Oil States International Inc (OIS) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Oil States International second-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Brad Dodson. Pleased proceed, sir.

Welcome to Oil States second-quarter 2004 earnings conference call. Our call today will be led by Douglas Swanson, Oil States' President and Chief Executive Officer, and Cindy Taylor, Oil States' Senior Vice President and Chief Financial Officer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent the remarks today contain information other than historical information, we are relying on Safe Harbor protection afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in Form 10-K and our other SEC filings.

I will now turn it over to Doug.

Thank you, and thank you for joining us this morning. We're pleased to announce that Oil States International completed the second quarter of 2004 with strong operating and financial results in our Well Site and Tubular Services segments, led by continued strength in Canadian operations, North American land drilling activity and the impact of acquisitions completed during 2003 and early 2004. In addition, our Offshore Products segment began to recover from its first-quarter weaknesses.

The pricing environment for our Tubular Services segment was robust during the quarter due to continuing higher pricing for scrap steel, and our Well Site Services segment also began to see some pricing improvements. Our Offshore Products segment remained down on a year-over-year basis, due primarily to reduced levels of activity created by timing delays and major project construction. These low-level activity levels continued to result in a lack of cost absorption in several of our product lines. However, the segment improved substantially on a sequential business, and backlog continues to increase suggesting that these low activity levels are temporary.

Our backlog increased at the end of the quarter 28 percent to $98.7 million. This is the second-highest quarterly backlog we have ever experienced.

Our net income for the quarter was 24 cents per share compared to 21 cents per share reported in the second quarter of 2003.

We continue to focus on our business plan and growth strategy during the quarter, spending 11.9 million on capital expenditures and completing two acquisitions during the quarter for total consideration of 51.1 million. One of the acquisitions, the Hunting Limited acquisition of their OCTG business, was completed during May for total consideration of 46.4 million. This acquisition solidifies ourselves as the leading OCTG distributor in North American.

At this time, I would like to turn over the agenda to Cindy Taylor, our Vice President of Finance, to go through our financial results.

I'm going to take you through the financial results on a consolidated basis as I usually do. For the second quarter of 2004, we reported operating income of $21.6 million on revenues of 222.2 million. Our EBITDA totaled 30.7 million for the quarter. These results compare to 15.2 million of operating income on revenues of 163.6 million for the second quarter of 2003. The second-quarter 2003 EBITDA totaled 22.3 million.

Our current quarter performance represents a 35.8 percent year-over-year increase in revenues and a 37.6 percent improvement in EBITDA. On a sequential business, our revenues were up 8.8 percent, and our EBITDA was up 10.3 percent despite the normal seasonal decline that we experienced in our operations in Canada. Our net income totaled $12.2 million or 24 cents per diluted share for the second quarter 2004.

Our second-quarter tax rate did increase to 39.8 percent, which is slightly higher than previous guidance that we provided due to provision return differences for 2003 in a couple of our international locations.

As Doug mentioned, our second-quarter results reflect benefits of improved North American drilling activity and contributions from acquisitions that we completed both in 2003 and early 2004, which resulted in year-over-year growth in our Well Site Services EBITDA of $5.1 million or 43.2 percent. In addition, our Tubular Services segment did very well during the quarter due to the impact of increasing prices for oil country tubular goods, improved demand from our customers, as well as the impact of the Hunting acquisition which we closed on May 11th of this year. Our Tubular Services EBITDA was up 9.3 million or over 600 percent on a year-over-year basis.

Growth from both of these two segments was offset by reduced year-over-year contributions from our Offshore Products segment, where our revenues and EBITDA were down 14.4 percent and 54.8 percent respectively. However, as Doug mentioned, these results did improve quite a bit sequentially as did our backlog position from March 31st.

Our balance sheet continues to remain strong with a debt to capitalization ratio at 27.5 percent at June 30, 2004. I would point out that our debt only increased by roughly $8.5 million during the quarter despite our making capital expenditures of 11.9 million, and we paid roughly 46.5 million to close two acquisitions during the quarter. Despite the magnitude of the acquisitions that we closed during the second quarter, we continued to have approximately $67 million available under our credit facility.

