Tetra Technologies Inc (TTI) 2004 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Tetra Technologies Fourth Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS). Thank you. Mr. Hertel you may begin your conference.

Good morning, and welcome to Tetra’s Conference Call, addressing our 2004 Fourth Quarter Earnings. With me today on the call is Joe Abell, Tetra’s CFO. We’ll be making a short presentation, which will then be followed by your questions.

I must remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by Tetra, based on a number of factors. Statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company. You are cautioned that any such statements are not guarantees of future performance, and that the actual results may differ materially from those projected in the forward-looking statements.

I also want you to be aware that many of the statements today will refer to data included in today’s press release. Therefore, we do not intend to reiterate all of that data, unless responses to your questions require it. Joe, would you start the conference call please?

Tetra’s revenues for the fourth quarter of 2004 were $109.2m, 45.3% above the fourth quarter of 2003, despite the fact that we were still suffering the after-effects of Hurricane Ivan in October and November, and despite the impact of the holiday season in December. This marks the highest quarterly revenues in the Company’s history, due mainly to the acquisitions we made in the second half of the year, but also owing to improvements in our existing businesses.

Sequentially, revenues were up 21.4%. Gross profit was $25.4m, 47.9% above the prior year’s fourth quarter. This was the highest quarterly gross profit in Tetra’s history. Sequentially, gross profit was up 14.3%. General and administrative expenses, however, were up 41.4%, to $15.6m, due mainly to the G&A associated with the acquisitions, higher salaries, incentive compensation and benefits, as head count has grown in our existing businesses, higher consulting expenses, including those related to Sarbanes-Oxley 404 compliance, and higher insurance and workers’ compensation expenses.

Interest expense, net of other income, was approximately $1.3m in the quarter, compared to positive $128,000 of interest income and other income in the prior year’s period. Therefore, income before taxes and discontinued operations was $8.5m, up 35.1% compared to the fourth quarter of ‘03, and up 14.7% sequentially. Net income for the quarter was $5.9m or $0.25 per share, full diluted, compared to $4.2m, or $0.18 per share, fully diluted, in the same period last year, an increase of 40.1% year over year.

Net income was up 15.9% sequentially. Revenues for the 12 months ended December 31, 2004 were a record $353.2m, up 10.8%, compared to ‘03. Annual gross profit was a record $81.4m, up 10.3% compared to 2003. Annual income, before discontinued operations, and the cumulative effect of a change in accounting principal, was $18.1m, or $0.76 a share, compared to $19.4m in 2003, or $0.84 per share, or a 6.9% decrease.

Looking at performance by division, revenues for the fluids division for the quarter were up 60.9%, compared to last year’s fourth quarter. And profit before tax was $4.7m, up 60% over last year’s fourth quarter, and up 47.9% versus the third quarter of ‘04. Revenues in the well abandonment and decommissioning division were up 18.3%. And profit before tax was $5.4m, up 29.8% compared to last year’s fourth quarter, but down 4.2% sequentially, due to the seasonality of this business.

Revenues in the Production Enhancement Division, previously called the Testing and Services Division, were up 72.7% in the current quarter, and (indiscernible) tax was $4.5m, an increase of 138% versus the prior year’s quarter, and up 47% versus the third quarter. Our debt increase $7.6m over the quarter, as we continued to grow our businesses. The majority of this increase funded working capital in our European calcium chloride business that we purchased at the end of the third quarter, in an acquisition that excluded accounts receivable.

Since the beginning of 2005, we have paid down a similar amount of debt, due to debt borrowed during the fourth quarter. Cash flows in the remainder of 2005 should be sufficient to continue paying down debt, or to fund additional growth. With that, I will turn the discussion back to Geoff.

Thanks Joe. As most of you know, we had a pre-release conference call and press release on January 13. At that time, we went into a fair amount of detail relating to our fourth quarter. Our final audited numbers that Joe just discussed were approximately what we had estimated on January 13.

Consequently, after a very short discussion on the fourth quarter, many of my comments will be directed toward the current business environment, and our outlook for 2005. First, a short summary of the fourth quarter. As we had indicated previously, earlier in the quarter we were negatively impacted by immigration issues relating to the three largest acquisitions in our corporate history, all of which occurred and closed in the third quarter.

