Tetra Technologies Inc (TTI) 2002 Q1 法說會逐字稿

Good morning and welcome to the TETRA Technologies first quarter earnings conference call. Participants will be in listen-only mode. There will be opportunities for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. If you should need assistance during the conference, please signal an operator by pressing star then zero on your touch-tone phone. This conference is being recorded. If you have any objections, please let us know by pressing star then zero now. Hearing no objections, I would like to turn the conference over to, sir?

Thank you. My name is Geoff Hertel and I'm the CEO of TETRA Technologies. On behalf of TETRA, I would like to welcome you to our first quarter 2002 conference call. Joe Abell, our CFO will be joining me to participate in this call. As is our custom, both Joe and I will address TETRA's most recent quarter and current operations in prepared remarks. Following this we'll open up the call for your questions.

As you know, our comments today may contain forward looking statements that we believe are reasonable but involve risks, uncertainties and assumptions. Actual results or developments may vary materially from those vested in any forward looking statements. Net income for the first quarter was $3.7 million or 25 cents per share fully diluted which matched the Thomson Financial first call consensus estimate. This compares to 35 cents per share in the first quarter of 2001 or 36 cents per share excluding goodwill amortization for the new FAS-142 requirements. Net income was down 28 percent versus the first quarter of 01 due primarily to our Well Abandonment and Decommissioning, and Testing and Service Divisions falling off their record paces of last year. Despite the weak market conditions, with the average gas rig count and Gulf of Mexico rig count for the first quarter of this year both being down 26 percent relative to the first quarter of last year.

The annualized first quarter performance of the company would result in the second best year in TETRA's history with 2001 having been our best year for the company. Revenues for the quarter were $57.8 million down 20.4 percent versus the first quarter of last year. The gross margin as a percentage of revenues for this quarter was 26.8 percent. Actually slightly higher than the 26.1 percent for the first quarter in 01. EBITDA was $11.2 million for the quarter down 17.3 percent versus the first quarter of 2001. Once again, EBITDA revenues was 19.4 percent for the quarter slightly higher than 18.7 for the first quarter of last year. An annualized EBITDA to net capital employee was 22.8 percent versus 28.1 percent for the prior period. Working capital excluding cash and the current portion of long-term debt, at the end of the quarter, increased by $3.3 million versus the beginning of the year. Investments were $5.9 million for the quarter, which exceeded DDNA of $4.7 million but was more than covered by cash from operating activities. With solid cash flow generation and with a strong beginning cash balance, we were able to follow our investing activities and pay down debt by $12.2 million.

Total debt at March 31, stood at $29.7 million with total debt and total capital at the end of the quarter being 14.7 percent versus 20.1 at the beginning of the year. And debt to trailing EBITDA was .52 versus .71 at the beginning of the year. Regarding segment performance, the first quarter of 2002 profit before tax in the Fluids Division was down 11.2 percent versus the prior period whereas the Well Abandonment Decommissioning Division's profit was down 34.8 percent. And testing and services profit before taxes was down 23.9 percent versus the prior period.

In summary, the revenue margins and returns on investment remain robust. The balance sheet remains very healthy. The revenues and earnings are down reflecting the weak market conditions. Furthermore, internal controls and financial discipline are keeping . With that, I'll turn the discussion back to Geoff.

To reiterate one of the comments that Joe just made, and that was during the last few years, we had positioned TETRA to take full advantage of the up-cycles in our market and we hope to cushion our results during the down-cycles. During last year, 2001, I was extremely proud of our results as each of our quarters' earnings equaled or exceeded the highest earnings ever recorded in any of our previous 80 quarters of existence. However, our industry has many examples of companies that do extraordinarily well in up-cycles but lose money in weaker markets. Therefore, our results during the weak first quarter of 2002 are what should begin to set this company apart from its peers. The 25 cents per share earnings were lower than those recorded in the comparable period last year. However, as Joe stated, if those operating earnings were annualized, they would represent the second-best year in our history followed only by last year. This was accomplished during the severe down-cycle in our markets. And in many respects, I'm prouder of our recent quarter than I was of our 2001 results.

