國民油井華高 (NOV) 2003 Q3 法說會逐字稿

Good morning my name is Jeanette, and I will be your conference facilitator. At this time I would like to welcome everyone to the Grant Prideco Reports Third-quarter Earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. McShane, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining us this morning. As always, Lou Raspino is with me; and he will go through the financials here in just a few moments. We released earnings this morning, 6 cents per share, $7.5 million in earnings on revenues of $221 million, about a 16 percent improvement in revenues sequentially. That 6 cents per share would compare against 3 cents in the second quarter and 2 cents in the same quarter last year.

We had some special items impacting the results this quarter. We had a gain on the sale of the rotator business, which we divested of earlier this quarter; that was about 1.4 million after-tax. We also continued to experience some transition-related expenses at ReedHycalog; those ran about 1.5 million before tax, about $900,000 after-tax.

Netting those special items in, we still came in at about $7 million in earnings or 6 cents per share. So up nicely, both sequentially and versus the same quarter last year.

I guess in summary, it was a good quarter at ReedHycalog. They have had continued success in the fixed cutter line of products. They certainly benefited from the drilling recovery in the Canadian market. We had a better quarter at the drilling products division. We had some international tenders which helped our volumes, although they were at somewhat lower margins than normal. We had a little bit better mix in North America, so that helped our pricing situation a little bit.

The Marine Products division, the XL division essentially, improved as expected and discussed on the last conference call, benefiting from some of the large tenders that they were awarded earlier in the year. Unfortunately, we continued to suffer from a very weak tubular technologies market, weakness in the Gulf of Mexico, customer destocking. And so that business was actually down somewhat sequentially. We will go through these in more detail.

Let's go into a review of the revenues by segment, starting off with Drilling Products. Quarter three revenues increased sequentially 26 percent, $18 million, to $86.5 million as compared to 68.5 in Q2. Our volumes were up about 18 percent. We sold about 2 million feet of drill pipe during the quarter. That compares to about 1.7 million feet in the second quarter. As I said, the volumes were helped principally by some tender sales out of the Far East. We also had better volumes coming out of our Mexican operation.

Average price per foot increased somewhat, about 4 percent sequentially. That was as a result of the somewhat better premium product mix here in the North American market. We also benefited from increased sales of drill collars, which were up about 55 percent sequentially; that is a relatively small number, though. Compared to the same quarter last year, revenues were up $9.2 million or about 12 percent. Footage was actually up 25 percent, albeit at a somewhat lower price per foot, so as a result only a 12 percent increase in revenues; but nonetheless an increase.

We continue to see the largest land drilling contractors in the U.S. on the sidelines. Despite the increase in U.S. rig activity, they continue to liquidate inventories. They are on pace to purchase less drill pipe from us this year than they have since 1999. So it has been a very difficult year from that perspective; and that has been offset by some of the international tender business that we've been able to obtain and some of our premium products.

In spite of a very weak demand for drill pipe business, though, we continue to run at about 17 percent operating income margins. So, not a bad result given the depressed demand situation. We can come back and talk about inventories if you have some questions on that later.

Moving on to ReedHycalog, very pleased with their results this quarter. It was in fact a record revenue quarter for ReedHycalog. Quarter three revenues increased 20 percent, to $68.1 million this quarter. That was an increase of about $11 million quarter-to-quarter, and about the same order of magnitude on a year-over-year basis. In fact, I think year-over-year they are up about 23 percent.

So a very good quarter for revenues at ReedHycalog. U.S. revenues were up 26 percent sequentially. Canadian revenues were up 75 percent. And international revenues were up 8 percent. The U.S. market is being driven by their tremendous success with the TReX fixed cutter bits. The Canadian market obviously benefiting from the seasonal recovery in drilling. And the international growth, both a little bit of activity and some success with some tenders. So a good result on revenues.

Gross margins were up nicely, as well. But as you've seen in our report, market expenses were somewhat higher, both sequentially and somewhat higher than what we had initially anticipated. Clearly a good part of that marketing increase is related to the higher revenues, as is to be expected. We also have initiated a number of new marketing campaigns at ReedHycalog. We are putting more engineers out in the field and in our customers' offices to work with them on optimizing bit programs. We are also investing in more people out of the field to run the fixed cutter bits, because we believe that with proper supervision of bit running we can get a better result; and as a result be paid a better price for those bits. So those are investments in the future.

We also have incurred some higher than normal expense in the distribution area. As many of you may recall, when we acquired ReedHycalog we felt like we had somewhat excessive inventories, and we have been working to liquidate those. That has required repositioning some of this inventory around the world. And so that is some money that we are investing so we can liquidate these inventories. When you go through it all, we expect marketing expenses to come back down in Q4 by about 2 or $2.5 million. So some higher marketing expenses, but a good chunk of it not expected to be recurring.

