RPC Inc (RES) 2005 Q2 法說會逐字稿

Good morning and thank you for joining us for the RBC first-quarter (ph) 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 departments. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Introduction (ph) will be provided at this time for you to queue up for questions. 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 and thank you for joining us for our second-quarter earnings conference call.

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. Some of the statements that will be made on this call could be forward-looking nature and reflect a number of known and unknown risks. I would like to refer you to our press release, which was issued this morning, along with our 2004 10-K and other public filings that outline those risks. All of these are available on our website, which can be found on the Internet at www.rpc.net.

If you have not received our press release for any reason and would like one, please call us at 404-321-2140 and we will fax or e-mail on to you immediately. Also, I want to let you know that in order to let everyone hear the call and get their workday started on time, we are going to limit this call to 30 minutes this morning.

I will now turn call over to our President and Chief Executive Officer, Rick Hubbell.

Jim, thank you very much. As Jim said, this morning we issued our earnings press release for the second quarter ended June 30, 2005. In a minute, Ben Palmer will discuss our financial results in more detail. At this time, I would like to provide you with our operational highlights.

Revenues for the second quarter were higher than previous year by over 19%. Our results continue to reflect high activity levels, improved pricing, and growth in our capacity.

The domestic side of the business performed very well, but these increases were slightly offset by a decline in international revenues. International business has declined in locations such as Kuwait and West Africa, but we have seen a significant increase in our business in Mexico and China. Currently, we see renewed opportunities in (ph) Kuwait, West Africa and other locations.

The average domestic rig count during the second quarter was 1339, a 15% increase over the same period in 2004. In comparison to last year, the price of oil increased nearly 39%; the price of natural gas increased 13%. Our domestic revenues grew at a higher rate than the rig count due to the continued investment in our operating capacity and strong performance in the oil producing regions of the domestic markets in which we operate.

I will also briefly discuss the performance of our two reporting segments, Technical and Support Services. Both service lines experienced stronger results due to the increased drilling rig count and related customer activity levels. Technical Services rose 21.7% for the quarter compared to the prior year. This was driven by pricing increases, additional capacity and higher activity levels, particularly within our pressure pumping division. This increase was offset by weakness in our international operations, as I mentioned earlier.

Support Service revenue grew by almost 16% during the quarter compared to the prior year. This increase was driven by increased capacity utilization within rental tools, which is the largest service line in this segment. This strong increase was slightly offset by having no revenues from the marine liftboat division, which was sold during the fourth quarter of 2004. With that overview, I will turn it over to our CFO, Ben Palmer.

Thanks a lot, Rick. For the quarter ended June 30 of '05, our revenues increased 19.3% to almost 102 million compared to 85.4 million last year. Operating income for the quarter was 18.4 million, an increase of 61% compared to 11.5 million in the prior year. Net income was 11.9 million, or $0.27 (ph) diluted earnings per share, compared to 7.5 million or $0.17 diluted earnings per share, in the second quarter last year.

Cost of our services rendered and goods sold was 55.7 million, which is about 55% of revenues, compared to 58% of revenues in the prior year. These costs increased due to a variety of things, including increase in fuel costs, incentive compensation, payments and repair expenses and materials and supply expenses. However, as a percentage of revenues, these costs decreased because of improved pricing, higher equipment and personnel utilization, and our ability to leverage certain of the fixed costs over higher revenues.

Our SG&A expenses increased from 16.2 million last year to 18.2 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 the overall improved profitability. As a percentage of revenues, these costs declined to 17.8% of revenue.

Capital expenditures, which both improved our existing fleet of equipment as well as used to purchase new equipment, were approximately 21 million during the quarter -- second quarter of this year. This expenditures were primarily in our largest and more profitable service lines. We are currently expecting to spend approximately 70 million in capital expenditures for 2005.

The balance sheet remains very, very strong. We had 10.6 million in cash and cash equivalents at quarter end. And the remaining outstanding debt at June 30 of $2 million was paid as scheduled early in the third quarter.

Goodwill increased with acquisition-related earnouts for full year 2004 results, as well as earnouts for short periods that ended during the second quarter of this year. At this point, we have recognized all remaining acquisition-related earnouts.