To give you a little of an overview of how we see the markets going forward, we're very encouraged by the recent signs of an anticipated recovery in the activity levels of our customers. While these signs have not yet become actual jobs, they are very encouraging. Some of these factors that we're looking at are the following: First, the increasing E&P budgets of a number of companies. Secondly, increasing seismic activities in certain areas. Third, increasing requests for big proposals by all three of our divisions. Fourth, the higher energy prices are stimulating much of this. Fifth, the expansion of hedging activities by our customers because of the higher well and gas prices and the increased cash flow for 2002 and into 2003 above their budgeted amounts thus giving them surplus cash. Sixth, heightened interest in finding drilling prospects. We're seeing activity in that regard expand dramatically. And then the concern that the natural gas surplus for the first quarter of 01 could now be a shortage by the first quarter of 03, has caused a lot of people to rethink their positions. So, in general we are seeing a much more favorable future than we've been looking at for the last, basically, 10 to 11 months.

Now, let's discuss our operations in particular. First, in the Fluids division, we've recorded profits as Joe indicated of about 11.2 percent versus last year's similar period. The primary driver for this business in the U.S. is the Gulf of Mexico rig count. It constitutes about 85 percent of our business in the United States. It dropped 30 percent from 162 to 114 units during this same period. So, our profitability dropped 11.2 but our major market in this country dropped 30 percent. The integrated nature of our Fluids Division allowed us to outperform the market in this instance. We predicated our 2002 budget on an improving Gulf of Mexico rig count during the second quarter and thus, increasing business to us during the second half of 2002. Remember that we lag slightly because we're in the completion end in the fluids business. All signs to a near term increase in rig activity in the gulf. But last week that count stood at 99.

To increase our fluids profits, we need to see a significant pickup in the gulf activity. Again, we are seeing signs of it but we are not seeing the rigs themselves. By the way, this is Baker Hughes rig count numbers I was using. I recognize there are other numbers we can go by as well. In our Testing and Services, we have added significant capacity and infrastructure since the first quarter of last year. This should mean that a decrease in activity would have a negative levered effect on earnings, because your revenues are declining and you build up a fixed cost base. A primary driver for this business, which is domestic natural gas rig count, has decreased 26 percent from about 898 rigs to 669 in the last year. So, one could assume that our earnings drop would be fairly precipitous with increased costs.

However, our earnings reduction was less than 24 percent, less than even the rig count reduction. Our loyal customers have given us a larger portion of a shrinking market essentially. We believe this is attributed to the following: One, exceptionally trained and motivated personnel. Two, an exemplary safety record, which is very, very important in the testing business in particular. It's important in all of these businesses. But it's much more important in all of these businesses but much more so in this business. Three, geographic diversity of both our personnel and equipment allows us to take advantage of the pockets of business that are good in weaker markets. Or, our ability to access majors (meaning the larger oil and gas companies as customers). And then, five, the industry perception that TETRA is a consolidator and they want to be in some fashion tied to us.

To achieve our 2002 goals for testing, we need to see an immediate and significant increase in the natural gas rig count from the current 613 units. Again, given what we have seen from our customers recently, we believe this is going to occur. In Well Abandonment and Decommissioning, quarter profitability year to year was down 34 percent. And yet we have stated that our backlog continues to increase. So, why is there a disparity between those two numbers? There are three reasons we have primarily been talking to you over the last year, that this business is a seasonal one. That in the first quarter, you always have weak markets. Due to the fact that a lot of our business is either in the water of off shores in the Gulf of Mexico, and it's impossible in some instances to get out to work. So, that is an important issue.

But, when you look at the three primary reasons - first of all, we need an infrastructure in this business that can accommodate the business that has grown, on average, 65 percent per year in each of the last two years. That has forced us to add people and equipment at a very rapid pace during last year to accommodate what we expect to see in 2002. Unfortunately, since this is seasonal and therefore these fixed costs impact us much more in a seasonal factor when you have a weak quarter than when you have a strong quarter. We have ended up with a drop of 34 percent in profitability. Not to be unexpected. The weather conditions in the first quarter were horrible for our decommissioning work.