Let's move on to the Tubular Technology group. As I mentioned, they continue to suffer from a very weak market environment. Q3 revenues, $45.9 million, compared to 48.4 million in the second quarter. So about a 5 percent decline. Unfortunately, it is the same story that we've heard for the last several quarters. Distributors continue to destock inventories. They have the luxury of very quick turnarounds, both from the mills as well as from the threaders, and they can drive their inventories down to historically low levels, which is where they are at today. Until the business picks up meaningfully, it is obviously in their interest to maintain extremely low inventories.

We think that we've about seen the end of the inventory liquidation trend, and the things will at a minimum stabilize at levels that we are at. But I think it is going to take a bit of an activity increase to see them start speculating in higher inventories. So we are not expecting a tremendous amount of improvement going into Q4. They also typically like to keep their inventories as low as possible at calendar year end to minimize their ad valorem taxes. So I don't think we are going to get a lot of help in Q4; it is probably going to be early into 2004 before we see much recovery in this group.

The tube-alloy accessory threading business was about flat quarter to quarter. The premium threading business was down. The Texas Arai coupling business was about flat, albeit it was somewhat more competitive prices, so that impaired their margins. And the TCE large-diameter casing operation likewise had a decline in revenues and manufacturing activity, which had a significant impact on manufacturing absorption, and as a result their margins.

The Marine group, as I mentioned earlier, came through with a nice increase in revenues. First off, I guess what we need to do on Marine is exclude the revenues from Rotator, which we sold earlier in the quarter to Oceaneering. That was a decision we made based on the product lines. It is a good product line; we just didn't see the strategic fit with us. Excluding Rotator from both Q2 and Q3, revenue was 17.7 million, or an increase of 57 percent sequentially, as compared to about $11 million in the second quarter.

Of course we talked at length in the last conference call about the success the XL group has had in obtaining some nice tender business from some major operators. And those products have begun to be shipped during Q3 and will continue into Q4.

Operating income was up nicely. Sequentially, about flat year-over-year. Their product mix is not quite as good as it was a year ago, and they are suffering some disruption cost as they completed the relocation of both their Holland and Indonesian manufacturing operations. Both of those moves are now complete. Both operations are up and running. And we would expect their margins to show some further improvement going into Q4.

With that I am going to turn over to Lou, who will go through some of the financials; and then we will come back with some wrap-up comments.

Thank you, Mike. As Mike mentioned, Q3 includes two special items, the gain on sale of Rotator, which is 1.4 million after-tax, and transition expenses of 900,000 after-tax. Now this amount is reported; $1 million is included in operating income and 500,000 is included in other expenses.

Also included in the press release, we have given details of certain special items in previous quarters in Q2. All of my comments are excluding the impact of those special items.

On a consolidated basis operating income was 22.9 million, which compares to 17.9 sequentially, and 10.6 in last year's quarter. Sequential increases in operating income at Drilling Products, Marine, and ReedHycalog more than offset the declines at Tubular Technologies and in the Other segment. The consolidated operating income margin was 10 percent in Q3, which is up from 9 percent in Q2, and up from 7 percent in last year's quarter.

At the Drilling Products segment, operating income was 14.8 million, which was up 6.8 million or 85 percent sequentially. And the operating income margin was 17 percent, which is up from 12 percent in Q2. The sequential incremental margin in Q3 was 38 percent. This was somewhat held down by a low margin sale of nonpremium products of about $7 million to a noncore international market. Items positively impacting operating income at Drilling Products for the quarter included the higher drill pipe sales volumes, as detailed by Mike; also we had higher production volumes. In Q2 we produced 1.7 million, and in Q2 1.8 million, or about a 6 percent increase.

As Mike mentioned, we also saw an improvement in drill pipe mix in Q3. Sales of premium drill pipe were approximately 70 percent of total sales for the quarter; that is up from about 50 percent in Q2. On a year to date basis, sales of premium drill pipe accounted for about 60 percent of total sales, which is about level with last year.

Also as Mike mentioned, we have increased sales of drill collars; also increased sales of tool joints; and with the higher production we have better manufacturing cost absorption for the quarter. All of that contributing to the operating income improvements.

Backlog at Drilling Products at the end of Q3 was $90 million; that is up 11 percent from the end of last quarter. It is now the third quarter in a row that backlog has increased. We started the year with only 56 million in backlog. Now footage in backlog is up 18 percent from last quarter; however, average price per foot in backlog is down 7 percent, reflecting a negative change in mix.

