Oil States International Inc (OIS) 2002 Q1 法說會逐字稿

I will be your conference facilitator today. At this time I would like to welcome everyone to the Oil States International First Quarter Earnings Conference call. All lines have been placed only because 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, now I will turn the call over to Mr. Bradley . Sir, you may begin your conference.

Thank you. Welcome to Oil States International First Quarter 2002 Earnings Conference call. Douglas E. Swanson, Oil States President and Chief Executive Officer and Cindy B. Taylor, Senior Vice President and Chief Financial Officer will lead the call today. the initial comments, we will open the call for a question and answer session. Before Doug begins, I have a few words about our forward-looking statement. The extensive remarks today contain information other than historical information. We are relying on a safe-harbor protection supported by Federal law. Any such remarks will be weighed in the context of many factors that affect our business including the risks disclosed in our Form 10-K. With that I will turn the call over to Doug.

Thank you, Bradley and thank you joining us this morning. We are pleased to announce that Oil Stat4es International had a strong first quarter results in first quarter 2002 despite the weaknesses in our drawing-related business. During the first quarter, US recount was down 17.9 percent from the fourth quarter 2001 and our Canadian recount was down 26 percent from the first quarter of 2001. Overall our revenues were down 21 percent compared to the first quarter of 2001, we were down 16 percent from the fourth quarter of 2001. Net income was $0.20 per share down from $0.31 per share in 2001 and was down $0.03 per share from the fourth quarter of 2001. First quarter of 2001 was benefited by a 1.5 percent tax rate while first quarter of 2002 was at the rate of 22 percent. We normalized tax rate and the goodwill amortization. EPS declined $0.08 per share on a year over year basis. EPS declined only 3 percent for share sequentially but was benefited by the seasonal impact of our drilling operations of our operations in Canada.

Included in the first quarter results was approximately $875,000 of cost associated with severance cost of some restructuring of our business units and this had an impact of about $0.01 per share. At this time I would like to turn the agenda over to Cindy Taylor who will take you through our financial results.

Thank you Doug. For the first quarter of 2002, we reported operating income of $13.2m on revenues of a $150.6m. Our EBITDA totaled $18.5m for the quarter. These results compared to $17.9m of operating income on revenues of $191.5m for the first quarter 2001. The third quarter 2001 EBITDA totaled $24.9m. Our current quarter performance represent 21.4 percent reduction in revenue and a 25.6 percent reduction in EBITDA from the first quarter 2001. Sequentially our revenues and EBITDA were down 16 percent and 8.9 percent respectively. However, we have to consider the normal seasonal pattern in Canada for our accommodation business when you evaluate the sequential comparison. Our net income totaled $9.8m or $0.20 per share for the first quarter 2002. As Doug mentioned, this compares to $15.2m or $0.31 per share for the first quarter 2001 before a $0.01 extraordinary item during the quarter. Again our first quarter 2001 was benefited but 1.5 percent affected tax rate compared to a 22 percent rate in the first quarter of this year.

Our first quarter results held up very well in a weakening market environment. The US recount of 27.7 percent year over year

and 17.9 percent sequentially. This negatively impacted our tubular services and well site services business. Our off shore product segment resulted in moderate declines in our drilling-related operations during the quarter. Our tubular services results were down significantly during the quarter due to low product demand, our customers, and low margins negotiated

At the year-end, and a conscious account to reduce our inventory position. From a balance sheet perceptive, we ended the quarter with working capital $101.8m, total assets $514.3m, net sales $55.1m and equity of $353.8m. We remain extremely well positioned financially and continue to balance sheet.

During the quarter we reduced our total debt by $19.4m, bringing our debt-to-capitalization ratio to 14.2 percent. Our current cash-borrowing rate is less than 4 percent and we have approximately $9,000m of availability under our credit facility. At this time, I would like to turn the discussion back over to Doug who will review activities and each of our business segments and provide you with our part as to the market outlook going forward.

