RPC Inc (RES) 2005 Q1 法說會逐字稿

Good morning and thank you for joining us for RPC's first-quarter 2005 earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO and Ben Palmer, CFO. Also present, we have Jim Landers of the Corporate Finance and Investor Relations Department. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. (OPERATOR INSTRUCTIONS). I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking statement.

Good morning. Before we begin our call today, I want to remind you that in order to talk about our Company, we're going to mention a few things that are not historical facts. And some of the statements that will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks. I'd like to refer you to our press release issued today along with our 2004 10-K and other public filings that outline these risks; all of which can be found on our website at www.RPC.net.

I'd also like to tell everyone that we're having some technical difficulty this morning and our website is not operating. What that means is that if you normally receive an e-mail with the press release from us, you haven't received that this morning. We're going to get the website up as soon as we can and the e-mail out as soon as we possibly can. The press release did go out through the other wire services so I trust that you have it. If you do not have it for any reason, please call us at 404-321-2140 and we will fax or e-mail one to you immediately.

Also, in order to let everyone hear the call and start there workday on time, we're going to limit this call to 30 minutes. I will turn the call over to our President and Chief Executive Officer, Rick Hubbell.

Thank you, Jim. This morning we issued our earnings press release for the first quarter ended March 31, 2005. Ben Palmer will discuss our financial results in more detail. At this time, I would like to provide you with our operational highlights. First, revenues for the first quarter were higher than the previous (technical difficulty). Our results continue to reflect higher activity levels, through (ph) pricing, growth in our capacity.

The domestic side of the business performed very well. Domestic revenues increased 20%. Because international operations have less revenues, overall growth rate was slightly lower. International revenues declined due to a decrease in our Kuwait operation. However, the decline was slightly offset by new business in China. The average domestic rig count during the quarter, 1280 (ph), 15% higher same period for 2000 (ph). In comparison to last year, the price of oil increased almost 44%. The price of natural gas increased by more than 16%. Our domestic revenues grew at a higher rate than the rig count investment. Our operating capacity and strong (indiscernible) region, domestic markets (technical difficulty). I would also -- I would also like to briefly discuss (technical difficulty) our two reporting segments (indiscernible) technical services -- both segments experienced stronger results, increased drilling rig count, (indiscernible) customer activity levels.

Technical services revenues grew 19% quarter compared to the prior year, which was driven by pricing increase, additional capacity, and higher activity levels particularly within our pressure pumping division. This increase was offset by a decrease of snubbing revenues (indiscernible) international operation.

Core services revenues grew by 23% during the (technical difficulty). Increase was driven by increased capacity and utilization within rental tool, largest service line segment. Strong increase was slightly offset by having boat (ph) revenues from Green (ph) liftboat (indiscernible). With that overview, I'll hand it over to our CFO, Ben Palmer.

Thank you, Rick. I will cover the numbers in a little more detail here. For the quarter ended March 31, 2005, our revenues increased 15.4% to 92.3 million compared to 80 million last year. Operating income for the quarter was 14.2 million, an increase of 54% compared to 9.2 million in the prior year. Net income was 9.9 million or $0.23 diluted earnings per share compared to 5.8 million or 0.13 diluted earnings per share in the first quarter last year.

Our cost of services rendered and goods sold was 50.4 million, represented 54.6% of revenues compared to $47.1 million or 58.9% in the prior year. Increasing costs was primarily due to the variable nature of many of these costs and in particular fuel costs, maintenance and repair expenses, and materials and supply expenses. However, as a percentage of revenues, these costs decreased because we had improved pricing, had higher equipment and personnel utilization and we were also able to leverage many of our picks (ph) costs over the higher level of revenues.

Our selling general and administrative expenses increased from 15.1 million last year to 18.4 million this year. This was due primarily to higher salary and wage expenses along with increased incentive compensation; consistent with the higher activity levels and improved profitability.

We also incurred increased public company compliance costs. As a percentage of revenues, these costs increased from 18.9% last year to 19.9% this year. The majority of our other income is comprised of proceeds from the litigation settlement. Our effective tax rate increased slightly in the first quarter to 38.8% compared to 38% a year ago.

Our capital expenditures, which were made to improve our existing fleet of equipment, as well as purchases of new equipment, were approximately $13 million during the first quarter this year. These capital expenditures were primarily in our largest in more profitable service lines.

Our balance sheet continues to be very very strong and we now have only 2 million in outstanding debt and over 22 million in cash and cash equivalents. That is an increase in cash and cash equivalents of approximately 7 million from a year ago.

Our accounts receivable increased consistent with our higher revenues. You'll notice an increase in goodwill. This relates to the earnouts which were recorded on acquisitions. This related to 2004 results. Also at the board meeting yesterday, the Board declared a quarterly cash dividend of $0.04 per share. With that, I'll turn it back over to Rick.

