Tetra Technologies Inc (TTI) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the TETRA Technologies first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Mr. Hertel, you may begin your conference.

Thank you and welcome to the TETRA Technologies first quarter 2006 earnings conference call. Joe Abell, our Chief Financial Officer; and Stuart Brightman, our Chief Operating Officer are here with me this morning and will be available to help answer any of your questions. Joe will also be giving a short review of our first quarter financial results. We'll be making a couple of short presentations which will then be followed by your questions. I must first 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 analysis made by TETRA, based on a number of factors. The 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 our statements today will refer to data that was included in today's press release; therefore, I do not intend to reiterate all of that data, unless responses to your questions require it. Joe, will you begin with the financial review?

The first quarter of 2006, marked the highest quarterly revenues and earnings in TETRA's history and the highest earnings per share in the Company's history, excluding earnings per share in the second quarter of 1999, in which we had the sale of a business. Revenues, earnings, and earnings per share were by far the highest for any first quarter in our history. TETRA's revenues for the first quarter were $152.2 million, 28.5% above the first quarter of 2005. Gross profit was 53.2 million, which is 107% above the prior year's first quarter. General and administrative expenses were up 28% year-over-year, to $21.2 million as our businesses have grown. Though as a percentage of revenue, G&A expenses remained at 13.9%. Income before taxes and discontinued operations was $30.1 million, up 245% compared to the prior year's quarter. Net income for the quarter was $19.5 million, or $0.53 per fully diluted share, compared to $5.7 million or $0.16 a share in the same period last year, an increase of 242%.

Looking at performance by division, revenues in the fluids division for the quarter were up 5.1%, compared to last year's first quarter, and profit before tax was $13.3 million, up 134%. Revenues in the well abandonment and decommissioning division were up 53% year-over-year and profits before tax was $18.2 million, up 296% sequentially -- or year-over-year. Revenues in the production enhancement division were up 36.6% year-over-year and profits before tax was $9.1 million, an increase of 70% versus the prior year's quarter. We had $108.9 million of net investment activity in the quarter, mainly for the acquisitions of a heavy lift barge, a production testing company, and a diving company and capital expenditures in each of our businesses. Our debt increased by $95.4 million during the quarter to fund those acquisitions. We ended the quarter at $252.7 million. Debt-to-total capital increased over the quarter from 35.6% to 43.8%. With that, I will turn the conference back to Geoff.

One year ago, in our first quarter 2005 conference call, we discussed how TETRA had tripled the first quarter profits versus the first quarter of 2004. We told you that our ability to accomplish that feat was predicated on our ability to build for the future and was a direct result of three acquisitions made in 2004. Today we once again have reported a record setting tripling of those very same first quarter 2005 earnings that we were so proud of just one year ago, and once again, much of the earnings impetus came from three acquisitions of properties that we made in 2005, and the full effect of the 2004 acquisitions. These acquisitions, when coupled with improving markets for our products and services generated these record earnings. Interestingly, these results occurred in what is historically our weakest seasonal quarter.

During the first four months of this year, we continued to aggressively expand our business capabilities. Many of these Joe just ticked off but I think it's quite impressive to put them in a list, here on January 10, we increased our line of credit by 60 million with the bank because we knew we were going to be making expenditures. On February 8, we acquired the derrick barge DB1 for $20 million, and long-term lease, the derrick barge Anna IV, both of those being used for our offshore packages for well abandonment and decommissioning in the Gulf of Mexico. On February 21, we announced our Magnolia, Arkansas, bromine and calcium chloride project which will full backward integrate our CBF business. That's $100 million plus project. On March 2, we acquired Beacon Resources, a production testing company that greatly increased our geographic footprint in the United States in that business. We paid 15 million in an undisclosed earnout. On March 9, we acquired the business of EPIC Divers Inc. And on April 20, we announce the placement of 90 million of private debt, 10 years 5.9% fixed which gave us greater financial flexibility.

I believe the quarterly press release also gives you some insights into TETRA's future. First, we reported record earnings in a seasonally weak quarter. We have previously told you to expect our first quarter to be our lowest earnings of the year, and we haven't changed our opinion on that matter. Two, we are increasing our earnings guidance from our previous per share range of $2.09 to $2.35 per share, to $2.40 to $2.80. Again, for comparative purposes, our previous best earnings which were last year were $1.06. Three, our fluids margins have obviously, dramatically improved over the levels attained in early 2005. This has occurred as price increases have now offset previous cost increases and you certainly see the impact of that in the first quarter. Four, our well abandonment decommissioning offshore spreads of equipment and people are now beginning to be deployed. Three of those four spreads are working.

A fourth is expected to be working in mid-June. Gearing up for this work as we had told you earlier this year, would negatively impact the first quarter. You see that in the services component of the well abandonment group. We hope to add additional spreads during 2006 on top of the four that we currently have working. Five, EPIC hit the ground running and was immediately accretive as we had indicated when we acquired it. Six, we have already begun to grow he EPIC. We have announced today an agreement to acquire a dynamically positioned dive vessel with a saturated diving system. This will significantly increase the capabilities of EPIC, and we expect to continue to grow EPIC as diving is an extremely short supply throughout the Gulf of Mexico. Seven, Maritech has begun to reflect the profits that we had anticipated following its property acquisitions in 2005. As most of you know, that was put off during the hurricanes because we had most of this production shut in. You are beginning to see the impact in the first quarter.