On the equity and earnings line, that reflects the performance of our investment in VA (ph), which declined by 1.5 million to only $0.5 million in Q3. This of course was impacted by the three-week shutdown of the plant in August for the European holiday that we discussed last call. In Q4 we're planning on another three-week shutdown due to the December Christmas holidays. So we expect a similar contribution to earnings from VA in Q4.

Turning to ReedHycalog, the integration continues to go quite well. As mentioned earlier, we incurred transition expenses of 900,000 after-tax. The effort to extract ReedHycalog's activities from Schlumberger's complex deal market structure and establish our own standalone systems is quite a complicated task. The amount of transition expense continues to decrease each quarter, though not as fast as we had hoped for in Q3. Q3 is slightly down from the 1.1 million after-tax number in Q2. We expect Q4 transition expenses to total about 600,000 after-tax; and as far as we are concerned that should be the end of it.

Including the effect of the transition costs, operating income in the third quarter was 14.1 million, which is up from 13.4 sequentially; and the operating income margin was 21 percent in Q3 compared to 24 percent in Q2. The margin decrease is primarily related to the increased sales and marketing expenses associated with the staffing up of the new marketing programs that Mike discussed, and the additional field support for the large increase in fixed cutter sales that he discussed. In addition, the increased distribution expenses to aggressively reposition the inventory that came with the acquisition into markets where we believe we can more quickly turn it into cash.

Also in the quarter we increased our accrual for incentive comp, to kind of catch up year to date in this segment, due to stronger than expected performance at ReedHycalog for the year. Now we estimate approximately 2 million of the Q3 increase in sales and marketing is nonrecurring; and about 1 million of the increase comes with no immediate increase in revenues, but instead represents an investment in future sales growth.

At Tubular Technologies, as Mike mentioned, revenue went down about 2.5 million sequentially. Operating income in this segment decreased by 1.7 million to 700,000. Items impacting results in Q3 for Tubular Technologies included severance costs for reduction of approximately 50 employees or 4 percent of the workforce. That act should improve annual operating costs by about 1.5 million going forward. And we had higher than normal maintenance expense at TCA due to an equipment malfunction which has since been corrected. We also had, as Mike mentioned, unfavorable sales mix at Texas Arai. The impact of those three items on operating income in Q3 was approximately $800,000.

Turning to Marine, the reported Q3 operating income includes the results of Rotator, which was sold in Q3. Excluding Rotator, operating income from Marine was 200,000, which is actually an increase of 1.5 million over the reported loss in Q2 of 1.3 million. The sequential incremental margin was 24 percent for Marine. The improved results in Q3 over Q2 are primarily reflecting the impact of the BP-PMEX contracts that we discussed last quarter.

Operating income at the Marine segment for Q2 and Q3 was virtually impacted by the cost and inefficiencies associated with the temporary shutdown and relocation of XL's manufacturing facilities in Europe and the Far East that Mike mentioned. Both facilities are now operational. Both quarters were also impacted by an increase in amortization of intangibles associated with new thread technology to be used to expand XL's product line.

Marine's backlog at the end of Q3 totaled 14.6 million. On its face it is down from 19 million at the end of Q2. However, the decrease reflects the removal of the backlog associated with the Rotator business which was sold in Q3. Excluding Rotator, the backlog at Marine actually increased 4 percent during the quarter, from 14.1 million at the beginning of the quarter.

The Other segment reported an operating loss of 1.3 million, primarily representing depreciation and other expenses associated with the previously announced winding down of our industrial operations. And we expect Q4 to be a loss of approximately 1 million in this segment.

CAPEX for the quarter totaled 8.6 million, down slightly from 9.3 in Q2. Year-to-date our CAPEX now stand at 28.4 million; and we expect CAPEX for the year to total approximately 35 to 40 million. Debt at September 30 was 445 million, which was down 21 million from Q2 and down 51 million year-to-date.

With that I'll turn the call back over to Mike for some concluding comments.

Okay. Well, as regards the outlook for the fourth quarter here, in the Drilling Products group, as Lou mentioned, while the backlog is up, the mix is not quite as favorable as we enjoyed this quarter. So that works against us a bit. We also have the impact of the holiday shutdown periods on manufacturing operations to contend with.

Quotation activity is pretty healthy right now. It's interesting. While quotation activity is pretty good, actual bookings are down somewhat here, early in the quarter. So we will be keeping an eye on that. Net-net, we will probably be off a little bit in operating income from the Drilling Products group in Q4 versus Q3.

Premium threading, as I mentioned, we believe we've seen the worst. We, in fact, actually started off the month of October somewhat stronger on the premium threading side of the business. While that is certainly encouraging, it is fairly project-specific; and I don't think it is indicative of a broader recovery throughout the market. Nonetheless, it should help us a little bit. What will be finding as the quarter wears on, though, is a tendency, as I mentioned, of the distributors to try to minimize their inventories at calendar year end. So we are assuming right now a relatively flat contribution from the Tubular Technologies group in Q4.

