國民油井華高 (NOV) 2003 Q1 法說會逐字稿

Good morning, my name is Tamica and I will be your conference facilitator today. At this time I would like to welcome everyone to the Grant Prideco 1st quarter earnings call. 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 key pad. If you would like to withdraw your question, press the pound key. Thank you, Mr. McShane, you may begin your conference.

Thank you. Good morning and thank you all listeners for joining us this morning. With me today as always is our Lou Raspino our Senior VP and CFO. To dispense with formalities we will be making some forward looking statements as we discuss our results this morning, and I will refer you to our SEC disclosures which describe and discuss the risk and assumptions therein.

We released earnings this morning, $4 million. 3 cents per share. A nice improvement over the 4th quarter, which were essentially break even results. Obviously, benefiting from the first full quarter of ReedHycalog's operating results. As well as improvement in the performance of our tubular technologies division. These contributions more than offset the seasonal declines in the marine division, and the volume declines in the drilling products division both of which was expected going into this quarter.

As outlined in the press release, this quarter does include some nonrecurring items. We had ReedHycalog transition costs of about $2.6 million on a pretax basis. These were partially offset by a gain on the sale of our water well and construction casing business. That gain was $1.3 million pretax. We want to exclude the impact of these couple of nonrecurring items. You would come up with earnings of approximately 4 cents per share. That would compare to a penny a share in the 4th quarter, excluding the acquisition related costs of ReedHycalog.

So again, a nice improvement over the 4th quarter, although, still reflective of a fairly depressed environment for growing products and premium to our products. Going into the revenues, overall revenues, $190.5 million, up from $156.9 in the 4th quarter, a 21% increase. Adjusting for ReedHycalog though, we would have come in at 137.5 versus 152. So the businesses excluding ReedHycalog were actually down about 10%. On a sequential basis, a $48 million revenue increase coming from ReedHycalog which really drove the top line.

To a lesser extent, we benefited by slight improvement in revenues at our tubular technologies and services division. About $2.4 million incremental revenue, I think the more important advance within that division, though, was a significant improvement in margins and we'll come back to that in a little while. As I mentioned, we had a decline in revenues, of approximately $8 million at the drilling products division, and about $7.5 million within the marine group. And I'll talk about those in a moment as well.

On a year-over-year basis, $190.5 million, versus $152.6 in the same quarter last year, again, the benefits of ReedHycalog driving that. Going into the drilling products division, sequential revenues declined by 11% from $72 1/2 million down to $64.6. About a 19% decline in drill pipe volumes. We sold 1.3 million feet versus 1.6 million feet in the 4th quarter. The decline in drill pipe sales was partially offset by other drilling products revenues which were up somewhat.

I think the encouraging thing here is on that $8 million revenue decline, we were able to hold the detrimentals to about $2 million, or about a 25% margin. The business is being driven by a very weak North American demand environment for drill pipes. This is being somewhat offset by some increased revenues in the certain international markets, the CIS, the Middle East. That's the good news, from a volume perspective.

The bad news is, these products tend to be small diameter, nonpremium type products as a result on a revenue per foot basis, or on a margin basis, they're not quite as attractive as what we traditionally sell here in North America. Let me go on to the year-over-year basis, you kind of see the same type of trends, where revenues were down. Although footage sold was essentially the same. We sold 1.3 million feet this year, we sold 1.4 million feet in the same quarter last year. Keep in mind, though, that this year we have the footage from our Chinese operation, which was not consolidated in last year's results.

So again, what you see is equivalent number of feet being sold, but being sold into markets where the price per foot tends to be somewhat lower. On ReedHycalog revenues, as I mentioned, $53 million in revenues, $48 million increase sequentially, of course, the 4th quarter only included the last several days of the quarter. I think the more meaningful comparison for ReedHycalog is a look at their revenues on a year-over-year basis. $53.3 million compared to reported revenues of about $54 million in the same quarter of last year. So essentially, flat on a year-over-year basis.

What's happening is the North American market is improving, our revenues on a year-over-year basis were up 7% in the U.S. Up 21% in Canada. So North American revenues were up 13% year over year. This is offset by decline in the international business of approximately 11%. That was driven principally by declines in Venezuela, the Middle East, some disruption over there for obvious reasons, and then obviously in West Africa.

