國民油井華高 (NOV) 2002 Q3 法說會逐字稿

Good morning. My name is Wesley and I will be your conference facilitator. At this time I would like to welcome everyone to the Grant Prideco announces third quarter 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 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you. Mr. McShane, you may begin your conference.

Thank you. Good morning and thanks for joining us today. To get started, take care of an administrative matter, we obviously will be discussing later in the call some forward-looking information. To that extent, I would refer you to our SEC disclosures, which adequately describe and discuss the risk assumptions inherent in those issues.

We concluded this past quarter with revenues of $162 million, earnings of 2 cents per share - a quarter that I would characterize as being impacted by the slow and sluggish environment we've got in North America; lack of visibility on when the drilling recovery will begin; and, as a result, have not seen much pickup in our drill pipe business. We are dealing with not only a low sales level but also a low manufacturing level and, as a result, are dealing with unabsorbed manufacturing costs. As a result, our margins have been impacted, both on the drilling products and premium side of the business.

Our quarter-end backlog did not develop as we had hoped it would 90 days ago, because the growing activity recovery that we were hoping for in Q4 has yet to materialize. Offsetting these factors was some progress being made in the marine group, leading to higher revenues and higher profitability and some further progress made on balance sheet management with some significant working capital reductions and, as a result, further debt reductions.

And, obviously, the highlight of our quarter outside of operations was a conclusion of negotiations for the acquisition of Reed-Hycalog from Schlumberger, and we'll discuss that briefly at the end of the call.

The drilling products division had revenues of 77 million versus 89 million in Q2 compared to about 106 million in the same quarter of '01. Obviously, dealing with the 21 percent decline in rig activity and not only do you have the lower rig activity, but also we're in this environment of the drilling contractors consuming excess drill pipe in the marketplace. The longer this goes on the more dramatic the recovery will be when it comes, because there's going to be less excess drill pipe out there for them to live off of.

Be that as it may, in the near term our margins were impacted in the current quarter by lower manufacturing activity as well as a couple of lower-margin tender sales into the international market of low-end drill pipe, which goes out at a lower cost-per-foot than our premium drill pipe does.

On the other hand, our China operation had another good quarter both from a volume perspective as well as making some progress in moving the pricing structure up in the Chinese market. Pricing for China drill pipe was up about 3 percent on a sequential basis, so that's an area that we're continuing to focus on.

Total footage sold during the quarter was 1.6 million feet versus 1.9 million feet in the prior quarter. We actually manufactured 1.4 million feet during the quarter as compared to 1.8 million feet in the second quarter. So you can see that not only were sales volumes down, but manufacturing volumes were down as well, and we sold a couple of hundred thousand feet of drill pipe out of inventory.

Pricing outside of the China comment I made and outside of product mix-type issues, was essentially flat on a sequential basis.

In the premium division, revenues held up reasonably well on the quarter-to-quarter basis. Unfortunately, revenues in this quarter were comprised of some lower-margin products and services. That, then, on top of an increase in unabsorbed manufacturing overhead cost led to a deterioration in the margins.

Given the current outlook that we've got, and we'll get into that in more detail, but our thoughts are that this next quarter is going to be relatively flat, visibility on when the recovery begins in '03 is a little uncertain, although we think it will be there - we are going to be going through a fairly detailed review of our premium division and looking at our cost structure and seeing what we can do to improve our manufacturing efficiencies, our manufacturing leverage, without compromising our ability to respond to market up tick, and we'll be addressing that in more detail during the current quarter.

On the marine division, the good news - one division had some good news. We've made some good progress in the XL product line. We secured another thread for this product to expand its market acceptance. We are in the process of perfecting the manufacturing process for the new weld-on connector. In the meantime, the sales group has made some good progress penetrating the existing market with the existing product, particularly in the deepwater markets. As a result, revenues were up 27 percent sequentially, up 38 percent year-over-year, and the operating income is once again in the black for that division. We're expecting some further progress in Q4.

In the industrial division, while returning to a profitable situation, it's clearly still not a core business for us. We are continuing to evaluate some strategies for this division. We are making some progress, and we would expect to be finalizing the plans for this division in the current quarter and announcing our plans with regards to that division by year-end.

On the balance sheet, I mentioned that we made some significant reductions in working capital and debt reduction. Louis will address that a little bit further.

