Core Laboratories Inc (CLB) 2003 Q1 法說會逐字稿

Good morning. My name is Jamie and I will be your conference facilitator today. At this time I would like to welcome everyone to the Core Labs first quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Demshur, you may begin your conference.

Thank you, Jamie. Good morning, I’d like to welcome all of our shareholders, analysts and employees to our first quarter 2003 earnings conference call. As usual, the call will be broken down into six segments. First, Dick will make some remarks regarding forward-looking statements, then we’ll give a consolidated company overview. We’re seeing a lot of positive operating developments within the company. Then Dick will give a detailed financial review of Q1. I’ll look at all three operations for Q1 in detail and update you on the progress that we’re making. And then we’ll offer some guidance on the outlook for operations and for our financials as we go forward into the second quarter and for all of 2003. And then we’ll open the conference call up for questions and answers.

I’ll turn it over to Dick now for a forward-looking.

Thanks, David. Before we start the conference this morning, I’ll mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion on the company’s business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating the oil and gas industry, business conditions, international markets, international political climates and other factors, including those discussed in our 34 Act filings that may affect our outcome.

These factors and other factors mentioned on this call could cause actual results to differ materially and we undertake no obligation to update or revise any forward-looking statement made in this discussion.

With that said, I’ll pass it back to David.

Thanks, Dick. I’d like to take a consolidated view of our operations for Q1 for 2003. We saw record first quarter revenues of 93 million. They were up 10 percent year-over-year. We think this is some of the highest revenue growth in the oilfield services sector. We’d like to talk a little bit about the reasons for that. The earnings were 10 cents per share, excluding some of the non-operating items that we’ll detail throughout the call. If we look at the number of positive operating trends developing in Q1, I think of important to note is that we see international spending, although tempered by some of the turmoil in the Middle East, remains at relatively good levels and has benefited our reservoir description group. And in North America we’re seeing good increases in our production enhancement group, which is leveraged the North American natural gas drilling and there we saw revenues, year-over-year, up 13 percent with incremental margins at 30 percent. So, this groups acting exactly like we thought they would.

So, when we look at our three reporting segments, reservoir description from the crude oil international based project, we’re seeing continued strength in West Africa, the former Soviet Union and Asia Pacific. On the production enhancement side, we’re seeing specifically increased demands for our proprietary and patented perforating gun systems and we’re seeing increasing market acceptance for SprectaFlood technology that’s used in increasing the efficiencies of the sweeps within field floods.

Of course, production enhancement being driven by North American natural gas developments, one important note here is that a difference between what we’re seeing in the year, in this year, and in 2001, we feel is the absence of the majors participating in the rebound in North America. Of specific note here is the deep shelf discovery by [Newfield] [phonetic work] exploration, which looks like it could be a hefty D-plus discovery. This is at a horizon below 15,000 feet, relatively undrilled in the Gulf of Mexico. This could open up a whole new horizon in which discoveries at that level, we believe would interest the majors. So, we believe that’s a very positive trend for the industry.

Looking at reservoir management, if we extract the cost for the closure of our London operation, which was a loser for the last three years of approximately a million two and $300,000 from currency effects, you’ll see that the year-over-year loss has narrowed significantly. We have a number of projects there that have major margins that are on track, which have some real positive operating trends as we go into Q2 and 2003.

I’ll have more detail on those operational breakdowns as we go forward. But, first I’ll turn it over to Dick for a detailed financial review.

Thanks, Dave. Revenues were 93 million in the first quarter, versus 84.3 in the first quarter last year. So, revenues are up by over 10 percent compared to last year’s first quarter. And, as David mentioned, this increase is primarily due to the recent improvements in North American activity levels.

If we break down revenues, service for the quarter was 74.9 million, up from 69.2 in last year’s first quarter. [Ten] [phonetic work] sales were 18.1 million, up from 15.1 in the prior year’s first quarter. The cost of sales in the first quarter were 84.5 percent versus 92 percent in the prior year. And cost of services for the quarter were 83 percent, which is unchanged from the prior year. G&A for the quarter was 5.5 million, identical to last quarter, while up from 4.7 million in the first quarter of last year relating primarily to the expansion of our global oracle based information network throughout our major centers. Expect G&A to run about 21 to 22 million in 2003.