Overall we were pleased with the revenue performance, considering it was the first quarter out of the gate. People dealing with an awful lot of transition type issues, I think we're off to a good start with the ReedHycalog organization. On the tubular technology division, again as I mentioned earlier, we had about a 5% of revenue improvement here. However, if you consider the product lines we're in the process of getting out of, look at the continuing products, revenues were actually up about 11%.

As I said, though, I think the more important thing is what they're able to do with their offering income. On a slight increase in revenues, we went from 47 to 49, so about a $2, $2.5 million revenue improvement. We were able to improve operating income by $4.8 million. So a significant improvement that was driven by a little more favorable product mix. They had some good sells, their vacuum insulated tubing products. And importantly, a significant improvement in cost efficiencies. That's certainly something we look to -- look for them to continue, and are pleased with the progress that we've made in this past quarter.

From an overall perspective, this division was confronted with a couple of offsetting issues, domestic deep drilling increased by about 13%. Domestic mill utilization improved somewhat from about 35% to just under 40%. That certainly helped. Offsetting this, though, was a continued decline in OCPG inventory levels at the distributor level, so again, our customers can continue to liquidate inventories depressed in demand. We also had a 9% decline in the Gulf of Mexico rig activity, which is a very important market for that division.

As I've mentioned before, we are getting out of a couple product lines, I think Lou you're going to cover that in a little more detail, so I won't cover that now. On the marine products and services business, compared to last quarter, revenues declined about $7.5 million, we came in at $18.3, versus $25.8. Principally driven by decline of revenues at the excel division. This was expected. A lot of that business tends to be project oriented and the second half of the year is typically their busier time of the year. On a year I've over-year basis it's important to note that excel revenues were up about 17%. So still seasonally adjusted, they're making some progress in their markets.

Clearly, their business was impacted by the sluggish Gulf of Mexico drilling environment as well. I guess that kind of covers the revenues. I'm going to turn it over to Louis, who's going to take you through some of the operating income dynamics, and then we'll come back with some comments about -- or expectations going into Q2. Lou?

Thank you, Mike. At the consolidated level, operating income was $17 million. Now, that includes $1.5 million of ReedHycalog transition costs. And since this is at the operating income line, it is of course before tax. Now Mike mentioned that the total transition costs were about $1.7 million after tax. The costs not included in the operating income line are shown down below in the other expense line, and I'll give a little more details on that in a minute. Including these costs, consolidated operating income is $18.5 million, which is up from $9.9 million sequentially. And the operating income margin of 10% is up from 6% sequentially.

Now this sequential increase is driven by an inclusions of four corners results for Reed. And improvements I might mention that tubular technologies division, partially offset by decreases in drilling products and marine. Turning to the drilling products segment, operating income of $8.9 million was down by $10.8 million sequentially. Mike mentioned the decrease in drill pipe sales volumes, from 1.6 million feet to 1.3 million feet. Production was 1.5 million feet in Q1, which was essentially flat compared to Q4.

We have a slight excess of production over sales, that's not because we're building inventories, but because we're really returning to a more normal state of operations. At the end of December, we had shut down manufacturing operations for two weeks, allowing us to get all our product through the sales system. f course, that's not the case at the end of the first quarter. Year-over-year in the division operating income was down 12.4% on flat sales volume. Reflecting the unfavorable change in product mix that Mike mentioned and less the absorption of fixed costs due to lower production at our facilities other than China.

As evidence of their continuing effort to improve efficiency, the drilling product division decreased head count during by an additional 120 or 7%. And since the beginning of last year, they have reduced head count now by about 590 of 31%. That's, of course, before acquisitions. Backlog and drilling products at the end of the quarter totalled about $73 million. Which is up from $56 million at the end of last quarter, however, the average price per foot in the back log is decreased approximately 14%, reflecting the unfavorable shift in mix toward the smaller diameter of nonpremium products that Mike mentioned in our noncore markets.