By December, many of these issues had been dealt with, December generating approximately 40% of our quarterly revenues, and well over half of the fourth quarter earnings. Now, while December was good, October and November were not particularly good. But I thought it was kind of interesting, when you take a look at the fourth quarter as a whole, and see how it related to the rest of 2004, and what that should bode for 2005.

In fluids, in the fourth quarter, 33% of our annual revenues occurred, and 30% of our annual earnings. In well abandonment, which is seasonally weak in the fourth quarter, 28% of our 2004 revenues and 32% of our 2004 earnings were generated in the quarter. And in production enhancement, a third of our total 2004 revenues occurred in the quarter, and fully 40% of our 2004 earnings were generated.

I used these statistics to help you appreciate the significant changes Tetra has undergone in the last six months. Some of these changes are the Compressco acquisition, the Kemira calcium chloride business acquisition, the Arapaho derrick barge acquisition, the redeployment of a significant amount of our domestic testing fleet, reestablishment of activity under certain contracts with our largest international testing customer, and right sizing our Inland Waters business unit to accommodate the existing market.

So what does all this mean for 2005? Our guidance that we gave you in January included the highest revenues, gross profits, earnings, and earnings per share in our corporate history. Some of the reasons for this enthusiasm, in addition to the items that I just enumerated, are the following. In fluids, we are seeing an improving drilling market in the Gulf of Mexico and parts of the North Sea, which is something we had hoped for, but were reluctant to bank on.

Also, the recent bankruptcy and plant shutdown of the calcium chloride operations of General Chemical has created an increased demand for our calcium chloride products in parts of the U.S. and Canada. In well abandonment and decommissioning, we are seeing increased activity or indications of future activity, as operators begin the abandonment process for certain properties acquired in 2003, and in 2004.

Also, in 2004, one of the negatives to this business was the fact that you had very high prices for commodities, which kept some properties producing longer than they normally would. There is a natural offset to that, that you are seeing now. And that is that the increased cash flow that you’re generating, available for abandoning properties today, is helping to offset the negative impact of these higher prices, and the desire of operators to keep even marginally producing properties producing.

Thirdly, worldwide demand for heavy lift derrick barges is helping to tighten the market for these services, even in the Gulf of Mexico. And finally, a number of Gulf of Mexico property packages should be available for Tetra to bid on between now and May.

In production enhancement, we’re beginning to open up international markets for Compressco. Now obviously I am not including it as an international market in Canada, where Compressco is a significant market factor already. Compressco is currently expanding its fabrication facilities, to increase output by over 50% at its major facility in Oklahoma City.

Also in this division, the acquisition last year of the Venezuelan testing company, Pema, has significantly increased our activity in that country. And finally, the Gulf of Mexico testing activity has also begun to improve with drilling.

The conclusion that I draw from all of this is that the strength that we saw in our markets in December was no fluke, and should continue in 2005. To date, in the first quarter, activity has remained strong for this time of year. And I underline that, because remember, Tetra’s earnings are very seasonal, with our second and third quarters representing a large portion of our annual earnings, possibly 60-65%.

The fourth quarter is typically the third best quarter. And the first quarter is typically our worst quarter. So, going into the first quarter with it being the lowest, I think most analyst expectations generally reflect this seasonality. And we’re comfortable with the direction that they’re showing.

Now I will open up the conference call to your questions.

(OPERATOR INSTRUCTIONS). [Ray Cramer] with First Analysis.

Good morning guys. A question. In the press release you commented that Compressco was doing a bit better than you expected. Is that something driven more by volume? Do you get any price increases there? Can you give a little more detail on that? I think prior to the acquisition it had been about a 15% EBITDA grower. I mean are you seeing numbers getting up into the 20s there? Or just a little more color on that if you could.

All right. I am not sure I am going to give you an exact number. But I will explain why we think that there is more growth there than what we budgeted originally. When we bought the Company, we looked at what they had done as a standalone business, and thought that it was not appropriate for us to put in any synergy business, such as the international business we’re talking about, such as business with some of our larger customers, that they may not have been operating with previously.