So regarding the outlook - as we've said, and I think others in the industry have said - the timing of a drilling recovery is still somewhat uncertain. We have gotten some positive indications of late. I think there's been a recent up tick in drilling permit activity. We're beginning to see a bit of a seasonal recovery at long last in Canada. U.S. has been steady, but it's a little uncertain as to how much of an increase we're going to get between now and calendar year-end. We have taken an approach of assuming that U.S. rig activity will average about 860 in this quarter, slightly above where we are today. I hope that turns out to be conservative.

We expect the Canadian market to continue to improve, albeit we're using an assumption of about 260 to 300 rigs for the quarter. Quite frankly, that won't have a dramatic impact on our earnings in the current quarter. In any regard, what's going to be more important is what kind of winter drilling season we have as we get into January and February and what type of outlook the Canadian operators have for the post-spring breakup period, and that will drive how much drill pipe they start ordering here in the next six months.

We expect the international market to be relatively flat in the near term. As a result, we've got a relatively flat revenue and earnings expectation for Q4. We're starting to hear talk of some spot shortages on particular sizes and pipes, the drill pipe, but it is not yet translating into orders. So at this point, it's more noise than it is anything substantive.

With that being the environment, the focus, near term, is going to be on internal cost control, looking for areas of cost reductions, manufacturing rationalization, continuing focus on working capital reductions, and close scrutiny on our capital budget. About 90 days ago we were on track to spend about $60 million to $65 million in CAPEX. We expect now that we will spend this year about 45. So we've brought it down already. We will be looking very closely at what our requirements will be for '03, but at this juncture, I'll expect '03 CAPEX to be somewhat below the '02 levels.

Finally, regarding the Reed-Hycalog acquisition - we are moving forward with the financing strategy. We expect the following HSR this week. I don't expect that to be a - to cause any kind of delays. We still believe we're on track to close this transaction between mid-December and late December. In the meantime, we are developing our transition plans in that regard. We have appointed John Deane to be a corporate vice president of Grant Prideco and president of Reed-Hycalog. I've known John for a number of years. He was with Reed-Hycalog in excess of 25 years, has extensive operating experience, engineering experience, manufacturing experience, was a division president under both Camco and under Schlumberger, and we're just as happy as can be to have John rejoining Reed-Hycalog in the Grant team to help us with this acquisition.

With that, I'll turn it over to Louis, who will go into a little more detail on the financials.

Thank you, Mike. First of all, I need to point out that all amounts in my comments will exclude the impact of the goodwill amortization at last year's third quarter of approximately 1.6 million and will also exclude this year's second quarter nonrecurring charge of 4.5 million, both of which are pretax.

Consolidated revenues decreased sequentially by 6 million from 168 to 162, primarily due to an $11 million decrease in the drilling product segment, partially offset by a $4 million increase in the marine segment. Year-over-year revenues decreased 37 million, or 18 percent, reflecting the impact of the 31-percent decline in the U.S. rig count and a 21-percent decline in the worldwide count. This decrease was partially offset by additional revenues from a few small acquisitions, primarily the increased interest in our Chinese joint venture.

Consolidated operating income decreased 6 million sequentially and 25 million year-over-year, reflecting the decreased rig count, change in product mix, and decreased absorption primarily at our premium division.

Before I get into business segment results, I need to point out some changes to our disclosure policies beginning this quarter. As you know, since the beginning of 2001, the company has provided unusually detailed disclosures concerning its product line results. While the investor community has enjoyed this level of disclosure, and we're certain that our competitors have enjoyed these details, we've given this much thought, and we feel this information is far too competitively sensitive and therefore it is not in the best interest of our shareholders to continue disclosing.

Consequently, beginning this quarter, we are no longer providing product line details for our business segments, nor are we providing specific pricing or cost data for any individual product line including drill pipe. We understand the investment community's need to model our business, therefore we will attempt to provide general guidance to assist you in this regard, but we simply cannot provide the details as we have in the past. While I'm sure many of you are very disappointed, I'm confident you'll understand.

Turning to our drilling products division, operating income for the division decreased 3.7 million or 19-percent sequentially, and 11.1 million or 41 percent over last year's quarter. While the division's headcount would remain relatively flat, sequentially a decrease by approximately 500 employees, or 27 percent, since last year's quarter. This reflects this division's focus on keeping its cost structure in line with reduced activity levels. Its revenue for employees was level with last year, despite the $29 million drop in revenues.

Worldwide backlog for the drilling products division at the end of Q3 totaled 75 million. This compares to 93 million at the end of Q2. The premium connections division, Mike has already discussed revenue and margins, so I won't go over that again. I will add that during the quarter we did complete a small acquisition of Grey-Mak pipe. Grey-Mak is headquartered in Casper, Wyoming; specializes in the threading of casing and tubing and related accessories. The company has been a long-time licensee of Grant Prideco's Atlas Bradford product line.