The ReedHycalog numbers of course, Mike, mentioned integration continues to go very well. Transition expenses, a little more detail during the quarter they totalled $2.6 million pretax, and $1.7 million after tax. And 1.5 of the 2.6 pretax number is in the operating income line, and the balance of 1.1 is in other expenses. Excluding these costs, ReedHycalog turned an operating income of $11.2 million. And a margin of about 21%.

Now, going-forward, we expect the transition costs will be about half in Q2 what it was in Q1, and then rapidly phase out in the 2nd half of the year. Turning to the tubular technology and services division, Mike's already mentioned the operating income performance so I won't cover that. I will point out that every business unit in this division did show sequential improvement in operating income. And is evidence of their continuing focus on costs in Q1, they reduced head count by another 55 or 5%, that's following a decrease of 130 or 11% in the previous quarter. So they continued to make good progress there on cost control.

Marines operating income was 200,000 in the 1st quarter, up from a loss of 300,000 in last year's quarter, but down from 3.9 million sequentially. That's sequential decrease is reflecting the change in product mix to smaller diameter, lower margin products in the quarter, as well as lower absorption resulting from lower volumes that Mike discussed. The other segment, Q1 results primarily include operations at our construction casing business which we sold in the quarter, we received proceeds of $11 million cash and a note valued at approximately $900,000. We recorded a $1.3 million pretax gain on the sale. In other income, after tax, it's an $800,000 gain.

Now, the only other items in this segment are our HDD and water well pipe product lines, which together reported an operating loss of $400,000 in the quarter, compared to a loss of $1.4 million in last year's quarter. As Mike mentioned, we're exiting these product lines, we're mothballing our Bryant Texas manufacturing facility, where we manufactured these lines as well as macaroni tubing and two-step tubing for the tubular technologies division. We do plan to work down our inventory levels in these products, and that inventory number totals about $13 million at the end of the quarter.

For all the product lines we're exiting, that includes the construction casing business we're now out of, HDD, water well, macaroni tubing and two step tubing. Just to give you some idea of some historical perspective here, in '02, all of those businesses contributed about $56 million in revenue with an operating loss of about $3.7 million. And in '01 in what should have been a strong year, it's about the same, revenue was $57 million and an operating loss of $2.8 million. So you can you see why we're exiting these businesses. Cap Ex for the quarter totalled $10.5 million, compared to $11.3 sequentially and $10.4 last year.

The Q1 amount is actually flat to down, despite the addition of ReedHycalog. We plan to spend a total of approximately $35 million in '03. Good progress reducing debt in the quarter, debt balance is down by $31 million. Primarily using cashflow from operations and proceeds from the asset sale. At quarter end we had undrawn availability under our committed revolver, totaling approximately $110 million. The effective tax rate is better than we previously guided you to. We're at about 34.5%. We would anticipate using that rate for the remainder of the year.

The SG&A line, we historically reported SG&A in two categories, we had SG&A attributable to the segments. And we had a separate line for corporate G&A. For '03, we're going to be presenting SG&A expenses based on three classifications. Seals and marketing, G & A, and research and engineering. We'll be doing that on a consolidated basis. The '02 amounts have been restated to conform with this classification in '03.

You want to look at total R&E expense, however, you also have to look into a portion of what we have to report in our equity and unconsolidated affiliates line, that's where we have a couple of technology joint ventures for our intelligent drill pipe, our composite pumps and motors. And the amount of expense that goes through that line is approximately $1 million a quarter. The average shares for the quarter were up to $223 million from $114 million in the last quarter. This, of course reflects the shares we issued to Schlumberge in connection with the acquisition of ReedHycalog and you've probably seen that Schlumberge recently sold off all of these shares in a broad distribution. I'd like to turn the call back over to Mike.

Okay, thanks, Lou. I'll just wrap up a few comments here. I think in summary, as I look at the quarter, as tough as an environment as it is, you can look at our growing products group, they've done a good job of offsetting a very weak North American market by penetrating some new international markets to pump up our volumes, to keep our shops busy. We've made good progress at the tubular technologies division. We're managing our costs a little more effectively.