The XL division, as mentioned, should see further revenue improvement in Q4. They should post a revenue increase of 2 to $3 million, and a nice contribution in earnings from that.

And ReedHycalog should have another good quarter. They have got tremendous momentum in the market right now. Certainly the U.S. expectations would be for a stable Q4, if not a little bit of an increase here between now and year-end. The Canadian markets should see some improvement between now and year end as we move into the winter drilling season. The international market, generally speaking, should be stable. It is always a bit of a wild-card with international tenders and your success rate. But we should have another comparable quarter, we would think, from ReedHycalog.

So depending on some of the factors I mentioned, we would expect earnings in the fourth quarter to be certainly in line with what we did. We would hope to do a little bit better. So somewhere between the 6 and 8 cent range is probably not a bad range to be thinking of; we will just have to see how some of these factors develop through the quarter.

With that, we will turn it over, operator, for questions. If you will, limit your questions to one initial and one follow-up, so we can get to everybody. Thank you.

(OPERATOR INSTRUCTIONS) Bill Herbert, Simmons & Co.

Mike, you mentioned earlier in the call you were going to give us a perspective on the inventory situation, with respect to drill pipe. You may have touched on that; I am not sure if I caught it. Could you elaborate a little bit, in terms of what you're seeing with respect to pipe on the ground, and inventories in general?

In general there's too much of it.

Yes, I figured.

As you know, Bill, we continue to try to refine our views of what is out there and, importantly, what is usable inventory, as opposed to the inventory that doesn't really fit the drilling programs that are out there today.

We have put some estimates out in some of our presentations recently, which have estimated that drill pipe inventories would be liquidated to tune of 3.5 to 4 million feet this year, based on estimates that we generally get from the drilling contractors of consumption rates, of 150 joints per year per rig.

What is that number again?

150 joints per year per rig. We are currently in the process of testing that number. We are wondering whether or not that is as accurate a number as we believe; or as the drilling contractors seem to think it is. What we're doing is some sensitivity to that. If the consumption rate is really only 125 joints, based on drilling programs, what does that infer about liquidation? So it's a bit of a moving target.

But with the 150 joint consumption number, that would still suggest that at the end of this year that there is still an overhang of probably some 4 million feet of new drill pipe on a cumulative basis going back to 1986. So our assumption is that that would have to be consumed, in general, before drilling contractors really need to step up to the plate.

Now as always, there is a factor of, yes, but is it the right stuff? We've got drilling contractors today who are buying certain sizes of pipes because what they have is not what they need. So there's a lot of different factors here. You put all that together, and it suggests to us that in a flat drilling environment that we still are probably looking at somewhere in the second half of '04 before we see much of an uptick in demand. Now there are a lot of things that could move that one quarter to the other, obviously.

Sure. That is helpful. Secondly, the follow-up here with respect to the drill pipe operations. We touched on this last call. You had had expressed that you were in the process of conducting a fairly intense review of your worldwide manufacturing operations for the drill pipe operations. And I am just curious as to whether or not you could give us an update, as to where you stand on that front, and what is expected to come out of that process.

It is well under way. The objective that we set for ourselves was to try to wrap up that study by the end of the calendar year. I believe they are still on target to do that. I'm supposed to see some preliminary estimates from them here within the next week or two. So we are going to stop short of quantifying what we believe the benefits will be from that, until we really have gone through it all.

But the expectation is that there is probably some consolidation to take place across all of our manufacturing operations. And I will just defer a quantification of that until I have seen the final study.

We look forward to those results. Thanks.

Michael Urban with Deutsche Bank.

Even with some of the issues you've talked about in Drilling Products, it looked like the incrementals were actually pretty good there. Was the improvement that you saw there more of a volume mix, a cost savings issue? And I guess following up on that, are you continuing to be able to pull costs out of there and efficiencies?

The incrementals, I think, sequentially were 38 percent, Lou. Not bad. But quite frankly, we would expect generally speaking the incrementals to be a little bit better than that. As Lou mentioned, a good chunk of the volume increase this quarter was through some fairly competitively priced tender business overseas that did not generate the type of margins we normally would expect to see.

So what offset that and helped the margins hang in there at 38 percent was the fact that we did have a little bit of a shift back to some premium products at higher prices. So that certainly helped offset the lower margin international sales.

From a specific cost-reduction plan in that group, there was no specific actions taken during the quarter. I think we have the operations, at least as configured, staffed to where they need to be. The next round of cost savings will come out of this capacity rationalization study that we're doing currently.

