoon for additional historical financials on each of our four reporting segments.
For the full year 2016, we reported total revenue of $262.8 million, compared with $270 million in 2015.
For the fourth quarter, we reported total revenue of $70.6 million compared with $63.9 million in the prior-year period.
On a sequential basis, revenue was up 9.7%.
Our strong top-line growth was primarily driven by the strength of our energy chemistry technologies business which reported a 22.4% sequential revenue growth with major account increases from significant clients.
Our consumer and industrial segment was down 19.9%, sequentially, from the seasonal impact on flavors and fragrances and lower terpene sales in light of the high demand from our energy chemistry clients.
Turning to revenue from our discontinued operations, drilling technologies revenues increased 5.6% sequentially to the highest quarterly revenue for the year.
But margins declined on lower international revenue.
Revenue from our production technologies segments increased 5.3%, our highest quarterly revenue of the year.
Our full-year 2016 operating margin was negative 2.8% and was negative 7.9% for the fourth quarter due to product mix of sales, higher average raw material costs and higher field service and delivery costs in the energy chemistry business as well as lower revenues and product mix of sales in the consumer and industrial chemistry unit.
Additionally, our R&D spending for the full year 2016 was $9.3 million, compared to $6.7 million in 2015.
This increase was due to the opening of our global research and innovation center.
Our selling, general and administrative expenses as a percentage of sales increased to 30.5% in 2016, compared to 26% in the prior year.
The year-over-year increase was primarily due to higher professional and legal fees and increased headcount in our energy chemistry technology segment.
I would like to note that our corporate SG&A spending is not allocated to discontinued operations and we do envision reductions following the sale of our drilling technologies and production technologies businesses.
For the full year, Flotek reported net income from continuing operations of $1.9 million representing earnings per share of $0.3 on a fully diluted basis.
Flotek's strategic repositioning which includes the sale of our drilling technologies and production technologies segments will allow our business to move forward and continue toward profitability in 2017.
For the fourth quarter, Flotek reported net income from continuing operations of $3.9 million, representing earnings per share of $0.7 on a fully diluted basis.
Our fourth quarter net income included a gain of $12.7 million before taxes from a legal settlement related to disgorgement of potential short-term short swing trading profits from a shareholder.
Flotek recorded income tax expense of $1.2 million yielding an effective tax rate of 39.3% for the year ended December 31, 2016, compared to an income tax expense of $3.5 million, yielding an effective tax rate of 32.7% in 2015.
At December 31, 2016 Flotek had accounts receivable of $47.2 million, compared to $35.5 million at December 31, 2015.
At December 31, 2016, [days] revenue and accounts receivable was approximately 63 days.
For both of the years ended December 31, 2016 and December 31, 2015, the provision for [now four] accounts was less than $1 million.
At December 31, 2016, inventories for continuing operations totaled $58.3 million versus $50.9 million for the prior year.
Our inventory turnover is currently approximately 3 times ---+ 3.0 times per year.
For the fourth quarter, capital expenditures totaled $3.3 million bringing our total capital expenditures for 2016 to $14 million, down $2.4 million from 2015.
We are continuing to invest in new strategic growth initiatives while maintaining prudent management of our cash position.
As a reminder, our financial statements report the continuing operations of our energy chemistry technology and consumer and industrial chemistry technology segments.
The Form 10-K provides a description and analysis of our discontinued operations as drilling technologies and production technologies in the foot notes and also in management's discussion and analysis.
We will continue to provide updates on the sale of these two business units.
In 2017, we are focused on monitoring capital expenditures, protecting our liquidity and growing our core businesses in energy chemistry technology and consumer and industrial chemistry technology.
<UNK>, back to you.
Thank you, <UNK>.
And now I would like to introduce our Executive Vice President Performance and Transformation Officer <UNK> <UNK> to share safety updates, some efficiency metrics and give more context around our data and analytical initiatives, an area that he had spearheaded and done a phenomenal job since joining the Company over five years ago.
<UNK>.
Thank you, <UNK>.
As we look through this downturn, we understood that our clients were going to require more out of every drop of our chemistry.