We've made good progress at ReedHycalog on transition issues, maintaining our market position through the turmoil as well as having very good market acceptance of their new T-Rex cutter technology. At excel our revenues as I said earlier, growing by 17% year-over-year. And we've made good progress in exiting some of these nonstrategic business lines. On top of all that, we've made good progress on reducing debt. I think there's real successes here that we're very pleased with. As we look out into Q2, rig activity has been moving in the right direction. Drilling permits will continue to suggest that rigs will continue to move up.

We continue to be cautiously optimistic, the demand for the North American drill pipe will improve in the second half of the year, this confidence level builds these rates are going to stay busy for an extended period of time. Our backlog at the drilling products division is better today than it's been for some time, albeit with a lot of international orders that aren't quite the type of the mix of business we want to have for the long term, but keep us busy in the meantime. OCTG inventory levels would suggest that that business has got to recover sometime soon. But the visibility isn't what we'd like to have, we're going to continue to take a fairly cautious view here in the near term.

All in all we expect our drilling products revenues to improve somewhat in Q2, driven as much as anything by a full quarter of Chinese operations, of course, in Q1 they were depressed a little bit because of the Chinese new year holiday. The tubular technologies group, we should be reasonably stable in the Q2, if the Gulf of Mexico activity begins coming back sooner, we will benefit from that.

ReedHycalog revenues should be about flat. They'll be up a little bit in the U.S. and international, but, of course, they're a large participant in the Canadian market. So the seasonal decline in Canada will offset much of that in Q2, all in all we look for revenues to be flat to up slightly quarter to quarter and earnings to be flat to up slightly on a quarter-to-quarter basis as well. With that, we'll open it up for questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Geoff Kieburtz from Smith Barney.

Good morning, it's Andy Hoffman, how are you?

Fine.

One quick question talking about inventories. I guess you would characterize the overhang you saw in the market maybe a month or so, just to put a broad number on it. How do you see that -- do you think it's improved in the last three months since the last quarter or --

Well, I think maybe we're talking two different issues. You mentioned OCTP categories, which include casing and tubing. I think what you're really asking about is drill pipe inventories, is that correct?

Yeah.

Big difference. We continue to try to get a good handle on actual drill pipe inventories out there. We work with the section yards, we work with the contractors, and it's a bit of a moving target, admittedly, clearly drill pipe is being consumed. And with 950 plus rigs out there, they're using enough drill pipe. Yes, there's still an overhang of drill pipe out in the market and that's why we've been saying we think sometime in the second half of the year, the bulk of that overhang should be absorbed and demand should start to improve, even in a reasonably flat rig environment. But ultimately, what's going to drive the demand for drill pipe is going to be the constant level of the drilling contractors that those rigs are going to be busy and stay busy for an extended period of time. That's when we start to plan ahead. Replacement requirements, as well as requirements to put additional rigs to work. That's really what's going to drive our demand sometime in the second half of the year. So I guess that's -- that would be our position on the drill pipe inventories now.

I'd like to follow up on you're talking about your expectations for 2Q. I remember from last quarter you mentioned that broadly for the year, assuming that a U.S. rig count of 90, and a flatish international account you saw was reasonable. I'm wondering with all the cost savings you've seen, a quarter of back log, and obviously your conversations with all the contractors out there. Any update on this guidance?

No, again, I think that so much of it depended not on the drilling products division, so much of it depended on the constant level and the expectations of where rig activity is headed as opposed to the absolute level. That I'd say it's a little soon for us to start ratcheting up expectations for the year. I think that all things being equal, you're absolutely right. Rig activity is higher than what we expected, so the consumption of the drill pipe is higher, the consumption of everything is higher, and the foundation seems to be there for a better second half of the year, than what we initially were thinking. If all that plays out, then certainly we would have expectations that we should be able to do better than that 30 cents, but we're not going to quantify that just yet.

Thank you.

Your next question comes from Bill Herbert from Simmons & Company.

Good morning. Mike, let me ask you first about China and the SARS epidemic. Has it had any impact on your production over there?

No, it hasn't.

Okay.

The only thing that impacted production this past quarter was the Chinese new year.

Okay. Turning to the Reed business. Can you help me understand a little bit better your market position in Canada, and how much your revenues on the Reed piece of business come from Canada?