Thank you, Ben. The theme of our annual report this year is focusing on our strength. That is exactly what we continue to focus on, the investments that have made us successful in the past, including our mid-continent expansion, international business development, and our top performing service line. We are always mindful of the volatility in this industry. Therefore, we maintain conservative capital structure, conservative investment, high financial return.

We're pleased by this quarter's results and based on best information we have at this time, we remain optimistic regarding RPC performance for 2005. I will also reiterate, as we have stated in the past, (indiscernible) issue of earnings guidance, confirm nor deny the validity of any published analyst's estimate. I would like to thank you for joining us this morning. At this time, we would be happy to entertain any questions that (technical difficulty).

(OPERATOR INSTRUCTIONS). Brad Sutter (ph) of Friedman, Billings, Ramsey.

A question for you on other income line on the income statement. Could you detail that? It looked like it was about 1.9 million. I was curious what that was related to.

The majority of that -- you'll notice that we normally have some level of other income on that line. It was higher than normal because of the litigation settlement which proceeds were received during the first quarter.

So that should probably decline to a little bit lower level for the rest of the year?

Quarter-to-quarter, I would expect so.

Looking ahead, I was curious if you could provide some SG&A and D&A guidance. Do you expect those to continue at these levels?

Relative to D&A, we're still, as we stated in the 10-K, projecting somewhere around 60 million in capital expenditures for the year. On the SG&A line, with the increased public company compliance costs, it's a little bit difficult to gauge exactly but I would expect that cost to stabilize or come down some. Otherwise, you know, with increased activity levels, we have been adding some administrative costs. We would like to think -- trying to manage that down to -- so that we can get some positive leverage on that. At this point, no plans to significantly increase that cost. So hopefully it will stay -- it will begin to decline to some extent.

I noticed that the support services segment revenues declined a little bit sequentially. I was curious if you could provide some color there and see us bouncing back second quarter?

That was primarily from the rental tool division and historically fourth quarter is always very high in the rental business, as it was for us. They had a good quarter, first quarter, but sequentially it was less than in (technical difficulty). Our rental accounts right now our approaching the point that they were (technical difficulty). So I think it'll bounce back.

Dan Pickering of Pickering Energy Partners.

Technical services revenue up 19% year-over-year. Rick, you talked about in your comments, rig counts up 15%, pricing is better, and there's more capacity. I guess I'm just trying to reconcile the thought here that if all the businesses here are rig count-driven, we should have been up at least 15% if pricing is getting better and there's more capacity. I guess I'm just wondering if there's a marketshare issue here or am I thinking about it the wrong way in terms of assuming you will grow at least in line with rig count. And then on top that is price, and on top of that is extra capacity.

Dan, this is Jim. As always, you're thinking about it the right way. I think reconciliation for you that you might be missing is the fact that snubbing is a technical service and snubbing declined a good bit due to the decline in international revenues year-over-year.

Jim, can you quantify that factually. Is that a couple of million bucks down year-over-year? Is it half a million dollars? I mean ballpark.

You know, just south of 3 million.

So the domestic business then actually growing quite a bit faster than the overall?

Yes, that's correct.

Can you detail for us a little bit the pricing environment that you're seeing in the U.S. for your pumping nitrogen, etc? Kind of the pumping services?

Well, in pumping, you know, it's improved pretty nicely. We did a price book increase around the middle of last year and it has taken hold. So that has worked out well for us. Year-over-year pumping revenue increased a good bit and a lot of that was pricing. A lot of it was capacity as well; but a lot of it was pricing.

I know that some of your competitors have been pricing. I think BJ services talked yesterday, pricing is up about 8.5% for them year-over-year. Are you guys in that same ballpark?

I would say so, yes.

Some of the competitors are also pushing price again, you know, sort of, this May June timeframe. Will you guys be impacted by that kind of rising price environment?

Well, Dan, we hope so. Nothing firm to say right now. As you know, we're sort of a distant number four in that market. We may get their price increase as we hope to follow thereafter and hope that'll happen this time as well.

So there's no reason to think that you shouldn't see the same upward movement that the industry does with maybe a little bit of a lag?

That's the right way to characterize it. Yes.

Switching over to the support services segment, you mentioned that the rental tool business is down. Can you quantify for us the quarter-to-quarter impact of the liftboat business being gone or was it completely out of the last quarter's revenue number?

It was out of last quarter's revenue.

The Q4 to Q1 is a clean comparison?

That was about 300,000 to 400,000 in revenue in the fourth quarter.

So 300,000 to 400,000 in revenue. And if I remember right, essentially break-even profitability? So, on an operating profit basis, the 3.7 million didn't really have any operating income from the liftboats. Is that right?

That's generally correct, yes.

When we think about -- is there any specific project because if we look back to last year in the support services business, Q4 to Q1 was actually a revenue increase? Did the rental tools business -- was it down Q4 to Q1?