Depreciation and amortization for the quarter was 5.2 million, up from 5.1 last quarter and 4.9 in the first quarter of last year. For this year, depreciation expense is expected to be approximately 21 million.

Other expense this quarter is in the amount of 677,000 coming from a variety of areas, but primarily from 1.2 million or 3 cents per share in foreign exchange expense relating, for the most part, to Venezuela and Mexico, which represented about $700,000 each. The Venezuela amount is due to the dramatic swing in the value of the bee [phonetic work], although it has now stabilized at a government mandated fixed rate and should not create further losses, unless the government changes its fixed rate.

The Mexico Paso devalued approximately 8 percent during the quarter creating transaction losses from holding and converting Paso client payments into U.S. dollars. Since quarter-end, though, the Paso has returned to its prior levels.

EBIT was 3.3 million for the quarter, which is up 35 percent, which, when compared to 2.4 million in the prior year. Interest expense was 1.6 million for the quarter, down slightly from 1.8 million in the prior quarter due to lower borrowing costs and down from almost 2 million a year ago as our debt levels are now lower.

Income tax expense at 428,000 was recorded based on the 27 percent rate and we expect the rate to remain at 27 percent for the entire year.

Net income for the quarter was 1.2 million, compared to the prior year’s gain in the first quarter of 234,000 before the change in accounting principle. Earnings per share for the quarter was 4 cents, or after excluding the items we have discussed, 10 cents. Those items being 3 cents for the London closure and almost 3 cents for foreign exchange charges in Mexico and Venezuela.

Now going over to the balance sheet I’d like to point out a view items of note. Cash was 10.7 million, down 4.2 from the prior year-end balance of 14.9 million. The cash was used during the period to repurchase additional shares under our stock buyback program. During the quarter we purchased an additional 791,000 shares at a cost of 8.8 million. Through today we’ve purchased a further 417,000 shares at a cost of 4.2 million. So, to date, in the aggregate, we have purchased 2,068,000 shares at a cost of $22 million.

Receivables stood at 98.8 million, down from 100.6 million at year-end. Inventory continues to decline. It was 33.9 million at the end of the first quarter, down from the year-end balance of 34.5 million. All other items on the asset side of the balance sheet are virtually unchanged, although goodwill is expected to increase in the second quarter due to our April 30 purchase of GOEX.

On the other side of the balance sheet, both accounts payable and total current liabilities were similar to year-end with only slight changes in payroll and other accrued expenses. Long-term debt was 92 million, up by 4 million compared to 88 million at year-end. Debt to cap stand at 26 percent, well below industry averages of mid to low 30 percent. As we continue to generate free cash flow we will either pay down debt or repurchase company stock, all based upon corporate activities at the time.

Outstandings under our $100 million revolver were 17 million, compared to 13 million at year-end. Borrowings are currently at 31 million as we drew to fund the recent GOEX acquisition, placing our debt to cap at 28.8 percent.

Shareholders’ equity ended the quarter at 250.5 million, down from the year-end balance of 258.1 due to the additions from first quarter earnings and reductions due to our stock buyback.

Capital expenditures for the quarter were 4.8 million on target for our $20 million program in 2003. We look at cash flow; cash provided by operations for the quarter was 5.3 million, which enabled us to fully fund our 4.8 million cap ex program. The company continues to generate free cash flow.

Now we’d like to go over our internal financial targets with you. Based upon discussions with our clients, our view of the industry spending in 2003 is unchanged from prior guidance on our last call. Activity levels in North America finally show definitive signs of recovery and the international markets seem to be continuing at levels similar to last year. We believe that the majority of the improvements within our operations will come from increases in the North American markets with the other international markets continuing at similar good levels experienced a year ago.

So, what does this mean for our internal financial targets? First we see an improving situation, primarily in North America, which is already demonstrated a positive impact in the first quarter on our production enhancement operations. Second, with some stability returning to the international oil markets now that the conflict in Iraq appears to have been reasonably resolved, we expect the growth rate in our reservoir description unit to continue to improve as the year progresses. Third, we do expect to see continued improvement in our reservoir management unit throughout the year.