At the marine division, revenues increased 4 million sequentially and 5.3 million compared to last year's third quarter. This increase reflects higher sales at our XL product line, particularly in deep water applications coupled with the full quarter's results for Rotator, which was acquired in Q2.

Operating income improved from a loss of half a million in Q2 to income of 1 million in Q3.

A few other comments - our debt balance went down by 9 million during the quarter, and our revolving credit facility now has a zero balance. Debt-to-book remains flat at approximately 30 percent, and our working capital, net of short-term debt, decreased $21 million. CAPEX for Q3 of 13 million is fairly flat, with 12 million in Q2, and, as Mike mentioned, in light of market conditions, we're re-challenging all uncommitted CAPEX plans.

Turning to our forecast, we should note that our consolidated backlog including China totaled 111 million at September 30. This compares to 143 million at June 30. Mike's already discussed the Q4 look-forward, so I won't go over that, but I will address our Q3 planning process - I'm sorry - 2003 planning process. In general, we'll be structuring our plan and cost structure around a gradual recovery in the U.S. rig count to an average in the low to mid-900s for the year. This is up from what appears will be an actual average in the low to mid-800s for 2002. We believe market psychology, which, as you know, does affect rates for drill pipe will be much improved next year over this year.

In Canada we're currently planning around an average rig count next year in the 300 range, up from what we believe will be an average of approximately 260 for this year, and internationally we're planning on a flat rig count with 2002. However, until we finalize our revenue and cost forecasts around these rig counts, not only for Grant Prideco but for Reed, it is premature to give earnings guidance at this time.

With that, we'll open the call with questions, and we ask that you please limit yourself to one question and one follow-up.

At this time, I would like to remind everyone in order to ask a question, please press star, 1 on your telephone keypad now. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Jeff Kevertuck with Salomon Smith Barney.

Good morning.

Hi, Jeff.

I guess the first question is - with the base-case scenario that Louis described, and your intelligence concerning drill pipe inventories, what would you expect to see in terms of increasing orders and, I guess more importantly, really, manufacturing volumes?

Well, we're working through that right now, Jeff, as we speak. We're right in the middle of our planning process. Simultaneous with that, we are scrubbing down some recent survey information on drill pipe inventories. It's interesting - if we look at new drill pipe inventories out there today, as best we can tell - I mean, clearly, there's still some excess - you know, the numbers would suggest to us that if you have a pickup of 10-percent or 15-percent rig activity in the U.S., that surplus disappears pretty quickly. So not only are you in an environment where you are no longer living off the surplus, but you're now in an environment where you're having to start replacing the drill pipe that you're using.

Again, those numbers have been recently developed. We're still kind of scrubbing them down. I mean, clearly, if we're in that environment, I would suspect by, certainly, in the second half of '03 if not sooner, that we'd start seeing a meaningful pickup in drill pipe orders. The premium division, the core, should improve from an activity perspective pretty much commensurate with rig activity, particularly improvements in the Gulf of Mexico or deep gas drilling. The Reed business, as we model that in, of course, will, generally speaking, track the rig activity as well.

So we're in the process of putting all those pieces together as we speak.

If that occurs, do you expect that you would be able to recover pricing levels concurrently? Or would that come with somewhat of a lag?

Well, Jeff, you know, we haven't suffered much. In fact, our pricing today on drilling products is up on a year-over-year basis. So pricing has, generally speaking, held. We are being cautious not to lock in any kind of long-term pricing agreements, if you will, that would hinder our ability to maybe see a little bit further price improvement as the market recovers, but we're not an environment of overly depressed pricing versus where we were a year ago. So it's a little different here.

Okay - I'm stretching my questions here - the decline in the EBID contribution in premium connections was pretty startling, at least percentage-wise.

Great.

You alluded to doing some review of the cost structure and so on - as you go into that, is it your sense that there is a real acute problem here? Is there something more general that is going to take some more in-depth study?

Well, I think, Jeff, what we're looking at is a division that's comprised of several autonomous business units, and we've got to look - and a number of these came about through acquisitions over the years, and we're at a stage now in the company's maturity where we have to evaluate the cost structure and whether or not there are some synergies that we can realize by bringing these divisions - or - business units - together, and a problem - no. I mean, basically, what they're suffering from is low activity.