And follow-up questions on the drill bit business. Even with the stripping out the $2 million of kind of nonrecurring costs there; margins were kind of flat to down on a significantly up revenue number. Is that related to some of the distribution issues that you talked about? And some of the other factors that were out there? Or was there a mix or a price issue?

No. If you look at the gross margins in their business, they certainly were in line with what we would expect. It was all related to the increased marketing expense. And as Lou explained, 2 to 2.5 of that we view as being onetime nonrecurring costs; and then another million, 1.5 million of that, if not a little bit more, relates to some staffing up that we are doing in anticipation of some further revenue growth into '04.

That's all for me. Thanks, guys.

Kevin Simpson with Miller Tabak.

Mike, you may have already gone over it, I may have missed it. But the order pickup and the backlog pickup for Drilling Products, where is that coming from? Is that some of this international tender business? And do you think there is a sustainable trend here? Backlog has been moving up kind of steadily.

You're right, it has. It is a mix. It is some of the national tender business that we continue to go after. Some of it is a little bit of a pickup in activity from some of the rental companies. Which is, I think, interesting; because what it tells us is that the demand for drill pipe may be, and I stress may be, a little stronger than what would otherwise assume based on the purchases from the drilling contractors. But because of their uncertainty of the near-term direction of rig activity, they are going to defer those purchases and rely on renting drill pipe, as opposed to buying it. As a result the rental companies are having to come to us and buy a little bit more.

I may be trying to read too much into that than I should. But I think it is at least something to take about. So we've seen a little bit of pickup from rental companies. Some international. And some spot purchasing by some of the drilling contractors who are beginning to run short on certain sizes and types. The Canadian market has been reasonably good for us, as well.

And what do you think would be the pricing off a little bit in it? So the mix is sort of towards a little bit lower grades. Is that telling you anything?

Lower grades, smaller sizes. It is not indicative. Not that I won't say that the international market in particular is not very competitive from a pricing perspective; because it is. But generally speaking, it is more driven by the mix than it is an underlying downward trend on pricing.

Thanks, Mike.

Robert McKenzie with Sterne, Agee.

If I wrote my notes down right, and I apologize because it is early in the morning and I don't always do that; I think you said that the Tubular Technologies you expected a better early 2004. Part of it was prefaced (ph) on liquidation of dealer inventories. But later on you said something more of the line that it was a project by project basis, instead of a secular recovery. Did I write that right?

Let me talk to two different quarters. In the fourth quarter, the one we are in right now, we have started off the month of October with somewhat higher bookings in our premium threading division. They are very project-specific. And of course we are glad to have them, but I was comparing that as opposed to a broader increase in activity across the board.

So what we are saying is while we are seeing a little pickup in demand for some projects, we do not necessarily think that is indicative of a trend towards restocking, if you will, by the distributors.

We think they will continue to minimize their inventories through calendar year end, both because they like to have the lowest inventories as possible at year-end for tax purposes, plus I think most people would expect a bit of a seasonal decline in activity as we go into the first calendar quarter. Which suggests they would want to keep their inventories fairly lean as well, and maybe defer restocking until the early part of 2004.

On the premium threads, is it specifically premium? Are you seeing anything else in the tubular technologies in terms of an increase in sales or inquiries going into the outlook for 2004?

Well, no, I would say the prime area where we would be expecting some activity increase would be in the premium threading; and maybe to a lesser extent the TCA business, because that ties into restocking inventories at distributors as well.

All right. Thanks, guys.

Ken Sill with Credit Suisse First Boston.

Wanted to dig a little bit deeper into the mix in the pipe business. It was a pretty good quarter volume wise. International sales were up. You said that some of the big land guys are still on the sideline. I would imagine with a lot of the big offshore drilling contractors still sitting around with a lot of idle equipment, that they are still pretty quiet in the market, as well.

Generally speaking, yes.

Is there a big differential in terms of margins between what you would sell offshore and onshore?

There can be a huge difference. You can get into more of the premium drill pipe products, the premium connections on it. So yes, it can be a fairly meaningful difference. Of course, you can sell the same products into markets onshore, where you are dealing with deeper, directional drilling as well, though.

Would that be true also between the mix between what you would use for a jack up versus a deepwater rig? Or does it (inaudible) what the jack up is drilling?

Water depth is not so much the issue, as much as the well depth.

Okay, so the trend towards, if we see the rebound in deep drilling onshore, and the deep gas play in the Gulf of Mexico, and the continued deepwater play, those are all kind of long-term positive trends for what you guys are doing?

They should be long-term positive trends both for the premium tubulars business as well as the premium drill pipe products.

Do you see a difference in the amount of pipe drillers have in inventory, for the big land guys versus the big onshore guys?

It varies wildly from contractor to contractor. I would have to go and look at that specifically. I don't have those numbers at the tip of my fingertips. Some drilling contractors have far greater inventory positions than others do. So I am not sure I could make a generalized comment that way.