A couple other points I would like to make, in our last Form 10-Q we estimated, that approximately $35 million would be spent on capital expenditures during 2004, which was largely maintenance-type capital expenditures. We are looking to update that estimate to a range of 55 to 60 million given the growth opportunities that we see in our various business lines. We are evaluating projects and expect to spend on additional $20 million in our Well Site Services segment to take advantage of growth opportunities that we see in Canada for future oilsands development and the lower 48 for potential drilling rig investments and also in the deepwater arena where we have some new rental tool opportunities. Other monies will be spent for continued facility consolidation.

At this time, I would like to turn the discussion back over to Doug, who will review activities in each of our individual business segments, and then we will provide you with our thoughts as to the outlook going forward.

At this time, I would like to go through each of our business segments just highlighting some of the key activities and the results. We have provided with our press release all the key operating financial data for your review.

In Well Site Services, revenues for the second quarter was 72.9 million compared to 52.9 million a year ago, a 37.8 percent increase. EBITDA was 17.1 million compared to 11.9 million a year ago, a 43 percent increase. Most importantly, our margins increased to 23.4 percent from 22.5 percent in the quarter one year ago.

On a sequential basis, our EBITDA was down 6.7 million. This was due to a 8.4 million reduction in EBITDA from our accommodations group. The other three business activities in Well Site Services -- the drilling rigs, the rental tools and workover rigs -- were up $1.7 million of EBITDA in the second quarter from the first quarter. Again, the sequential decrease in revenues in EBITDA occurred due to the impact of the breakup in Canada.

Contributions from rental tool acquisitions completed in the last few months generated significant growth for this segment on a year-over-year basis and for the quarter. In addition, our workover operations improved with revenue up 29.8 percent and EBITDA up 161.1 percent. Our land drilling operations were fairly flat sequentially in both revenues and EBITDA. Our daily cash margin in the second quarter of 2004 was $2300. That compared with $2400 in the first quarter. Our revenue was actually up, but we had higher costs due to the fact that we had long-term commitments on our rigs. We were not able to pass cost increases or price increases through to the customer in order to alleviate that.

Comparisons were strong in our accommodations business segment on a year-over-year basis, due primarily to contributions from the Canadian oilsands developments and an international catering and facilities management contract.

In Offshore Products, revenue for the second quarter was 48.9 million, up 16.8 percent from the first quarter of 2004. EBITDA was 4.7 million, up from 1.5 million in the first quarter, and our EBITDA margin increased to 9.7 percent, up from 3.5 percent in that first quarter. Our backlog increased 98.7 million, up from 76.9 million in the first quarter.

On a year-over-year basis, our margins declined due to weak activity levels resulting from timing delays in major construction projects. However, activity in margins improved sequentially as this segment began to recover. Margin improvements occurred in most product lines due to better cost absorption resulting from the activity increases. Again, backlog was 98.7 million, up 28 percent from the 76.9 million at March 31st.

In Tubular Services business segment, we had an outstanding quarter. Revenues for the quarter were 100.4 million, up from 66.2 million in the first quarter. Our EBITDA was 10.8 million, up from 4 million in the first quarter. Our gross margins in the quarter was 13 percent compared to 8.9 percent in the first quarter of 2004, and our EBITDA margin was 10.7 percent compared to 6 percent in the previous quarter.

Our inventory level was 111 million compared to 59.3 million at March 31st. Our turnover in the second quarter was 3.83 compared to 4.05 in the first quarter, and the tons shipped were 84.6 million, up from 67.3 million the first quarter, a 25.6 percent increase.

Year-over-year improvements in volumes and gross margins were due to improved demand, increasing OCTG prices and the impact of the Hunting acquisitions. Our orderbook or apparent backlog strengthened significantly during the quarter due to the spot market orders and the impact of the Hunting acquisitions. At the end of the second quarter, our apparent backlog was 117.9 million compared to 70.7 million at the end of the first quarter of 2004. Our inventory increased 51.7 million during the quarter, primarily due to the acquisition and the timing of quarter-end shipments.