What we’re finding as we have begun this integration process is that there are a lot of opportunities for the quality staff of Compressco in our marketing group to do things that Compressco on its own was unable to do. We also have the advantage of having a balance sheet that allows them to grow more rapidly than they could have previously. So what we’re really seeing is the beginning of the synergies that we would hope that would push this acquisition to very good profitability over the next couple of years. So that’s really the difference that we’re seeing. It’s not pricing. It’s really increasing market share, both within their markets, and geographically.

Okay, great. And then on the well abandonment and decommission side, I know I mean probably for activity in 2005, you’re going to have to have bid and won contracts in the next 30-60 days. Can you sort of give us an update on how it’s looking, how much activity is going to fall in ‘05 versus ‘06/'07? And, based on what you’re seeing, are you more comfortable with the low end or the high end of your revenue range for abandonment this year?

Well, first of all, a lot of these packages that we bid on will be available for bids between say now and May. So it’s a little difficult for me to give you a real good assessment of how many we’re going to win. But let me step back a minute, and make sure everybody understands this division. This division has a number of parts to it. The four most significant parts are the decommissioning, the abandonment, the Inland Water component, and Maritech.

Last year, at this point in time, we were looking at activity that we needed to put on the books to justify our budgets in three of those four areas. We were relatively comfortable with Maritech. However, we were looking at Inland. And, if you remember back then, we were modifying it, restructuring. I don’t think the accountants like that term. But we were putting it in a different format than it had been operating in previously.

And then in the abandonment and decommissioning, you had some work that was subject to day rates or turnkeys or lump sum. But you needed a number of packages to fill out the year. And so you had three of those four that were in question. This year we again feel relatively comfortable with Maritech. And we feel very comfortable with Inland, given the turnaround that has occurred there. And with the Arapaho purchase, we are getting other business, other than package business, in our decommissioning.

So, this year, while we still need to acquire packages, I guess I could say it would be for half of decommissioning, and all of the off-shore abandonment. So you have one and a half question marks today, versus three out of four question marks last year. So, to answer your question in general, I am much more comfortable with the numbers that we have today, because two and a half of those items are relatively well positioned versus one of them last year.

Okay great. And then just one sort of follow-up there. I know I think the last time we talked there were some big hurricane type packages that were sort of being held up by the insurance companies. Have there been any movement there? Are you seeing any of those start to open up for bids yet?

We have not seen any open up yet. These costs continue to escalate on these projects. They’re continuing to do evaluatory work. In some cases, this is in parts of the Gulf of Mexico, where you have very, very strong currents currently, because of all the water. And they’ve been unable to do some of the evaluatory work that they’d hoped to do. It may be the summer before they even get that done. And I am talking about the evaluation, not the work.

Okay. All right. Thanks a lot Geoff.

Jim Rollyson with Raymond James.

Geoff, it sounds like the only thing that’s really materially changed from your crystal ball a month ago is maybe the General Chemical leaving calcium chloride, finally, the business, and the Gulf of Mexico rig count, the fact that it’s running up higher than what you guys set your budget at, running around 100 rigs now. Is that fairly accurate?

Yeah. I am trying to remember back to a month ago. But yeah, that’s probably an accurate statement.

I mean we obviously, you spent a lot of time a month ago going through your budget, and just basically pretty much everything. It doesn’t sound like, except for a couple positives, that maybe gives you the higher end of your range or something, that for the most part, things are still tracking kind of what you thought.

I guess I’d say it a little differently. I’d say a month ago we saw what December had done, and we were questioning whether that was a continuation or an anomaly. I think today we would suggest that is a continuation.

Very good. And just in Maritech, given where commodity prices are today, or specifically oil prices, just wanted to get your thoughts on your hedging strategy, if you guys generally do a lot of hedging there, or what your thought is there.

We currently have a portion of our oil hedged, and none of our gas hedged. That hedge this year is up materially over the hedge last year. The reason for that is that we have some high cost properties, obviously, given the fact that they’re late in life, a nominal amount of production. And we need to lock that in. So we have locked that portion into our current operations.