Thank you Cindy. At this time, I would like to go through our 3 basic business segments. I will be going through the information that is included in our press release with respect to the revenues and EBITDA on each of the business segments. In our well site services segment, our revenue declined $66.6m from $69.2m in 2001 and EBITDA was down $15.2m from $19.9m in 2001. It declined a 23.4 percent. Our margins were 22.9 percent in 2002 compared to 28.7 percent in 2001. This decrees in results was due to lower utilization and lower revenues realized in our drilling work over related businesses. In addition, in our accommodation business, we had a greater mix of lower margin manufacturing and catering contributions, which reduced our margins. In our well site services business segment, we provide 4 different services. I would like to go through each of these.

The first one is our well site and accommodation and building companies, revenues in 2002 was $46.1m compared to $46.6m in 2001 first quarter. EBITDA was 11.7 compared 14.8 a year ago. Our EBITDA margin was 25.5 percent compared to 31.7 percent a year ago. One of the big drivers in the segment is the drill-camp in Canada. In the first quarter of 2002, we averaged 50 camps compared to 102 camps in 2001. In looking at the drivers in Canada, Canada drawing activities were very weak during the quarter evidenced by the 26.1 percent drop in the Canadian recount. Our Canadian revenues, however, were flat despite the decline. This was due to the strong activity in the area, which offset the weakness in the drawing camp area. However, because of this mix, our EBITDA margins were not very impacted as ewe realized lower margins on our catering and manufacturing operations.

In US, Gulf of Mexico buildings, our revenue was up $775,000 due to building sales in the first quarter, however,

Our rental activity was weak reflecting the general market conditions in the Gulf of Mexico. Our 3 other services, we provide our embodied in our HWC energy services unit. These services, of course, are the work over, the rentals and the drilling rigs, shallow drilling rigs. In HWC, in the first quarter of 2002, we had revenues of $20.5 m compared to $22.6m in 2001. EBITDA was $3.5m compared to $5.1m the previous year and our EBITDA margins were 17 percent compared to 22.6 percent a year ago.

In the work over area, we had decreased activity year over year and sequentially due to lower Gulf of Mexico activity, our utilization in the first quarter was 27.4 percent compared to 30.7 percent a year ago. Our utilization was down 3.7 percent from the fourth quarter 2002. Our day rates had a slight increase; this was due to the mix. the business we had stronger activity in the international area and lower activity in the Gulf of Mexico and our year over year increase in the day rates was about a $1000 per day and we had sequential increase about $200 over the fourth quarter of 2002.

In our rental tool area, again this is driven by the drilling activity and work over activity in the Gulf coast area, we saw revenues down 6.3 percent and EBITDA was down 26.3. Sequentially, we also had revenues down and EBITDA down and margins of 62 percent. We had weak activity in this particular business segment that adversely affected our results for the first quarter. In shallow drilling, our 12 drilling rigs, we had declining year over year comparisons. Our revenues were down 20.5 percent a year ago and our EBITDA was down 53.3 percent. Sequentially revenues were down

28 percent and EBITDA was down 62 percent with margins 73 percent. Our utilization in the first quarter was 71.5 percent compared to 83.3 percent in the fourth quarter of 2001 and we had 94.9 percent utilization in the first quarter 2002. Our day rates were down significantly, the average, the effective day rate we do drill most of our wells on but the effective day rate was down. The effective day rate was $68,00 per day in the first quarter of 2002 compared to about $8,000 in the fourth quarter of 2001 and $6,900 a day in the first quarter of 2001.

Our utilization and backlog had improved significantly. We have gone from a low of about 5 rigs working in the first quarter and today we have 11 of our 12 rigs working and we have that 12 rigs working within a day or so and our backlog is building, our day rates, however, are not retuning as quickly as we would like.