During the second quarter, we invested more than 10 million in repurchases of the Company's common shares. This happens to be the highest amount in one quarter we've ever committed to stock repurchases, but we believe it was prudent given the market conditions during the quarter. You may have also seen this morning that the Board of Directors declared a quarterly of $0.04 per share. With that, I will turn it back over to Rick.

Ben, thanks. During the second quarter we made significant capital expenditures and repurchased a substantial number of our Company's stock. We believe that these were wise uses of our capital. While we make these investments, however, we're always keeping in mind how volatile this industry is, so we have maintained and will continue to maintain a conservative capital structure.

Next month, our largest service lines and Technical and Support Services will be instituting a price book adjustment. The price increases contained within this new price book are being made in an effort to maintain our level of service while remaining competitive with our peers. Of course, it is impossible to tell at this time how effective the price increases will be. It will be impacted by the number of customers on long-term contracts, and may also be impacted by general customer acceptance and other market conditions. Having said that, we believe that by the fourth quarter of this year, at least -- or at the latest, we will see an overall price increase for RPC at least in the single digit range.

We are pleased by this quarter's results and, based on the best information we have at this time, we remain optimistic regarding RPC's performance for the remainder of 2005. I will also reiterate, as we have stated in the past, that we do not issue earnings guidance and neither confirm nor deny the validity of any published analyst estimates.

I would like to thank you for joining us this morning and at this time we would be happy to entertain any questions that you may have.

(OPERATOR INSTRUCTIONS). Brad (indiscernible).

Good morning. I have a couple of questions. I wanted to dig into first of all the Technical Services margins and then also your capital spending program. First on Technical Services, good quarter, but incremental margins were low 30s. And good margins, but a little bit lower than we were expecting and lower than what some of your U.S. competitors have delivered so far this quarter. You mentioned some international revenue declines. Does some of the loss of business overseas explain that fully or are you guys seeing cost inflation outpace pricing growth in the U.S. market?

This is Ben. I would say that certainly the international decline contribute to that. We are seeing some cost escalations, but I think that is consistent with everybody; fuel costs, for instance, are really going up. But I would say those are the primary reasons.

International and cost inflation. So you mentioned a price book increase on the way. Have you realized -- did you realize much pricing improvement in the second quarter? I guess what I'm driving at is if you saw increased costs and not much increased pricing, perhaps your price book increase would drive maybe 40 plus percent incremental margins in the second half? Is that reasonable or --?

That would lead to (ph) revenue increases of 40% incremental margin increase?

I guess with the price book increase, can we expect incremental margins for Technical Services in the 40% plus range? They were low 30s this quarter and you have explained a couple of the reasons why.

Again, I think price book alone maybe could get us there. We are expecting that that will facilitate realizing more additional price increases. We did have some price increases during the second quarter, but we think the price book will provide additional increases to prices. We think that will help us.

So there was a little bit of price increase in the second quarter?

There was some, yes.

On capital spending, I think you said 70 million for the quarter. That is a little higher than we thought, and I assume that most of that is going towards pressure pumping or how are you deploying that?

Pressure pumping is the largest service line, so it will get its fair share, and it typically will be in the other large service lines, such as rental tools and cudding, coiled tubing and nitrogen.

Can you tell us -- how much capacity have you added so far for your pressure pumping business this year and how much do you expect to do by year end -- ballpark? Or is this mostly maintenance?

It is Jim. We are adding capacity in pressure pumping, and I would, thinking about hydraulic horsepower and things like that, I would probably put it in the mid-teens range year-over-year, if you look at the end of this year compared to prior year.

Mid-teens -- exit rate for '05, roughly mid-teens over '04?

Yes.

Okay. Thanks again, guys.

Tom (indiscernible).

Good morning, fellows. Just a couple of things, following on last comment about the capacity. If we are up mid-teens, December run rate by the end of this year, then I think it clearly (ph) shows that for the second half of '05, we will have probably at least single digit or more capacity -- greater capacity at pressure pumping compared to the second half of '04, plus price increase. And so those two things really should help drive margins in pressure pumping through the second half. Is that a fair statement or does that sound optimistic?

I would say in this environment, that is certainly a reasonable possibility.

