Core Laboratories Inc (CLB) 2004 Q3 法說會逐字稿

Good morning. My name is Katie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Core Lab third quarter 2004 earnings conference call. [Operator Instructions]. Thank you. Mr. Demshur, you may begin your conference.

Thank you, Katie. Good morning and good afternoon. We'd like to welcome all of our shareholders, analysts, and, most importantly, our employees to Core Laboratories third quarter 2004 earnings conference call. As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO, for the call. The call will be broken down into five segments. First, Dick will start by making remarks regarding forward-looking statements, and we'll come back and give a brief consolidated company overview followed by Dick giving a detailed financial overview for our third quarter results. Then we will go on and look at our three operating segments, detailing our progress and notable projects that Core has been involved in. And then lastly, we will go ahead and open it for questions and answers. Dick.

Before we start the conference this morning, I mentioned 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 of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international clinical climate, and other factors including those discussed in our 34 at 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 the discussion back to David.

Well, thanks Dick. I would like to give a consolidated overview for our third quarter results. Core had another exceptional quarter. It was our seventh consecutive quarter that we've either met or exceeded our internal targets within the company. The quarterly earnings of $0.29 per diluted share for the highest quarterly total in company history only matched by the third quarter of 1998. The third quarter revenue of almost a 109 million was an all-time quarterly high for Core Laboratories, and we continue to generate strong levels of free cash which was used to continue a successful spot buyback program and also to reduce debt during the quarter.

The revenue growth and profitability were driven by the following factors --Number 1, increased demand for Core's proprietary and patented technologies; Number 2, the continued introduction of new Core Lab technologies especially in our production enhancement segment; further market acceptance and market penetration of these newly introduced technologies especially in the North American natural gas market; also the coupling of our newly introduced technologies with existing services are providing a powerful information database to optimize reservoir performance which has become far more important as we look at a tight supply in demand picture for petroleum products around the world. We will highlight these drivers in the detailed operations section which is to follow. I will turn it back over to Dick for a detailed financial review.

Thank you David, and before I begin and just like our last quarter's call, I would like to point out that the numbers discussed today will for the most part be about our continuing operations, although the impact of the discontinued operations are indeed becoming less. The financials in this earnings release are also formatted in typical discontinued operations presentations style. The results of the discontinued business can be found at the bottom of the statement of operations or in the balance sheet in line items in final assets or liabilities held for sale. So for today, our numbers are all about continuing operations, and just to be clear all comparisons will be made against what would have been the results in prior periods for those same continuing operations. In other words, year-over-year and sequential comparisons will be on an apples to apples basis.

As David said, our revenues were a 108.8 million in the third quarter versus 97.8 million in last year's third quarter and 102.2 million last quarter. The revenues were up a 11.2% year-over-year and up sequentially 6.4%.

Services for the quarter were 83 million, up 8.6% from 76.4 million in last year's third quarter. Sales were 25.8 million versus 21.4 million in last year's third quarter, were up 20.6%. Cost of services for the quarter -- 77%, virtually the same when compared to 76% a year ago. And for cost of sales, they increased in the third quarter coming in at 83% versus 81 in the third quarter of last year. The slight increase is primarily due to cost associated with our inventory reduction initiatives. The quarter does, however, compare favorably to our cost of sale for all of 2003, which were 85%.

G&A for the quarter -- 6.1 million, slightly lower than the 6.3 million last quarter, and although higher than the 5.6 million incurred in last year's third quarter, G&A is running at lower percent of sales basis coming in this quarter at 5.6%. We believe the G&A will run at levels of around 25 million for 2004.

Depreciation and Amortization for the quarter -- 3.9 million, down slightly from 4.3 million in the last quarter and 4.7 million in the prior year's third quarter. This is primarily the result of CapEx running lower then depreciation. For the year, depreciation expense is expected to be approximately 17 million.