This was a key focus on data and analytics this past year and I would like some updates on what we have accomplished to the benefit of our client.
In June 2014, we developed a data analytics visualization software application.
The introduction of this type of digital open record of data is still growing in acceptance by the industry but it will be an increasingly important differentiator for us as we advance new, cognitive computational technology to [incumbent] key insights and trends about our client's wells and our how our chemistry can better enable and protect their reservoirs.
We feel strongly that open source data will be at the forefront of innovation for our industry and we will continue to accelerate improvements of our chemistry design for our clients.
As a testament to the industry's growing acceptance of this data movement, Core Laboratories and Baker Hughes both shared related remarks in recent earnings calls acknowledging that E&Ps want service and equipment providers to deliver on the vast promise of data analytics to enable them to make the right decisions and investments at the right time to quote Baker Hughes CEO, Martin Craighead.
These comments serves as affirmations to our own strides in data and analytics over the last few years, which has uniquely positioned us ahead of the curve with respect to meeting client demands to address productivity looking beyond cost as the end all and be all in this industrial.
I will now give you an update on our new research and innovation center which has allowed us to accelerate the pace of our prescriptive analytical chemistry business approach.
Our patent portfolio has continued to grow with four more patents granted surrounding our polymer activities last year bringing the total to more than a dozen.
Our total filed or pending patents now number more than 70 including 40 unique CnF formulations demonstrating our commitment to continuing to be the leader in a specialty chemistry sector.
Clients innovations were also up significantly due in part to the collaborative capabilities of this new unparalleled global research and innovation facility.
Since we completed construction, we have secured six new clients due to business to the center.
We have also held four events that brought together key industry leaders, academics and leading minds for a monthly Pursuit of Knowledge Institute series and have completed construction of our Canadian Research Center in Calgary.
We have also developed and continued active partnerships with eight universities and educational institutions.
Turning to our health, safety and environmental efforts, we have maintained an excellent best-in-class safety record.
Flotek's total recordable incident rate has consistently declined over the last few years falling 64% to [0.78] in 2016 from [2.19] in 2012.
This total recordable incident rate or TRIR as you know is the number of recordable accidents per 200,000 hours worked.
Our TRIR is much lower than averages for other economic sectors tracked by OSHA.
I would also like to mention the lost time and light duty injuries plunged to essentially zero in 2016 from [5] in 2015 as we further build-up upon our strong safety culture.
While we are very pleased with our performance and the dedication on safety shown by our employees, we continue to hold monthly safety meetings and reviews with all of our managers.
Our executive leadership is very involved in our continued review and enhancements regards the safety of our employees as well as the environment.
We also transformed our process to improve employee efficiency at the same time increasing the number of gallons of prescriptive chemistry per employee by 20% and exceeding our employee retention levels from 2015.
And with that I will turn it back over to you, <UNK>.
<UNK>, thank you very much.
Before we take questions, I would like to add a few concluding thoughts.
With numerous shale oil producers and oilfield suppliers now forecasting a low double digit growth rate in 2017, Flotek is uniquely positioned for an activity rebound, especially in light of our August acquisition of International Polymerics IPI, a leading supplier of natural polymers such as guar that complements our work with citrus based nano-Fluids.
IPI has also brought us a strategically located staging center in the Permian Basin that will help our cost curve as we serve the many independent and innovative E&P companies in the fast-changing and most active area in the US shale industry.
What we have seen among our large and small independent clients, as well as privately funded companies, is a trend of embracing technology sooner than their larger counter parts and thereby becoming more illustrative of what the industry is capable of being.
While an oversupply of pumping equipment currently exists, pumping companies that have recapitalized are differentiating themselves extensively with technology such as with our prescriptive chemistry.
Additionally, a looming shortage of small mesh proppant is having an effect on the type of fluid being used in completions which will increase demand for other solutions as companies seek to lift IRRs and EURs are expected ultimate recoveries.
As the playing field continues to evolve and activity levels begin to rise, we are positioned for growth and have initiated a double-digit price increase effective this quarter.