Purchase prices for our inventory increased during the quarter due to mill price increases and surcharges. Our average cost per ton for our inventory at June 30th was $964 a ton compared to 886 a ton at March 31st, an approximately 10 percent increase. We are currently holding approximately three months inventory based upon current levels of sales, and approximately 62 percent of our $111 million inventories are committed to customer orders at the end of the quarter.

The industry inventories increased during the second quarter 2004 with no shipments, outstripping consumption. However, supply on the ground remained reasonable at current rig count, approximately 4.8 months supply.

In looking at 2004, again the key drivers for Oil States International is North America natural gas drilling, deepwater development and the Canadian oilsands development. Within our Well Site Services group, we experienced normal seasonal declines during the spring break in Canada. However, our year-over-year results were much improved due to the impact of the oil oilsands developments and the impact of an international catering and facilities management contract. Canadian activity in the oilsands development remains extremely promising given planned construction activity in that region.

Land drilling utilization is strong and should continue through 2004. Backlog visibility remains strong in both Texas and Ohio with commitments extending into the fourth quarter. We are presently implementing price increases as the rigs come off their current commitments. Rental tool contribution should continue to increase significantly year-over-year due to acquisitions completed, rig count improvements and improvements in the capacity of our equipment.

Workover demand improved during the second quarter of 2004; however, that work remains fairly unpredictable. Spending additional capital in this segment -- we will be spending additional capital in this segment to grow our business lines through both capital expenditures and acquisitions.

With respect to Offshore Products, we are coming off record years in 2002 and 2003. Our first-quarter EBITDA margins were negatively impacted by weak activity levels causing reduced cost absorption in several business lines. Our second-quarter revenues and EBITDA increased sequentially showing signs that the segment is beginning to recover. Our backlog position continued to strengthen with a backlog of 98.7 million, up 28 percent for March 31st. We have implemented various cost reduction initiatives in Houma, Louisiana and Houston, and they should be fully implemented by the end of the third quarter, and we will begin to realize those benefits.

Outlook for 2004 has improved somewhat from the last quarter due to the increased activity levels and the impact of cost reductions that have been implemented. Revenues for 2004 should be down by approximately 6 to 7 percent from 2003. This compares to our previous guidance of 10 to 15 percent. EBITDA margins are still estimated at approximately 10 percent for the year given the weakness experience in the first quarter. With the increase in our backlog and the increase of activity, the year 2005 continues to look very promising.

In Tubular Services, improvement in the rig count continued to be focused toward shallow land drilling activities. Prices continue to increase during the quarter as mills implemented price increases and surcharges. We saw price increases in both July and August also and are anticipating further price increases in September. Our OCTG inventories increased significantly during the quarter due to the Hunting acquisition, but they are still at low levels given our backlog position at the end of the quarter. We expect to continue to realize strong revenues during 2004 with current activity levels, the realization of price increases and the impact of the Hunting acquisitions. Our margins remain strong in the third quarter of 2004.

On a consolidated basis, we expect continued improvements in the activity in Tubular Services and Well Site Services led by land drilling activity and the acquisitions recently completed. We expect year-over-year improved contributions from our Canadian operations given the expanded activity in the oilsands region. Our Offshore Products will be down year-over-year but is recovering quickly from the first-quarter levels.

With respect to guidance for 2004, our outlook for 2004 has improved from the last quarter due to the strength in our base operation, as well as the impact of acquisitions closed during the quarter. Revenues should be up over 2003 levels by approximately 25 percent, and EBITDA should increase approximately 20 to 25 percent as well. Our DD&A totaled 8.7 million for the quarter. We are now projecting that to increase to approximately 9.2 million per quarter given our capital spending plans. We expect to be fully taxed at an estimated 39.8 percent rate in the third and fourth quarter, bringing the annual effective rate to approximately 32 percent.