Okay. You said you're going to put in another book price increase. Are you trying to -- is this new increase intended to set you at some level below Halliburton/BJ, or are you trying to price right up against them in terms of what your new pricing point is?

This is Ben. I think we're trying to, as quickly as we can, get up to their levels. Again, being the size we are, we have to be a price follower, but clearly that is where we are headed towards. We want to get up to where they are.

Obviously, everything you have is working. Do you feel like you're still turning down or do have a some measure of business that you have had to turn down this past quarter for lack of equipment?

We clearly have -- in pressure pumping, there is a backlog in terms of -- and so clearly there is some turning down of business that is taking place, yes.

So if a customer calls you today for a frac job, you're quoting them out three-weeks out, or is it a month or more? Any way to quantify that?

It is several weeks at this point.

Okay, well thank you. That is all I had.

Chris Jarvis (ph).

Hi, everyone. Great job on the quarter. Would you be able to expand a bit more on pressure pumping during the quarter, utilization rates and some of the pricing power? I know some of the other questions have addressed that, but maybe dig a little deeper.

And going forward, obviously, these trends look favorable at this price book adjustment. Could you give us a little visibility going into the second half of the year? I know you're not going to give us any guidance, but obviously you have to be optimistic here.

Hey, Chris. It is Jim. If you compare, perhaps, second quarter of '05 compared to '04, pressure pumping was good. A lot of revenue increase was due to capacity and a lot of it -- most of it was due to capacity increases. There were some pricing increases, but really we are thinking that is going to come later. We have talked in the past about our job mix in pressure pumping and how that has actually driven some revenue increases. That wasn't so much the case this quarter. It was more just capacity that's coming onstream and that sort of thing.

In terms of characterizing it going forward in terms of our price book increase, it is kind of hard. As Rick said, we do have some contract customers and we have to wait for those contracts to cycle through before we can get the new ones, and it just depends on traction and that sort of thing and general acceptance in the marketplace. And it is just a little too early to tell because those price book increases are imminent, but they are not here yet (multiple speakers). Kind of difficult at this point.

The next question and actually the last question I had for you guys is you guys are expanding into the Rocky Mountains with the rental tools business. Do you have any idea when that will be online -- the second half of this year, maybe, or 2006?

We are building our facility right now and we're doing jobs in the Rockies currently. But they are being trucked in from Oklahoma and other places. So we hope to have that facility online during the fourth quarter this year.

Great. Great job on the quarter.

Dan Pickering.

Good morning, guys. A couple questions. I want to make sure I understand kind of the year-over-year changes. You talked about international business being down and the sales of the liftboats. Could you quantify either individually or collectively the revenue impact from those two events on a year-over-year basis?

International was down a couple million dollars.

Okay.

It's Jim. The sale of the marine liftboats hurt us in terms of revenue by about 1.3 million.

Okay. What we are comparing against our 102 million in revenues this quarter was roughly 82 million a year ago on an apples-to-apples basis? Is that fair? Taking out about 3.3 million?

If your adjustments are international and Marine, then that is correct.

Okay. I guess where I am going with this is our revenue growth for this year then on a year-over-year -- for this quarter on a year-over-year basis is about 24%. And I am looking at your balance sheet on a year-over-year basis, looks like PP&E is up about 11% and we know rig count was up about 15%. And so I guess I am looking at those two numbers, and it would appear to me that from a pricing perspective, we haven't gotten a lot of price yet. Is that a fair assessment?

This is Ben. I would think that, again in talking about the price book increase, I think that at this point we have realized some pricing improvements, more in some service lines than others. But I believe, again, that the price book increases that we are instituting here shortly will help facilitate more increases over the next couple quarters.

Okay. And then the price book, is that just in Technical Services or is it across the Company?

It is in rental tools within Support Services and it is in three or four of the largest service lines within Technical Services.

Okay. All right. So all of the places that it really matters in terms of the size of the segments, we're putting this in.

Correct.

It sounded like you expected the realized increase to be high single digits by the end of the year. Did I interpret that correctly?

I think that is correct.

Okay. Then depreciation, what do you guys kind of target the run rate for depreciation here between now and the end of the year?