As we announced on January 30, Michelle Adams worldwide Vice President of IBM Watson Platform, has joined Flotek's Board of Directors bringing a wealth of first delicacy expertise in innovation, entrepreneurship and sustainability.
We are excited to have her on our Board and inspect to leverage her unique background in technology and cognitive learning.
Michelle becomes our eighth Board member and will serve on our governance committee.
I am confident that having an executive of Michelle's stature join our Board is as tremendous statement about our future business opportunities as cybersecurity and technology are now considered to be must-have competencies insides the boardroom.
I am also pleased to tell you that since the announcement of the Flotek store, we are in more direct communication with exploration and production operating companies.
With the opening of the Flotek store and the launch of our pre descriptive chemistry management business offering, we are becoming increasingly involved in the entire lifecycle of the well.
We are investing an additional subsurface characterization competences to design, execute and analyze applications of chemistry in oil and gas wells drawing on disciplines including geology and geophysics G&G, photography and reservoir completion and production engineering.
We continue to strengthen our team.
William Hill recently joined Flotek as Director of Geology.
He was most recently at BP America and has over 35 years of varied geoscience experience.
Flotek is succeeding in a tough market because we treat our clients' reservoirs and their capital like they were our own, meaning we do not prescribe a gallon more of fluid than we would if it was our own well.
We earn their trust by letting the results of our products speak for themselves as many of our clients have attested to and that is truly special.
For the first quarter 2017, we are anticipating continued improvement in completion activity.
In addition, we are experiencing continued strong demand in energy chemistry and are focused on delivering improved margins through strategic pricing increases and process efficiency.
In consumer and industrial chemistry, we continue to expect yearly growth and our net revenue and gross margins and expect to make substantial progress on the divestment of drilling technology and production technology businesses this quarter.
As always, we are focused on maintaining strong liquidity to fund our business.
We also recently posted a new video series called Catalyst for Change ---+ Conversations with Flotek's Directors featuring our Board members, which can be found on our website's Investor Relations page.
Today's shareholders are expressing more interest in learning more about, hearing from and understanding the Board of Directors' capabilities, as well as their positions on Company decisions.
Therefore, we created this video series to proactively showcase our Board members as they share their thoughts on Flotek's business and corporate citizenship, which is very important to us as a Company.
To that end our social responsibility work which we see as part of our broader sustainability efforts continued this past year.
In January, Flotek foundation made donations to food banks that helped the funds an estimated 1.3 million meals for families and children experiencing food insecurity, most notably in the communities surrounding our work in energy centers such as Pittsburgh, Oklahoma City, Dallas, Houston, Midland-Odessa and Denver.
This was a result of a hunger initiative we held in September which was supported by our clients as we donated a certain percentage of sales revenues from that month to local food banks.
For more information about these efforts, we encourage you to visit our website Makingadifference.com to see other examples on how we are creating change in the communities in which we operate.
We would like to take this opportunity to thank our employees around the global who believe in making a difference each and every day, not only for our clients but also for our shareholders, communities and environment.
Thank you for your continued interest in Flotek.
We will continue to work hard each day delivering, improving financial and operational results and do all we can to maximize our significant and unique opportunity.
And with that, operator, we will now open the call to questions.
Hey, <UNK>.
Yes, no.
Great question and I am sure others have the same thought and it will take a bit of an expanded answer, but every company in every industry that has transformational technology or a product wants a direct path to the end-user.
For full appreciation of that technology and for many, many decades in this industry that was just not the case.
And what we had was probably the most amazing brands nullification that I have ever seen.
When we sold our technology through the distributed networks, there must have been 55 different plus brands names that represented complex nano-Fluid, and that was just not a sustainable business model because you become dependent on that distributor's interests, pricing and technology sharing with the ultimate end-user.
So we felt after a lot of examination that in May of 2015, when we made that decision it would certainly transform us and we did not really realize how much it was probably also going to transform this segment of the industry.
What we had observed ---+ not in any way intentionally ---+ but what certainly what we had observed was some dilution of chemistry and really kind of a lack of interest of getting the right prescription of the chemistry into the well.
