國民油井華高 (NOV) 2002 Q2 法說會逐字稿

Good morning, my name is July and I will be your conference facilitator. At this time I would like to welcome everyone to the Grant Prideco report of second quarter earnings. All lines have been placed on mute to prevent any background noise. After the speakers' 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 star, then the number two. Thank you. Mr. McShane, you may begin your conference.

Thank you operator. Good morning everybody, and thank you for joining us this morning to discuss our second quarter results, we'll have a few comments from myself, and then Louis will take you through the financials in a little more detail, and then we'll have a question and answer period. As always, before we get started, I would like to note that we will be discussing a lot of forward looking information relating to future financial results, market conditions, and other information. All of these statements should be analyzed in connection with the risk factors and assumptions described in our public filings with the SEC.

OK, with that formality out of the way, we reported this morning earnings per share of 3 cents, which included a severance related charge of $3.1 million after tax impacting earnings per share by approximately 3 cents, so we did about 6 cents prior to the severance related charges. This was achieved on revenues of $168.6 million. We also booked, this quarter, about a $2.5 million pre tax charge related to some equipment, which was taken out of service and replaced with newer equipment in line with our manufacturing upgrade efforts.

Let's talk about the environment that we had to operate under and most of you are well aware of the fact that U.S. rig activity was down on a year to year basis by 35 percent, our Canadian rig was down by 42 percent and the international rig environment was down by four percent. In this environment, as you can imagine, our customers slowed down their orders of drill pipe and we saw a 40 percent reduction in drill pipe footage sold. This activity decline in North America, likewise, adversely impacted our premium connections and Tubulars business, which typically tracks North American gas drilling activity. Given this environment, I think we're reasonably pleased with the revenues that we achieved. Revenues were off 13 percent for about $24.3 million year over year, clearly benefiting from a couple of acquisitions, those being the Chinese drill pipe operation where we acquired a controlling interest here recently as well as the Scana Rotator Valve acquisition done recently.

Excluding the benefits of acquisitions, our revenues were down about 22 percent year over year. income prior to the severance charge was down by $12 billion. If you look at operating income prior to the severance and asset right downs we were down about $9 million, so we dropped about 37.5 percent of the revenue decline down to income. So, while not pleased about the overall environment we have to operate in today we think that our results do reflect some progress in manufacturing efficiencies, some market penetrations with some of our premium products as well as the benefits of some of these recent acquisitions.

Let me comment, make a few comments on revenues and then I'll turn it over to to go through the financial results. On the drilling product side, revenues benefited from the, from the, from two primary factors; first as mentioned, our Chinese drill pipe operations provided over $14 million in revenues, clearly exceeding the acquisition plan and so we're quite pleased with the way that operation has started. We also benefited from a significant pricing benefit, which is as much as anything reflective of the fall off of U.S. land drilling driven API drill pipe and maintaining pretty good business on the premium side.

By way of example, last year our mix was about 92 percent API drill pipe, this past quarter that was down to about 44 percent and the API drill pipe clearly is a lower-priced product and is the premium end, so that helped our average unit pricing considerably. As a result, when we look at overall drilling products revenues they were only off by eight percent year over year with the benefit of China and only down 22 percent without the China acquisition benefit, despite a drop off in footage of about 40 percent. On the premium connection side of the business the premium connections and tubulars our revenues fell by 23 percent in the face of a 36 percent decline in North American drilling activity, this division was particularly hit hard in the threading casing, premium casing business, the high collapse casing business out of our TCA operation, that business was up 50 percent reflective of the weak drilling market we've got here in North America.

However our premium threading in accessories revenues held up quite a bit better, AB was actually up year over year by 13 percent, and tubular was only up by 9 percent, within those products, within those business units we benefited from a growing business on the expandables threading business which we are aligned with in venture that case continued to perform well and grow quite nicely, and our vacuum insulated tubing business line is holding up quite well in a flap to down market, the primary installations for this product today have been in the deep water Gulf of Mexico market but we believe we see a number of opportunities to grow this business going forward.

