Tenaris SA (TS) 2002 Q1 法說會逐字稿

Welcome to Hydril's conference call to discuss the financial results for the first quarter of 2002. Before we begin, I have a few words about forward-looking statements. To the extent our remarks today reflect our expectations about Hydril's business or performance for any future period, we are relying on the safe-harbor protection afforded by the Federal Law. Any such remarks should be read in the context, as there are many factors that affect our business including those discussed in our annual report on Form 10-K for the year ended December 31st 2001. Today Chris Seaver, Hydril's Chief Executive Officer and [Mike Carney], Hydril's Chief Financial Officer will make brief presentations reviewing results for the quarter which will be followed by a question & answer session. Mr. Seaver.

Good morning. Overall we had a relatively strong first quarter considering current market conditions. Earnings were up year-over-year but down sequentially. Compared to last year, our first quarter revenue was up 5% to $58 million. Operating income increased 15% to $9.5 million and net income increased 8% to $5.6 million. Sequentially revenue was up 1%, operating income declined 15%, and net income declined 19%, all of which were within our expectations for the quarter. For each of our segments, Premium Connections and Pressure Control, I would like to review the key drivers and then discuss the operational and financial progress we made during the quarter. Deep formation drilling and deep water drilling drive our premium connections business. In the U.S. we look at the rig count for rigs drilling of targets deeper than 15,000 feet and the deep water rig count measured as rigs under contract drilling in greater than 1500 feet of water.

The average deep formation rig count for the first quarter was down 15% from last year and down 14% from the fourth quarter. The average deep water rig count for the quarter was up 4% over last year but down 13% from the fourth quarter. Internationally, we look at the combined land and offshore rig count, which were essentially flat, up 1% from a year ago and down 2% compared to the fourth quarter. First quarter premium connection revenue decreased 4% to $29 million while operating income was up 28% to $7.2 million, both compared to the first quarter of 2001. The increase in operating income from low revenue was due to improved efficiencies in our international and North American plants and to the cumulative impact of price increases initiated last year. Sequentially rig counts were down. And premium connection revenues decreased 8% while operating income was down 18%. This sequential decline in operating income was due to lower trading volumes in North America and to a sales mix shift to lower margin pass-through pipe sales outside North America. The capital equipment portion of our pressure control segment is driven by rig new drills and upgrades while the after-market portion of this segment is heavily influenced by the level of off-shore drilling activity, so the worldwide off-shore rig count is the way we track this business. The average worldwide off-shore rig count for the first quarter was down 8% compared to the first quarter of 2001 and down 2% compared to the fourth quarter of 2001. Compared to the prior year quarter our capital equipment revenue increased 49% to $16 million while the after-market revenue decreased 12% to $13 million. As we discussed in our call last quarter, this mix shift in revenue to capital equipment from after-market was what we expected and it will continue for the remainder of this year. Our pressure control had operating income for the first quarter of $5.4 million, which was up 9% from the first quarter of 2001 and up 3% sequentially. We continue to carry our healthy pressure control equipment backlog of $54 million, which will provide a stable base of project business for Hydril through the third quarter of 2003. Now, Mike Carney will review our financials.