In looking at 2004 for earnings, we are estimating that they will be in the range of $1.00 to $1.10 per diluted share.

We would be pleased to answer any questions you might have.

(OPERATOR INSTRUCTIONS). Stephen Gengaro.

Good morning, everybody. The first question, on the Tubular Services side, can you give us a sense for what your outlook is? I mean obviously the volumes look strong and revenues, but how should we think about margins going forward in that business either on a gross margin level or an EBITDA level?

Well, I indicated in our guidance that we were seeing strong margins to date in the third quarter, and with the commitments we have in August, we see continued strong margins. Again going forward, these are exceptionally high margins, and depending on supply and demand, it is hard to predict exactly where the margins will be in the fourth quarter into 2005.

The only thing I would add is we gave guidance on the first quarter that we expected them to come down. We continue to reflect that, and that range of a $1.00 to $1.10 does reflect a reduction in margins. Obviously the variation in that range was largely dependent on the magnitude of that reduction in margin that will occur. So it is just a matter of a progression. But in the numbers that we are giving you, we are forecasting reduced gross margins and, therefore, EBITDA margins from what we experienced in Q2. Reduction is more moderate in Q3 and stronger reductions in Q4. That is how we did the modeling.

Okay, that is helpful. And then as a follow-on to that, you have about 62 percent of the inventory committed at the end of the quarter. How are you managing the inventory situation given the extreme volatility in final pricing? Are you doing anything different to protect yourselves from the standpoint of what happens when prices fall?

Well, this is a strong environment for us obviously. We typically carry a high-level of committed inventory. It came back a little bit from the first quarter, but more in line with historic norms. But we are carrying higher levels of committed inventory.

In addition, we have been able to on most circumstances to put this inventory out on a noncancelable nonreturnable basis, which is a typical for the business. So we have protected ourselves from getting a lot of it back if the market was for some reason to take a change.

And we watch the market very closely. As you will recall in 2001, we started reducing our inventory in May of that year prior to the rig count peaking in August and July. So we will watch it carefully. We don't see any indications of a weakening in demand right now, but obviously if we have these indications, we will take actions to reduce our exposure. But with 62 percent of it committed and our apparent backlog of 117 million, our exposure is not significant right now.

Thank you and just one final. On the Offshore Products side, you saw a real nice rise in the backlog sequentially. Can you give us any details as to any particular products that are driving that, or is it pretty widespread?

It has been fairly widespread. I would say the on a quality basis the mix is comparable to what we had in end of year December and end of first quarter and just on an overall margin basis. However, we have seen some improvements in the backlog in our FlexJoint orders, which is obviously helping us towards our higher end product.

On our other connectors, we are still seeing high levels of activity coming on the lower margin side that have tended to kind of weight our margins down from optimal levels. We have also got some expanded activity in our Houma operations.

But in totality, the mix is still good to maybe slightly improving if not optimal is how I would characterize it. But just the fact that we will have a higher backlog and, therefore, higher revenue helps us on the cost absorption side such that our margins will improve in our out quarters in the last half of this year.

Bill Herbert.

Sticking with Offshore Products here for a second, I'm trying to get a little bit more precise on the margins. Late late year I think EBITDA margins for Offshore Products in Q4 were pushing 12 percent, an enormous improvement with (technical difficulty)-- in the low teens range. It sounds like you are not going to be quite back to the targeted midteens margin level.

That is correct. Your assessment of low teens margins is what would get us to that 10 percent overall EBITDA margin for the year 2004.

Okay and then from a revenue standpoint, we have had a very nice surge in backlog. I am trying to get the revenues here for Offshore Products. It was about $9 million, and I would assume that you would see a pretty healthy uptick in revenue generation for both Q3 and Q4 for Offshore Products?

That is correct.

Okay, great. Back to Sooner here for a second, I heard a little bit of a mixed message here as Doug on the one hand is sort of professing that margins in the quarter look very very strong, yet Cindy here is saying that you're expecting them to be down a little bit, which is intuitive just given the fact that you probably have rising inventory costs.