I would suggest that if we were to buy any additional properties, and have to use the higher prices that are currently en vogue to buy those properties, you would probably have to hedge that to a great degree. So you would see additional hedges come on as you would buy properties.

Right. And lastly, just now that Superior has obviously gotten into the business, kind of are you seeing running into them a lot in the property transactions today, versus six months ago, a year ago?

Six months or a year ago, they were in most of these as well. If you went back a year and a half ago, they weren’t in many of the data rooms. Yeah, they’re in most all of them as you look at it today. Absolutely.

Okay. And Joe, last thing, G&A you mentioned was up for a variety of reasons, Sarbanes-Oxley, etc. What’s your expectation there for a run rate for ‘05?

I think it will be higher Jim. Maybe use something similar to what we had in ‘04. Sarbanes-Oxley expenses should come down. But then, we will, for this year, have a full year of the additional G&A associated with the acquisition.

So somewhere kind of between Q3 and Q4?

Q3, Q4.

Okay. Or $14.4m and $15.6m between the two.

No. It will be higher than that.

Okay.

It’s probably closer to $17m to $18m.

Didn’t we provide that in our guidance? Let me check that Jim.

No. The guidance has it by division, and then corporate. The total is something in the order of $17m to $18m a quarter.

Okay. Thank you.

Wil Foley with Sidoti & Company.

Good morning. First question, just trying to get a flavor here for just kind of just what your – how the March quarter is looking. Maybe if you could just quickly talk about by business, what kind of trends you’re looking at, I guess March quarter versus December quarter.

Well, seasonally, you would look for the well abandonment group to be off versus the fourth quarter. Again, the biggest seasonal factor we have in the company is the well abandonment and decomissioning. And a large portion of their profitability is typically the second and third quarter. And again, the fourth quarter being better than the first quarter.

So one would presume that that business would be off. Now if it’s not off much, that would indicate a pretty strong quarter. But, theoretically, that should be off. Your fluids business would be relatively static, one would assume. And your testing business will have improved, if you assume that Compressco is static up, as you move forward. You ought to see that division better than the fourth quarter.

So when you kind of add it together, if you had to kind of guess off the top of your head, you’d say that production enhancement would be better, well abandonment would be worse, and fluids would be relatively stable.

Okay. And just getting back to your comments about the Gulf of Mexico drilling activity, I know we have seen some move in the rig count. I mean are there other factors out there, that you’re seeing, that’s kind of giving you more optimism in terms of GOM drilling? I mean obviously we’ve been waiting for an improvement here for some time.

Well again, I am not probably the best person that you should ask on the Gulf of Mexico rig counts. There’s a lot of drilling operators out there that can give you better data. But what we’re seeing is we’re seeing, on properties, that we have people drilling on Tetra properties, or Maritech properties, we’re finding that they’re having difficulty getting rigs. We’re finding that they’re having to take rigs for longer periods of time. And there’s a lot more backlog to those operators in terms of what they’re intending to do. So, with that, we’re expecting to see a pick-up.

Again, you will have a limited amount of rigs there, compared to what you had a few years ago. So you’re not going to go crazy. But anything about 100 would be a blessing, compared to what we’ve been looking at.

Okay. And in terms of the production enhancement segment, can you give us a sense of the breakdown between testing and Compressco within the division in terms of revenue?

We don’t generally do that. I will tell you that you can go back to the public data that was available with Compressco before we bought it. And I think they were at a run rate last year of something in the order of $35m, give or take.

Okay. And lastly, I guess the testing division was kind of held back over the last 12 months by a variety of issues. I mean do we finally kind of have those issues behind us, and looking at a pretty good year for testing as we look out into ‘05?

We believe so. And I think the proof in that pudding will be in the first quarter. If the first quarter is better than the fourth quarter, by any kind of an amount, it’s probably going to be the testing area, and not necessarily what you’re seeing in Compressco, remembering that Compressco is a good stable growth environment company, but it’s not likely to be pressing the envelope at big increases on a consistent basis, because it’s, to a great degree, a business that is lease oriented. And therefore, that doesn’t fluctuate a whole lot.