MIKE CARNEY]: Good morning. As Chris mentioned, total revenue for the quarter was up 5% compared to the first quarter of 2001 and up 1% sequentially. Our gross margin for the first quarter was 36%, up from 32% a year ago and down from 39% last quarter. The principal reasons for the year-over-year improvement were increased efficiencies at our premium connection plants, increased profitability on our capital equipment projects, and the cumulative effect of price increases initiated last year. The sequential decline in gross margin was due to a sales mix shift in both of our segments. Premium connections had a mix shift to higher revenue on pass-through pipe sales outside of North America, which carry lower margins. Pressure control had a mix shift from higher margin after-market spare parts to lower margin capital equipment. SG&A expense in the quarter was up 16% compared to the first quarter of 2001 and down slightly sequentially. The year-over-year increase was due to higher engineering expenses to support the increase in pressure control projects and higher administrative expenses. These higher administrative expenses included escalating health insurance costs, overall timing of public company related expenses, and commercialization of our SubSea MudLift drilling technology. As a percentage of revenue, SG&A expense increased to 19% from 17% a year ago. Operating income for the quarter of $9.5 million was up 15% compared to the first quarter of 2001 and down sequentially 15%. Operating margin increased slightly from 15% for the first quarter of 2001 to 16% but was down from 20% in the fourth quarter. Net interest expense for the quarter was $739,000 compared $59,000 for the first quarter of 2001 while interest expense was approximately the same in both quarters. Interest income declined substantially in the first quarter of 2002 due to much lower short-term interest rates. Net income for the first quarter was $5.6 million, over 201/2 cents per diluted share compared to the $5.2 million or $0.23 per diluted share for the prior year quarter and compared to the $0.30 for the fourth quarter. Moving to the balance sheet, we ended the quarter with $78 million in cash and $60 million in debts. The cash decrease in the quarter was primarily the result of higher working capital requirements for pressure control projects which we have received, customer advance payments last year and capital expenditures in the quarter. As you will recall, our $60 million of debts is 6.85% private placement, which is due in June 2003. Total stock over equity at the end of the quarter was $166 million compared to a $160 million at December 31st 2001. Capital spending was $5.2 million for the quarter. Our premium connections segment spent $2.8 million primarily for plant capacity expansion. The pressure control segment spent $2.4 million to replace and refurbish machine tools and to construct a new deep water assembly building at our technology center for BLP stack assembly. I would like to cover a recent accounting announcement FASB 142, goodwill and other intangible assets, which is effective for fiscal years beginning after December 15th 2001. This announcement addresses to the changes to the accounting treatment of goodwill and intangible assets. While earnings of many companies will benefit from goodwill no longer being amortized the change will only have a $10,000 per quarter positive impact on Hydril's earnings. This means Hydril's operating performance this year can be compared on a clean apples-to-apples basis to previous periods. That wraps up the financial overview, now I would like to turn it back over to Chris for a few comments regarding our outlook for 2002.

Our US premium connections sub-segment, which is about half of our premium connection business, is tied principally to the deep formation rig count which had declined since September of last year. The deep formation rig count was a 127 last week down from a peak of 179 in September and a 138 at the end of the year. This decline in the deep formation rig count has been a shift from the run-up we have seen over the past two years. But it looks to us like the deep rig count bottomed six or seven weeks ago and is now gradually increasing. In this segment of our business, we now expect distributed destacking which began last year to be completed by the middle of this year. This destacking will keep our U.S. plants at a lower level of utilization while our international plant utilization should continue to gradually increase. Therefore we expect second quarter activity in premium connections to be flat or slightly lower than the first quarter as a result of lower activity in the U.S. partially offset by slightly higher activity in our international markets. This slightly higher net international demand includes some weakness in our Latin American markets. Our pressure control business is also affected by the lower rig count levels projected for North America this year. Our after-market spare parts business was very strong in 2001 but we are seeing and expect to continue to see reduced demand in this sub-segment this year in North America. Our capital equipment backlog at the end of the quarter was $54 million compared to $56 million at year-end. During the quarter we received orders from Global SantaFe for two additional surface blowout preventer stacks for their new-build program. For our pressure control segment, we expect second quarter revenue to be approximately inline with our first quarter revenue. We also expect the sales mix shift from high margin after-market parts to lower margin capital equipment to continue through the second quarter and the remainder of the year.

In summary, we expect our second quarter financial results to be slightly below the first quarter. For the second half of the year we expect, as do most industry analysts, that U.S. rig count will bottom out during the second quarter and then gradually improve during the second half of the year. Therefore for the second half of the year we anticipate improvement in our North American business from higher activity that will be driven by high rig counts in the U.S. and the Gulf of Mexico. For our premium connection business, we expect North American revenue to gradually increase in the second half while our international revenue remain stable. In addition, pricing, plant cost, and efficiencies should also remain constant in the second half. For our pressure control business, we expect our North American after-market revenue to gradually increase in the second half while our capital equipment revenue will remain constant, consistent with first half. Operator, we are now ready for questions.