Okay, and one last question. Could you give us an idea what's going on with the intelligent drill pipe?

We are continuing in the testing mode. We have about 7,500 feet of 5-inch pipe, which is under construction right now. That is slated for some field testing with one of the major operators. We are actively working with a couple of the other service companies, so that they can develop the interfaces with their MWD/LWD tools to run on the pipe. One of those companies in fact has 3000 feet of 5 7/8-inch pipe which they are currently testing.

We think we've completed the development of the drilling jar. We have a prototype out there. The tests have been quite successful. We are currently manufacturing the first drill collars with the connection; that was another component that had to be completed. So we think we're just about there.

We have hired a commercial manager to start working on the marketing aspects and business plan aspects of this product. The ReedHycalog guys, in fact, are working on a tool that they have themselves that would run in conjunction with the pipe. So it is progressing. It is not commercial yet, obviously. We expect to get some pretty good field trials here in the next several months. And that is the latest update.

Field testing really probably won't turn commercial until maybe second half of '04? Is that optimistic or pessimistic?

I would like to think that is reasonable. The only reason I hesitate is with any R&D project, the closer you get to market introduction, you start thinking of various little aspects of the product that you need to tweak or adjust to gain the customer's confidence to run it. But I think we all feel very confident ultimately that this will be commercialized. I think we feel very good about the progress that has been made.

Would I have liked to have had a commercial string in the hole by now? Yes. But yes, I think the second half of '04 is probably not an unreasonable expectation.

Thanks, Mike.

Eric Zellens (ph) with Deutsche Bank.

Debt came down a little bit more than I had anticipated. Is your cash position still relatively high? I didn't see that in the press release.

I'm sorry, what was the question?

What brought your debt position down by 20 million quarter-over-quarter? And then what was the cash position, quarter end?

Remember we had the sale of Rotator in the quarter. That helped. And the cash position at the end of the quarter was about $15 million, which shouldn't be very different from the end of Q2. It is down a few million, yes.

One follow-up question. Do you see any synergies going forward as far as the drilling products group and the ReedHycalog business? You've had close to a year to absorb the ReedHycalog business. I was just wondering what your comments were on any further synergies going forward between the two businesses. Thanks.

Yes, I think we do. I just mentioned in a moment ago the development of this tool at ReedHycalog to run in conjunction with drill pipe. The synergies I think are going to be (ph) characterized as soft nature, though. In other words, we have not and never have targeted specific cost reductions as a result of this acquisition. That was never the objective.

However, we are beginning to get increasing dialogue on the marketing front between the salespeople at ReedHycalog and the people within Grant Prideco. I think that will lead to better market intelligence, better marketing opportunities. But we are the very early stages of that.

Quite frankly, the guys at ReedHycalog have had a very busy time just getting their feet on the ground, and getting out from Schlumberger, and getting themselves re-established in the market. I think that is an objective that we have talked about and that we will increasingly be focused on as we go into 2004.

Mike Hahn with Merrill Lynch.

I was wondering on the inventory repositioning, is that realized on -- have you already realized revenues from that inventory? Or is that a sellout type of thing?

Ask me that question again. I am not sure I followed it.

You talked about you're repositioning some inventories in other parts of the world. You can sell it a little bit more easily. In distribution, have you already realized the revenues from those products? Or will you eventually realize them when you reposition them and sell them?

A little bit of both. We have certainly liquidated a fair amount of inventories that were on hand at the time of the acquisition. We still have a long ways to go. So it is an ongoing program that is probably going to take us another year to 18 months to get to where we really think we need to be on inventories.

And then on the premium bit, you talked about a shift to more premium drill pipe within the drilling products segment. Is that just more offshore work? Or what is driving that?

This is something that is order to order. It's a matter of what particular drilling contractor places an order in a given quarter. I don't think we can extrapolate some sort of underlying trend. And that is why we are quick to point out that while the premium mix worked in our favor this quarter, it is going back a little bit the other direction into Q4.

So it is just a matter which orders happen to land on the desk in any given quarter. But it could be a combination of some premium drill pipe for some of the rental companies, some premium drill pipe into a couple particular international orders, or a couple of the offshore drilling contractors. Usually those are the sources.

Just lastly, could you describe a little bit more some of the marketing initiatives that you talked about? You said 2 million was one-time in nature. But some of it was recurring. I just want to understand a little bit more where some of those investments are going.

Well, two primary areas. One is a program that we called the -- it is really a reintroduction of a group within ReedHycalog called the Advanced Technology group. And these are engineers which oftentimes sit in the offices of some of the operators to work with them on designing the drilling program, and the bit programs. It is a marketing-engineering type approach to really growing our business.