Now looking at the performance-based top compensation line, we incurred an additional charge of a 199,000 in the third quarter relating to the first thrust of our performance share ward plan which was discussed at length on the last call. This charge relates to our share price increase that occurred in the third quarter. We have continued to outperform the OSX members during the three-year measurement period, higher than the 75 percentile, which causes us to believe that it is probable that we will continue on a relative basis to outperform the OSX members with a full three-year measurement period of the first thrust which ends this December 31. So as discussed on prior calls, all of our financial targets that we have mentioned have excluded any expense that may be recorded as a result of these strictly performance-based incentives.

Other income this quarter is in the amount of 362,000 as opposed to a loss of 552,000 last quarter and a gain of 229,000 a year ago. The gain this quarter was primarily due to foreign exchange largely the Canadian dollar for 232,000. EBIT from continuing operations excluding the performance-based compensation was 13.6 million in the third quarter providing margins of 12.5%, which compares favorably to last quarter's EBIT of 11.6 million with margins of 11.3%. So sequentially, margins improved 120 basis points, or by about 11%, while incremental margins were 30.4%. Our improvement in margins continues to be driven, for the most part, by the margins earned on higher revenues combined with better utilizations of our cost structure. On a year-over-year basis, our incremental margins this quarter by segment were up for reservoir restriction 33%; and in production enhancement, they were 23%; and they were not really meaningful at this time in reservoir management. And, however, the performance of our operations within the reservoir management segments continues to improve with each sequential quarter since they were separated from the discontinued operations.

Interest expense was 2 million for the quarter, virtually the same as last quarter in the prior year. Income tax expense from continuing separation were 3.1 million for the quarter verses 1.9 million last quarter and 2.6 million for the prior year's third quarter. As stated on the last call we expect an annual tax rate aquae tax rate to be 27.45% for the full year 2004. Income from continuing operations for the quarter was 8.4 million compared to last quarter's income of 6.9 million before starting this compensation. On that basis net income was sub sequentially 21.7%. After considering the discontinued operation, our net income was 7.3 million compared to 5.9 million in the prior year. Sequentially net income was up 4.8 million for 196% from the 2.5 million earned in the second quarter.

Earnings per share from continuing operations for the quarter was $0.29 of any above first calls main straight estimated of $0.28. Sequentially the earnings were up 21% from the $ 0.24 before stock base compensation opposed to last quarter. And after considering the discontinued operations our net income was $0.26 per share compared to a gain of $0.09 per share in the prior quarter. Then if we look at the balance sheet cash was 17.7 million up from 16.2 at year end receivable stood at 93.5 million up from 89.2 at year end reflecting greater business activity. Importantly from the prospective of secondary liquidity management our DSO's at the end of the quarter was 77 days down from 81 days at year end and 89 days 1 year ago. Indicating and improved utilization of working capital.

The inventory was 32.5 million down slightly from the second quarter's balance of 32.6 that after a year end balance of 31.3 million. As in the case of receivables management, our days in the inventory have approved again this quarter given a higher level of sales into the North American markets. Our other current assets were 8.4 million in quarter end, which reflected a reduction of almost 2 million from year-end primarily due to a read off in our prepaid accounts for insurance. We have a separate line for discontinued operations with the assets of the discontinued businesses were recorded at year end, generally the line items were in current assets and another one in long term assets, the values in those categories have been substantially reduced now that the majority of the assets have been sold. PTNE is down by 6.1 million from the year-end balanced from the effective CapEx running at lower rates in appreciation.

And for the most part the other asset items on the balance sheet are unchanged from the year-end. A we are on the liability side of the balance sheet, accounts payable were slightly higher than the year-end balance and up by 1.5 million from last quarter end, as our activity levels have continued to increase during the year. Our other current reliabilities were down slightly from last quarter but up by 1.6 million over the year in balance. The increase from the 2003-year in balance was due to recording the performance share ward plant ability last quarter along with the timing of certain payroll accounts. Liabilities of assets held for sale have come down as we wind up the process of exiting the discontinued business. The remaining 1.9 million is made up for the most part of reserved for bad debt.