Our next business segment I would like to talk about is our offshore product business segment. It had a very strong first quarter. Revenues were $32.7m compared to $29.5m one year ago. EBITDA was $4.4m compared to $1.8M IN 2001 and most importantly our EBITDA margin increased significantly. We had EBITDA margin of 13.3 parent in the first quarter of 2002 compared to 6.1 percent in 2001. Our backlog has picked up significantly. Our backlog at the end of the first quarter was $84.3m. This compares to $38.1m one year ago and $72.4m at the year-end. So that is significant increase in backlog.

Our fist quarter EBITDA results includes our higher price connector technology business products that helped to increase our margins and this is offset somewhat by the lower margins we received in our fabrication work. Our EBITDA margins, as I indicated earlier improved by 6.1 percent in the first quarter to 13.3 percent in first quarter of 2002 and that was 10 percent in fourth quarter of 2001. Our backlog of $84.3m is one of the largest backlogs we have ever had and again it is also impacted by frame agreements that we have for providing products and services for operators. frame agreements which any be multi million dollar blanket purchase orders by the oil companies, We only record specific backlog for POs for products that are to be manufactured.

Overall our outlook for offshore product group remains very strong. We can see continuing improvements in the business going forwards.

Our last business is our tubular services segment. Tubular services segment, as you know, we sell all kinds of tubular goods to E&P companies. This was dramatically impacted by the down turn in the recount. Our revenues declined from $92.8m to $51.3m in the first quarter of 2002, a 44.8 percent change and our EBITDA was $100,000 compared to $4.3m one year ago. Our gross margin was 4.3 percent compared to 7.1 percent one year ago. The average rate count declined significantly 17.9 percent from the fourth quarter and we experienced a year-to-year decline of 27.7 parent, which was driving the decrease in our business activity. Our backlog remains weak but it had improved from year-end and backlog is about $56.1m today.

Our inventories have significantly been reduced. We have an inventory level of $37.6m at the end of the quarter this compares to $73,4m one year ago and our inventory at the year-end was $41.8m. It appears the recount has bottomed out. The prices were soft in the first quarter and they are still soft in receive, a slight increase in the activity going forward in the second quarter. The majority of our clients are large independent providing high for their development programs. We don't see any inventory building up this time. In addition, during this quarter we did restructure our tubular services business. We had a 16.9 percent reduction in headcount, which will have favorable impact of savings of about $200,000 in the quarter for the balance of this year.

Looking at the balance of 2002, we believe hat our businesses have held up very well during the first quartet of the year. Our offshore product group experienced significant growth and increased margins, however, we expect continued weaknesses in our tubular services and our well site services operations during the second quarter. On the balance of the year, we expect activities to take up in the third and fourth quarters. And looking at our offshore product groups, we are not tired of the recount and we should see a growth in both our backlog and profitability. Our second and third quarter will show significant growth from our first quartet 2002 based upon our existing backlog and we are looking to attain a 15 percent EBITDA margin in these quarters. Our well site services business segment, we expect weal work over demands in the Gulf of Mexico through he second quarter and improving in the third and fourth quarter. AS I indicated earlier, our drilling activity in West Texas is picking up. We expert to have full utilization within a day or so of our 12 drilling rigs and we expect them to have a high utilization for the balance of the year.

Our Canadian well site group is in the break up period and we expect them to have the normal seasonal decline. But this

With the tubular services, we expect the revenues and margins to remain weak during the second quarter, which should improve over the first quarter results, an additional benefit from the $200,000, fourth quarter G&A savings. We expect to realize

Slightly improved revenues going forward in the second quarter and margins ranging from 4.5 to 5 percent and gross margin should return to a 6 percent level in the third and fourth quarter. We are continuing to look for acquisitions since our public offering in February 2001; we made 3 acquisitions in our rent a tool area. We concluded one acquisition in the first quarter in the rent a tool area, $1.4m acquisition of a rent a tool company and we continue to look at opportunities going forward and expect acquisitions in all of our business segments in the balance of the year.

Looking on a consolidated business, the first quarter was very good in relation to the demand in our business units. We expect a stronger year in the balance of the year. We expect the second had of the 2002 to be stronger market for our drilling related services and overall we expect the results for the year to range from $0.64 to $0.70 per share based upon the outlook as we see it today. We now will be pleased to answer any questions you might have.