On the marine side of the business, which is principally our "Excel" product line, revenues where up 47 percent year over year, principally this is from the acquisition of "Scana" which contributed about $3.5 million in revenues this quarter, generally speaking in line with the acquisition plan; if we look at the "Excel" product line alone it was up about seven or eight percent on the year over year basis which we think is reflective of some market penetration by our "Excel" group. On the industrial side, this business unit continues to be plagued by a weak market for industrial drill pipe, it was down 38 percent year over year, essentially clad on a prior quarter or on sequential quarter basis, clearly this business unit is one that we've got some issues with, we're not satisfied with the performance from a profitability perspective and we are evaluating a number of alternatives to maximize our investment here.

On the new products in R&D side I've already mentioned progress in expandables and VIT, we've also continued to see good performance from our five and drill pipe product line within the drilling products group, more on the R&D side we are continuing to progress with our project, I'll be traveling up to Utah next week to witness some product testing and visit with our folks up there, but they are continuing to make progress; it's a little bit too early to predict the actual market introduction on that, but hopefully we can have an update on that in the near future. We are continuing to evaluate our Plexus technology group as well as our composite project to evaluate how we can best exploit those technologies in conjunction with our core business lines and we'll be looking at those closely here over the next several months.

Let's see here, I think that that basically concludes my remarks on the revenues and the quarter, I'll turn it over to Louis to go through a little more detail on margins and balance sheet issues and then we'll have a few comments about the market outlook at the end, go ahead.

Thank you Mike! First of all I need to point out that all of my comments are going to exclude the impact of amortization in last year's numbers which where approximately $1.6 million per quarter, pre tax. Focusing first on the drilling products and services division sequentially operating income for the division decreased just over $3 million or about 15 percent on a flat number of sold and average price was also basically flat with Q1. The decrease in operating income includes $2.5 million for the write down of fixed assets that Mike just mentioned; going the other way the consolidations of GSG our Chinese operations contractible approximately one point nine million to the operating income improvement.

As part of our efficient improvement program during the quarter we shifted all the drill manufacturing from our Mexico plant to our Texas plant which resulted in a reduction of our labor force in Mexico from approximately 600 employees to approximately 320 employees a reduction of 280 employees from Q1 to Q2.

For the entire drilling products division we have reduce that count by 31 percent since last year. And our revenue per employee has increased by 29 percent sequentially and 35 percent year over year for the division. On a year over year bases the operating income for the division excluding the fixed assets write down was relatively flat despite a 25 percent decline in the world wide rig count. And that performance is primary driven by the much higher drill pipe prices that Michael talked about 38, 55 in Q2 compared to 28, 34 in last years quarter.

Two and a half million operating income improvement from the consolidation of our Chinese joint venture and the acquisition of the step up interest there. All theses 0 improvements was set by the significant dill pipe that Michael mentioned from two point two million feet to one point three million feet. Sequentially our US manufacturing coast for foot decrease by approximately 25 to 50 cents from Q1 to Q2 that is excluding the impact of mix.

A drill pipe bookings for the quarter total about one point one million feet at a average price of just over $39 , this compares to about 800 thousand feet at about $40 in Q1. In our drill pipe back log at the end of Q2 totaled about 800 thousand feet at about 38, 50 compared to one point two million feet at the end of Q1 at just over 41, 41, 75.

Turning to our premium connections in product division we began to see sign of a turn around in Q2 as Michael mentioned, on a nine percent increase in revenue with a 56 percent increase on operating income and 42 percent margins this is primarily due to operating leverage and a of products mix and efficiencies gains. Again at our primarily at our product lines. The Texas operations has not shown similar improvement due to unfavorable product mix and inefficient with the re negation of the union contract that took place over the second quarter.