Remember that these properties also base load up to one $0.25 billion of future well abandonment and decommissioning work. It is a wonderful two-step process that we have endeavored to expand dramatically and have. The first quarter, well abandonment and decommissioning division profits were primarily generated from Maritech. In the second and third quarter we should begin to see well abandonment and decommissioning services contributing a significant portion of that division's profits. Eight, beacon was also immediately accretive following its acquisition as we had predicted. The synergistic benefits of this acquisition within our production testing business should be further reflected in upcoming quarters. and finally, nine, Compressco has recently been awarded additional international business for its wellhead compression equipment. This work will augment Compressco domestic growth initiatives.

I guess really what I would like to say, is what is the bottom line of what I just enumerated and it is that TETRA has excellent opportunities to invest in existing growth markets in which we are already a major or dominant player. I think that's very important. We have opportunities in these markets. Some of these markets are significantly underserviced and this situation may persist for an extended period. We expect to continue to take advantage of these attractive opportunities in a judicious and controlled manner. And with that, I will open up the conference call for your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Ray Kramer.

Good morning, all. And congratulations on another spectacular quarter.

Thank you.

A couple of questions, looking at fluid sales can you sort of give a breakdown? I saw sales were up 5%. I assume that was more than 100% price, given your comments on margin.

You had a couple of things working in fluids. Yes, you had price increases that have been going on for the last few quarters that are now catching up to the cost increases that we've had to endure through that entire period. But secondly, you had a mix of business that was very good for us during the quarter. As you know, there are different products in the fluids business, and it depends on how that mix is structured and what kind of jobs you get during the quarter. Consequently, as you saw on our press release, we said that you shouldn't anticipate that that kind of margin is going to continue to escalate at those rates. It will depend again, each quarter on the mix of business that you get.

And on the cost front, Kemitura, is out this morning with 20 to 50% increase is effective May 1, in certain CBFs, was that sort of foreseen in the market or is there going to be additional price increases coming down the pipe?

We had indicated at the beginning of the year that we thought price increases for CBF products would increase throughout the year, at least through the July to September time period. So this is right as scheduled.

Okay. And then in terms of the new Maritech capacity in June and August, can you give us a sense, maybe as a percentage of current Maritech capacity, how much additional is going to be coming on stream?

Probably because we didn't put it in the press release, we can't. I would say that a large portion of our production is on stream, but a large portion would indicate something probably over 80 or 85%.

Okay. And then just lastly, looking at your new $2.40 to $2.80 guidance and what you know now, is the only upside, basically new spreads at this point, or are there other things that you can sort of see now that could push that even higher? Because it seems to suggest in the press release that that may be moving up.

Very frankly, we're in the same position you are. We are looking at a business in the Gulf of Mexico with completely different dynamics than you have ever had before in terms of the well abandonment. You are looking at putting complete spreads of equipment out into the Gulf under contracts in which the customer in many cases is eating part or all of the weather. When you add that to the amount of work that we will be getting, we have a pretty wide parameter of what we think our earnings range may be, just from our existing equipment. And frankly, we'd like to take a quarter or two and get a feel for what those earnings really can be, before we go out and start talking any more specifically than we have.

So the answer is that no, it is not predicated on having to bring additional spreads up; however, we feel that's a likelihood. It is more predicated on the fact that we have never had four spreads nor has anyone else, to my knowledge working in the Gulf, simultaneously under the kind of conditions that we have right now, and once we get that under our belt, so to speak, we will be a lot more able to give you guys a real expectation of what these earnings may be. Does that mean they may be higher? Could be. Could they be lower? Could be. The $2.40 to $2.80 at this point in time we feel very comfortable with.

All right, thanks a lot, Geoff.

Your next question comes from Brandon Elliot.

Good morning, Geoff.

Good morning.

Congratulations and please tell the rest of the team you guys are doing a fantastic job. The seasonality, is it any different now than it has been historically?

That's a good question. Actually, if you ask, the first quarter is probably always going to be our weakest quarter. So yes, there's still seasonality. The difference is that if you went back a couple of years, the first quarter was extremely weak compared to the other quarters, because your fluids business was just getting geared up under new budgets, especially in the Gulf. Your well abandonment business in the fouth and first quarters were not periods in which you did a lot of work because of the weather, and the net effect of that is you had some very significant seasonal factors. We still have all of those factors in play today; however, you have ratcheted up the amount of business that you can do throughout the entire year. So on a relative basis, your first quarter may end up being closer to your second and third quarters than they had historically, but I think the seasonality is still there.

Having said that, I mean, I guess if you can add -- I mean, given normal seasonality, but slightly -- I mean, I guess I'm trying to get both sides of that question there. It does seem like you are still saying that there's enough more work to come through the remainder of the year that makes Q1 still pretty low in comparison?

Well, I'm saying there's seasonality in it regardless and I'm also saying that you are building up in your well abandonment services a lot of business that was not reflected in the first quarter. You had one spread, essentially working through the first quarter and it was up and down under an older contract and had weather that we ate some of. In the second quarter, by the end of the first quarter, actually, you had two other spreads that were up. You've now got three. That's the Arapahoe, the southern Hercules, and the Anna IV are out with full equipment. The DD1 is scheduled to be out on June 15. So effectively, your second quarter is going to be, hopefully, very much better than your first quarter, and your third quarter, if it has all four working in it, should be better than your second quarter. And if you add anything else to that, obviously that would augment later in the year. So you are seeing a growth, if you will, of earnings through this year but you also have a seasonal factor overlaid on it.

So maybe less of an effect. It looks like over the last few years the first quarter has been 10 to 15% of your full year earnings. So obviously not that low, but still versus what you could do for the year--.

Well, you are not going to get me into telling you we are going to earn $3.50 to $5 if that's what you are trying to come to. No.

Okay. Thanks, Geoff. Good job.

There are no further questions at this time.

Very good. We thank you for your attention, and we will talk to you at the end of the second quarter.

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