Long-term debt was 117.3 million down from a 119.4 million last quarter and down by 7.4 million from a 124.7 million at year-end. Up standing under our revolving credit facilities was 42 million at the end of the quarter down from 44 million at the end of the second quarter and 49 million at year-end. And as of tomorrow, the revolver balance will be down at further 2 million to 39 million. This debt reduction has continued to strengthen our balance sheet. Our net debt GAAP continues to be in the low 30% range in line with industry averages. Our long-term liabilities were 17.4 million up 3 million from year-end primarily relating to liabilities associated with compensation plans.

Shareholders equity end the quarter at 186.6 million pretty much unchanged from last quarter down by 900,000 and by 33.8 million from 220.4 million at year-end. The reduction in the balance from year-end was due to additions from earnings and reductions due to losses stemming from the discontinued operations and repurchases of our shares through are stock buyback program. Our return on equity for the quarter using EBT was an annualized 28.7% compared to 24.7 decline annualized the second quarter EBT.

And this compares very favorably to the 15.1% returned we posted for all of 2003. Our return on equity this quarter is also significantly higher than what we have seeing reported so far this third quarter by the members of the OSX group, which have returned on average of 19.3%, versus our 28.7%. Capital expenditures for continuing operations for the quarter were 3.5 million we continued to expect our full year CapEx to be around 13 million. This compares to our expected full year depreciation of about 17 million. We look at cash flows, cash provided by continuing operations for the quarter was 13.3 million, year to date our cash provided by continuing operations were 36.9 million free cash flow defined as cash from continuing operations less the amount we spend on CapEx was 9.8 million for the quarter and 29.6 million for the first 9 months. And as David said we use this free cash flow to pay down debt, we purchase shares and invest in our capital expenditure program. We continue to be active with our stock buyback program. During the quarter we have purchased an additional 407,300 shares at a cost of 9.1 million in essence, reinvesting our free cash flow generated in the quarter.

Through yesterday we purchased a further 86,600 shares in the fourth quarter at a cost of 2.1 million, on its inception of the program we have purchased in the aggregate 7,670,550 shares at a cost of approximately 112.2 million. Our current share is outstanding now stand at 26.25 million and our diluted weighted average share account as of today is 28.87 million shares. The programs continues to be quite successful as it has contributed to our shares more than tripling in value or increase in value of over 210% since the inception of the program in October 2002. That return to share holders is also significantly higher than the performance of the OSX, which was 62% over the same time period for the S&P 500, which rose 40%. In all our financial ratios continue to strengthen as we repaid debt driving our debt capital lower. Even though it remains inline with the industry average. No doubt putting smiles on the faces of the debt rating agencies. We continue to generate OSX leading returns on equity and invested capital. And industry-leading returns to our shareholders in terms of stock price appreciation since the initiation of our share repurchase program. Now we like to go over our internal financial targets with you.

Based on discussions with our clients, our view of industry spending for remainder 2004 is unchanged from our thoughts, which we discussed on the last call. We still believe that activity levels in North America will continue at these levels through the end of the year. Further we believe the international markets will also continue to improve. So we believe that the improvements within our operations will come from increases in both the North American markets and the other international markets as well. What does this mean for our internal financial targets? Over the near term, our third quarter revenue target was driven during the last excuse me our third quarter revenue target was given during the last call in the 105 to 110 million range and as we just announced we came in towards the middle of that range at 108.8 million. We believe that we should see revenues in the fourth quarter somewhere between 108 to 113 million.

EPS from continuing operations and without regard to any performance they stop compensation expense is expected to be around $0.29 to $0.31 reflecting improvements in earnings from incremental margins on those potentially higher revenues. These revenues and earnings targets are of course related only to our continuing operations. For the full year on a continuing operation basis, we believe revenues will fall on the 420 to 425 million range. This expected growth in our annual revenues over 2003 is higher than most spending survives in the case for the industry, suggesting that we will continue to enjoy secular growth in the technical industry again this year. We also expected annual earnings for 2004 will improve over our internal targets we discussed on the last call.