At this time, I would like to inform everyone in order to ask a question please press *, then the number 1 on your telephone keypad. Your first question comes from [Dan Hegos] of Credit Suisse First Boston.

Dan Hegos]: Good morning. And I know you guys done on the pipes is definite news, small international occasions, but do a job of tracking inventory conditions. What have you guys seen as far as days inventory on the pipe side, in that has there been much of a change over the last couple of months?

We follow specifically the [Alphrine] inventory on the ground, i.e., pipe threaded with our premium connections in our distributors hands in North America. And we don't have perfect information but we [clock tracked] as best as we can, it has been declining gradually since December. On per deep rig running basis, it has also been declining but since January. In terms of how much there is, may be four months work.

Dan Hegos]: On a per rig basis, how does it stand versus say 12 months or a year when things get a lot more active.

It's about 30% higher on a per deep rig running basis.

Dan Hegos]: Has there been much can utilization or product demand using, do you think you can get a pre buying mode here sooner than second half or is there potential for that?

There is potential from a variety of reasons but there's also negative potential too. We believe that on a rig running basis there is less of our premium connections on the ground than there is of API. When our distributors distribute API pipes as well as premium connection pipes and, if they have too much API pipe on the ground, they have a working capital problem and that's on the negative side. On the positive side we added a distributor recently and we got a stacking order from them, our initial stacking order but right now the distributors are not talking like we should expect any speculative inventory to be placed in the near future.

DAN HEGOS]: Okay. I guess carrying it on a little bit, how was the utilization between the U.S. and the international plants in the quarter?

It was in the, slightly above 50% range for domestic plants and international plant closed the full, 80% let me say.

DAN HEGOS]: That's pretty good. And I guess there's one more here. What have you guys been hearing on the SubSea MudLift drilling system as far as increase in customers and what are the prospects going to be for that right now.

We have no request for a quote. We have no quotes outstanding that could be accepted by our customer and we have no RSQs form the customer that we could quote into. We are continuing to market the product; we are working on taking the cost out as well as working on other deployment methods in water shallower than 5,000 feet, which was the prime target, deeper than 5,000 feet is the prime target. We have a feet contract for [an] engineering one that make sure of our several rigs, can accept our equipment. We are continuing to talk to non-JIP participants but identifying deployment opportunities based on the driver technology and reducing the overall cost and increasing the value of our projects is what we are working on and we do not see revenue this year from this product line.

DAN HEGOS]: Okay, thanks all you guys.

Your next question comes from [Scott Gill] of Simmons & Company.

SCOTT GILL]: Yes, good morning. Chris, you didn't talk about pricing on the premium connection side. Could you, perhaps, contrast where pricing is today with where it was last quarter and peak pricing levels?

There has been no change in the pricing since fourth quarter. We had our last price increase in the third quarter and the price increase has upheld. Our anticipation is that they will to continue to hold; we have not seen scrawly behavior from our competitors.

SCOTT GILL]: That's good.

Excuse me, I didn't mean it.

SCOTT GILL]: On the pressure control side, Chris, any strategies to grow that business outside the SubSea MudLift or are you looking at product line expansions there such as deep-water raisers or anything along those lines.

Thank you for asking. We are working on a new concept blowout preventer and we haven't applied for all the patents yet, so I can't describe it and we are looking at further product line extensions. And we looked also improving and next generation for our [Mux] control system and a mini-[Mux] that can applied for shallower water and even surface applications. Those are our principal internal product development right now in the pressure control side of the business.

SCOTT GILL]: And your anticipation is those will be more of 2003 impact revenue as opposed to 2002.

Correct.

SCOTT GILL]: Okay. And lastly from my end here, capital spending, can you talk a little bit about your capital spending plans for the rest of the year and what's its intended purposes?