We don't have quite the market share that we think we ought to have with some of the larger operators. And we are focused on that. We also are investing on putting more people in the field to supervise the running of PDC bits. Because we think, with a little bit better oversight of that, that we can improve the performance of those bits. And a lot of times the way we are paid for these bits is based on performance.

So those are the two primary areas. And of course when you're first bringing on these people you have hiring, recruiting, relocation, training costs. And so the front end of getting a program like this started is always a little bit more expensive than what it ends up costing you as things kind of level out.

It seems like you are outperforming your peers in the industry, at least on the ReedHycalog side. Is that market share or is it just coming off a small base, or what is going on there?

Well, again, I think the success of that TReX cutter technology has certainly been a significant factor driving the growth, particularly in the U.S. So I think you can assume that there is a little bit of share growth. And quite frankly, we've probably lost a little bit of share. ReedHycalog had lost a little bit of share under the prior ownership. We probably slipped a point or two during the first six months of ownership in a couple of markets, and I think we are regaining some of that.

Okay. Thanks a lot.

Matt Scheffler (ph) with Investment Strategy (ph).

Good morning. Thanks for taking my question. I have a question about the timing of and the study for pipe rationalization, and also just wondering what the steps are and if that project is turning out to be more complicated or straightforward than you had originally anticipated. Thank you.

Well, the timing has been, from the start when we initiated this program several months ago, was to set up a team within the Drilling Products group to look at our manufacturing capacity and the logistics involved in moving these products around the world. And the question was, how do we minimize logistics costs and most effectively use the capacity we have? And how much capacity do we really need? So that was a challenge.

And we set out to have a recommendation from this group, checked (ph) us for management review by the end of the calendar year. And they are well on track to do that. So, no, it is not proving to take any longer than we thought or more complicated. And the initial reports I'm getting back are quite encouraging about what those results will be. But again, as I've said, until I've gone through the study thoroughly I'm certainly not going to start throwing around a bunch of estimates that I haven't gotten completely comfortable with.

Great. And this may not be really kind of a fair question, but just give it a shot. Can you size for 2004 what the cost take-out that you've been able to do -- and I know mix is a kind of a fungible thing here -- but mix aside, how much cost will you have successfully removed from the business in terms of your run rate for 2004?

Do you have any kind of ballpark figure at this point for the actions that you're going to complete, excluding this particular study that you just mentioned for 2004?

We'd have to go back. I mean, there have been so many moving pieces here this year. There's businesses that we have exited. Most of the specific cost reduction initiatives that have been taken during 2003, which would carry on into 2004, were done at the early part of the year. They were primarily focused within the Tubular Technologies group. They have continued to adjust costs quarter to quarter as their business has continued to soften.

So, no, I don't have right at my fingertips a quantification of that. We'd probably have to go through and do some adjusting for businesses that we've since exited, and businesses we've added, and so on and so forth.

Just a housekeeping. Was working capital a use or a source of cash this quarter?

Something of a source. We had some inventory liquidation.

Thank you very much.

I think we might have had a slight use of working capital this quarter. We are finalizing the balance sheet numbers right now. The primary issue, again, it deals with pulling the businesses out of Schlumberger. We probably have some of our money still held up in Schlumberger as they are continuing to collect some receivables on our behalf; and there is a delay in getting that money to us.

We think that is a short-term issue. We have a lot of pressure on the organization to get that solved by year-end. But we do have the working capital hung up in Schlumberger, which is causing probably a use for the quarter.

Thank you very much.

John Tasimir (ph) with Raymond James.

I think, obviously, your really core assets were a big surprise this quarter in the drill pipe and the ReedHycalog business. The past several quarters, you have been highlighting the fact that you are trying to rationalize assets. Certainly we've seen some of that. But you have also alluded to divesting potentially some of your nonperforming assets, which obviously are showing up this quarter. I guess what I'm asking is, are you getting a little closer to that? Are you still pursuing that strategy? Any comments there?

I would say, John, that we clearly understand that we have some businesses which are performing below levels that we would view to be acceptable. We are still working on those. And we are looking at all options. We've got a number of marketing initiatives ongoing at a number of those businesses, to try to develop some alliances with mills and so on, to provide some more stable business through them. So that is an ongoing process.

Okay. Fair enough. I guess the final question I have is on the Reed business. I think the performance there has been a lot better than expectations. And even on a run rate going to next year, what you just did this quarter of, let's say, $70 million puts you in the $280 million range for next year. Can we assume some growth on what you saw this quarter. And is that really coming in above your expectations, as well?

I think that ReedHycalog has certainly been a very successful story for us this year. And, yes, the third quarter was above our internal expectations. I think that taking that and simply multiplying it by four, you have to be little careful in that you understand that there is some seasonality in the Canadian and U.S. market, which work against you. We annualize things.