In addition to the normal seasonal problems, the first quarter of 02 was relatively one of the worst periods in the last decade. And if any of you follow any of our competitors I think they've all told you the same thing. Much of our business in the well abandonment and decommissioning was, therefore, effective. Third, in attempting to perform decommissioning work, our heavy lift vessel experienced unusual weather conditions and was actually damaged. We also needed to modify this vessel to accommodate the expanding workload that has been brought on by our recent backlog. We therefore chose to bring the vessel in and perform repairs and modifications. We do not expect to use the vessel between February and early June. We believe we can make up this shortfall but utilizing other equipment and working our vessel continuously during June. Should that not be the case, and it not be available during the second quarter, the activity will be deferred to the third and fourth quarter. We've lost no jobs because of this for the year. But it's possible that we're going to have to defer some of this into the second half. Right now we're not expecting to but it's possible we'll have to.

We're very excited about our expanding relationship with many of the major operators in the Gulf. And during the first quarter we signed additional contracts for significant work in that area. So we are continuing to build our backlog and our relationships and we continue to feel that this is a very strong growth business for us.

From a financial perspective, we continue to look for synergistic, accretive acquisitions within our core business units. The weak markets have made some of the sellers more realistic in their values that they assign to their assets. More importantly, our performance has generated interest from various prospective sellers. And we are continuing to actively pursue this method of expansion. And we would hope to be able to land a couple of these acquisitions in the relatively near future. Our current long-term debt position, as Joe pointed out, puts in an enviable position as it relates to acquiring. By year-end 2001, we had reduced this long-term debt by 66 percent down to the 41 million he mentioned over the last three-year period. And at the end of the first quarter, we had dropped that 41 back to 29. We are essentially unlevered and have plenty of firepower within our bank line alone to become an active acquirer if the opportunities present themselves.

Finally, I'd like to talk about earnings guidance. During the last three months, almost the entire oil and gas services industry has reduced its earnings guidance. The upturn in activity has been slow to materialize and that has caused most of the shortfall. TETRA is obviously affected by this same shortfall. If we believe that the market improvement would be slow to develop, our guidance is too high. However, given the more optimistic outlook being suggested by our customers, we're going to leave our guidance in place, as published, at $1.45 to $1.75 per share until we see what the activity levels really look like during the next 45 days. We think that is essential. So, our guidance will remain in place until we see if the activity levels that the people that we are working with have suggested is coming, truly comes into play. With that, I'd be happy to ask - answer any questions. Operator?

Yes. At this time, if you would like to ask a question, please press star then one on your touch-tone phone. If you decide you want to withdraw that question, press star then two to remove yourself from the list. And the first question today comes from Jim Rollyson of Raymond James.

Hey, good morning guys.

Hi Jim.

A couple of things, Geoff. You talked about which is out for both I guess damage repair and upgrade modifications. And you're going to utilize existing equipment or other people's equipment for the time being on the heavy lift side. Do you think, assuming that we go back to a normal seasonal summer month type of weather patterns -- and utilizing other people's equipment, which you used to do previously. Do you still feel, at this stage, and given your backlog, good about your guidance in that particular Division for the year?

Well that's the $64 question. I think that the guidance for the year for that Division is very realistic. The problem that people have - the problem that people have - we have never given guidance by quarter, as you well know. And therefore, it's difficult for people to guess where business should be when we budget it internally. A lot of that business was going to be done from late May through September, October. If we get the out for June, there shouldn't be much impact on the year at all. We should be able to get most of that work in during 2002. If for some reason -- which we do not anticipate -- that we wouldn't get it until, say the middle of the third quarter that obviously would reduce our Well Abandonment Division. But right now we expect the Well Abandonment Division to do what we projected earlier, five months ago. If we determine that we want to reduce that, due to activity, we will. But again, it's not drilling driven as our other two businesses are. The testing business domestically is very much affected by the gas rig market and our fluids business is very much affected by the Gulf of Mexico drilling market. While the Well Abandonment Division, is affected by our backlog, which continues to grow. So right now, the answer is we're not going to change anything for the year. However obviously, you may push some of this into the third or fourth quarter.