With this view in mind, we continue to believe that our annual revenues could be in the area of 400 million, or an increase of about 10 percent over 2002 revenues. Given these revenue levels, we believe [audio gap] for 2003 will be in the 65 cents to 70 cent range. We also expect that for the full year, we will generate approximately 25 million in free cash flow from a combination of earnings and improvements in working capital. And this is after paying for our projected 20 million cap ex program this year.

In the near-term, our view for the second quarter we have a revenue targets in the $94 million to $96 million range, and EPS in the 13 cent to 15 cent range, reflecting encouraging operational improvements coming from improvements in the results in margins in our reservoir description unit due to increased activity levels both internationally, as well as in North America. Our continued rebound in production enhancement due to increasing activity levels primarily in the North America markets and improvements in reservoir management, as they have been able to reduce their cost structure while generating better returns year-over-year.

I’d like to turn it back to Dave for a little more details on our operations.

Well, thanks, Dick, I’d like to go down to our three operating segments and add a little bit of color behind the numbers and what we see going forward. For reservoir description, remember this is a primarily international crude oil related set of technologies. It had its highest first quarter revenues on record with a 10 percent year-over-year increase. If we look at the margins year-over-year and the EBIT totals, you got to remember that about a million dollars worth of currency affects are in there. So, you do have incremental margins on the increase of the 5 million pickup on revenues, although the incremental margins were not where we wanted them to be.

We will see margin expansion through increased incremental margins as we head into Q2. Again, these revenues have been bolsted by the good levels of international spending that we see, tempered with some of the turmoil in the Middle East, which appears to be getting back on track. You got to also remember that reservoir description, these technologies, also apply to natural gas reservoirs and some of the increase and some of the revenues in reservoir description going forward will certainly be tied to some of the projects in North America associated with natural gas.

We see particular strength continued in West Africa, not only in Nigeria, but some of the other parts of the West African coast in the shelf and deep water plays. Asia Pacific, the former Soviet Union, including Kazakhstan and the Middle East, particularly in [Ibudabi] [phonetic work], Omar and Kuwait. This is even in fact with the ending of the oil for food program, which we’ve always said was a very interesting project for us. And for us going forward, we hope to take part in the reconstruction of the oil fields in Iraq.

Looking at Venezuela, operations are slowing returning to normal. We are working some short-term projects there, field related projects, as opposed to some of the longer-term reservoir management projects that we have suspended. One positive note, we are receiving payments from both the east and west operating regions in Venezuela and we will continue to monitor that very closely, although we do see these payments as a very encouraging trend in Venezuela.

So, if we look at reservoir description it’s well positioned for Q2 and we should see the annual progression of incremental margin expansion, which will expand our EBIT margins.

Turning to production enhancement, the group is acting as we thought it should with year-over-year increases in revenue in response to the increased North American natural gas drilling. The incrementals in this group reached about 30 percent in Q1 year-over-year. This is in response to increased demands for some of our perforating gun systems and perforating charges. I’d like to add note that here on -- as Dick mentioned, on 30 April Core acquired substantially all of the operating assets of GOEX which was a privately held company up on the Forth Worth area that was involved in manufacturing shape charges. The consideration for GOEX was about $10 million in cash. We look at this as a consolidation play. And also one of the gems that we were able to get out of this consolidation was the exclusive oil field distributorship for [debtcord] [phonetic work] that was made by GOEX’s parent. It’s widely used throughout the world here in North America and we feel the technology there is superior to all the [debtcords] [phonetic work] that will be out there.

Also, on the manufacturing side, we have begun construction of a gun manufacturing facility in Godly Texas. It is currently right now located in Forth Worth. It’s not very efficient where it’s at because of the transport of the gun systems off the load plant. So, we’re consolidating these two facilities into a load plant in Godly, Texas, which should bring some savings starting in the third quarter of this year.

Also in production enhancement, we’re seeing a good increase demand and market acceptance for our SpectraFlood technology. We’d mentioned before we’re working a number of large projects in Mexico, which have been expanded. SpectraFlood technology is a tracing technology that enables the operator to determine the efficiency of the field sweep in a water flood program or a gas injection program. And it’s working very well and it’s increasing the efficiencies of these field floods, along with the production that they’re getting from the fields in Mexico.