Sure. Before we go to our capital expense results, Scott, which you may know is at the beginning of the year we put together the total list of prospects and that becomes a high-level of guidance capital budget but we approve each project individually as we go through the year. For this year, we have about $10-11 million of carry over from last year. So, that's in the bank statistics so we will have that much just to finish up the projects that we are taking it around the time of the IPO. So that are the money's that we will spend in the first quarter will carry over into the second quarter. Beyond that the capital expenditure issue you could probably work to about another $10 million, beyond that.

SCOTT GILL]: That's...as I understand, you might have $20-21 million less thanwhat you spent in the first quarter?

Over the year it would be about $20 million.

SCOTT GILL]: Okay, great. Thank you.

Your next question comes from [Jeff Skeiburg] of Salomon Smith & Barney.

JEFF SKEIBURG]: Good morning. I would like to go back to the SubSea MudLift drilling. I just understand that it's a little bit better, it seems like we have gone through a cycle here, very cautious outlook on that new technology a year and a half ago and looked like it was going to elicit a strong interest by customers prior to the field test and then it has dried up. I just want to know what your hypothesis was concerning that change.

There are a couple of things. Except for BP none of the operators have enough projects, projected drillings, wells drilling, developmental drilling in oil-fields to commit to multi-year contract. Remember the full capital equipment cost of a system is in the range of $40 million. BP has a drilling schedule and they don't want to, it appears like they don't want to implement technology that has the risk of delaying [First Oil] from [Thunder Horse]. We have talked to participants, who are potential customers who are outside the JIP and working with them to identify deployment opportunities, but you have to have a significant number of drilling up of scheduled drilling prospects. There's another that's coming up is almost all the deep water wells that have been drilled to date have been straight holes. There is a big impact on this technology when you start to do extended reach drilling. A real big impact but nobody is there yet even Thunder Horse is going to be mostly semi-vertical wells, not extended reach drilling. So, there were at one time you remember two other people developing this kind of technology [DeepVision] and Shell. We understand that DeepVision has folded and we are in discussions with Shell about working with them.

JEFF SKEIBURG]: Okay. When you say it a big impact on the technology from extended reach, I am assuming, you mean its advantages are all that greater when you are doing extended reach.

Yes. Much higher, like controlling the bottom hole pressures and such stuff.

JEFF SKEIBURG]: Okay. You sort of touched on this in your comments but could you just give us a little bit better sense of what your Latin American exposure is in the premium connections.

We have a plant in Mexico, as you know a major investment for us in Mexico. We have no capital or financial exposure other than that. The Mexican market place is priced in Pesos versus U.S. dollars; there looks to be a little bit delay and [Pennex] is having political problems with Congress in getting its budget approved and therefore there looks to be some delay in demand there. Pedawaser] of Venezuela has got over year actually may be [Pedawaser] might start drilling more than uptake from what we are seeing. We never sold anything to Argentina, anyway.

JEFF SKEIBURG]: You feel relatively insensitive to the most acute situations down there.

Correct.

JEFF SKEIBURG]: This was so someone touched on before, but what is your outlook expectation impact of the [Steel paris] on tubular prices, I ask it because you said before that there's some correlation between what you are able to get in pricing on your connections to the steel body pricing. I guess there is a two-part question to that, do you still think that's the case? And if so, what do you think might go on here in the next year or so?

With respect to pipe, we expect the pipe price in the U.S. to rise but we don't any change in premium connection pricing in North America this year. We didn't drop our prices in the downturn and we expect major resistance to increases, at least in the near term.

JEFF SKEIBURG]: Do you have any comment to offer on the $0.89 consensus estimate that is out there for 2002?

We are comfortable.

JEFF SKEIBURG]: Okay. Thanks very much.

Thank you, Jeff.

Your next question comes from [Gary Russell of Soft Securities].