Given that, I think that the onus is on us to see what we can do to take some of these costs out of the system while, at the same time, not hindering our ability to respond to a market recovery. We have a fair amount of under-absorbed manufacturing costs in this division, and I've got to believe if we focus on this for a while, we can find some opportunities.

In the near-term, we are suffering, on top of that, from some lower-margin products and services that we hope - hopefully, you know, somewhat unique to this quarter, and we'd expect some recovery as we move forward. It's a combination of factors.

Thanks very much.

Your next question comes from Dan Eggers with CSFB.

Good morning.

Hi, Dan.

I guess my first question is you guys, you know, with the Reed acquisition, you guys made a very public statement that you're going to focus the company back on manufacturing or the co-operations. Does this have any implications? Or do you care to comment on the implications this might have for the marine business and some of the new ventures and new technologies that are being pursued?

Again, the marine business - you know, the bulk of that business is the XL product line, which is a manufacturing of a connector, if you will, on large-diameter pipe. So although it is marketed to a little bit different customer base, it is, nonetheless, a very synergistic product line with our premium division. So it's not as much of a bird out of the water, if you will, as what it may first appear.

You know, the smaller businesses within there are things that we're evaluating in terms of how good a fit they are and whether or not there's something different we should be doing.

Okay, and I guess the other question is that you guys had talked previously about developing a new premium connection to try and get back in the international game. I was wondering if you had any comments on where that stands and -

There are a number of efforts underway, and I'll leave it at that for now.

Okay. Thank you.

Your next question is from Yves Siegel with Wachovia Securities.

Good morning.

Good morning.

Two questions - one is, can you detail how much of the manufacturing and sales, excluding China? And the other question I have is, Mike, I was really startled - I guess that was Jeff's word - startled - but I was surprised by the amount of reduction in your capital expenditures from plan. Can you just discuss where the dollars are going in CAPEX? And what are you not doing that you had previously planned to do?

Well, again, we haven't stopped any projects that were underway. Rather, there were a number of projects that were being planned and commitments were getting close that we just decided they could be deferred or needed to be re-evaluated in light of this market. That's what took the number from - a number north of 60 million this year down to about 45, okay?

Within the 45 that we're spending this year, there is a fair amount that's related to some expansion, upgrade of our China facility, modernization of some of our manufacturing facilities, which we certainly are doing, and we'll continue to look at, but there are some expenditures in there that I view to be of somewhat nonrecurring nature, so I think, all things being equal, we can lower our CAPEX next year, still maintain our focus on improving manufacturing efficiencies through modernization, and still realize a reduction in CAPEX.

Okay, so is 45 million sort of a maintenance level?

No, I think 45 is even less - or 45 is above that, because, again, it's had some expansion and upgrades, in particular, with China and certainly has had some significant upgrades to our Mexican, our Navasota, facility. So it's significantly above what I would consider to be a replacement-level requirement.

Okay, and then China in terms of sales and manufacturing?

Again, what we're reporting is the revenues on a global basis.

Okay, thank you.

Okay.

Your next question is from Bill Herbert with Simmons and Company International.

Good morning.

Hi, Bill.

Hey. Mike, getting back to the drill pipe evolution, if you will, with respect to a hopeful recovery in '03, pricing was relatively flat in the third quarter, vis-à-vis the second quarter. I would presume that with the recovery in the U.S. rig count you're probably looking at mix working against you in the early part of that recovery. Is that a fair statement in terms of more lower-end piping sold?

That would be the conventional wisdom, Bill that as the land rig count improves in the U.S. that you're going to sell more of the standard API drill pipe as opposed to the premium drill pipe, and it will shift your mix a little bit.

And so does the conventional wisdom translate into the economic reality of pricing perhaps eroding on the margin with mix working against you?

Well, yeah. Let's say we're getting pricing for mix, if we may. If you're looking at an absolute price per foot of what you sell, you're right, that your average price may go down.

That's what I'm talking about.

Okay, but I just don't want, you know - I think that needs to be clearly understood as opposed to what pricing is doing on a product-line-by-product-line basis, which has been stable. It's expected to continue stable, and, you know, as we get into a full recovery, you know, presumably there's some room to move up again.

That's fair, and so the follow-up question here -

- the other points worth mentioning, Bill, is that your average cost on manufacturing to lower end of pipe is lower as well. So you're still going to be generating good, solid incremental margins on this business, albeit, at an average cost per foot that may be lower.

That was my follow-up question. So then let me switch to another one. With respect to -

- is that the way it works?