But with that said, assuming the rig activity holds up, and I don't think we are anticipating a decline; I am not sure how much of an increase we are expecting right now; but I think if you were to normalize the quarter for seasonal factors, we certainly believe there are some growth opportunities beyond this.

We are clearly underrepresented in some markets that we've identified. And part of the marketing dollars that we have started to spend here in this quarter is to address those opportunities. It will take some time to materialize, obviously. But we think we have the products, we think we have the people, and we certainly have a bunch of guys who are motivated to grow this business from this point forward.

Thanks, Mike.

Geoff Kieburtz with Smith Barney.

A couple of follow-ups, I guess. On ReedHycalog, are you able to separate out the mix effects, and get to a kind of apples-to-apples pricing trend? Is anything going on in regards to pricing, excluding mix?

Generally there has been a firming of pricing. In the U.S. of course we rolled out a price book increase. That was back in April, and certainly we feel like that has stuck. We in August raised prices up in Canada about 5 percent; I believe the guys feel like that is being implemented nicely and is sticking. So there has been a little bit of price improvement in the business that would be above and beyond mix considerations.

Would you be willing to give us some idea of the revenue mix at ReedHycalog currently? You want to use third quarter specifically, but U.S. Canada and outside North America.

U.S. Canada combined are right around 50 percent, or just below. And outside North America then is about 50 percent.

Right, and how has that changed? Or maybe it is not long enough period for you to have even seen much shift in that. Is that right?

If we go back, say, a year ago, the business was probably more along the lines of maybe 45 percent North America. So we've had, in the last year, we've had more relative growth out of U.S. and Canada than we have international. Now clearly a good chunk of that is rig count driven.

In terms of taking a step further and trying to extrapolate whether or not there is more share growth in one market or the other, I think that is a little early to conclude anything there.

Since I am last question, let me take advantage of this. On the Tubular Technology, kind of the reverse of the prior question; I think you've already indicated that the performance there has been disappointing relative to your expectations. It seems to us, at least, that the typical drivers of that business would have indicated that the demand would be a little bit stronger than what we've actually realized. I was wondering if you are seeing it the same way. If so, what are you looking at to give you the confidence that should pick up in the first half of '04?

I guess I would say that we would agree with you, that if you look over the last quarter or two there has been something of an increase in feet gas drilling. And that one would expect would lead to higher consumption of some of these premium tubulars.

The only consolation that we get out of this is that, as we look at some of our peers in this industry, we are hearing much the same type of discussion. And that is, they are not seeing the improvements either. In fact their businesses have softened as well.

I think the reason then that we believe that the market should improve gradually is that we now have OCTG inventories at near all-time lows. They can only liquidate these to a certain point, and eventually they have to start restocking inventories. I think we would expect some of that to begin to happen this quarter, were it not for the fact that they are fighting this year-end desire to keep inventories as low as they can. So it's going to be a bit of a tug-of-war there.

But then as we get into the first part of '04, typically we see a little bit of a seasonal uptick at that point in time anyway. So if you combine that then with the exceptionally low inventory situation we've got, and if we assume that activity is at least stable, it just seems like, up to us, that with another quarter of liquidation, getting them past year end, it is not unreasonable to think that we could have a pretty reasonable uptick in the demand for threading and some of the premium casing products.

Can you think of any reason why the distributors would be more than normally concerned about their year-end inventory this year?

More than normally concerned?

As you described, you see indicators of end consumption up; the distributors being, if anything, persistently aggressive in reducing their inventories. I just wondered if there is anything you had picked up that might have caused them to be unusually sensitive to year-end inventories? I can't think of anything.

I can't think of anything. What I do think is a little bit different than maybe what we've seen historically, is that given the very low utilizations that the mills are experiencing, these guys have the flexibility that they don't have to speculate a whole lot on inventories. Because they know they can pick up the phone and get deliveries very quick, either from the mills or from us. And so that allows them to be as aggressive as they have ever been.

So even if it were not for year end, obviously, they are much better off minimizing the level of inventory that they take. I have talked to some of these guys, and they will tell me that our real desire is to carry two months supply of inventory. If we're carrying more than that, we are not making much money. We've got to turn our inventory six times a year to make a reasonable return. Now, why do they have four or five? Because they are always stuck with some inventory that is what is not moving.

But if you think about the inventories that are really being consumed with any regularity out their in the field, these guys would love to live with two or three months of inventory. They are not there yet.

Great. Thanks.

Well, thank you for all of your questions this morning. We will talk to you again in 90 days.

This concludes today's Grant Prideco Reports Third-quarter Earnings conference call. You may now disconnect.