GARY RUSSELL]: Good morning gentlemen. You talked about your expectations for pricing on the premium connections side enlarging for this first quarter came in pretty darn strong, would you expect what pricing to hold up then that your margin would be similarly strong next quarter on that side of the business.

On the connections itself side, yes. But remember that the overall margin is affected by the amount of pipes, which we don't report. So, it can shift around a little bit if there is more or less pipe.

GARY RUSSELL]: Okay, fair enough. Also one of the oil services executive held a conference call recently, he made a comment that we have seen limited success with some deep water exploration drilling recently and that they would expect that might slow some of those efforts while the oil companies start to have a second look at the prospects in non-deep water. With that kind of dynamic potentially taking place, do you think that the kind of thing that would perhaps hinder introduction of the SubSea MudLift drilling technology or is that the type of dynamic that could motivate increased interest in that type of technology.

We think it's either independent or increase in the demand because the technology permits larger well bores to deeper depths and so a lot of prospects that have actually been discovered up to now cannot be developed economically because you can't get a big enough piece of trooping there to the base out. SubSea MudLift drilling permits that. So that would be helpful. If you are referring to dry holes, might have an effect but generally speaking the introduction of the technology should be independent of that.

GARY RUSSELL]: Seems like it's going to be more driven by the economics of the development not the exploration efforts themselves.

I think that's correct. Yes.

GARY RUSSELL]: Okay. Then lastly, you commented a little while ago that on the pressure control side perhaps some product extensions, development, that type of thing. Would you expect for most of that to come from in-house development or acquisition of technologies or a little bit of both.

At this time, internal development.

GARY RUSSELL]: Okay, great. That's all I have. Thanks gentlemen.

Thank you, Gary.

Your next question comes from [Robin Schumacher] of Bear Sterns.

ROBIN SCHUMACHER]: Thanks, good morning. I wanted to ask you about, I think, you made a statement that you are 50% domestic....

Roughly, little over...

ROBIN SCHUMACHER]: So, in terms of ramping down production what have you done, you are running one or two shifts and if assuming, demand picks up a little bit how long do you need to rehire or add a shift or something along those lines.

What we are doing is, you remember, the way we produced, obviously, where we have got threading lines. We are running fewer than all of our threading lines and we are running among two shifts instead of three shifts. When we had the lay-offs we tried to keep as many of the high-skilled jobs, machine operators and inspectors as we could and reassigned them to lower skilled positions. So, we believe that we can ramp up not the full capacity but to something like 75% capacity on a moment's notice by hiring off the street for the low skilled pipe handlers, paint coaters, stuff like that for lower skilled positions.

ROBIN SCHUMACHER]: So of the various threading lines that you have how many are running?

Well if you measure it in terms of threading shift lines available per week, we are running about 50-55%.

ROBIN SCHUMACHER]: Okay. I wanted to ask you also, Chris, about expandable to tubular connections, I know you are working on a version of your wedge thread connection, which would be expandable. And what if you could give us update on when you expect to have a thread, which is fully qualified for solid tubular expansion.

So we are working with [Rutherford] and others to develop this product. We have successfully tested a sample; we are continuing our testing program and the specific answer to your questions we can't tell. We think, we hope, we believe before the end of the year. Let me say something else about expandables. Altogether by everybody since the beginning of expandables, we have done about 50,000 feet of solid expandable tubular run. None of that has been run with a [metal-or-mould feel] connection. If all of that have been run with a [metal-or-mould feel] connection, including very high introductory pricing, the total market place over the last five years is less than a $0.25 million of premium connections. So even with cold explosive growth in this segment, it will not be material to anybody in the premium connections business this year or next. But we are working on it we are at the front row, we think...

ROBIN SCHUMACHER]: Do you share the optimism of others about the potential for this, the model bore and and so forth.

It has great potential and so does SubSea MudLift drilling. We don't know about the timing but it's not this year for expandables for the connection manufacturers.

ROBIN SCHUMACHER]: Okay, thanks very much.

Thank you, Robin.

At this time, there are no further questions. That completes our first quarter conference call. Thank you for your participation.