These hydraulic stimulation jobs are very complicated ---+ a lot of equipment, a lot of manpower.
Quite frankly, sometimes whether you are pumping a 1.5 gallon per 1000 or 1 gallon is probably not the highest on everyone's mind.
That exposed us to companies like [<UNK>ny Lee], [<UNK> Blevins], companies that consult on the well side to ensure quality assurance and gave us a better appreciation as to how the chemistry itself should be applied.
And from that as I mentioned in my earlier remarks, with a tighter relationship with these E&P clients, it has led to greater value for them, as I mentioned two in particular, Brigham and Silverback and greater value for us because we had a direct way to communicate how we would change the variability of certain chemistries to get to the optimum prescription, and in some cases that might be less chemistry but in all cases it was designed for what is best for the reservoir.
Along with that, came price transparency that the industry needed.
And so now I think as a lot of folks on this call know, more and more of the overall additives whether it is proppant, whether it is acid is he now decoupled from the way those services were provided for decades and at the end of the day it creates the opportunity for the most efficient technology to be conveyed to the end-user.
And so it took us really I think about two years to make CnF synonymous with Flotek chemistry.
And now what our vision is is where we want to be is when clients want the best prescriptive chemistry system, not necessarily the cheapest but when they think of one company and that is Flotek and the Flotek virtual store created that opportunity.
Hopefully, that answers your question for you.
Well, you hit on certainly three of the alternatives you can have when you have that flexibility and that luxury and we consider all those.
I think most of our stakeholders on this call envision Flotek as a growth company.
And a dividend program even a special one, I think they kind of feel like if we can put the money to work, whether it is an acquisition or whatever that is probably their preference.
We are very pleased with the balance sheet that we have.
We have identified that in the near future it will become even stronger and I think that speaks well to our flexibility as this industry continues to change, but I think the take-away is ---+ the folks who know us know that we look after this capital that it is ---+ as though it is our own money we have put into this and we are very respective of that be assured we will do everything we now how to put it to good use and it will be one of those nice problems to have but thanks for pointing that out.
Hi there, <UNK>.
Yes.
So great question.
There is absolutely in my now four years experience in this industry, more ---+ I will call it chatter between clients than ever before.
What used to be regarded as very tight hole information, now really through social media a lot of these younger engineers communicate to their friends in the industry ---+ and everybody talks about the Permian Basin because it is the most active.
But social media really is driving a lot of informal sales on our part and I am sure other companies that they are sharing their experiences, whether it is a Flotek product or whether it is the amount of sand they are putting in per lateral foot, these folks are just sharing that information.
The other thing that is happening is there is been ---+ and, again, folks on this call know this ---+ there is more and more lease swapping that is occurring where clients may have the desire to industrial a longer lateral but that would require going into someone else is lease so they will swap that and then immediately that person who swaps it becomes informed of how the completion is being done that otherwise they may not.
That just was not happening two or three years ago.
Still there is vestiges of the kind of old traditional oilfield, even though you have got social media going, at the same time these companies and you mentioned Noble in many cases operate like different companies.
Although their pay checks all have Noble on it, the Midland effort is different than the DJ basin effort, but what is kind of coincidentally is more and more of these companies that have acquired companies I have seen in the last 45 days have acquired companies that have been using Flotek chemistry, and obviously we think that is a good thing.
Still those acquiring companies have to feel confident that the companies they acquire had a good total benefit analysis and so it is still a process, but the industry certainly has changed not only for us but I am sure others in large part because of the lease swapping and also of all things social media.
Well, sure.
We sold a small part of downhole technologies in the northern part of the United States.
And by accounting rules, you have a year to divest once you do this discontinued operations accounting treatment.
So by accounting, we have to have it completed by the end of the year but practically we have a professional advisor that is running the program.
Our expectation is by the end of the first quarter, early the second quarter, have a resolution that is satisfactory to us, to our shareholders, to the potential buyer for both of those entities.
So we will keep obviously everyone informed.