Sure. Probably has, theoretically, a bigger impact on your margin versus your revenues. Without that that's just - Can you give us the SG&A and the D&A for the quarter?

They're getting it right now for you.

OK. Your fluids margins, surprisingly, went up quite nicely during the quarter. Any specific comments related to that?

Number one we didn't see significant drops in price, which would have reduced them. Number two; the fluids business is a function of where that activity takes place. Meaning there are some foreign areas where you have higher margins. And also what type of fluids go into the mix. And as it turned out, the type of business we were doing, the geographical area in which we were doing it, and the type of fluids that we work with generated margins that were at least comparable to the previous year.

And pricing, as far as you guys are seeing, is still pretty much holding in there?

Pricing deteriorated last year for part of the year and there was some price reductions - some but modest this year - but again, it depends upon which fluids.

Sure. But overall, generally, it's been holding in?

We're doing very well on pricing. Actually on all of our divisions, which you could tell, our margins are not deteriorating to the level that some people have expected. That's your answer.

Jim, the G&A was 9.4 million for the quarter and DD&A was 4.7 million.

OK. Thanks Joe. And the last question from me, just also on your testing margins obviously as activity slows down a little bit, your margins came in a little bit. Where are you seeing margins on kind of a current run rate? And what's your prospects for anymore contracts in, say, South America and Central America?

Well, I'll try to answer those as you asked them. First of all, the most important aspect of testing is safety. Pricing certainly is important in getting contracts but it may not be quite as important as it is in some other areas. Thus, you wouldn't expect to see major deterioration in margins especially if some of your business is under contract which some of ours is. So, we are not looking for significant reductions. In fact, I'm not sure we're looking at material reductions in margins over any extended time period here. As to new contracts, you may be aware of some of the new discoveries that have been made in Mexico (gas discoveries). It is conceivable that we could get additional business in Mexico and that is one of the areas where we have some of our equipment currently. Obviously, Venezuela is a market that we would like to see build. That has not been a good situation heretofore. And then, in the Easter hemisphere, an area that we haven't talked about much, this is a $150 million market but it's strewn all over hither and yon versus the $250 million market in the Western Hemisphere. There are some opportunities that are showing themselves and TETRA may take advantage of those over the next six months. That would be a new market and a new area for us.

OK. Thanks Geoff.

Our next question comes from Lewis Kreps of Frost Securities.

Well Geoff, congratulations on doing a good job in a tough market.

Thank you.

Geoff, can you quantify the backlog in well abandonment? Can we put a dollar number on it or is that not possible?

Mr. Kreps, are you still on the line?

Yes.

Mr. Hertel? Apparently there's something wrong with our line. Please hold on.

Geoff?

Mr. Kreps continue.

Geoff did you hear my question?

I didn't.

Geoff, I was going to say could you quantify the amount of backlog in the well abandonment area.

That's difficult. And let me tell why that's difficult. As most of you are aware, we have normal contracts, we have turnkey contracts, and then backlog as it's reported is when we have acquired a companies' property in exchange for the plugging and abandonment. It actually goes into backlog. Because contracts that are more like a turnkey do not - for instance the Seneca Range contract of last year which was 30 million and some dollars. It is shown in backlog in some areas and not in others. When I give you a number, it would be difficult for you to correlate it versus a prior year number. I guess what I can tell you is that we have added some $20 to $40 million in the quarter. What the base number is, is a very difficult number to come up with because of the issues I just related to you.

What would you say - let's look at it a different way, Jeff - as far as the number of projects you're looking at compared today to three to six months ago. You're seeing increased inquiries? Is that correct?