At this time I would like to remind everyone if you would like to ask a question please press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A . Sir, at this time your first question comes from Bill Herbert.

Thanks, good Morning. Thanks for the run down. Doug, this $0.64 to $0.70 guidance, is that promised on revenue outlook that is at all different from the very specific guidance you gave differ from the Q4 whole where you think you had offshore products for the year to 13 percent, HWC down 10 to 15 percent. Well site revenue has a total down 20 percent, down 30 percent and overall revenues down 15 to 20 percent. Has the revenue guidance changed at all?

.

Cindy has the numbers. Let me ask her to answer that question.

Hi Bill, it is in the what has happened really from us and looking at 2002 has been hard and originally in our offshore products division has witnessed a little bit on where the margins stand during the 1Q and we are going to feel it more on the revenue side, particularly in 2Q and 3Q. Doug mentioned our backlog as roughly $84m, 95 percent of that backlog will turn in 2002 and the bulk of that will benefit in the second and third quarter. 4Q visibility is a little lower so as I mean, so right now we have a stronger 2Q and 3Q than 4Q, however, we will have a better feel for that at the end of the next quarter given our backlog position there is no negative trends in the marketplace but we just got significant benefits from our offshore products as evidenced by the strings the backlog not only from the total number of it but from the quality of that back log.

Right, and so in speaking with the Oil State's second, sorry, the offshore segment, very impressive margins in the quarter, 13 percent EBITDA margins, in fact a little bit higher than that. Margin trends going forward, given your mix in the back logs spending in are we flat, up or are we sort of settling up as the year unfolds?

As I indicated in my presentation, we see a slight uptake in the second and third quarter and aging the visibility in the fourth quarter is more difficult based upon the back log and the mix of our business, we think that there will be slight uptake as I indicated in the first quarter about 15 percent margin in the second and third quarter.

But on an EBITDA basis, what we had in the past as you know Bill, kind of of 20 to 25 percent on the gross margin line item. Our 1Q gross margins were 25.2 percent, so they were top of that range and we expect to hit the top in that range in 2Q and 3Q and then we will give you a better guidance on 4Q at the next quarter.

And if I understood you correctly with respect to your articulation of the premise around the frame agreements, because of these frame agreements, your backlog is actually under stated, well, you stated it backwards.

It could be. They were frame agreements per say, $15m and we mainly have $3 or $4 m of backlog against that.

For example, would you care to venture in gas by how much of backlog is understated because of this?

Well, there is so much uncertainty about what the releases or how we get the frame agreement that we obviously don't book. The dollar amount of the frame agreement for just that reason we don't know. We think that there is upside potential but we don't want to quantify it.

Okay. Marko Paulo, is that a project that is encompassed by a frame agreement?

That work is still on, it had been no let at this side for . It is part of our visibility going forward.

And with respect to Mody I recall that your main revenue you had booked in terms of backlog was quite a bit lower than what you thought the revenue potential was going to be associated with that project?

We have significant amount of backlog for Mody Guard and dollar amount under frame agreement for mode Grove in both our pipeline products and in our specialized products again I don't know exactly what that would be at this time but we do have a significant amount of Mody Guard work.

Okay. On order of necessarily reflected in backlog?

Right, it is a mix because we have a lot of work and we have been fortunate with that project and as I would probably largely will come backlog on the side, but more recently we got into some of the connective work on Mody Guard and that is an area where we have not got full budding of POs against the frame agreement.

Okay and two quick questions and then I are done with respect to Sooner. At the prime of the 4Q call, I recall you indicating that these are the inventory overhangs with respect to tubular were about 7 to 8 months. Something like that?

That is correct.

Where would you construe the inventory overhang being at this juncture?