Turning to reservoir management, we are encouraged here actually by first quarter results. If we can factor out the $1.2 million closing cost of our London facility, and remember our London facility has been a loser for the last three years, and the about $300,000 worth of foreign exchange effect. We have near a breakeven for reservoir management in the first quarter. This is usually its toughest quarter and so going forward we look at and have 18 or so projects in integrated reservoir solutions. These are the integrated projects that include a lot of Core’s proprietary technologies, most of which are engineering based. At this time last year we only had three or four projects in the queue, so, very positive from that standpoint. We ought to see, going forward, strengthening in the results of reservoir management because we’ve now completed the refocus of this group.

Also on the cost reduction side, in addition to the London closure of the office, we also had some staff reductions here in Houston, which ought to have a positive effect going forward in the second quarter of 2003.

For the company outlook for Q2 and Q3 in reservoir description, we see the international crude oil related projects staying very constant at good levels. We will start adding incremental revenues and EBIT and we ought to see, in Q2, margin expansion.

For production enhancement, we’re seeing the results lifted there by increased drilling for natural gas in North America and the incrementals are already running at about 30 percent. We have a rig count now in the U.S. above 1,000 for the first time in several years. And it’s now climbing back in Canada where there is a possibility that we will drill a record number of wells this year.

One note we are excited about that deep shelf discovery that [Lucill] [phonetic work] made. We would hope that this would open up a new play in the deep shelf area of the Gulf of Mexico, which may attract the majors back to the party here in north America a little sooner than we expected.

Also on the combined product lines of Core and GOEX we’ve seen that strengthening on client base, plus adding the exclusive [debtcord] [phonetic work] contract that we have with GOEX’s parent, we also see as a positive operating development for production enhancement.

On reservoir management our visibility is increasing with the 18 or so integrated reservoir solution projects that we now have in the fold and that should bode well for Q2 and the rest of 2003.

So, for 2003 we still have our revenue target at somewhere around $400 million and EPS range of 65 to 70 cents. For Q2 we do see revenues at the 94 million to 96 million. This would be a record second quarter for us and EPS in the 13 to 15 cent range. I’d also like to add that 400 million in annual revenues would be a record for the company.

What I’d like to do now, Jamie, is open the call for questions.

Thank you. At this time, I would like to remind everyone in order to ask a question, please press star, one on your telephone keypad. We will pause for just a moment to compile the Q and A roster.

Your first question comes from Asheesh Kuffa [phonetic work] of Banc of America Securities.

Good morning, gentlemen.

Good morning, Asheesh.

Since the announcement of your statements, have you visited with any debt rating agencies or the SEC?

No, we’ve had no visits, no inquiries, no calls. Keep in mind our debt is private and we’ve had no contact with Fitch who was the original rating agency on the senior debt.

Okay. And regarding, I guess, shareholder losses, do you guys have an insurance coverage? And if you could maybe talk about the amount?

We have typical D&O coverage. It’s $30 million.

$30 million? Okay. Turning, I guess, more operationally now, to reservoir management, you guys have previously guided around 10 cents -- I’m sorry, it’s 10 percent EBIT margins ending the year. Is there any change in that outlook, or do you still see it ending the year at 10 percent?

Yes, review of that operating unit yesterday, we still feel comfortable with that 10 percent EBIT margin target.

Okay. And, could you venture to guess for that 14 cents -- the 13 to 15 cents second quarter, I’m assuming you’re factoring in similar incrementals production enhancement and if you can give us any guidance on what you’re factoring in for markets to ramp up for reservoir management?

Yes, if we look at the incrementals for production enhancement, Asheesh, I think we can still stay in that range. We ought to see the incrementals expanding for reservoir description and those usually run somewhere in the lower 20’s. And, for reservoir management our target there would be a positive month with EBIT margins somewhere in the mid single digits, so 5 to 6 percent.

Thank you, guys.

Thanks, Asheesh.

Your next question comes from [Neil Maxcki] [phonetic work] from Morgan Keegan.

Hi. Good morning. Hey, Dick, can you comment the -- can you break down the EBIT by division? Corporate and other was a positive 388 and could you comment on why that was positive?

Yes, that was an artifact of the way we allocate our G&A among the operating units. And in the queue it’ll be spread to the appropriate operating unit.