We now believe based on the current improving activity levels that our full year continuing operations may earn a $1 to $3 per share excluding any cost associated with the performance based stock compensation. This new range is higher than the internal guidelines of 95 to a dollar that we discussed with you last quarter as well as the quarter before when we discussed a target of 89 to $0.93 per share. And now I would like to turn it back to David for more details and operational review.

Well, thanks Dick. Our first half would go ahead to our reservoir description segment. Lets remember this is about 60% of Core's revenues, it has an international focus and in general related to crude-oil related projects. On last quarter's call, we talked about our operating margin focus and as Dick said we saw a sequential improvement of 70 basis points in operating margin, this will be a continued focus in to the fourth quarter of 2004. I like to look at some areas and some projects of note in the third quarter that we were involved in. We saw a strong flow, continued strong flow of reservoir fluid projects in our Aberdeen Advanced Technology Center. This included several phase behavior studies not only from the North Sea but some parts of West Africa including some of the deepwater of West Africa. Even though the North Sea has been slow in activity, let's remember that the amount of fluids being produced from the region tends to be constant and we like the momentum that we are starting to see building in the North Sea area. We continue turning to the Middle East, we continue to work on about 4000 feet of core for a project from Kuwait; this is a large reservoir characterization project. These projects, these data basis will ultimately be used to expand some of the productive capacity that is been talked about throughout the Middle East, this tends to be one of the larger projects that we are now working on throughout the entire Middle East. And looking at Asia-Pacific, our Asia-Pacific operations have benefited from the increase crude-oil prices as the scope of several other projects that we continue to work on in the Asia-Pacific region have been expanded, these reservoirs description projects we are generating data basis from fields in Indonesia and Malaysia, that currently are in decline. These data basis will be used for enhance recovery projects to help alleviate to decline some of these fields in that area.

Turning to production enhancement, 35% of Core's revenues its our most rapidly growing sector, which remember has a North American focus and in general technologies relate to natural gas, related projects lets remember that production enhancement operations hosted record quarterly revenues with revenues up 24% year-over-year and 19% sequentially in incremental margins on a sequential basis with 23%. This is a continuing story of further market acceptance and market penetration of recently introduced technologies first we like to discuss the SpectraFlood, lets remembered that is a technology used to improve the sleep efficiency's and field floods and in past calls we talked about our success in Mexico, that continues there and within the quarter we now injected a field in Nigeria where we will use SpectraFlood to determine and improve the sleep efficiency for that field. So we are taking this technology and now taking it around the globe.

The second one would be SpectraChem, so remember this is a technology that is used to determine the effectiveness of what near wellbore clean up of frac fluids and gels. Our past work has shown that, there needed to be improvement in frac fluids and gels in the breakers that are put in those so we can have better clean-up and better flow of natural gas to the wellbore. This has been a very successful for these Texas and now we are seeing it used in another provinces in the United States and in Canada.

And lastly, I like to return to our hero or our high efficiency reservoir optimization perforating charges and gun systems. Remember this is the powered metal technology that when perforating a wellbore it creates a clean perforation tunnel we are not damaging the formation as we perforated and thereby having superior flow into the wellbore from day one and then superior recovery from the natural gas in the reservoir. This has been successfully introduced in Canada, the US and now Mexico. We will continue to develop the technologies of these charges, because now they are mainly used to shallow to medium-depth natural gas wells and hard rock formations, we are looking at continuing the development of this technology for some softer rock formations and you can read that to the areas in the deepwater where we have semi consolidated in available reservoirs. Turning to Reservoir Management of course 5% of Core's revenues has a world wide focus these projects look country wide basin-wide and field-wide in the use of integrated and semi graded engineering and geological informations and many of these data steps drive our Reservoir description and production enhancement segments as well. We had sequential revenue increase of 23% and operating margins of 16%. Some notable new projects personally believed petroleum geology of Libya parts one and two which were on shore of projects are now under way with characterizing all the producing horizons of the on shore fields in Libya and if we look at Libya lets remember that crude oil production peaked in Libya in 1970. The same year that it did in United States. So there is a lot of potential in this area and a lot of companies and we have now 20 participants are eager for this updated information. Part three of this study will be initiated in the first quarter of 2005 and look at the off shore Reservoir Stratographic sequence and we anticipate additional companies joining at that time.