You know, everybody is going to calculate this differently but in our view we are similar to where we were kind of in that 7 to 8 months but it is predicated on a very weak rig count at the end of the quarter and inventories went down but the rig count went down as well though it really didn't improve our position. However, I think that just generally speaking the mills have been extremely disappointed and the distributors have been extremely disappointed because that is up. I think it is going to be

a good market, particularly in the latter half this year.

Okay. Then last question. At the time of the 4Q call, imports as it related to sooner were playing a negative role as you expected to market dynamics. What role are imports playing right now, please?

Imports are to the level and it is there, you know, right from the type of product. But generally speaking, imports are branched up to roughly 40 percent, which significantly impacted the mail, had some impact on us as well. Obviously that has trended down slightly and the or the outlook is that fact is that the new try cases were re-instituted again in 14 countries at the end of the quarter that just falling at the try cases as expected to weaken some of our price that comes into the country so that.

I am sorry, this 40 percent number what is that relate to? Imports had risen by 40 percent?

Risen to 40mpercent of demand.

Okay, got it. Right, thanks a lot.

Your next question comes from Kevin Simpson.

Good Morning. Doug, I wonder if you could, may be give us a sense of whether you are changing, I don't know emphasis or anything inside the portfolio of a company is, it is getting a little bit of a sense of even more defensive posture on Tubular and may be you deserve the emphasis here in terms of the your own focus in what we should be looking at, you know, in the mix of the business going forward?

I don't think we are de-emphasizing tubular, we are just recognizing the market conditions, and the demand is down as a result of the decline of the recount. We expect this domain will increase as recount increases and we will return to the profit levels we had before. As indicated earlier, we are looking for acquisitions in all areas of our and all of our business segments, we hope to grow even in the segments. We had a significant growth in our market last year that we participated in, we see opportunities for internal growth in each of our 3 business segments we see opportunities to reduce our cost and ensure the 3 business segments, we started to restructure these units and we will be looking acquire and our goal this year is to continue to grow these businesses through acquisitions and through internal growth opportunities and to reduce our cost going forward. So we think we have a very good position to grow the company. We are going to decide all 3 business segments including Tubular services and we will be looking to acquire companies to increase market share in that particular

Business segment also.

Okay, I was going to ask about acquisitions and may be to What you have done so far has been able to take off from small rental companies primarily and I wonder if you will be able to do then, what the potential sellers are looking for, are they kind of getting more excited with gas prices and oil they are more feeling the heat or pressure of the low level of activities. So may be more likely to be able to get some things done and then you know, I get to the other issue, what areas are you emphasizing, I mean, I think the market probably can think of a harder time convincing people about tubular's acquisition, you know, was a good thing for you know the evaluation versus say something in rentals or offshore products?

Yes, the first question, what is the market condition with respect to opportunities, I don't think you have seen the decrease in the prices of the companies that are being marketed but what you have is, I think, the sellers have not recognized the volatility we have and they don't have the attitude that it is going to up for ever as they have been the case an year ago at this time. So the expectation of the sellers is still, they have high expectations with there are still some real values out there because they recognize that their growth is limited because of the size of the company. With respect to our acquisitions, we are looking at acquisitions at each of the business segments, in offshore products we hope to acquire additional product lines to incorporate in to our offshore products company. There are other products that we Ken manufacture in our facilities without needing incremental capacity we can bring in these product lines. We want to expand some of the product lines we have through acquisitions. We are looking to do that in the balance of this year. In our well site services group, we are looking to do more acquisitions in the rental area. We hope to have some more of those in the balance of the year. In our drilling group, we have just made a commitment to buy one additional rig and it is wide roughly bring up to 13. We are optimistic about acquiring this rig; we have an agreement to acquire it for a cost of about $1.2m that includes the re-service rig cost. This is Myer acquisition to us but we will increase at least by about 8 percent. We anticipate that it will go to work sometime in the end of the second quarter third quarter.

So Doug, would you, so you already have work for that, what do you think?