Well, I mean, I guess my point is it’s normally a negative number. So, you just didn’t allocate? I mean...

No, in the past it had not been G&A related, just other activities and that’s why it’s called corporate and other. I think in one previous call we had mentioned that they relate specifically to items that cannot be allocated to individual units. And, for example, we had mentioned a lawsuit that we have against a competitor where we believe they’re infringing on one of our patents. And, so the cost of that lawsuit in prior quarters showed up there. In this case, we had some allocation of G&A that wasn’t all the way spread and it will be in the quarter. So, the majority of that 388 is going to go to zero.

Okay. When the queue comes out?

Yes, sir.

Okay. So, that 388 then spreads to the EBIT, decreasing the EBIT of the other three?

That’s correct.

Okay.

No, Neil, that would increase the EBIT in the other three.

So, the bottom line is going to stay the same.

Right. So, you would pull G&A out of the other -- Okay. All right.

Right. You have to pick up where it is and it will go and it will be spread to the other units.

Okay. So -- all right. And, just -- I mean, production enhancement, I mean, that seems to be going along really well. Reservoir management, you know, I guess, you know, it continues to make progress and given it’s the weakest part of the year and you’ve got these 18 projects, you know, I guess that’s fine. Reservoir description, I guess I would, you know, would have expected maybe a little bit more incremental margin. Is there something seasonally or operationally going on there that may be would explain why that division maybe is not running quite as strong?

It was just project mix in the quarter, Neil. It happens from time to time. And usually, you know, their margins in Q1 are not the best. But, when you look at Q1 last year to Q1 this year, when you put the million back in, they’re pretty comparable. So, if you put the FX [phonetic work] back in there it becomes more comparable.

Okay. All right. Thanks, guys.

Your next question comes from Rob McKenzie [phonetic work] of Friedman, Billings, Ramsey and Company.

Good morning, guys.

Good morning, Rob.

Good morning, Rob.

A couple questions for you here, what was the after-tax impact of the $1.2 million charge to close the London plant?

It would be about 900,000.

Okay. So, there’s no different tax rate to take into affect on that number?

No. No, there’s not.

Okay. Secondly, what’s the run rate on GOEX’s revenues?

Well, it was an asset purchase and what we’re looking at there is mainly inventory, their receivables and their machinery. So, it was about 12 million. How much of that we’re going to be able to keep, we don’t know. But, we’re thinking that if we can keep a half to two-thirds of that, we would have done well.

So, in terms of your goal for revenues going forward on a quarterly basis, you’re looking at an incremental $6 million or so from GOEX?

Yes, for the rest of the year, that’d probably be right. That’d be a good ask. Probably more so, Rob, in Q3 and Q4 because, you know, we’re assembling [audio gap] in our facility now, so, we bought it right near the end of April, so you get maybe half of May and so maybe half this -- half a quarter this quarter and then a full quarter Q3 and Q4.

Okay. And, are those -- is that to say $12 million in revenue for those two quarters...

No, no, no, hold on, Rob. That would be annual...

Annual...

We’re going to try to keep 6 million to 8 million. So, if we keep it for, let’s say, two and a half quarters, you’re probably -- yes, I’m looking at maybe 4 million to 5 million impact.

Okay. And what do you expect the margins to be like that? Do you expect them to change the OM [phonetic work] significantly?

Well, we think we’ll see improvement in OM [phonetic work] margin just because of the increased demand and the efficiencies that we’re putting into place with building the manufacturing facility in Godly and moving it from Fort Worth. And, so, the margin that we bring along from GOEX should be similar. So, you know, we would target low teen margins from that business.

Okay. Now, the facility you’re building in Godly, moving from Fort Worth, A, what do you expect the cap ex impact of the new facility to be; and, B, do you expect to take any charges for closing the Fort Worth plant?

On the cap ex side, Rob, that’s 3 million, but that’s included in the 20 million target that Dick gave you. And we don’t anticipate any shut down cost in Fort Worth because that’s just basically a transfer of materials from the manufacturing facility there which we rent to the facility out at Godly.

Okay, your 65 to 70 cents guidance for the year, does that assume a 10 cent first quarter?

That is correct.