However on a year over year bases operating income for this division is down 58 percent primary driven by lower volumes again primarily at and at Texas business. Both of these business are heavily driven by steel mill activity which is well know it is not very strong right now. In a less favorable mix at TCA, AB, and Texas our marine product and service division turned in a operating loss of about 450 thousand which was relatively flat sequentially but Q2 includes the operating income of just over 500 thousand from the rotate acquisition that Michael mentioned .

Decrease of 780 thousand of operating income in the other business in this division related to primary to increases in SG&A. We all know the SG&A cost structure was in place to significant in rapid growth in the segment for acquisitions. The other segment the industrial drill pipe includes also expenses for new technology and joint ventures like drill pipe. Michael mentioned the very depressed nature of the business the telecommunications business being way down. To spite the to drill horizontal to lay fiber optic cable. As I mentioned last quarter the industrial operation is carrying about $11 million in good will and based on the extremely depressed nature of the business is impaired in the amount of the impairment will be determined by year-end as we decide on the strategic direction of the business. The entire balance should be considered at risk. In accordance with the new goodwill accounting rules any down in this segment this year will be treated as accumulative effect of an accounting change.

The other comments, our debt balance went down by 38 million in the quarter. Our debt to went down from 34 percent to 30 percent. Revolving credit facility was paid down only 12 million, which leaves about 120 million of un-drawn, committed capacity on that facility. Cap ex for the quarter of about 10 million is in line with Q1 and in line with our budget of 40 to 50 million. However I should mention that in light of market conditions we are going to re challenge every item in the budget that has not already been committed. Looking forward our forecast while current U.S. count of just over 830 is slightly up from the Q2 average of just over 800, it is down from recent levels of 860. In our business the absolute count is not as important as the psychology of where the count is going.

In Q2 the psychology was one of, in the beginning recovery, which could accelerate rapidly. The current market psychology is however, extremely uncertain. We see of our drilling programs, which is leading to a weakness in our audit rate, our audit rate so far in Q3. Overall we continue to see long-term prospect of this business very very positively. In the short-term however, we will be negatively affected over the next two quarters and for forecasting purposes we're using a U.S. of 860 in Q3 and 950 average in Q4 and we are going to have to work to get to the Q4 number from here. Given those assumptions our premium business continue to see improvements in some of its markets particularly its premium and service markets and should see real improvements across the board in the fourth quarter again assuming the growth and count.

In our drill and product side because of inventory issues this business is not expected to see much improvement until late this year but should be well poised for recovery in '03. Now, marine business we expect to see steady improvement as the revenues and profitability of our excel systems products increase.

In summary we currently believe expected recovery of our business has effectively been pushed out of quarter from where it was at the end of first quarter, primarily because of current market uncertainty. As such we now believe Q3 will be our low point for corporate performance and our forecasting earnings in Q3 of one to four cents and earnings in Q4 of seven to 12 cents. Now again that number in particular Q4 could go slightly higher or slightly lower depending on market dynamics. With that we'll open the call to questions. We will ask everyone to please limit yourself to one question and one follow up.

At this time I would like to remind everyone if you would like to ask a question please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from with .

Good morning.

Morning .

I guess my question is what can a year a foot out of your cost structure on the drill pipe side of the business. You know looking forward you know as you continue as has and upgrade equipment you know how much of any improvement do you guys expect at the end of the day on a cost structure basis as activity improves versus say Q3 of last year line activity is also quite good.

we've been working with an assumption that the implementation of our capital program should get our cost structure down approximately 10 percent from where it was at the rates in '01. Again that's at the same kind of operating levels the same kind of footage levels.

OK thank you .

Thank you.

Your next question comes from with Merrill Lynch.

Good morning.

Hi .

Mike it's kind of a broad brush type question you've been you've gotten a decent amount of, you know, feel for the company under your belt now I wonder if you could kind of go over what you like, you know, and what you need to and you think needs to change in terms of the way the company's is being run and then just whether you know you have any better sense for strategic direction or is it really a bit too early to make any significant changes there?

