Core Laboratories Inc (CLB) 2006 Q1 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Lab first quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you. I would now like to turn the call over to Mr. David Demshur, Chairman, CEO, and President of Core Laboratories. Mr. Demshur, you may begin.

Thanks, Crystal. I'd like to say good morning to everybody in North America, good afternoon to everybody in Europe, and good evening in Asia-Pacific. We'd like to welcome you all to our first quarter 2006 earnings conference call. This would include all of our shareholders, analysts that cover Core, and more importantly our employees. As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements. Then we'll come back and give a brief consolidated Company overview. This time we'd like to discuss Core's leverage and global scalability and then talk about two new technology focuses that we have within the Company. Dick will then follow with a detailed financial overview, and then we'll come back and give a detailed operating review of our three segments detailing our progress and discussing the continual successful introduction of new Core Lab technologies and services. Then we'll end up with a Q&A session.

I'll turn it over to Dick for the forward-looking statements.

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 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 political climate and other factors including those discussed in our 34 [ACT] filings that may effect 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 Dave.

Thanks, Dick. I'd like to give a consolidated Company overview. Core's operations posted the most profitable quarter in the Company's 70-year history. It was a very good quarter. Operations under the command of Monty Davis delivered all-time quarterly records for revenue, operating profit, and net income. Our operating margins of 18% were the second highest in Company history, only surpassed by the fourth quarter of 2005. More importantly, the quarter marked the ninth consecutive quarter in which Core's operations posted record revenue and operating profits. To that end, we'd like to discuss Core's leverage and scalability on a global scale.

Over the past two years, the Company has increased revenues by almost 30% or $110 million by adding only 50 operational employees against a workforce of some 4,500. So Core was able to grow revenue almost 30% while adding only about 1% to our workforce. Moreover, during those two years, the Company's CapEx was slightly less than depreciation.

Now looking at 2006, Core anticipates revenues increasing another 80-plus million. Our current operational plans are to add about 75 employees. Projected 2006 CapEx will slightly outpace depreciation as the Company continues to expand internationally in Saudi Arabia, Libya, and the Asia-Pacific theater.

Core's operations are the most scalable, if not the most scalable in oil field services. Our business model is based on the continual adding of parallel reservoir optimizing technologies that add incremental revenues that drive our incremental margins. Our year-over-year incremental margins neared 50% for the quarter, which is one of the highest in the oil field services universe. With Core's current asset base, we believe that with similar rates of CapEx and employee additions, the Company can generate over $800 million in revenue on an annual basis. This is an increase of 60% over 2005 levels. So we think the Company is well positioned from an asset standpoint, from an employee standpoint, and more importantly from a technological standpoint going forward.

Speaking about technology, there are two areas that the Company continues new focus on. That has to do with introducing new proprietary and patented technologies to address production challenges in the Canadian oil sands and for boosting recovery from many of the world's mature and ultra-mature fields. For the Canadian oil sand developments, Core is bringing proprietary technology to (1) characterizing the constituents of the bitumen diluent. This is including the hydrocarbons, the salinity of the produced water, and more importantly the type and size of particulate matter contained in that diluent. These data sets are used in designing up-graders to maximum bitumen extraction and also to design the pipeline delivery systems to optimize flow in pipeline lines. With these data sets, looking at the economics of the Canadian oil sands, have dramatically reduced their operating costs.

Also in the Canadian oil sands, Core is providing reservoir description services that high-grade the placement of the SAGD steam delivery systems and the optimal placement of well bores that are used to extract the bitumen from the oil sands. Optimizing the placement of the steam delivery and production systems are critical in lowering operating costs and maximizing cash flow.

Core is also working on some new exciting technologies related to miscible natural gas field floods where heavy hydrocarbon gases, those from C3 to C7, are re-injected into the reservoirs along with – in some cases – nitrogen and possibly CO2 – to bolster hydrocarbon recoveries from some of the world's mature and ultra-mature fields. Core is currently testing pilot programs for the North Sea and some Middle Eastern aging reservoirs. We believe that miscible floods can be applied to some fields that have already undergone water flooding enabling additional recovery from ultra-mature fields once not thought possible. As in the past, Core will update shareholders and our analysts on the rollout of these new technologies and services over the next several quarters.

Now I'd like to turn it back over to Dick for a detailed financial review.

Thanks David. If we look at the income statement first, we'll walk through the major changes. Revenues were 137.3 million in the first quarter versus 116 million in the first quarter of last year and 128.9 million last quarter. Revenues were up 18% year-over-year and up 7% sequentially. In a moment you'll see the positive impact on earnings from our focus on higher-margin services and from leverage we can squeeze from our international-based fixed-cost structure.