Going forward here in the second quarter can you give us a feel for what kind of foreign exchange losses or gains you might realize in the second quarter?

That’s tough to say there, Rob. I’ll turn that one over to Dick.

If you look at the areas where we’ve had the issues, Mexico and Venezuela, you know, Venezuela is now fixed by the government. So, if they don’t change it, there won’t be any impact there. And Mexico’s kind of interesting, the exchange loss is really an artifact of timing on selecting the data points when you begin the quarter and end the quarter. So, for example, at the beginning of the first quarter the rate was 10.2. The rate at the end of the quarter that we had to use was 11.2. Today it’s right back down to 10.2. So, if our determination period had been from the beginning of the quarter to today, there would have been no Paso impact. So, if the Paso remains at this 10.2 level, we don’t see any impact.

Well, you could have a positive impact.

Yes, one could.

Okay. Thank you very much.

All right, Rob.

Thank you. Again, if you would like to ask a question, please press star, one, on your telephone keypad.

Your next question comes from Allen Brooks [phonetic work] of CIBC World Markets.

Good morning. Dick, the share count, you’ve been buying back stock. Where are you exactly with respect to outstanding shares now?

We are at 32520.

Okay. And, your annual meeting is coming up, what, the week after next or so?

I think it’s like May 28 -- May 27.

May...

Hold on, May 23.

Okay. Are you both going to be at the same meeting?

Well, yes, we’ll coordinate that by then, Allen.

Okay. So, the current buyback authorization expires at that time, right?

That is correct.

Okay.

And we have purchased just over 2 million under that current authorization of 3.3.

Okay. All right. Second question is on the implementation of the Oracle system, which, of course, was -- I guess would uncover the Mexican problem. Where are you with respect to that program and have there been any other problem areas that you’ve discovered?

We have done a couple of installs since the last we talked. We did a small one in Northern Europe. We also did Holland just this last month, which is certainly a larger European center for us. The next initiative for us is converting our Oracle 11.3 to 11i, which is more fully Internet capable. And that will enable us to go into smaller locations at lower connectivity cost. And that is being initiated right now. And we’ve actually retained Oracle consulting to do that one for us and the reason why we went outside is we wanted to be able to expedite this project.

In the third quarter we will be doing Venezuela and Australia. And in Q4 we’ll get over into Thailand.

Okay.

And, so, it’s on track and maybe sped up slightly from the last time we spoke.

Okay. You haven’t found any other problems?

No.

Okay. Dave, on strategy at this point, obviously, you have some areas you’re focusing on. Are there any areas within your portfolio of products and services and business thrust that you want to either divest and/or, you know, significantly add to?

Well, with the purchase of GOEX we had talked I think in the last two conference calls that if we were to add some assets to the company it was going to be in the production enhancement side because we see the timing to add those assets were very good. That still is the strategy at this point. We would and are looking currently to increase our exposure in production enhancement. And, at this time, we’re quite satisfied with our reservoir management level of technology, we just want to see better execution there. And, also if there’s any tuck-ins on reservoir description, we would look there as well. So, the number emphasis, Allen, would be adding technologies and assets to production enhancement, followed by a reservoir description and then on reservoir management we think we’re going to hold the cards that we have, just awaiting better execution there, the blocking and tackling and getting that to the profitability levels that we’ve looking at.

Okay. Very good. Thanks.

Hey, Allen?

Yes?

One note, I think on the actual share count now at this date, because we were looking at an average share count there, it would be 31 million 209.

Okay. Thank you very much.

Okay, Allen.

Thank you. At this time, there are no further questions.

Okay, Jamie, very good. In summary, Core continued to see positive operating trends in Q1. Certainly internationally focused on reservoir description, should have a solid Q2 in 2003 with significant gains expected in production enhancement as the North American natural gas steadily increases. The project mix should provide increased margins and earnings for reservoir management, which I think is in a position, a better position now than it has been for the past couple of years.

Q2 should be significantly better than Q1 as 2003 should be significantly better than 2002, both from the activity level and then also from the execution of the company and our business plan. At this time I’d like to thank all of our shareholders and also employees for sharing their morning with us. Good-bye and thank you.

Thank you. This concludes today’s Core Labs conference call.