Now the project to note from the Gulf of Mexico we were doing an Eocene Provenance Study these Reservoir have potential in the deep shell and deepwater as we have seen these paleogene reservoirs in deepwater has field potentials between 200 and 300 million barrels and several companies-- several independent companies have exploited a some of these deep water reservoirs in some of the deep water blocks and off shore Gulf of Mexico and we are getting significant amount of interest for that study. But what I would like to do now Katie, is turn it over and open it up for questions.

[Operator Instructions]. Your first question comes from Robert McKenzie with FDR.

Good morning guys.

Hello.

A question for you David, Reservoir description its typically has you know it's estimated pretty strong fourth third quarter and this going up probably in the fourth quarter at sequentially lower revenues. So, I want you comment on why that happened and what you expect to happen in the coming quarters?

Yeah, really two reasons Rob. First would be in Mexico. We have a number of projects that didn't finish up into the third quarter and a flow of projects going on in the fourth quarter was not as strong as we experienced last year and in the second quarter. Secondly we can look at some of the disruption in Russia, where our Reservoir description has a strong presence and we are looking at a year-over-year down cycle in sequential down cycle and revenues in Russia owing to some of the destruction there in some of the projects for you tell us. And the third would be not as much worked in the deep-water Gulf of Mexico from the second quarter of this year to the third quarter of this year. We don't think that any of these are permanent we just think that it was the timing on some of these projects and in the fourth quarter we expect to strengthen that operation to continue.

OK following up on that you know despite declining revenues you had margins improved as you mentioned in your prepared comments. How much of that is from you know just the mix of business with high yield of Mexican product ending disruption in Russia versus actual improved productivity?

Rob, I would say that is probably about equally spread certainly some of the margins in Mexico we were not happy with and that's why some of these projects are terminating but as we said in our third quarter our second quarter call that we were going to have a focus on increased profitability, and I think we will get advantages from that as we go forward and in the forth quarter and in the next year.

OK fair enough. You know you didn't give much guidance or any guidance probably for'05 in your press release and in your comments. I wonder if you can give us the framework as to how we should be thinking about 2005 for Core Laboratories, most in terms of top-line growth in productivity gains?

Rob, we were in the process of doing our budgeting right now for next year. We just think as we said the press release it's a little bit too early to provide this guidance.

OK.

What we done in the past Rob, is we have looked at some of the surveys that come out Lehman Brothers the Solomon Survey I think are very good basis for providing some guidance. As we have always said our growth has been 2 to 300 basis points. We tend to look at those surveys. We check with our own internal budgets and see how they agree. So I think that would probably be the first indication to when these surveys come out we will have a pretty good idea what were looking for on the top-line growth for next year.

In terms of your clients and what you are hearing from them, what regions are you hearing are likely to be the strongest over the next six or seven months?

We will go with Middle East, Asia Pacific West Africa and probably a return in South America.

And what's driving your return in South America?

I think you are looking at project basis there in not only Venezuela but Ecuador and possibly Argentina, Brazil being stronger as we go forward certainly with the looking at Venezuela certainly a lot of work needs to be done there and we are hoping that we are going to see some stability come back to that area year over the next year.

And would it be fair to assume that your start relationship outrun the industry by a couple of hundred basis points will continue next year?

Yes we don't any reason why that should not continue with some of the newly introduced technology that we have. We think that should continue.

Great, excuse me. Thank you guys.

Your next question comes from Allen Brooks with CIBC World Markets.

Good morning.

Hello.

I got a couple of questions for you Dave. One is in your press release you talked about a refined product study in Europe. Can you elaborate on that characterization of refined products?

Yes that's just crystalation of crude oils and what products that they are going to generate normally crude oil can be fractionated and also looking at values of certain white products of how a crude will be split. So not only dealing with crude oils but also their refined products.

OK and is which tying in with the change in Sulfur restrictions etc in Europe?