Of these revenues, sales for the quarter were 38.2 million, up when compared to 25.9 million last year. Services for the quarter were 99.1 million, up when compared to 90.1 million last year.

Looking at cost of sales, in the first quarter they improved to 73% versus 79% last year. In cost of services for the quarter, they also improved to 73% compared to 77% last year. G&A for the quarter was 10.5 million, up from 7.7 million in last year's first quarter. This increase, compared to last year in the first quarter, was due to higher stock compensation expense and costs relating to employment benefits. For 2006, expect G&A to come in around 32 to 34 million.

Depreciation and amortization for the quarter – 4.1 million, slightly higher than the 3.7 million incurred last year in the first quarter. We expect depreciation in 2006 to total approximately 16 or 17 million.

Other income this quarter is in the amount of 1.9 million, primarily from foreign exchange gains of 400,000, casualty insurance settlement gain of 500,000 and a gain on the sale of business assets of about 500,000. This is compared to a loss in last year's first quarter of about 500,000. That was related to primarily to foreign exchange.

Operating income was 24.4 million. These earnings are up 10.4 million or 74% compared to the same time period last year. It is also up from 16.6 million, or 47% sequentially over last quarter. This operating income represents margins of 18%, up 565 basis points compared to margins of 12% in last year's first quarter. As David said, these are our highest first quarter margins ever recorded. Our continued improvement in margins has been driven by our focusing on obtaining commercial contracts to deliver higher product and service margins thereby creating higher levels of incremental margins earned on those revenues and combine this with better utilization of our cost structure. The results are clearly demonstrated in our expanding margins.

On a year-over-year basis, our incremental margins in the quarter were 48%. By segment, they were for reservoir descriptions 73%. Production enhancement they were 47%. Reservoir management they were 52%. Interest expense was 1.3 million for the quarter, down from 2 in last year's first quarter. That is because we exchanged our higher-rate senior notes in the fourth quarter of last year with lower-rate debt under our revolver. We expect interest expense in 2006 to run in the range of 4 or 5 million. Income tax expense was 6.9 million for the quarter compared to 3.3 in the prior year's first quarter primarily due to higher taxable earnings in this quarter coupled with an increase in the effective tax rate from 27.3% now to 30%. As mentioned on the prior call, the annual effective tax rate is expected to be 30% for all of 2006.

Income from continuing operations for the quarter was 16.1 million compared to 5.3 in the last quarter and last year's first quarter income of 8.7 million. On that basis, net income was up 207% on a sequential quarter basis and up 85% on a year-over-year basis. Earnings per share from continuing operations for the quarter was $0.58. This is $0.08, or 16% above First Call's mean Street estimate of $0.50, which compares to $0.31 earned from continuing operations in Q1 of last year. Total earnings are up 86% year-over-year. Sequential EPS is up $0.39 or about 205%.

Now going over to the balance sheet. Cash was up 2.3 million to 16 compared to the yearend balance of 13.7 million. Receivables stood at 108.9 million, up by 9.8 million from 99.1 million at the prior yearend. DSOs continue to improve, now down to 71 days compared to 74 days for the full year 2005. Inventory was 27.3 million, down by 1.8 million from 29.1 at yearend even though our product sales were up almost 32% on an annualized basis.

Other current assets were up 3.5 million when compared to the prior yearend balance of 11.3 million. That is primarily due to a re-class to current from long-term of a valuation reserve on certain NOLs. There were no material changes in PP&E or intangibles, goodwill, and other long-term assets.

Now the liability side of the balance sheet. Our accounts payable were down by 2.4 million primarily due to the timing of vendor payments. Other current liabilities increased from the 2005 yearend balance by about 6.5 million primarily from an increase in deferred revenue and taxes payable. Long-term debt was 91.1 million, up 5 million from the yearend balance of 86.1. Our net debt to cap at the end of the year stood at 24.3% -- excuse me – 24.3% at the end of this quarter compared to 23.7 at yearend. Other long-term liabilities were 24.7 million, up from 16 million from the prior yearend primarily due to deferred revenues by about 5 million and 2 million for compensation expense accruals.

Shareholders equity ended the quarter at 206.8 million, down from the prior yearend balance of 214.3 million primarily from our share repurchases. Our annualized return on equity for the quarter was 47.2%, if we use operating profit, up from 28.4% in 2005. Capital expenditures for the quarter were 4.3 million, up from 3.2 million for the first quarter of the prior year indicative our efforts to commit capital in support of our growth objectives. We continue to expect CapEx in [2003?] to closely match depreciation slightly higher than falling in the range 17 to 18 million.

Looking at cash flow, cash provided by operations in the quarter was 24.8 million. After paying for our 4.3 million in CapEx, our free cash flow was 20.5 million or about $0.74 per diluted share in the first quarter. The annualized per share yield on this quarterly cash flow was about 6.2%.