What I was saying is that from what we have seen through July that we have strong margins, there has been a deterioration, and indications are for early August that there hasn't been a reduction in margins. (multiple speakers). The third quarter as a whole and the fourth quarter as a whole where we are projecting in our estimate a decline.

I got that. But I mean Q3 to date margins are at least flat with Q2.

Thus far, that is correct. I mean we are obviously through one month of actual numbers, and as you know, we have very good information on the margins that come off those sales. We had largely sold our allocations for August, so we have a pretty good indication obviously of what those margins will turn out to be, and September is still open.

Walk us through why margins would be down on a quarter on quarter basis?

Well, the real question is the price has flattened. Obviously our inventory is increasing. We did not put that out, but our average cost of inventory this quarter is up 10 percent from where it was at the first quarter. Given the pricing trends and the turns, clearly our inventory will continue to increase depending upon the timing, taking the mill allocations, and the pricing. But if mill pricing flattens and our inventory value increases, then yes, that has the impact of thinning our margins.

No, I understand that. But for the third quarter, you have essentially inventory in hand to cover sales for the third quarter, yes?

Depending (multiple speakers) unless there is some unusual size, weight or grade. If it is routine type orders, yes.

Essentially you have got the cost part of that equation dialed in, and you've got commitments already lined up for August, and so the only thing that is subject to change here is demand for September, which probably is going to be pretty good if not improving and ultimately pricing that you get for your end products? Right?

Yes, you're right. And I did not want to --

We have $111 million of inventory. Not all of that will turn in the next 60 to 90 days. Some of that is longer leadtime items that are committed to programs and things like that. And so you have that situation is that you may have a customer out there that has a program and we have pipe on the ground that would be for September, October or November delivery depending upon the spud date.

At that pricing already determined.

At that pricing already determined.

Right. It just sounds to me that the third quarter, there is very little likelihood that margins on the whole are going to be weaker than the second quarter?

Indications are we are one-third of the way into that quarter, and that appears to be a reasonable assumption based upon the knowledge we now have.

Okay. And then moving on here, workover obviously just had a fabulous quarter from a margin standpoint. I think you had close to 23 percent EBITDA margins, which is quite a bit higher than what we have seen. Now walk us through in terms of what happened there and what the expectations are going forward.

I think Doug hit on it, but the primary improvement Q1 and Q2 was in two areas. First of all, if you will recall in Venezuela, we had virtually no activity at all in all of the first quarter. The units are now back operating in Venezuela, and that outlook does look like it is stabilized.

In addition, the Gulf of Mexico had some lift in the second quarter. I never know what to attribute it to in the Gulf, whether it is sustainable or not, and that is why we say activity just tends to be unpredictable there. But what you can see, we had about I think 3 percentage points increases in utilization, but it has a pretty dramatic impact as you have noted to our EBITDA margin percentages. I would say those two markets are probably key to sustaining them, but I am just reluctant to say it is going to stay at that level.

We had 10.1 percent margins as I recall. (inaudible) for Q1 of 22 percent, 23 percent in Q2. So maybe somewhere between the two in Q3 and Q4, but that is just a tough business. It is call out and it's not on long term programs to speak of, so it's pretty difficult to project.

Last question, rental tools. EBITDA margins at least looked down on a quarter on quarter basis. Is that correct?

Yes,they were down.

What is it like there?

Again, we had higher activity level quarter to quarter and revenues were up. What we have is we have the pricing situation there as we are not able to obtain that we still have a very competitive market in the Gulf Coast area for pricing for rental tools due to the fact of the weak Gulf of Mexico shelf activity. And so increased activity, but the pricing just was not adequate.

What is not adequate? Pricing going forward appears to be doing what?

I would say we are projecting sort of flat pricing going forward, but with an increased some -- activity being basically flat.

Ken Sill.