Well yes what I'd say to that is that, you know I'm pleased with a number of initiatives that are ongoing within the company, to focus on manufacturing cost and to lower our cost of producing products, I think that people are focused on the right issues. I think there is number of internal issues from you know the financial systems and things like this that are headed in the right direction, they're going to give us better management tools to run the company with over the next several years.

I'm pleased with, you know, some of the recent acquisitions, they've positioned us quite nicely in the Chinese market and where that may lead. I think that the folks on the premium side have had a number of initiatives to roll out some new products whether it be on the expandable side or the , they're very innovative, are very aggressive about seeking out markets to market those into and they have a number of initiatives ongoing in that area and I think our performance reflects that.

So I think that you know the core of the business while we've got some challenges and some issues in front of us have a number of opportunities to continue growth. There are some things on the acquisition front that are quite interesting as well that we're already looking at, so I think that I'm quite pleased with what I see on that front obviously I wish the business environment was better than it is but that will come.

You know, we have issues on the industrial side of the business as I think has been talked about in the past and you know we're looking at what we need to do to fix that. You know there are a number of issues that need to be considered there because there's an overlap in facilities between the product side and the industrial drill pipe side and so we've got to rationalize a few facilities and some equipment as to how we best deploy those things, but we're working on that and we'll come up with the right answer I'm certain between now and year end.

Yeah I guess the bigger question mark would be with regards to the marine strategy that had developed here. I think the good news is that we don't have a huge investment at stake here, that if we change strategy then we've got a big problem to deal with. You know the bulk of our marine division today is the product line, that's basically a large diameter threaded pipe business and so you know that fits very nicely with where our core expertise is. You know the real question mark is, you know, the future of that division and pursuing, you know, deepwater sub-sea business lines whether that be wellheads, Christmas trees, so on and so forth.

Without a doubt that strategy in under evaluation and certainly in my view today is a lower priority than focusing on some of the opportunities within our core businesses that's not to say that some of what strategy was there can't still be pursued and that's what we're working with to see whether or not you know do we have to, you know, go after the whole or is there sectors of that business that we feel like we can be highly successful in and leverage off some of our premium connections and technology and that is the way we are looking at that. I mean we are in the marine business today, we sell our products into the deep water environment, so it is not as if that is a section of market we don't participate in, rather it is a question of what products and services we want to offer there, and that is what is under re-evaluation.

I think the good news is that number one we have got some good opportunities on the core business, number two that if we change direction, and certainly we have slowed the strategy going forward, if we change that strategy completely from where it is, there is not a huge investment that has been made that can give us a problem, so I think that is good news. So I guess those would be my initial thoughts Kevin.

OK so just as a follow up to that Mike, sounds like there is real commitment to that business, it has been a business which was much touted and kind of disappointed you what is your sense in terms of where specifically is going and.

We have got two primary issues at . We have not penetrated the market the way we need to number one and number two we have got some product cost issues, fortunately there are efforts underway on both those fronts. The fact that we have grown our revenues on a year over year basis by seven or eight percent, while the overall offshore environment has not been very healthy, I think demonstrates that we are making some progress there. We do have a number of efforts underway to re-engineer the way we produce this product that we think can meaningfully reduce the standard product cost.

So there is headway being made there, but it is not what it needs to be by any stretch. That business also is looked at in combination with the Plexus well head technology to see how we can leverage one off the other and where that will take us and I have asked our folks to develop a longer term plan as to where they think that is going to take us through the five years down the road, so we can assess how attractive this business is for Grant Prideco, so I think in the near term if Excel is not performing where we want it to be, but I think we have a number of initiatives underway to improve its performance. Longer term you know its fit with Grant Prideco and it is fit with the Plexus wellhead technology is what is being reviewed.

Your next question comes from with .

Staying on the strategic side for a moment Mike, what about on the verticals off the existing businesses or the core businesses the drill piper and the affiliated drilling products and the premium connections, have you in your strategic review so far identified areas of consolidation that makes sense to refocus on that may not have been part of the focus until recently.

We have and we are.

Do you want to give us any sense of any details on that?