Last year, Q4? I think back in that time period, we were experiencing some increases. So I'm not sure if that trend held true at that point in time.

I guess where I am pushing with this is did you have a specific contract or customer that was busier in fourth quarter that went away in Q1 and is back in Q2 or --?

No, it was just kind of general across the board. The regions we operate in, of course the mid-continent has grown, and Texas markets have grown, Gulf has not grown very much. (indiscernible) business have been in the past predominately in the Gulf. We're trying to branch out more of the land business. But no, it was not a specific customer.

So it wasn't on shore versus offshore. It was just a general slower environment?

Yes, (technical difficulty). Offshore business as a percentage of the total has been down over the last few years.

But specifically from fourth to first, there was no noticeable -- the offshore was down a lot more than onshore or anything like that?

No.

And then Rick did I hear you say that we're now kind of back up to the Q1, sorry the fourth quarter, sort of, activity levels as we are moving through the second quarter here?

Yes.

Any significant new contract wins or customer ads that are going to change that number as we step out into the back part of the year.

No, not that we know of.

I'm sorry. I missed it.

No, not that we know of now.

The majority of other income was the litigation of the 1.9 million that was 1.5 million?

A little less than that.

The other pieces of that -- is that lost in whole or just knicks and knacks?

Both. Typically, there are a little bit of lost in the whole, gains that are there. Typically, we do have little things here and there, Small litigation settlement or other particular types of things.

Tax rate, you'd expect to be 39% going forward.

At this point, yes. I mean that's what we try to do is project the full year, so that's our current projection is 38.

And share count was up a little bit here on a fully-diluted basis, this option exercise?

Some of it is option exercises and restricted stock grants. We have moved away from option grants and are doing more in the form of restricted stock.

Okay. That's all I've got for now. Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Tom Escott with Pritchard Capital.

Good morning, fellows. I think most everything has been covered but just to clarify on this litigation gain here, this is basically $0.025 after taxes, as I calculate it, right, which means pure operating earnings in the quarter was like $0.20 a share. Does that sound right or did I miss some math?

I think when I calculated it it was closer to two but yeah that's probably correct.

So $0.02 of gains and sort of $0.21 of real operations in the period?

Correct.

Dan was referring to Halliburton announces its price increase in pressure pumping last week to take effect here in June. Just on a timing basis, would it be your expectation that sort of August, September you would be able to start implementing this increase or is that too aggressive of a time frame, you know, if Halliburton BJ go up here in the May, June period?

I think, Tom, the timing is, of course, difficult to predict. I mean, we're constantly trying to always pushing on trying to increase our prices and take advantage wherever we can. I'm not sure we have done a historical analysis to be able to tell us precisely what the delay is. But just theoretically, it takes a little bit more time for us to get through increases than it does the larger competitors.

Yeah, although at this point, I imagine your equipment utilization has got to be, what, 85, 90% which I guess would make that easier. Is utilization in that range?

I would say yes, our utilization is very high right now.

Our next question is a follow-up from Dan Pickering of Pickering Energy Partners.

Just wanted to come back and revisit support services one more time. Just trying to understand the profitability. We were down about a million seven from the fourth quarter in terms of revenue. Profit came off about 1.5 million to obviously very high incrementals. Do we expect the same -- I mean, if revenues ramp back up to the fourth-quarter levels, are profits going to be back in the fourth-quarter level as well, kind of low 20's kind of operating margin level?

That's a very high fixed cost business. So yes, those increased revenues especially in that rental tool service line. Yes, produces high incremental.

And then the technical services from an international perspective, we talked about revenues may be down about 3 million year-over-year in terms of the international business. Were there any international revenues in the quarter?

Yes, they were actually slightly higher than fourth quarter. China, we mentioned in the press release, is one that did generate some new business for us and we see some pretty good prospects there. The difficulty with a lot of our international business is it's very difficult to predict the contract wins and when the work will actually begin. It's something that (technical difficulty) try to predict or forecast with any degree of accuracy. But we do still have a lot of nice prospects on the horizon.

So it sounds like -- did the China work start early in the quarter, late in the quarter?

It's really throughout the quarter.

Not a lot of visibility on your stand, Ben. I'm going to push I guess, at least, here over the next two three months, second-quarter international, running about the same level. Nothing new starting up?

I think that's fair to say. We don't expect it to go significantly up or down.

So running at roughly the same levels. And then your incremental profitability in the technical services business was pretty strong year-over-year, 30% incremental operating margin. Do you kind of think about that as a sustainable run rate? You know, if revenues pick up at the same pace, would we continue to see that kind of 30% flow-through to operating income?

I see no reason that it should not.

There are no further questions at this time.

Thanks to everyone for joining us and have a good day.

Thank you for participating in today's RPC first-quarter 2005 earnings conference call. You may now disconnect.