Yeah, we feel comfortable about . And then we are also going to be acquiring another work over unit for the Middle East, it is a small acquisition, but we think we can put that to work in the Middle East. So we this expansion in our well site services group. In the tubular services group, we are looking for expansion there to acquire distributors that service market that

We are unable to separately service from our existing infrastructure and would not be a consolidation still operates with the same geographical area, on the same customers we serve that would add new geographical coverage or new markets in terms of customers that we don't presently serve. Basically we are looking to significantly grow the company; we are also looking at major transactions. We will see opportunities for this but we are not counting on doing like that. We will continue

To try to grow the company through internally generated projects in, that is more acquisitions.

Hey, thanks. I got 2 other questions. Sorry for taking up so much time. One is on the rigs you got them back to work but rates are disappointing. Does that mean they are still falling or they are relatively flat with the kind of rates you have

quoted?

As I said, they flattened out. They will be increasing as rigs go back to work.

So it is possible then it is rate, we don't yet, if by June or July, you know, recounts perked up, you will have camps running at a higher level but the Patterson's of the world don't get to see the rate increases. Would you still be able to see somewhat of a rate increase?

We are going to so I think we can see rate increases yet.

I mean I get your $49,000, so you are comfortable underneath ? And then the other question is another stab at trying to try out about the potential one offshore product. You talked about a very high in the $200m, I guess worth of business potentially to get on for bringing a lot of that into the backlog. But I guess I have 2 general questions is what out there way of left to be , still you know that kind of higher level or you kind of biting into your longer term potential and then second margins very strong, you know good mix towards connector high products, sounds like it is likely to continue into 2Q and 3Q. If you look at what is out there in terms of the potential business that, you could be in the backlog as we go forward in the next 3, 4 quarters. You know, will that be similar in mix to what you are experiencing right now or is there more or does it may be go back to something, you know, little bit lower margin?

No, I think we feel that the mix will try and will continue to we achieving the slightly higher margin as what we said in the second and third quarter but we don't see a shift in the mix of our business of which dramatically lower our gross or EBITDA

margins. And with respect to the outlook, you know, there are lots of projects that are on the drawing board. You have seen and we have experienced how difficult it is to predict when these contracts will be left for these projects that are under evaluation in the engineering side. What we believe though is that the fundamentals are there, they will continue to do it in our engineering and they will the contract when they are ready to and not affected by the price of oil or price of gas.

Do you still see, you did state that you brought back or would be up from levels that, you know, we 331?

We think that our backlog should increase in the second and third quarters over this level that we had at the end of the first quarter.

Thanks a lot. That is it for me.

Okay, let me just answer one of your questions, Kevin. You were talking about the drilling operations in the utilization there. As I said earlier, we have our 11 of our 12 rigs working toady. The 12 rigs will go to work within next few days and we expect to have 100 percent utilization and going forward beginning in the month of May, which will only be offset by downtime between jobs. We think we are booked through this, 100 percent booked though the second quarter in building backlog

When you opened on that issue, do you think that the second, I mean there is no reason to think that I would assume that you wouldn't have very high utilization without being specific on numbers during the second half of the year.

I think that is given, you know, we are going to have the recounts in the increase which we think it will and we are saying right now is that we have a 100 percent utilization sometime beginning in this month or May that we will experience high utilization in the third and fourth quarters.

Great, thank you very much, Doug.

Good luck.

Sir, your next question comes from Dan Heggers.

Good morning. I guess first question is PTI, you know, you guys did pretty well as far as, is holding gin given our economy environment. How much of your business is coming from some kind of mining in non-ore related businesses versus oil in the first quarter and how is that going to hold in the second?

Cindy?

Yeah, I can answer that. For the first quarter the mix was almost 50-50 on non-drilling camp activity as opposed to our traditional drilling cap and that was evident obviously by backlog reduction in our margins which we talked about and that mix is based on another large camp management catering and manufacturing as well. But it is kind of 50-50 during the first quarter. Obviously we go into break up and then orient to our higher amount of non-drilling related revenue. As you know our 3Q results, because of seasonal declines and work off in Canada and that is when all the rigs basically shut down and we projecting work in May during the second quarter. So your mix orients us on the non-drilling related type of work.