I was going to follow-up on a theme here which is the guidance. You guys are guiding to a $1.00 to $1.10, and you did 56 cents in the first half. If you assume things are getting better generally across the board except for maybe margins and rentals, it looks like your earnings would probably go up 2 to 3 cents a quarter, which gets you to the top end of the range. So it sounds like your guidance is based on relatively conservative assumptions given where we are today and the trends you see in place.

You know I would characterize that as likely being correct, particularly the low end of the range. There is no doubt about that. That has typically been our trend, and again if I am not been clear, the real variability is the sustainability of the gross margins that we are realizing in Tubular Services.

It is tough for us, but Bill is absolutely correct. We've got pretty good visibility for Q3. When I said there would be some margin degradation, I also said we expected the majority of that to be in Q4, not Q3. But that is the real variability there.

However, if I look back at the other segments, Well Site Services is doing very well. It will grow throughout the balance of 2004 absent some major change. Clearly our Offshore Products division is doing better both in terms of revenues and EBITDA margins. But that suggests an improvement. Again, the variability SG&A is a fairly fixed number. The variability comes in what margins that we get in Tubular Services. But the low end is clearly conservative, and the high end could prove to be depending upon how those margins turn out.

In looking at our forecast, we are in the hurricane season, and our people have been doing -- in our forecasting, we have to evaluate some downtime and things of that nature also.

That is fair enough. The last one went up the East Coast. Okay, so far. I also wanted to kind of walk-through on the Tubular Services side since this is where the variation is. If no price is flatten out, but demand remains strong, how much does that squeeze margins versus mill prices actually coming back a bit?

Let me address part of that question. I indicated in looking at our revenue some of our revenue flows from shipments out of our inventory and some is direct shipments. Okay. Obviously the direct shipments are priced at the then market price from the mills. Our profit is not being derived necessarily from embedded profit in our inventory. We are still sustaining high margins on the new highly priced inventory that we are shipping. So you do not see a difference in that we are making the higher margins on our inventory to liquidate our inventory. We are seeing high margins on both new shipments and the margins on our inventory. Is that a fair assumption? Does that answer your question?

So if mill pricing flattens out, direct shipment margins I would assume do not really change much. What happens is you get squeezed on the inventory margins? They just kind of decline a little bit as you work off the lower-cost inventory?

We indicated that our inventory costs only went up 10 percent on a quarter to quarter basis. So we don't think we will get squeezed on our inventory margins.

Well, it sounds like you have only got about a month of exposure there any way. Okay. So actually for the margins to get hurt substantially, you would need to see mill prices actually come down? Is that --

Mill prices come down, or obviously the biggest thing is a weakness in demand. Weakness in demand you will have a more competitive environment for selling the available tubular goods, and you will see margin erosion. But we have not seen that weakness yet.

Okay. And then just on the rental business, how much of the increase sequentially was from acquired businesses versus just a little bit better volume given that the margins are down?

We will have to kind to pull that, but just intuitively the larger contribution has come from acquisitions in that business because -- and capital expenditures -- that we have made. As Doug mentioned, we really have not had much in the way of pricing power. What we tried to do is improve the product offering that we have so that on an overall basis from a mix perspective we're getting higher revenue per ticket. But just broadly speaking, the majority I would say comes from acquisitions. I am looking around the room to see if anybody has a hard number. I don't think that we do right now.

That's all right. We should assume then as you spend capital in this business, you are going for more deepwater higher margin stuff, and that should help a little bit even though the market is still very competitive?

Absolutely.

A significant amount of our capital expenditures have been for that equipment, which has not been employed yet which we hope to have employed in the last half of this year. We actually have contracts and commitments, but the operators have not been ready to utilize this equipment.

Terry Darling.

A couple of follow-ups on the tubular side. First, if we look at your revenues this quarter relative to your volumes, it would imply a price per ton of just under 1200 versus just under 1000. In the first quarter, I know sometimes you've got some other types of revenues going through there that does not make that a clean comparison. But in percentage terms, if we were trying to get toward the between sequential improvement in pricing on a per ton basis, is the 20 percent range about right?

That sounds about right. I know my average purchase costs went up about 15 percent. So in light of that, the sales price being up 20, that sounds I would say very reasonable, yes.