So if you see what we think you’ll see, and I just alluded to, and that is an improvement quarter to quarter in our production enhancement division, you can assume that’s out of the testing side to a great degree.

Okay. Last question. The fluids margin, I guess sequentially was down somewhat in the December quarter, although obviously revenue was up strongly. And what do you attribute that to?

Product mix. And you will probably continue to see that in the early part of this year, as there have been very significant price increases in brominated products at the wholesale level, to all of the customers. And that includes where we don’t make our own, where we’re buying it from somebody, and then selling it, as all of our competitors have the same situation going. You’ve had a significant increase in bromine costs at wholesale.

Okay. Thanks a lot.

Lewis Kreps with Aperion Group.

Geoff, following up on the last question there on the pricing, you put through a calcium chloride increase here recently, price increase. Are we going to see this year, across all of the divisions, increases in prices, both in fluids and testing? I mean are you raising prices at this point in time?

Well, first of all, in fluids, there is no question that you’re going to see brominated prices go up, for just the reason I just told you. And that is the costs are going up dramatically. So if you don’t raise prices, your margins are going to go to zero. So obviously you’re seeing price hikes where you can on the brominated side, just to make up the difference in terms of the cost increases.

I don’t know that you’re going to see tremendous increases in the fluids side. However, historically, and I will just go back to historic cyclical pricing, the pricing in fluids usually lags an up-tick in activity by 6 months to 15 months. And, given that, it would be appropriate to see pricing moving up some this year, and hopefully margins. We would expect to see margins by the end of the year improve over where they were in the early part of the year.

Okay. Geoff, people wise, the drillers are starting to get short on people. Are you seeing any problems in your three different segments?

In general, and I’ll then go to the specifics, in general we have a lot of capacity in a number of our businesses that would allow us to increase activity, without having to worry about a lot of personnel. However, in areas like Compressco, which has continued to grow, and areas like Maritech, that has continued to grow, where there is obviously a lot of competition for good geophysicists and scientists, there is obviously a lot of competition there. And the answer is we’re always having to add as business picks up.

Fortunately, or unfortunately over the last year or two, we’ve kept a lot of our quality people, even though they weren’t fully utilized in some of these positions, because we didn’t want to give them up. The disadvantage is that you eat those costs, as we did in 2003 and 2004. The advantage is you don’t have to go out and add a tremendous amount of personnel as the market picks up.

Okay. And my last question, Geoff, it seems like all the stars are aligned in all the different divisions and segments. Just what are your concerns for ‘05, if there are any?

Well, obviously the things that will be real important to us on a go forward basis, in fluids we need to offset the cost increases in the brominated products. In well abandonment, we would certainly like to get two or three of these packages, so that we could do additional base loading. As you noticed, even in 2004 though, we added to our backlog of potential business in a very poor market. This is a much better market. So we’d like to make hay when the sun shines.

In our production enhancement area, we’d certainly like to add some additional businesses. So I guess the negative in looking forward is that we are hungry to expand this Company internally and externally. And in a real good environment, it becomes expensive to do that. So you’ve got to look at other ways to enhance your businesses.

Okay. Thanks Geoff and Joe. Appreciate it.

Byron Pope with Pickering Energy Partners.

The press release speaks to the right sizing of the Inland Water business. I am wondering if you can help us kind of size what’s happened in terms of costs that you may have taken out of the system. And then on the revenue side, what you’re seeing in terms of activity levels for that business, relative to maybe a year ago.

When we got into the Inland Water business, we got in because we got what was at that point Texaco as a customer. Texaco had a large portion of the Inland Water wells in Louisiana, where most of these wells are located. Texaco merged with Chevron. We still got a fairly good amount of business. Some of those properties have now been sold to independents and others, who may not have the same abandonment philosophy that the majors had. And I am saying that kindly.

In that arena, where at one time we had as much as 65% of that business, we needed to make a decision in late 2003 into 2004. Would we continue to hold onto all of the equipment, keep it up and operating. Would we continue to hold the crews. Would we do some of the things that we needed to do, to be able to go back to a 65% market share. And we looked at that very hard.