In addition, another. Obviously the remaining camp work in the work is up during the, relatively to developing relationship to the drill camp abut we also have maintenance work that is dome at these facilities periodically in the summer months which further accentuate the difference.

How is the frame of reference the 50-50 guess had in the first quarter? How is that break down compared to what you saw, say, last year?

I don't have the exact percentages in front of me but I think it was roughly 65-35 oil and drilling that is kind of in the more historic patterns that we experienced.

What we indicated earlier was that the average number of well camps we are working in the first quarter this year was 50 compared to a 102 a year ago in the first quarter. So we had a 50 percent reduction in activity and revenues in that area.

Okay, If based US has price was going on in the tubular , have you got any feel as these rigs are starting to move about, is there any cannibalization issue, I guess as far as your revenues being down as far as they were going to need a bigger as things come back?

Well, I will try to speak, I mean there is now question that inventory that are allowed to and certainly we are at the lowest level for our company that we had in a long time and most of that was are just doing the first quarter was program related development work as some of our very large independent and even ours which we have several customers that operate on a program basis and their buying was significantly down year over year on the program related work and then it closed with

The mills with the the distributors have not been buying and therefore not been building any specific inventory which we agree with and certainly that is the case for us and so what we got, I think is the a good environment going forward because we believe and we sense that really in most of our businesses, in our drilling side of our business is beginning to see enquiries on the tubular side that really do seem to validate that rig count had bottomed and we are going back to work and with that they are going to need so I think you have a very favorable environment going forward for product demand in that sector.

You guys have a great balance sheet right now and you probably have . There is no incentive to go ahead and build the inventory, you know, the outlook seems to be very positive and you are of that opinion, there is no incentive right now for you folks to start building inventory now, delivery in two and you get better price you offer your suppliers right now to help them out?

Dan, obviously we are the largest buyers of tubular products from the mills and so we do have buying powers that we get the prices and we also get our allocations. So with the mills is, I think, they can deliver very quickly any products that we need in addition, you know, we are evaluating whether we should increase our inventory but we don't think that e do that materially right now.

What would it take to motivate you guys to start adding inventory?

I think from our perspective the biggest that we were on were the price deterioration and right now there is every indication that is not going to correlate with the but during the first quarter, price that were down 5 to 6 percent sequentially and is about 8 percent year over year and we have to extremely cautious and then sound like a loss when our margin is 6 percent or lower that is a critical price for us and so we are very sensitive to pricing because you are right if you stop guarantee that that is going to be a possible price increases before the quality wise. You know every one comment there is a lot of indiscernible in terms of the regulatory environment of these product and I think ERW prices will approximately go and it has been closed half level steels.

I am not sure of what is going to happen in this environment. I think that is what we are coming from. We like even now our inventories are low. We think the rig count will be covered absolutely right time. But we got to be confident pricing is flat and minimum and will increase for its benefit by now. And it is clearly said, because of our market share and our position with the mills we are going to get high some of the smaller distributors of once more risk in that environment.

I think for our perspective that the biggest risk that we run is fight deterioration and right now there is every indication that it is not going to occur but

Will extend the distribution compensation little bit further. It seems you guys are now out of the international out of the international market as far as the this distribution goes. Did you guys made any forest kind of research in that market, or is that something that is past at this point?

We do some international sales but historically most distributors don't sell internationally. It is done directly by the mills or the mill representatives. We don't see that as the real growth area. I think the relationship we had with that one company was started unique and that was terminated in march as far as Africa is concerned and the ended up growing directly one of the mills we are supplying and maintaining their inventory for them and we cannot compete to (indiscernible) like that.

Okay great, thank you very much.

Thank you.

Your next question comes from (indiscernible)

Good morning.