Well, we don't disclose that level of detail, you know, I will tell you that in the quarter we just finished, there are are Canadian revenues probably in the range of 70% what they are in the U.S. It's a big market for us. On a relative basis.

And can you talk a little bit about pricing on your bit business?

Well, on the pricing front we have just rolled out a new price book that went into effect on May 1st. On a basic roller cone bits, the price increase is about 5%, on some of the upper film bits it can be somewhat higher. On a lot of the PDC bits it can be as high as 20%. A lot of the CVC bits tie into the cutter technology of course, and those bits are more and more being sold on a performance basis. We can get, depending on performance, anywhere from a 10 to 20% pricing advantage when the performance is there. And so, you know, that -- those are priced somewhat if you will, outside of the price book.

Final question, if I missed it I apologize. You had given some indication regarding the outlook in Q2, on revenues by segment. I think I may have missed your outlook on the marine segment. Can you enlighten me there?

Yeah, the marine segment, I may have skipped over that, I apologize. Our expectations are, it will be up slightly. We think with a little more favorable product mix as well. They had -- you know, it's a pipe business and their sales this quarter tended to be some smaller diameter, riser pipe, margins aren't quite as good. Next quarter there's a few things in the backlog that looked at a little better margin. Their strongest performance should kick in the 2nd half of the year.

Thank you very much.

Your next question comes from Tom Rinaldi with Duetsche Bank.

Good morning. You had mentioned you were a little hesitant to give detail in terms of Canada and North America and ReedHycalog, and you mentioned changes over last year. But just as a starting point for us, can you give us a sense of international versus North America both in terms of revenue and on whatever profit basis you like?

Well, in terms of revenues I will. The North American business is just over 50% of their total revenues. Now, bear in mind that that was a very strong quarter for Canada so that's a little higher than normal, okay?

Okay. What would be a normal Canada/U.S. distribution at 7030 distribution with a peak winter season distribution would be in North America?

Yeah, I mean, it -- on an average basis, it may be more on the line of -- okay, Canada was about 70% of the U.S., roughly.

Mm-hmm.

Yeah, so it's -- it's probably typically more in the range of 40 or 50%. I would have to look at it. I don't have it right in front front of me.

Okay.

But obviously the Q1's are going to be the highest quarter in terms of relative basis. Although the North American revenues are going to typically be probably in the 50, 60% range of total revenues.

Okay. And in terms of margins or EBITDA or anything like that, anything you're willing to --

We don't disclose that.

Okay. That's all I have, thanks.

Your next question comes from Steven Gingara with Jefferies.

Thank you, good morning.

Hi, Steve.

Can you give a sense for activity levels on the premium connection side? It's typically kind of a good indication of what's coming down the road on the other parts of your business. Can you give us a sense what you see in the 1st quarter and year-to-date.

It's still fairly the same, Steve. Now with the consolidate, the bill activity we followed that pretty closely because it's pipe leads to bills [Inaudible] there's an opportunity there that's spreading but in a lot of the steel that was moving during the quarter, were the carbons, they weren't the high alloy content tubulars that typically get used in the Gulf of Mexico or in the deeper higher pressure type gas environments, okay? So when we look at our revenue pickup that we had in Q1, it came from our cupling business, which our cuplings go on to carbon products. The Texas ARRAI operation. It came with some sales on our tubing products which are a [Inaudible] product themselves, but if you look at the premium spreading business itself, it didn't change much from Q4. So it's still relatively depressed, still waiting to see those premium tubulars waiting to move into the markets.

Okay. That's helpful. Thank you.

Your next question comes from Kevin Simpson with Miller [Inaudible].

Good morning, Mike. My question's on drill bits. And one of the issues around Reed is that the relationship with the Schlumberge integrated services operations, where they can direct the business, and I'm wondering what you've seen so far in, you know, those sales. Is, I guess, international coming off as much as it did. Any indication that you might be losing some of that business? And then on the conference call of the, you know, Doug was indicating meaningful 2nd quarter pickup in that kind of business for Smith?