To help you analyze also the results, in comparing the sales increase on a quarter to quarter basis from Tubular Services by 34.2 million, in analyzing the increase, 52 percent of that was related to volume and 48 percent was related to price.

Okay.

In analyzing that revenue increase.

Yes, and if we take out the impact of the acquisitions, the tonnage gain was about 10 percent -- 9 to 10 percent on a sequential basis and about 21 percent on a year-over-year basis, if that helps.

Yes. I was going to ask for you to simplify that actually and just tell us what the revenue and EBITDA contribution from Hunting was if possible?

I don't have -- we sold roughly 13 million in terms of revenue. I don't have EBITDA that is laid out separately for that.

And the consolidation started at the end of May or beginning of May?

It was in the middle of May, May 11. As Cindy said, we had approximately $13 million of revenue, and our gross profit was on -- the Hunting product was approximately 1.4 million or 11 percent margin, 11.1 percent margin. So our overall margins were better on our product than from the Hunting. So the Hunting was not the primary driver of the increase in margin.

It was not. It was just a volume contribution.

But just to be clear, you are going to pickup another basically a month and half sequentially of Hunting in Q3 that you did not have in Q2?

Right.

Okay. And on the price increases, Doug, that you mentioned July, August and I think you said likely September --?

We have gotten indications from our people at Sooner and Tubular Services that they anticipate there may be a price increase in September also from the suppliers.

Can you tell us what the dollar per ton increase was in July and August?

I think it varies from supplier to supplier. I really don't have that number.

You do not even have a ballpark for us?

The price increase? It is roughly $100 per ton as I understand it in July and August.

Each month? $200 total versus where we expect that we ended July, I mean June?

Yes, that is what we think. Yes.

Okay. And the 62 percent of inventory that you have committed, are you committed to deliver, or are you also locked in on the selling price?

It is both. We have already priced that. To the extent it is committed, it is committed at a price. That is what we were trying to explain in terms of the margin analysis.

Okay. Are you committed on a price that includes the new price increases or no?

No. It will be based upon the price -- the margins -- look on a margin -- it will be the margins that we actually bid that work for.

But you did not include the new price increases in whatever you bid there? So basically we've got 38 percent of your inventory that is in the spot market available to benefit from these?

That is right.

Okay. That helps in terms of your outlook on margins?

That is correct.

Okay. So in terms of the Offshore Products backlog, I am wondering where you see that headed over the balance of the year?

Well, I would tell you we don't know. We would be very happy if we can keep it flat throughout the balance of the year. There have been some good projects out there there are yet to come in, but we are obviously planning on taking a lot of our backlog to sale in the back half of this year. I think the percentage was like 70 to 72 percent as I recall of our backlog will turn into sales by year-end. So my best guess would say that we just hold it flat throughout the balance of the year.

At the end of the first quarter, if you -- at the end of the first quarter if you asked what our backlog would be at the end of the second quarter, we would not have told you a number this size. It surprised us that it built that quickly, but as Cindy indicated, if it is flat at the end of the year, we would be pleased. However, we do see strong activity for 2005 that will replace this backlog and potentially increase it.

And is there any of the backlog currently that is to be booked in '05, or is at all for '04?

No, that is what I was trying -- roughly I have got it in front of me. Let me find my sheet. Let's say 73 percent of my revenue is scheduled to be delivered in 2004, and the balance between 7 percent is '05 primarily.

Okay. Terrific. Thanks.

Bill Herbert.

It might be a little bit too early for this, but I will take a stab anyway. Tax rate for 2005, what do you think is a good starting point there?

Well, I am just going to tell you it is early. I would not tell you -- if I pulled a number out of the air and wanted you to use that, I would say it is 38, yes.

38 percent?

38. Yes. It could be lower, but it is depending upon us benefiting further some of the NOLs that are out there, and it is just early.

There are no further questions at this time.

Well, thank you very much. We appreciate your calling in. We will be visiting with you on our next conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.