So how did we use the free cash in the quarter? In essence, we gave it all back and then some to our shareholders through our share repurchase program. Speaking of the program, during the quarter we repurchased an additional 606,000 shares at a cost of almost $27.3 million. Through yesterday we repurchased a further 173,000 share in this second quarter at a cost of almost 9.4 million. So from inception of the program, we've purchased in the aggregate approximately 10 million shares at a cost of just over $190 million or about 25% of the shares outstanding at the time the program began back in October of '02. This has been a very successful program for shareholders as it has contributed to our shares increasing in value over sevenfold since inception of the program. So the return to our shareholders from inception has been over 600%, significantly higher than the OSX, which rose just over 200% or the S&P500, which rose 62%.

Over the past year, our financial ratios strengthened further. For example, our return on shareholders equity this quarter improved to 47% compared to 28% for all of 2005. Our net-debt-to-cap is down to 24.3% from 29.4 a year ago. So we continue to further improve our balance sheet and financial position while providing our shareholders with one of the highest cash returns in the industry.

Now we'd like to go over our internal financial targets with you. Beginning in 2006, under the new FAS 123R rules, our equity incentive-plan designs now call for quarterly amortization of stock-based compensation expense over the life of the measurement periods rather than incurring the possibility of one-off acceleration of the expense as we experienced in prior years under the previous accounting rules. This means that under the new 123R rules, that quarterly expense beginning in 2006, should be more stable and predictable. For example, the quarterly expense this year should be about $0.02 to $0.03 per share. Due to the structure of our plan, this amount is fixed regardless of share price movements. So our $0.02 to $0.03 per quarter, or about $0.11 per annum, equates to about 4.4% of our target earnings for 2006.

Now for our targets. We have increased our revenues, as David mentioned, for the full year 2006. We now believe our revenues should approximate 560 million, or about 16% higher than in 2005. On the last call we gave an earnings target for 2006 in the $2.05 to $2.15 earnings per share range, which included stock-based comp. This was raised in our press release dated April 3 to $2.20 to $2.30 per share. Our view now is that our earnings should fall in the range of $2.50 to $2.70 per diluted share including stock-based compensation. This represents an increase over the targets given on the prior call by 22%. This is substantially up from the $1.11 earned in 2005. Excluding stock-based comp, our EPS in 2006 is expected to fall in the range of $2.61 to $2.81, which is 55% higher than the $1.74 earned on that basis in 2005.

For the second quarter, our revenue target is in the $138 to $145 million range. This target is up from the 135 to 140 million range we gave on April 3 and up 17% from the second quarter of last year. For EPS we expect it to be around $0.60 to $0.62 including stock-based compensation expense. This is up from the targets we gave on April 3 of $0.54 to $0.58. These results, if attained, would reflect a 60% increase in earnings per share over the $0.37 posted from operations in the second quarter of last year.

Now I'll turn it back to Dave for more on our operations.

Great Dick. Thank you. I'd like to go over a detailed operations view starting with reservoir description. Let's remember that this segment deals with technology that describes the reservoir system. These reservoir systems are composed of course and permeable rock, which contain the three reservoir fluids, those being natural gas, crude oil, and water. So this business analyzes rocks and fluids. It's not a consultancy business. It has an international focus. It is about 52% of Core's revenue. And the technologies mainly focus on crude oil related projects.

Solid quarter as we continue to eliminate, downsize, and replace lower margin projects with those that have a higher content of Core's new services. The revenue growth may be lower year-over-year. But we are doing far less work for far greater returns. A project of note – we're doing a lot of work in the fluids area from deepwater reservoirs. We've been utilizing Core's new pressurized fluid imaging technology or PFI, which optically defines the pressure and temperature envelop that ensures continuous hydrocarbon flow from deepwater reservoirs. They define the window in which asphaltenes and waxes will precipitate on the flow lines, thus letting the operator know at what conditions he needs the flow the oil and gas from that reservoir to the surface. This ensures continuous flow from these deepwater reservoirs.

Turning to production enhancement, these are technologies used to enhance the production on a daily basis and the ultimate recovery of hydrocarbons from the reservoirs. It is 41% of Core Lab revenues. It does have a natural gas focus. Recently it has expanded internationally putting services and products into Libya, Iraq, and New Zealand. Great quarter here – 32% year-over-year growth driven by the continual market acceptance of (1) Core's high efficiency reservoir optimization perforating or HERO charges. A recent example of this – we used over 10,000 charges to perforate a 2,000 foot horizontal well in New Zealand. The entire section was done with one intervention in the wellbore. More importantly, the production results were very encouraging.