Well, I'm following the lead of your first questioner there. With respect to the cost-reduction opportunities that we're evaluating within premium right now, do you care to quantify, just broadly speaking, what the dollar magnitude of cost savings that we're trying to attain?

No, really, I think that it's premature on that, and we've just got to go to work and the folks are well aware of that, and we just have to go through operation-by-operation and figure out where the opportunities are.

Got it.

But for a division that's running at $60 million, plus or minus, on a quarterly basis, we - and where pricing has, generally speaking, held up. We just feel like we ought to be able to get this thing running at a more profitable level, and that's the objective.

Okay, thanks very much.

Okay.

Your next question is from Robin Shoemaker with Bear Stearns.

Yes, good morning. I just wanted to tie in a couple of things with the conference call last week on Reed-Hycalog. The expectation of 15 to 20 percent EPS accretion - I just wanted to ask if that is based on the same forecast you just gave us for the U.S. - you know, the low to mid-800 level; Canada, 300; international, flat - is that the scenario under which you get the -

Actually, Robin, the 15 to 20-percent earnings accretion is in an environment where the rate activity would actually be a little bit better than that. The relationship here is going to be that the lower the activity is- the more accretion there's going to be, because Reed's business is a little more stable in this environment. It does a little bit better than what the drill pipe business does. So one of the challenges that we looked at as we made the decision on Reed was whether or not when we got into a full recovery mode, and we got all the earnings leverage being realized on the drilling product side, were we doing something that was going to potentially dilute our upside earnings leverage, and we got comfortable that even in that environment, Reed was still going to be in the range of 10-percent-plus earnings accretive.

So I'd say that with the rig activity environment that Louis talked about, that earnings accretion level will be there or better.

I see. Okay, so I guess we're actually hoping that it's less accretive.

Well, no, all things being equal, I'll take more absolute earnings.

Okay, and then also on the Reed-Hycalog, the figure that you just gave us of, I think, less than 45 million on CAPEX for next year - is that including Reed-Hycalog's -

- well, it will be. You know, I was referring to Grant Prideco numbers, but even with Reed in there, I think we'll be at or below the 45 range.

Okay, and you had mentioned to us that you were talking to a team of - a management team. Is that done now?

Well, of course, the first step was getting John Deane on board, and that's been accomplished. He, in fact, has selected his senior management team, and the announcements on that will be out either - potentially today, but certainly within the next couple of days. There are just one or two administrative issues that have to be cleared up before we can do that.

Okay, thank you.

But, yeah, things are moving ahead very nicely on getting the management team all in place, and what's important to us is these people are all being made available to work with us pre-closing to get transition issues addressed.

Thank you.

Your next question comes from Michael Urban with Deutsche Bank.

Good morning, guys.

Hi.

I guess my question would be on the drilling products business. I guess the focus on the cost-cutting side, or the efficiency side, has been on premium. Is there anything further that you could do efficiency-wise or cost-cut-wise in the drilling business and what would that be?

Well, I want to, I guess, emphasize that the focus on cost control and potential cost reductions is going to be company-wide. It has to be in this type of environment, and it's not to say that folks aren't doing a good job today, but we just have to keep looking harder and closer at everything we're doing to look for opportunities.

You know, we think there are some particular issues, and maybe some particular opportunities within the premium group that, you know, that are probably going to get a little more focus in other areas. In the meantime, you know, the drilling products group is continuing to move forward with these installations of new CAPEX out at Navasota that's going to be streamlining some of their manufacturing processes. Those are expected to be operational by sometime in the first half of '03. So there are ongoing efforts in that area as well.

And what do you think, maybe on a per-foot basis that could be in terms of cost savings?

You know, I think the hope was that, you know, through these actions and some others that we may be able to chip away at costs in the range of a couple of dollars a foot. You know, it's going to take some time to get there, but we're going to keep chipping away at it.

Great, thank you.

Your next question is from John Frank with Investment Strategies.

Hi, this is Matt Sheffler for John. Good morning. I just had a question about SG&A and you sort of mentioned the sort of various divisions and how a lot of the companies operations within the company operated separate teams, or distinct teams - what about SG&A levels of the quarter that just took place, and can you comment on, maybe, some more joint selling?

Some more what?

Joint-selling opportunities.

Yeah, you know, I don't know that there are that many opportunities between premium and drilling products within the premium group. That will be one of the areas that we're looking at. We are going to be re-evaluating SG&A from top to bottom and looking at what we do where and whether or not there are areas that we can streamline. So we're looking at all these areas.