We these project on four levels. If you take all four of those levels as to what we're working on today versus let's take a year ago. First of all, let's go back to February 2001. We had two projects, two main projects we were looking at. Going back six months ago we were working on twelve to fifteen. Today we have some 33 or 34 projects that we are actively bidding on or trying to bid on depending on whether we think it is appropriate or not. That's part of the problem when you look at this division. We have added engineering talent that is necessary to help make these bids. Both from a well abandonment side as well as from a decommissioning side and where necessary, from an oil and gas reserves side. That's part of this infrastructure increase that we've talked about. So we are right now looking at, if you want to take a multiple increase, 16 times more projects than we were 15 months ago. It's not a question of needing the projects. It's a question of getting them bid accurately and then putting them into queue to be able to do the work. Very substantial increase even in the last six to nine months.

Geoff with the purchase of by , is that going to or not and how?

We said on that last conference call that we didn't think that was going to to us one way or the other. Clearly on the retail side if I can say, relating to how we operate on an integrated fashion, always been a very good competitor. And is clearly a company. So we don't believe that there's going to be much change. We've had a very competitive environment with and we'll have the same competitive environment with .

From a wholesale perspective, as you many know, was owned by Great Lakes Chemical and I guess if the acquisition goes through at least 50 percent. That opened the access to brominated products that they may have after this transaction is consummated. Since we are a wholesaler to some of our competitors of that product, it's conceivable that we may actually from the wholesale level when this transaction goes through. I'm not suggesting that there's anything out there today in the form of an agreement with anybody because the people at are going to do anything along that line until they actually own the company and have decided they want to do it. But it does have the potential to enhance our business.

Geoff you've done a great job lowering the debt and you mentioned that earlier in your comment. You know, how low are you going to go? Or will the acquisition that you're thinking about or looking at these days make your debt start going back up this year or are you going to fund your acquisitions with cash flow? Or what's the situation there as far as you see it at this point?

Well let me give you a general answer and then let Joe make a specific comment if he wishes to. The general answer is that I would like to see TETRA with about 30 percent debt because I think it gives more leverage to our shareholders ultimately. However if we're going to add that debt it needs to be in areas that are core to our business area, accretive to our earnings, and something that strategically fits. And if we find such acquisitions, we intend to increase our debt because we don't expect to give stock especially since we're selling at a discount to our peer group in this environment.

I think that's exactly right, Lewis. We're in the fortunate situation of generating plenty of free cash flow. We're not going to spend that free cash flow unwisely. If they're not good opportunities, we're going to pay down the debt. That's just a simple, logical, matter of fact. On the other hand, we have plenty of spare borrowing capacity and we're not afraid to use it. So, when the right opportunity comes along, and it's purely opportunity driven, which we can't control. Those are random events. We're more than happy to increase that at that level.

OK. Gentlemen, thank you. I'll let somebody else ask some questions.

The next question comes from of . Mr. Hutchinson just dropped off.

Let me put the next question through. of .

Hi Will.

OK. First of all, what was your interest expense in the first quarter?

We're getting it. Just a moment.

OK. Another financial question would be; I think you indicated your G&A rate was about 9.4 million. Could you give me sense of what's a run rate for that kind of going forward? And the other question would be, based on what you're seeing today, do you think the first quarter represents the bottom in terms of the Fluid and Testing and Services Divisions? Or do you think that the second quarter might be more likely to be the bottom?

Well, let me answer the last question and let Joe answer the first two. The last question related to services and testing. I would expect the testing profitability to be enhanced somewhat in the second quarter so it depends on how quickly the rig count for gas drilling picks up. But that one conceivably is going to be flat to up. The fluids business is a real question. Again, you've gone from 114 average in the first quarter in the Gulf to currently 99. If that doesn't pick up dramatically, then it's going to be very difficult to equal in the second quarter, the first quarter in fluids. However, if it does pick up, we ought to be able to be pretty close to that and then of course the well abandonment business ought to improve as we go throughout the year.

Interest expense was $740,000, Will. And while I was looking for that number, I didn't catch your second question.

Oh. The G&A number in the first quarter I think you said was 9.4 million. I wonder if you could give me a sense of on a going forward basis where you would kind of expect that to be.