Yeah, I've heard those comments. The -- our assessment is that we have maintained our position thus far with Schlumberge. Clearly we have competition for it. There's no guarantees, they're what we categorized as tier one customers, they're very important to us. We're out there trying to earn that business day in and day out. Based on being awarded continuing contracts in Mexico with them, which was a very important high-profile, IBM contract. Based on recent conversations with the people in that organization. All indications are, that that relationship has continued to be very strong.

But, you know, Kevin, I mean, we have to earn that business month in and month out, we don't take anything for granted. We're very much aware of the fact that our competitors would love to get in there and take a piece of that business from us, and that they're going to continue to focus on it, but so far, we don't think they've been able to do that.

Okay. Mike, thanks. Have you indicated how much of the ReedHycalog revenue was through Schlumberge or is that confidential information now?

I'd say that's as confidential as any other customer list now.

Okay. Just one more question on the bits specifically. I just wanted to clarify, did you say that normalized, that North America was 50 to 60% of revenue? Was that for every -- was that [Inaudible] and if so is it for lower coned end diamond or --

Yeah, I said, I may have misspoke.

I may have misheard.

No, I probably misspoke. In the current quarter, the North American business was approximately 50% of our total revenues within ReedHycalog. Okay?

Yeah.

And that is obviously high in the current quarter because of the Canada factor, okay?

Yes.

So if you were the normalized Canada, and then look at North America on an annual basis,s it's probably more in the range of about 40%.

Okay. That may have been what you said, but thanks for clarifying. That's it for me, Mike. Thank you.

Thanks, Kevin.

Your next question comes from Ken Sill with CSFB.

Yeah, a couple things, Mike. First on the marine business that was a little bit worse than we had been expecting on a revenue. How much of that is seasonal and how much of that is just things are a little slower than they've been.

Yeah, it's seasonal. We expected the marine business to be down. I think we talked about in the last conference call it would be down seasonally. When it was all said and done I think they were maybe a million or two, a little bit below even our forecast. That I would attribute to some projects being pushed out as well as the weakness in the Gulf of Mexico.

Okay. And then you've talked about some of the cost-cutting efforts, head count reductions at the some of the various divisions. Could you kind of quantify how much that's going to add, you know, as we move into the second half of the year? If you have that?

Well, no, I mean, most of that -- those reductions were done during the 4th quarter and very early stages of the 1st quarter. So the bulk of those benefits are reflected in our results this quarter. Okay?

Okay.

So, I mean, we are not in a -- other than these product lines that we're exiting, we are now in a downsizing mode, we're, you know, we're beginning to see that it won't be that long, we suspect because we'll have to add a few folks back on the chalkboard to take care of some work. We're not doing that yet. But I think we're closer to that stage of the cycle than continued downsizing. Now we are, as always, looking for opportunities to become more efficient. That's an ongoing process regardless of the cycle. I just want to quantify on that front.

Okay, so a little bit of improvement in the 2nd quarter, but most of it's already in the numbers? And then just some housekeeping questions with the new reporting structure on the G & A segments, any kind of guidance on, you know, are those kind of good run rates going-forward, we expect to see those things creep up as we move through the year? On the corporate G & A.

I think generally speaking those run rates will be fairly reflective of the balance of the year. The corporate G & A numbers ought to be reasonably flat through the year. The one thing to keep in mind, the ReedHycalog tends to have a more variable component of selling expense than the rest of the businesses do, so it will tend to move up and down on a percentage basis with the revenues. So those, you know, on the marketing expense, the run rate that you're seeing there should be, you know, reasonably good for the balance of the year, as a percent to revenues, the other areas ought to be fairly constant on an absolute basis.

Okay. And then on depreciation came a little bit higher than I was thinking, is that a good run rate or is that coming down with some of the facility closures?

It came up a little bit because of the amortization of some intangibles, when we did our final purchase -- accounting for ReedHycalog. So the run rate you see there now should be fairly reflective for the year.

Okay. Thank you.

Your next question comes from Eric Jackson with Deutsche Bank.