Not at this point in time .

OK then the other question or I guess that you can call it a follow-up is in terms of looking at those businesses, both the Premium Connections and the Drill Products clearly there is market leadership in one and not in the other. Do you see, obviously it is hard to consolidate any more on the drilling products, do you see pretty much internal measures to improve costs, or again does doom initiatives like consolidation in those verticals or are there such steps help on the cost side or is it more in diversity of revenues that would help.

Yeah, Oh I think its, as you may expect, it's a little bit of both. There are some niche opportunities out there today that we think are, you know, if and when we can do something that I don't think anyone will question, but what they are very rational, logical fits with our existing products today, in some cases, you know, overlaps, and so clearly as you do those type of things, you expect to get some operating efficiencies out of those type of transactions, and I think that there are some of those we're looking at today. There are some areas geographically, where we believe we can expand and do better, and we're focused on that.

This is what's so intriguing about this business , that I'm quickly learning, is for a straightforward business manufacturing connections and pipe and putting threads on them, and obviously a lot of sophistication that goes into the metallurgy and threading is a highly complexed business in terms of the network of companies who are out there, that participate in this, when you consider you know the steel mills, distributors, and so on and so forth, and licensing arrangements, and put in place historically and so on and so forth, you know we sell tool joints to our competitors, and we market in some areas, and not in other areas, so there's just a number of issues here that I'm getting my hands around, and what it tells me is that there is an opportunity for being a little innovative and creative, as to how we streamline some of this. That's the challenge I think, and I thinks there's some acquisitions that we do along the way that will fit in very nicely, but the larger issues, how do we ultimately streamlined some of these businesses to get the product from the steel mill to the customer.

OK. Thank you.

Your next question comes from from Salomon Smith Barney.

: Good morning. My question's a little bit more mundane. Can you just, giving the order rate, and the comment that was made before about the inventory levels particularly in the drill pipe segment, I'm not sure I completely understand, why with a sequential increase in the US rig count, which I think Louis said is the base case assumption that your looking at. A sequential decline in operating earnings, if you allow me to call this quarter a sick second quarter.

Yeah. I think that I'll comment, and then let Louis go through in a little more detail , I think that we are sequentially, I think the rig activity we're looking at is reasonably flat, going up modestly, I think that what drill business last quarter on the drill pipe side was the anticipation of an increasing rig activity environment, and so we're beginning to see orders come in as people were preparing for that. That's being pushed out, and you know, in a flat rig environment, until our large customers start envisioning that the fourth quarter in 2003 rig activity is going to pickup in a meaningful way, they're pushing out their orders of drill pipe, and so its just a matter that people are not preparing for a big increase in activity, that they were beginning to do somewhat in Q2.

: OK. If I kind of take what your saying you, do you believe there's been an increase in the inventory of drill pipe, as customers, or distributors kind of got a little bit ahead of the rig count increase, and the fact that it didn't really materialize, or wasn't followed through on. You've now got a bit of overhang.

Well you know, there was a bit of an uptake in drilling activity, so we assume that some of that drill pipe has been put in service, and has been utilized, but again what can drive our business is mobilization and more rigs from this point forward.

And similarly on the premium connections side the same dynamic?

connection side of the business we're envisaging that going into Q3 that it will be you know relatively flat to up modestly similar to what we're forecasting on a rig activity environment.

OK.

This should very well attract the rig out.

I think Luke got some problems here Geoff?

OK.

Geoff, just a couple of things. First of all our drill pipe business lags the recovery of the drilling rig market by you know one to two quarters, so your not going to see a direct impact when the average rig count goes up being reflected in our drilling product business until a quarter or two after that. And its not so much the absolute level as it is how certain is the market that the rig count is going to increase and how rapid do they believe it will increase?

The quicker the believe it will increase the earlier there going to get into the market to start putting orders in backlog. Its not an issue if customers got ahead of themselves more at the end of this quarter than we saw at the end of last quarter in buying which created an inventory situation. Its simply an issue of how quickly are the going to be willing to place orders to anticipate the rising rig count and of course they longer the wait to do that the more the utilize the pipe that has been sitting on their rigs which means when it does turn the faster it comes back.