And we probably looked at it too long last year. And we finally made the decision, particularly in the third quarter, to get this thing right sized. By that I mean we went out and said how much of this equipment is going to operate in a market that we would envision for the next two or three years. And we accommodated that market, if you will, with changing the size of what we were doing, both in how many units we were running, and how many people we were running.

That could come back and bite you, if that market picks up dramatically. However, we haven’t seen it pick up tremendously. It has increased to some extent. What does that mean? It means that our revenues in that division might be the same this year as they were last year, except that we’re budgeting a nice profit this year, and we’ve lost money both of the last two years.

In fact, I think we earned money in December that was the largest monthly profit we’d made in the last two and a half years. It was also the largest quarterly profit, if you accommodate that in the last two and a half years. And it was the largest annual profit in the last two and a half years. So when you look at it in that fashion, we think we’re positioned correctly. We’re not going to step out and add back equipment and personnel until it becomes an extremely tight market, which it is not yet.

Okay. And last question, just relating to the integration status of TCE, and specifically wondering if you can address opportunities that may have surfaced, that weren’t really apparent pre-acquisition.

I believe the way that we couched that acquisition to you at the time was that we felt very comfortable with our North American position. And we felt comfortable with our ability to access product into Southeast Asia. And we were a large marketer into the Middle East and into Europe in the North Sea. But we really didn’t have the advantage logistically that we had in the Gulf Coast.

So when we acquired TCE, we replicated that logistical advantage that we have had in the United States over the last few years. That profitability, when it was acquired, was the profitability that the Company had as we bought it, meaning that we just brought it over at the level of activity that we saw. We told you at the time that there were a lot of synergies that we expected to have between our operations, once this got going. For instance, being able to penetrate some of the markets in Eastern Europe or Russia or the Caspian, for instance to be able to do things in either West Africa or the Middle East in a different fashion that we’d been doing.

I guess the way I would characterize TCE today is TCE is delivering the profitability that we anticipated when we acquired it. And we are working on getting these synergies to our bottom line. When we bought it, we said it would take anywhere from one to three years to get those additional profits. And I am going to stick with that time frame.

Okay. Thanks a lot.

Martin Malloy with Hiberia Southcoast

Good morning. I was wondering on the General Chemical closure, I was wondering if you could talk about how important that was as a component of the overall North American market for calcium chloride.

General Chemical was the second largest dry operator or marketer in North America, and behind us in liquid. Their markets were not particularly markets that we went after -- Eastern Canada, some of the New England areas. However, when you lose a major marketer, it creates a tightness in that market. And those customers are now looking for product, which tends to tighten up associated markets.

So what you’re beginning to see is you’re seeing a tightness in all of North America, much more so in certain places than others, as the customers scramble to get supply. This is a market that is in pretty good balance, if not slightly more demand than supply today, before this happened. Therefore, you’re going to create some substantial demands on the market, that probably are not going to be fulfilled, at least in the short-term.

Luckily, with our relationships in Southeast Asia, as well as the TCE operations, we may be able to take advantage of certain things that we couldn’t heretofore. I think I am saying that delicately enough.

Okay. Thank you.

Warren Clifford with Clifford Capital Management.

Following up a little bit on the last question, what often happens in bankruptcies, the facilities are still there. So they eventually come back on stream, carrying less debt than they did before, and more competitive. Do you see that as a likely outcome to this situation?

That’s a real hard question. You’re right. Normally they do come back up. I would think that in one way, shape or form, some of this may come back up. The problem with that operation relates to the costs of that -- it’s in Canada, by the way. The costs associated with it, the environmental issues there, the cost of energy. Whether that’s highly competitive or not is going to be the issue.

We have not had difficulty placing our product with them as a competitor. Therefore, I don’t think that the cost of capital, if you will, the debt issue, is going to make or break that plant if somebody else brings it up. It’s going to be their ability to access the brines, access energy, and actually manufacture products that will be competitive in the market.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). At this time gentlemen, there are no further questions. Are there any closing remarks?

No. I just would thank everybody for participating. And we’ll see you at the first quarter.