Good morning, Louis. Good morning, Michael. I'm sorry I'm on speaker phone, somebody stole mine last night so that gives you a sense of how things are going on this side of the business. Quickly can you guys give me a quarter and cash position and what was the amount drawn on the credit facility, and also, on a more fundamental basis, if you guys could give me a sense of when you feel as though the business mix is going to change for, you know, the higher margin, both pipe side and the bit side. And also, I was wondering if you could comment on -- have you been able to experience or do you foresee experiencing any purchasing power with the combination of the Reed business and the ongoing grant business?

Yeah, let me cover the last two, and then I'll turn it back over to Lou who can handle some of your questions on the grant facility. When does the premium business turn? Well, again, we think of premium tubulars at the distributor level are at very low levels right now. So even without a big turn in rig activity, we think pressure is building, there's going to have to be replenishment of stocks, we're not seeing the orders today. But we're scratching our heads wondering why. That will then be further accelerated whenever we get a recovery and the Gulf of Mexico drilling activity that will provide the next leg up on that business or move into deeper gas type drilling in the U.S. supposed to be the driver [Inaudible] not good enough to tell you what's going to happen.

In terms of purchasing power, we're beginning to look at those issues. Clearly, there are some -- there's a number of areas both on the purchasing front as well as some R&D fronts between our traditional product lines and ReedHycalog, now that we're getting through a majority of the transition issues with the ReedHycalog employees and legal structures and things like that, we're just now beginning to explore those areas, and again, it's a little soon to try to quantify what we may find there. But it's certainly on the target list for this year. I'll turn it over to Lou, who can handle your questions on cash facilities.

Outstandings on our credit facilities were just under $30 million per facility. And the cash balance at the end of the quarter was approximately $26 million, I believe it's down about $4 or $5 million from the beginning of the quarter.

And the final question, Louis. The Cap Ex budget for '03?

We're still working with the $35 million budget.

Thank you.

Your next question comes from Tom Ascott with Pritchert Capital.

Good morning, fellows.

Good morning, Tom.

Good to talk to you again, Mike.

Yeah, it's been a while.

On the backlog, you mentioned your tubular's backlog is up from $56 million to $73 million. I guess that's sequentially from the December quarter. Is that the first sequential pickup we've seen in over a year in tubular's backlog?

Again, I'll just make the clarification that that's our drill pipe backlog.

Okay. I'm sorry, again, I keep mixing them up, yes.

I don't want to get confused with our tubular technologies division. The pickup and the backlog, those are certainly the first sequential increase we've seen in several quarters, Lou's checking right now, but probably the first uptick we've had in a year anyway, I will caution you that the pickup is somewhat seasonal in China. All the Chinese drill pipe orders tend to come in in the first quarter of the year, so it gets artificially depressed at year end and picks up at Q1. That's about $5 million of the increase, okay?

Okay.

And then the balance of the increase by and large are some of these international orders that we've been pursuing because of the depressed nature in the U.S. We've been going after some of these international markets, smaller diameter commodity type products, which attributes some revenue margin, but are not seeing the quality revenues we want to see, ultimately coming out of North America. But it's a long-winded answer to your question, I just want you to understand what's in that backlog.

And then the corollary to that, we heard from some drilling contractors that despite, you know, an over supply of pipe in total, that they are seeing some shortages in some sizes in grades in various locations. Are you beginning to see kind of any early signs of pickup in some sizes in grades, even though in total the business is still very slow in North America?

Yeah, that's an excellent point. And that's been part of what's kind of kept us going through the past year. And we definitely are aware of some significant inventory positions out there, certain sizes and types, as we look forward to the next six months, is not what they need. So that's -- it's a very valid point. And it's something that's hard to factor in, exactly how that plays out. And how much flexibility they have on using some of the drill pipes, but I -- it's not surprising that you're hearing that from the drilling contractors.

Okay, then, lastly, just quick, Reed in the quarter, can you give any indication of the unit sales increase, sort of from December to March, you know, comparable numbers for unit volume up 5% up 10%, or can you put a parameter on that?

I cannot, as I sit here right now, Tom, perhaps we -- that's something we can go back and extract if we want to have a follow-up call. But I don't have that handy.

That's great. Thank you, I appreciate it.

Thank you, Tom.