OK. That's ...

Is that a good run rate?

Yes, I might answer that. The one thing that we have done is we haven't added personnel in certain areas where we anticipated the market to improve later in the year. And therefore, I would expect that to go up some as the business goes up. However, it's not going to be any kind of a quantum jump. Is it going to be 40 to 42? That's probably a good number, maybe 40 to 43 for the year. It really is going to depend on how quickly the market comes back.

OK. Thank you very much.

If you want to ask a question, please press five and one on your touch-tone phone. We have Mr. in the queue.

Sorry guys. Technical difficulties on my end.

That's all right. We just had one ourselves.

Just - and I caught the tail end of one of the questions - we've just talked a lot about rate count or activity levels for the year. Can you guys give us some insight as the year unfolds? What do we need to see? Or do you have rate count estimates or assumptions that are driving the earnings guides that you have given that we can use as a barometer for sort of how well or how - the chances of you meeting these estimates at this time?

We did do that. If you go back to the January 25 earnings guidance, what we've tried to do for you is not only give you profitability by division so that you can determine whether we're within the parameters that we suggested. But also, give you the various assumptions that need to be made. And in that press release as it relates to Gulf of Mexico rig count, we said that we were expecting about 110 in the first quarter. Well we had 114 and consequently your fluids profitability was at or above what we had internally estimated. We expected that that would rise to 139 units by the fourth quarter and average 128 for the year. We did not go through all four of the quarters for 2002. But that ought to give you a pretty good idea of what our expectations were. Obviously, if you have 99 units in the second quarter, that is not what we had in our projection. Secondly, the U.S. natural gas rig count. We had estimated 650 in the first quarter and it was 669. So, our testing business was actually not much different than what we had estimated. We expected that to rise to 820 during the fourth quarter and average at 735 units. That seems to be fairly appropriate at this point in time.

OK. That's great. And one quick question from a modeling perspective. If we look at the Fluids Division and the well testing part, are you able to break out the international component at this time of each of those divisions?

We are but we don't do that on a quarterly basis for competitive reasons.

OK. Fair enough guys. Thank a lot.

Our next question is from Allan Cohen of First Analysis.

Hi this is Corey Greendale for Allan. First of all, let me add my congratulations on delivering 25 cents of earnings in a tough environment. Is it possible to quantify what the impact was of the Southern Hercules getting damaged in Q1?

I'm sitting here thinking of how to quantify that. There were really three aspects of this. One is the overhead and costs associated with going out and trying to work in the quarter. That had nothing to do with the damage. We, because of the backlog that we're building, wanted to try to work this, if at all possible, during the time of the year that most people park their vehicles or their vessels. We probably lost a quarter to a half a million dollars of expenses that we had generated where we didn't have associated revenues because we were trying to do something that the weather wouldn't allow us to do. It might have been larger than that but that's a good number.

As to costs associated with the Southern Hercules and the damage, there was to be business in the latter parts of March in our budget. That did not materialize. That was probably another quarter to half a million dollars. As to expenses such as deductibles for insurance and so forth, that isn't anything that we have worked with yet and it did not affect the quarter at all. In order of magnitude, that might be what it was. That is not, again, the primary reason that you saw earnings declining in the quarter. The reason for the decline in the quarter was that we are building this company to accommodate $100 to $130 million dollars in revenues this year and to do that we have had to add by 2001 to 2002 substantial infrastructure to accommodate that. And those costs are just a lot higher on an ongoing, everyday basis than what they were before. And when you get a seasonal business like this in the weak part of the year, you would hope that you wouldn't give away all your profits. And we're actually quite happy that we were able to make what we could given that environment. So, it was exacerbated by the problem with Southern Hercules but it was really a function of the time of year that you were trying to work.

OK. Thank you.

Press star then one to ask a question. Gentlemen, we show no more questions at this time.

Thank you very much. On behalf of TETRA, we appreciate the time that you all spend and appreciate you as shareholders, those of you who are.