This is Jim. It is about 11 million a quarter, third and fourth quarter.

Okay.

(multiple speakers) for a run rate.

So we are stepping up from 9.6 this quarter just as the new capital comes online?

Yes, that is correct.

So what does that get us to for the full year? About 22, 31 --40 million or so?

Yes, about 40 million -- maybe a little bit north of that.

40, 42? And then next year we're going to run at 44, 46 -- something like that?

Yes, if the rig count is up 1300.

Sure. And I guess it's too early to call a 2006 capital budget?

Yes, too early.

All right. The share repurchase, as you indicated, 10 million still was a big number for you guys. Obviously well-timed in terms of where the stock price is today. It didn't look like the balance sheet didn't change much quarter-to-quarter. Proceeds from the liftboat I assume reallocated toward -- did you think about it sort of apples-to-apples -- sold something, so bought some stock back, or was it more opportunistic?

I think more opportunistic.

And the acquisition environment? How do you see it today?

Pretty tight. The couple things we're looking into, but nothing on the immediate horizon. We do have two from -- we have disclosed previously that we do have a tax refund coming in. There will be some -- if we collect it, and we do now expect to collect it during the third quarter, there will be tax benefits of about 3 to 3.5 million -- a total collection of somewhere around 5.5 to 6 million.

Wow. Okay. So the 5.5 to 6 million, that comes in later quarters?

Third quarter.

Sorry, I am confused. The 3 to 3.5 million, that is the income statement impact?

Correct.

Where will we see that? Is that going to be special or is that just going to be a lower tax rate?

There will be a one-time, a discrete item that will be recorded in the third quarter, if we do in fact collect the money, which we do expect to get back in the third quarter.

Okay, great. That's good.

But total cash would be 5.5 to 6 million.

Got you. So some more firepower if you choose to use it on a tactical basis?

Correct.

Good. Talk in general about your comfort level with the balance sheet in terms of debt-to-cap. If the right opportunity did come along, where would you think about your leverage and being comfortable with your leverage?

Today we have no debt. We have always said, and historically we have taken on debt for the smaller acquisitions that we have completed. I think it would be a little bit speculative at this point to say, but again, it would depend on the opportunity. I would think the likelihood with one transactions of us going from zero debt to a 30% level would be unlikely in one transaction.

Okay. A couple of segment specific questions. Your operating margins in the Support Services business were kind of in that 21% range. They have been fairly volatile. What is driving the movement quarter-to-quarter? Is it just the operating leverage of the business or is there some specific types of business you're doing that is changing that mix, and how does that look for the second half of the year?

It has been volatile, Dan. That is a little frustrating at times; that is an area that we are focused on. We hope that the Rockies going forward, six months, 12 months out, we hope that is going to improve things further. And continuing to focus on the business and trying to get some of these price increases, I think that is going to help it.

Okay, so it sounds like it is more volume leverage driving the margin variation than mix differences?

That is probably correct, yes.

So it doesn't so like there are any big objects offshore that you are working on now that you won't be working on in the third and the fourth quarter?

No.

Okay. We talked about the Technical Services incrementals several different ways, but I just want to make sure that I -- I heard kind of on a pressure pumping basis, did you feel like we got any pricing in the second quarter versus the first or pretty stable?

No, we did realize some.

With international, I know it was down year-over-year by a couple million dollars. How does that look sequentially for you?

Sequentially, I think it was --.

This is Jim. It was actually up about 1.1 million sequentially.

Okay. What's the sort of second half outlook there?

Hate to be vague, but again, international is very difficult. We think it is an area that we talked about for a while that we have had some success in. That is also an area that creates some frustration with the inability to determine the timing and duration of some of these contracts. But we have several that are very positive that we believe will be happening within the next quarter or two that should provide some more lift under those numbers.

Okay, greater. Thank you.

(OPERATOR INSTRUCTIONS) Brad (indiscernible).

Good morning. My question on the international outlook was answered. Thanks.

At this time, there are no further questions. Are there any closing remarks?

Yes, our time is just about up, so we want to thank everybody for joining us this morning and we appreciate your interest in the Company and everyone have a good day. Thanks.

This concludes today's conference call. You may now disconnect.