OK then as my follow up what I'd like to understand a bit better is the fourth quarter guidance fairly significant sequential increase was tied to your assumption of 950 US rig count in the fourth quarter, are you saying really the fourth quarter results are going to be more dependant on whether the industry believes the rig count's going to 950, than whether it actually gets there?

both, it's discriminative about both, obviously the absolute level of the rig count affects how quickly pipe is being used up and where they think it's going from there will affect how quickly they think they need to get inline for new orders, so truly both, its kind of a simple but complex dynamic.

OK, may I ask on last question, if your right the third quarter rig count is 860, where your wrong on the fourth quarter and in fact we just stay at 860 through the fourth quarter, would you expect to still make one to four cents in the fourth quarter or is there some other things going on that would be, would allow you to still achieve a sequential increase even if the rig count remained flat?

I think that generally there'd be obviously some variables there but the primary driver of a fourth quarter uptake in earnings is going to be high rig activity driving our premium business higher and beginning to see the order rates starting to increase on the drill pipes side, so yeah if that doesn't happen, yeah that number would be at risk.

OK, thanks very much.

again I would like to remind everyone if you like to ask a question please press star than the number one on your telephone key pad. Your next question comes from with .

thanks good morning, sticking to the inventory questions for a second here, listening to the conference call yesterday sounds like they have a substantial amount of new pipe just sitting on the ground and not being employed and other drilling contractors on shore appear to be somewhat in the same state, I'm just a little bit curious here as to whether the lag of a quarter of two is not optimistic, given what we're hearing from some of your customers.

well we've taken down our expected drill pipe manufacturing in sales projections for Q3 because of the flattening out of the environment and, you know, the, I think what helped prop it up, and in this quarter we just is finished was again a bit of an uptake, I mean there, you know, you're knocking against a strong recovering drill pipe, you're right, until you have a couple of quarters of sustained rig activity increase, but there's always going to be the special purpose type of drill pipe that they don't have that's going to come in, and orders are going to come in as they get busier, and that's what helped us a lot in this, in this current quarter.

OK. Secondly the, a follow up here, give us a sense as to what sort of pricing pressure you're, you know, expect to be undergoing forward given the present environment and the expectation for fairly subdued recovery.

, we're not seeing pricing pressure. We're holding onto our prices. The only pressure we might see, as we mentioned last quarter, would be to the extent we see more, kind of, lower end commodity, low value added product orders coming in from, what I would call, non core developing countries and not our typical market and not our typical product mix. That's the only thing that would really be affecting prices but, you know, we're still, we're still maintaining the view that our pricing in Q3 and Q4 will be in the mid thirties area.

What about the rhetoric emanating from customers with respect to incremental orders and pricing?

Well, you know, we're not seeing a lot of orders from those customers that are saying that right now. Most of our business is being driven by more specialty type products pipe, you know, and the order rates that we're seeing reflect what they're saying, I mean, they're not ordering a lot of pipe right now and it's going to take the rig kind of coming back before the land drillers come back into the market, but you have to remember, while the land drillers do contribute a lot of volume in feet, I mean, again, that tends to be the lower value product.

Yeah.

It doesn't contribute as much margin.

That's fair.

Now in previous years when this company would go through a market like we see today the operating results would have been significantly worse, and I think it's a credit to our operating people and our technology people for developing products that customers are asking for even in this kind of a depressed drilling market.

You sold 1.3 million feet of pipe in the quarter, how much did you produce, excluding China?

Yeah, hold on a second. We produced 1.4 million feet.

OK. Thank you very much gentlemen.

at this time there are no further questions, are there any closing remarks?

No, I thank you for joining us today. We'll look forward to visiting with you again here in the near future. Goodbye.

Thank you for your participation in today's conference call. You may disconnect at this time.