Good morning

Just a couple of follow-ups. Try to understand the off shore products EBITDA margins great but on the back log it looks like back log rose about 12 million dollars during the quarter. I would imagine that most of the backlog is related to connect your type products. Could you talk a little bit about the outlook for the moving systems and the last movement on the top of the business?

We had increased the backlog for both of the connective products and also our pipeline products and we have seen increases in all areas and for the moving system areas. In the moving system areas, we see opportunities are additional work in that particular area in our molding systems in fabrication and repair and other types of winches and so we see both regional mill corporate business and prepares in that business.

Yeah, I think they have said what we have experienced really to the 2001 and 2002 and have been built not to the connecter but it is also states that the pipeline side of the business and all of this has been oriented to the offshore development and the infrastructure and make equipment back log and as you know that we have had on the rig equipment side has been in the moving side of the business which is one customer one rig.

There has been a significant movement yet on rig construction and equipment, that seems to be a little better visibility for that to began come and imply and particularly there is probably two companies out there that might have work and I think we have a favorable relationship with both of those of the company and that we would participate a kind of refurb type of activity and once it does that curb and it this point of time. It has really been offshore infrastructure focus and most of that has come as the key connectors in our pipeline side.

On the two-wheeler side, I am just trying to understand the strategy here, it looks like a fairly significant headcount reduction 16.9 percent and how quickly can you adjust when the market comes back.

With respect to the head count we have a reduction. What we do is we combined four companies in 1999 and that was the beginning of the recovery in the business and we have not really did any serious restructuring at that time because market conditions didn't warranted at that time with the decline and demand we addressed our organization how we operate and deemed to advice able in to make those reductions and there were probably deferred reductions. If we go back to much stronger demand we do not see the need the significantly increase the work force at all

I heard you talk about the possible geographic expansion on the tubular side of the business and now that the correlation in the Nigerian operation are kind of winding down. Is that expansion mostly in the North American area or is it in national?

North America.

What percent currently the inventory, what percent of that is not committed, I guessed at the end of the last year was about 20 percent? You have the number handy?

It was how much?

20 percent I thought.

We had not recalculated at it at this stage. We have done no special advance with anything. It would be down rather than us. But has not done a separate calculation. I will 20 percent or less.

As indicated our inventory at the end of the quarter was 37.6 million but our backlog is 56.1 million and our backlog has increased significantly from the start of the year. That backlog begins by 40 million

Thanks a lot.

Thanks

Your next question comes from Bill Herbert.

Any tax for 2003, any particular guidance there.

We have been operating on the assumption of 35 percent, we will do an update on the later half at 70 percent and just pretty fast and 34 cent and I will count the later half of the part with 2002 ends up. But I would have set that right now.

Last question. What percentage of the off shore products backlog is devoted to the Gulf of Mexico.

It is a large percentage that we have separately calculated.

Historically offshore revenues stated to the Gulf of Mexico have been 60 to 70 percent, if I am not mistaken?

That has been order of magnitude but hold well for us and there is few project that we have right that are not in the Gulf of Mexico and we have specifically populated there.

So, I guess the point I am trying to make were the questions and I trying to get the answer, what efforts are we making to better penetrate the international deep water markets and what are the realistic expectations on that front?

We do have items in backlog that for international facilities and we market those, we will be bidding on the deep-water activity. Will guide us on the geographic location, we are not trying to bid on everything.

I appreciate that and I have not doubt that you want to increase your exposure to international. But today has been at sort of predominantly at Gulf of Mexico?

predominant other than Brazil as for the predominant deep-water activity.

We do it.

I am specifically looking towards West Africa, Brazil where you are hopeful that our penetration of those gross markets is going to improve.

We think our penetration in all other market is very good. We had operations location and people on all these geographic areas were, work we have is the work being less, and not necessarily over work penetration of that market.

We don't think our market share in the international is less than the market shares in Gulf of Mexico.

Thank you.

Well there are no further questions at this time.

Well we appreciate your calling and we look forward to visiting with you and the end of our second quarter. Thank you so much.

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