Hey, it's been just more of an analytical testing to look at value of these products and the different regulations in different areas here that does mean a lot of analytical work is being used

OK, the second question, you touched on earlier the Yukos situation in Russia and I wonder if you could elaborate a little bit more as to very kind of on going or for heavy capacity impact and what the on going impact might be which are doing and how the market might be changing over there for you.

Yes specifically Allen on Yukos, as we said on the last call they were less than 1% of our sales, but it is an incremental amount of sales and certainly there has been a bit of a slow down there. We don't have any, what we could consider bad receivables at this point from them as we mentioned on our last call of that point in time they were current with us, but some of the sales opportunity stemming from that organization has certainly slowed or dried an inter-tangial resolve as civility comes back, fortunate for us throughout the former Soviet Union, we have a variety of clients and who are not tied any one particular client.

Are you seeing any change in other client's attitudes with respect to activity?

No, no and we do travel there frequently and reports from people underground don't indicate that other companies are reacting any differently.

OK, the third question Dave, on the enhancement business, taking those products more in to the international arena you know what is the strategy going to be?

Well certainly if you look at structure flood, this is something that should be used in any field floods especially water floods around the world, so our world wide sales force made aware these technologies and the good result was, we are active right now in Nigeria, it would be just a matter of fact roll-off using our reservoir description platform to take some of these other technologies out even though they might be in production enhancements, if you look at presence in Nigeria, we do have a reservoir description presence there, but that lead to the production enhancement project now taking place for Shell in Nigeria.

OK, so what you are suggesting is that this roll-off can be accomplished with out any kind of significant infrastructure, build up for additional cost, is that right?

Yes that is correct and certainly, that enables some of the higher margins that we are seeing in production enhancement because that international cost base is already there, for instance we have just had a delegation of production enhancement folks in china and that's again on the back of our reservoir description framework, so we'll not be adding a lot of incremental costs to get this taken out world wide.

OK, good that's it from me Thanks.

Your next question comes from Mary Saffrey (ph) with Graces Square Finance(ph)

Good morning, I have a question about reservoir management you have just sought of said that some of the operations that they were doing there, some of the projects were reading to other work for reservoir description and then you mentioned the project in Libya, I'm wondering if you could may be flush that out of little bit.

OK very good Mary if we look at the project in Libya for incidence, it has several thousand feet of core from 75 wells and what we are going to be doing is generating data basis and so looking at that core, it will need to be described, it will need to have porosity and premier ability measurements other analytical measurements that will be needed for that database that work will be done by our reservoir description group. Some of those rocks may also be tested for their stability and the mechanical properties on how they might act under whether they be factor stimulated or assets stimulated, and that would roll under our production enhancement group. So as we look at this large project in Libya there will be a lot of analytical work and project work generated by the reservoir description group and the production enhancement group.

Do you have other things else for in the world that might tell also fit under this category of reservoir management project that they have that are ready to work in our other segments.

Oh yes we have dozens of them, I just mentioned these couples they are like the providence one study, we are looking at literally hundreds of eocene rocks, we have got a project deep water Brazil that we talked about in the past conference calls, the tight gas stands of the Arkoma Basin, all of these projects need analytical work and they actually feed a lot of our reservoir description and production enhancement locations around the world. Another example would have been the project that we did for Swift Energy in New Zealand, where are reservoir description and especially our production enhancement proofs were very active because these wells were being stimulated through fax -that were not very affective and saw production enhancement people were involved in it. So there is literally, they literally now have dozens of projects that is been working in two groups.

OK, thank you very much.

OK Mary.

[Operator Instructions]

OK Katie, I think we will go ahead wrapped. In summary Core posted another exceptional third quarter as all of our operating segments contributed to our record revenues and continued increases in profitability. With world wide crude oil production nearing peak levels, our continued focus on Reservoir Optimization Technology positions quarter for an another excellent close for 2004 in the Meet The Challenges 2005, we would like to thank all of our share holders and analyst to follow Core and especially all of our hard working employees for spending part of their morning with us. And we look forward to talking to you on our conference call for the fourth quarter. Thank you and good-bye.