Matt, I think it's fair to say that the company, again, has not been in existence as a stand-alone public company for very long, and when you see changes in our G&A cost structure, a lot of that is just related to the company becoming a mature public company and having the infrastructure in place to do that effectively as opposed to being a division of a larger company.

Great, and maybe just one last question - with the cyclicality being kind of what it is, what would you say the two or three things that we could sort of look for to measure the success of the management team over the next couple of quarters independent of the cycle?

Well, I think, clearly to the extent that we are in, for another quarter or two, a less than robust environment to the extent that we can make some progress on improving our cost structure. It's certainly going to be an area that we're focused on. I think we - addressing some of these non-core businesses and bringing those to conclusion, one way or the other, is certainly an area that we're focused on. Clearly, execution on the Reed acquisition, getting it successfully transitioned into Grant Prideco is going to be a high priority. So those are just a few things on the top of the list.

Great, and if I could just add one last - in terms of the change in the information that you're providing - just, really, this is more naiveté than anything else - where is the biggest risk for you by continuing to provide what you have provided in the past?

Well, I think that part of the risk is that some of these numbers can be misused and misunderstood. You know, people have tendency to want to oversimplify when they talk on revenue per foot, on drill pipe. There are so many variables that go into that, that for somebody on the outside trying to model on that basis, we think, is probably not doing you a service to suggest that you can. We think we can do a better job of providing you revenue guidance and margin guidance without getting hung up on a revenue-per-foot basis. We have a product that can sell from $30 a foot to $60 a foot, and we have so many other factors that come into this, it's just difficult, and I think dangerous, to oversimplify.

I think that with regards to not giving all the detailed breakout within the premium division, again, you know, there are discrete businesses within that that have direct competitors. We get phone calls from some of those competitors looking for those numbers. And, again, I think as we move forward, arguably, we're going to be looking for more of a blending of those businesses and a sharing of resource and capacity and whatnot, so I think the product line distinctions may become less relevant, anyway.

Thank you very much.

At this time, I would like to remind everyone, please press star, 1 on your telephone keypad to ask any question. Your next question comes from Beth Farnsworth with KPB Investment Advisors.

Given an outlook for gradual recovery and rates over the course of '03, how do you see the use of that new revolver playing out through the year?

We really haven't gotten down to that level of detail yet for funding purposes. I think I mentioned last week that we are structuring the revolver and our entire financing package to provide us with approximately $100 million of liquidity, and I would say that our plans would be that, as the industry conditions improve, that liquidity would also improve. As industry conditions do not improve, I don't think we'll see much deterioration in that level of liquidity, because there are working capital items that tend to be self-adjusting for that.

Okay, and if I can ask my follow-up question - given the talk about CAPEX, can you give a baseline maintenance level for the combination of Grant and Reed-Hycalog?

Yeah, we're looking at that and really kind of going through all the projects we've got. What we've got is such a combination of some replacement and some upgrades, but you are probably looking at a number that's in the 30 million range - probably no more than that if you're really looking at pure replacement, capital spending. It's probably in that range.

Okay. Thank you.

Your next question comes from Todd Craig with US Bancorp.

Thank you. I was off the call for a minute, so I apologize if you answered this, but I thought I heard you say on the call that there were some areas where you were seeing tightening or spot shortages? Could you elaborate on that a bit, please?

Well, again, what we're hearing - of course, our salesmen are out visiting with the drilling contractors on a regular basis, and what we're beginning to hear more of is, you know, situations of being short on particular sizes or types of drill pipe, and all it is talk right now. I want to emphasize that. You know, it's good to hear, and it's better than hearing the other, because, generally speaking, there is still excess drill pipe, but we are starting to get an environment where they're running short on particular types and sizes, and we think that eventually that's going to lead to some orders coming in, and I think it's indicative of the environment we've got that when rigs do start picking back up, what's viewed to be 15 or 20 percent surplus or excess today is going to disappear rapidly and is usually the case.

You know, I think one of the things about this cycle is that the longer we've stayed at this level of 850 rigs, plus or minus, you know, we have, as an industry, we've cannibalized more and more drill pipe than what may have otherwise occurred, obviously, than if rigs had picked up sooner. So it just means that when they start evaluating what they've got there to put a few hundred rigs back to work, you know, they're going to find themselves short, we think, in a lot of areas.

Thanks.

There are no further questions at this time.

Okay, thanks for joining us.

Thank you for joining today's conference call. You may now disconnect.