Also we've expanded the applications of SpectraScan, SpectraStim, SpectraChem to applications in the Bakken play, which is a non-conventional reservoir for crude oil in the Williston basin. The Bakken play has been exploited by horizontal drilling and hydraulic fracture technology much like some of the gas shales, although this is an oil play. We've been able to apply SpectraScan, SpectraStim, SpectraChem to locate and high grade reservoirs that will produce more crude oil and produce more crude oil recovery over the life of the wellbore.

Finally looking at reservoir management, let's remember that this team of geologists, engineers, and petro-physicists work on field and basin-wide projects that utilize data sets that are generated by Core's reservoir description and production enhancement segment. This has an engineering focus and it is 7% of Core Lab's revenues. The group is rapidly being recognized as experts in the exploitation of non-conventional natural gas reservoirs. Basically they are altering the production decline curve for our clients. They had a great quarter.

Two projects of note that we've spoken about in the past. They are recognized must-haves in the industry for non-conventional natural gas reservoir exploitation. The first being reservoir characteristics and production properties of gas shales and the second one dealing with piped gas sand developments throughout North America. Both studies now have over 30 participating companies. We're making great progress with both studies and in locking value for our clients in these difficult reservoirs.

Before we open it up to the Q&A session, Crystal, we did get one question via the email this morning regarding the Chinese government raising short-term interest rates and the effect that that would have on Core Lab's business going forward short-term and long-term.

Although we might be seeing a commodity sell-off this morning in oil and natural gas, in looking at our business as we've talked about in the past, on onshore China we don't have a large number of facilities in onshore China. More importantly as we look forward, we don't think that this short-term interest rate in China and the commodity sell-off will affect our business whatsoever short-term and long-term.

With that, Crystal, we'll go ahead and open the phones for the Q&A session.

(OPERATOR INSTRUCTIONS). James West of Lehman Brothers.

Good morning. My first is, given that you had pre-announced some first quarter guidance in early April, what has changed since then? Or what changed in the numbers that you were seeing come out of the quarter that caused the enormous earnings beat that you had in the first quarter and then caused you also to raise your earnings guidance for the full year so dramatically?

I think when we look at margins and the margin expansion that we're seeing, I think that that has led to the upside beat. In looking at the projects internationally, a lot of those projects came in as we closed the books with higher margins. We're seeing a greater acceptance of the new technology in the international theater, not only in North America. I think that led to the upside surprise even after our 3 April press release where we guided higher.

Do you think that this rapid adoption of your new technology – is it being driven by a change in the behavior of your customers? Or are you marketing more aggressively in the international markets?

I think a little bit of both. I think they are looking at – we've got 4,000 fields of size around the world. Over the last couple years we believe at Core Lab that we've added no additional spare productive capacity worldwide. I think you're getting operators concentrating more on those 4,000 aging fields of size. As you know, our technology is better applied to fields that are already producing. So our plan over the next ten years is to address an additional 400 fields. Currently we work in about 800 fields. As we go forward, we believe that our growth will come from additional penetration of our technologies in the existing fields we work in – those 800, plus the penetration of the additional 400 fields that we target over the next ten years.

The 75 employees you plan to add over the course of this year, would these mostly be going to new fields or on existing fields that you are working on currently?

Existing fields and probably most of those employees we'll be looking at adding in the production enhancement segment. That is our most rapidly growing and one where we're seeing adoption internationally. Plus, we're seeing good demand for our reservoir management studies. So they will be hiring a number of professionals going forward as well.

One last question. With the oil sands technologies and the miscible flood technologies that you discussed earlier, when should we think about revenue contribution from those technologies? When will they be commercialized?

We're getting those now. With our other new technologies and services that we rolled out, these always continue to be based on our business model – incremental adds; nothing revolutionary; always incremental adds of revenue that drive our incremental margins. As we go quarter-to-quarter we'll give you an update. We've been very, very pleased about the response to our HERO charges and we hope that our miscible flood technology and our Canadian oil sand technologies meet the same greeting. We'll keep you up-to-date. We'll give you signposts every quarter when we report.

Okay, great. Great quarter. Thanks.

(OPERATOR INSTRUCTIONS) We currently have no further questions, Mr. Demshur. Are there any further remarks?

Yes, Crystal. I'll go ahead and close. In summary, Core posted our most profitable quarter in the Company's 70-year history. We have never been technologically better positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company. This positions Core well for continued growth in 2006 and beyond.

On a final note, I'd like to say that Core will be making a guest appearance on CNBC's The Closing Bell today at approximately 2:30 central time. We are going to be guests there to discuss the quarterly results and the global challenges to expand production from the world's aging oil fields. Join us for that.

In closing, we'd like to thank everybody that joined us for the call. We look forward to meeting with you again at the end of our second quarter. Thank you and good-bye.

Thank you for participating in today's Core Lab first quarter 2006 earnings conference call. You may now disconnect.