Tom, this is Louis, just to follow-up a little bit on your backlog question. Our backlog numbers are a little bit of an apples and orange, because we started adding China to backlog in the middle of '02. But if you normalize that, we haven't seen a pickup in backlog since the middle of '01. But I'll caution you the backlog that's picking up right now, as Mike mentioned, is a lot of the lower price, small diameter, nonpremium products in the international market. While it's picking up, it's not a high margin backlog.

You've got to start somewhere though don't you?

Absolutely. We take what we can get right now.

Your next question comes from John Freeman with Raymond James.

Good afternoon, guys. Most of my questions have been answered. I just had one quick question. Along the same lines of that drill pipe backlog, I realize pricing's down just on the whole product's mix issues, but if we back out the product mix issues and look at an apples to apples basis, is pricing still holding steady across all these?

Yes, it is and thanks for asking that question. There's a good clarifying point that needs to be made. The price per foot decline we're dealing with is purely driven by product mix, geographic mix. On a line item by line item basis, pricing has been very stable for us.

Okay. I appreciate it guys.

Thank you.

Your next question comes from Francisco Garcia with J.P. Morgan.

Most of my questions were answered. I was curious to see if you had a run rate for interest expense that was up a little higher than we thought.

Lou should be able to give that to you.

I think the first quarter expenses is a pretty good run rate. We plan on taking that down a little more as we go through the year, where we're looking at $100 million reduction in debt. If our plan comes into reality from operating cashflow and asset sales. But I would say you could take the change from Q4 to -- you could take the Q1 number and bring it down by interest on $20 million a quarter at a very good rate while revolving at the same time.

Okay, thank you.

We'll take one more question if there is one.

Your final question comes from Bill Sanchez with Howard Weil.

Good morning.

Hi, Bill.

Louis, just a clarification again on the personnel reduction. Is that strictly the 5% that you mentioned on the call during the quarter. That was strictly in the marine division?

It was the premium technology and tubular division.

Okay. The premium technology. And, Mike for you, in terms of looking at expectations in the drilling products and services business for the second quarter, operating margins down sequentially in that business, you talked about the lower sales volumes and a mix impacting that. I'm curious of how much of the margin erosion was due to the fact that production continues to outstrip sales in that segment, what the expectations are in the second quarter, in terms of, if you look at your production levels and what kind of incremental EBIT margin could you give us in that segment sequentially.

The drilling products segment?

Yes, sir.

The sequential margin decline, first off, Q1 versus Q4 was due to reduced manufacturing activity and reduced sales. And resulted in a less favorable product mix. Okay?

All right.

Going into Q2, the product mix issue is going to continue to be a factor. And we're not -- I mean, manufacturing at this point. I mean, it depends what happens at the end of the quarter, but at this point I think our manufacturing plans are probably reasonably stable on a quarter-to-quarter basis in terms of volumes. So the -- you know, the margin change going into Q2 will be driven by the product mix more than anything else?

Bill, the only reason why production was ahead of sales, volumes in Q1. As I mentioned, was because at the end of Q4, we shutdown manufacturing two weeks before year end, that allowed us in essence to clear out our work in progress, and get it all approved, the sales system. And at the end of Q1, of course, we had product that we didn't quite get through the sales process, but we did get through the production process, it's not really building inventory.

Okay.

Going-forward we would expect that our production levels would basically be equal to our sales level.

Okay.

Although, if you begin to get into a rising sales environment, then your production levels are going to -- they're going to outstrip their sales levels, because you're building production that you're going to sell in the subsequent quarter.

Sure. And Mike, since you expect revenue to be up sequentially in the drilling products business, what kind of incremental EBIT margins do you think we see in that business in the quarter?

Absolute margin is probably going to come down a bit. Because we have some of these international orders at fairly low margins. Let me have Lou try to get that number and follow up on it.

Okay. Thank you.

Operator?

Yes, sir.

Okay. I think that's it.

Okay, you may proceed with your closing remarks.

Okay, well thanks everybody for joining us today. We look forward to visiting with you again in the quarter. If you have any follow-up questions as always feel free to call Lou, Jerry or myself.

This concludes today's teleconference, you may now disconnect.