We have felt that having both of these as evidenced by their performance in the fourth quarter as ongoing entities should create a larger value of the divestment, as opposed to shuttering them and saying ---+ okay, take what you want.
And we think that will be the case.
We will see.
But, again, I think the next 60 to 90 days will be very important for that process.
Okay.
Well, I don not want to run the risk of putting anyone to sleep on this call because it is somewhat complicated.
I will let our good man, <UNK>, speak to it at a very high level and then we will go from there.
This is an issue that comes under section 16B of the Securities Exchange Act of 2000 - of 1934 and it relates to affiliates of the Company.
Those would be folks that would have potentially have inside information.
So if there are any transactions in the Company's stock with affiliates as they are defined by the SEC, then there is a ---+ it really turns out it is a mathematical computation and we do disclose these our potential short swing profits.
We do not know if there are actual short swing profits.
So the rules require any possible potential profits that are recognized be disgorged to the Company and that has what has occurred in this case.
Does that help.
Sure.
Hi <UNK>.
Well, as much as we would like to tell you from competitive reasons, we are not going to give the exact delta of what we think will be the outcome of this double-digit price increase, along with our increasing cost of raw material.
I just do not think that would be prudent on our part.
But safe to say that the net of that will improve our margin and this whole pricing of the terpene in itself is a bit of a challenge.
Although we have got long-term contracts when you are buying 50% of your citrus oil from Brazil that in itself and, <UNK>, you can add some additional color.
But we just want to be really kind of mindful of the competitive balance in trying to answer your question but still being respective of, you know, the pricing model but go ahead.
Hey <UNK>.
Obviously, the citrus oil markets have been a little bit volatile here over the last 12 months, given the crop reductions that we have seen certainly in Florida as well as Brazil during the current cycle.
We do see Brazil's crop coming back up next season.
There will be a little bit of a delay in the price relief, but we do have, as <UNK> indicated, short and long-term contracts to position us well on those raw materials.
That being said, we will feel some of the increase.
To <UNK>'s point that increase will be more than passed on in our pricing increases of our finished products.
So, again, not getting into the specifics of what those numbers are, we do see the ability to pass the increases on to our customers and CICT as well as ECT.
Yes.
So I think I kind of urge everyone on the call these quarterly variances will fluctuate in the case of when it is going through a distributor on whether they have contracts with certain clients that may have run out and other clients are coming in and there may be a lag there.
In terms of someone that is coming through the Flotek store, it may be ---+ what their completion program looks like at the time, whether they have caught up to the drilling program.
I think as we have tried to telegraph for some period of time, this industry now truly is a just-in-time industry.
There's people are ordering this week for completions for next week, at the most in two weeks.
So it is not like there is a increase in stocking that has to be worked off.
It is pretty much more from an operational standpoint, as I mentioned, whether certain completion programs have run down, if it is going through a service company or whether the completions have caught up if they are going through the Flotek store.
So I would not spend a whole lot of time on the way that fluctuates.
You know, what we are most interested in is nothing would make us happier two quarters from now to have A, B, C, D and E and that is what we are striving for, not so much whether A is slightly up or slightly down in the quarter, that will all take care of itself.
Hopefully, that answered it for you, <UNK>.
Sure.
You know, we have had a policy we really hate to get into looking at this on a month-to-month thing and just prefer not to do that.
I think the comments really kind of speak for themselves of the demand that we see.
I think at the end of the week, the EIA report comes out as to what the completions looked like in January and we see every reason to believe.
And I think that is one of the benefits of the Flotek store is we have greater visibility out than what we had before.
And so with a level of confidence from what we can see the first quarter will be a very nice quarter in terms of ---+ as has happened in the past us having a level of activity that should be greater than what the completion activity increases.
I do not think there is any reason that would make us think anything differently than that as we have done throughout all of the 2016.
Sure.
Thank you.
Thank you, operator.
We like to again thank everyone's interest for being on the call, wherever you may be calling in from and coming in through the website.
We appreciate your confidence and like I say continued interest in Flotek.
We will look to see some of you in the near future and talk to you again at the end of April.
Like you all to have a great day.
Thanks for joining Flotek.
