Tesco Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 1.13 | About: Tesco Corporation (TESO)

Tesco (NASDAQ:TESO)

Q4 2012 Earnings Call

March 01, 2013 11:00 am ET

Executives

Julio Manuel Quintana - Chief Executive Officer, President and Executive Director

Robert L. Kayl - Former Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Megan Repine - FBR Capital Markets & Co., Research Division

Josh C. Lingsch - Simmons & Company International, Research Division

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Trey Cowan - Clarkson Capital Markets, Research Division

John R. Keller - Stephens Inc., Research Division

Richard Brent Mattis

Operator

Good day, ladies and gentlemen, and welcome to the TESCO Corporation Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. Julio Quintana, President and Chief Executive Officer. Mr. Quintana, please begin.

Julio Manuel Quintana

Thank you, Janine. Good morning, ladies and gentlemen, and welcome to TESCO's fourth quarter and yearend 2012 Earnings Conference Call. I'm Julio Quintana, TESCO's President and CEO and I'll be hosting our call today. Bob Kayl, our Chief Financial Officer, is with me on the call.

I'll begin with some general comments on the quarter, and Bob will give you an overview of our financial results. Following Bob's remarks, I'll return and provide an update on our business and plans for the future.

Before I begin, it is important to note that during the course of this call, Bob and I will make forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and Canadian Securities Legislation. These statements are based on current expectations that involve risks and uncertainties, which could cause actual results to vary from those anticipated. These risks and uncertainties have been and are more fully described in our annual reports and quarterly reports filed with the SEC and with securities regulatory authorities in Canada. You should not place any undue reliance on these forward-looking statements made in the conference call, nor do we intend to update these forward-looking statements.

Also we will use certain non-GAAP measures. The earnings release issued yesterday contains an explanation and a reconciliation of these measures to GAAP measures, and we refer you to that release for additional information.

Now onto our fourth quarter and yearend results. We reported net income and diluted EPS in Q4 of $13.3 million or $0.34 per share on $137 million of revenue, compared to $9 million of net income or $0.23 per share in Q3 on $126.4 million of revenue. Operating income increased during the quarter to $17 million, up from operating income of $16.2 million for Q3. For all of 2012, we reported revenue of $553 million, a record revenue year for TESCO, and net income of $50 million or $1.27 a share, compared to $513 million of revenue and net income of $27 million or $0.69 per share in 2011.

Operating income increased for 2012 to $76.8 million, also a record for TESCO, up from operating income of $42.5 million for 2011. Operating income for 2012 included a $12.4 million pretax gain on sale of our CASING DRILLING business sold in the second quarter of last year. Excluding this gain, operating income increased by 52% from 2011 to 2012.

You will notice in yesterday's press release and in our public filings that we are not describing our Casing Drive System or CDS-related tubular services as Automated Tubular Services instead of proprietary to better reflect the nature of this product line. We were pleased with the strong finish to 2012, by recording the highest annual revenue and operating income in the company's history. Despite a number of delays and operational challenges last year, we were able to grow both our Tubular Services and Top Drive revenue quarter-over-quarter and year-over-year and improve our margins. Our transformation post-CASING DRILLING continues. Over the coming months, we will begin executing our new strategy for TESCO's growth. With this increased focus on our base businesses and continuous improvements in our operational efficiency, we're excited about the opportunities in 2013.

I will get into this a little bit more after Bob summarizes the financial results. Bob?

Robert L. Kayl

Thank you, Julio. I will discuss our fourth quarter and yearend 2012 operating results by business segment and then give some comments on our corporate and research and engineering expenses. Starting with Top Drives, revenues totaled $86.7 million for the quarter, up 9% sequentially from Q3. The increase from Q3 is primarily a result of a higher number of Top Drive unit sales. We sold 30 units in Q4 compared to 28 units sold in Q3, and 46 units sold in Q4 2011. Of the 30 units sold in Q4, there were 28 new units and 2 used units from our rental fleet. In Q3, the 28 units sold consisted of 25 new units and 3 used units from our rental fleet. With the 28 new units delivered to customers in Q4, we ended the quarter with a backlog of 28 top drive units, with a potential value of $42.2 million, down from 30 units with a potential value of $42.4 million at the end of Q3.

During Q4, we saw steady Top Drive sales in order activity and today, our backlog stands at 27 units with several sales pending. We do not include a sale in our backlog until the contract is signed and we have received a nonrefundable deposit if required by the contract. Top Drive rental revenue was $28.7 million in Q4, down from $28.8 million in Q3, and $32.7 million in Q4 2011. Our revenues held steady from last quarter even with a slight decrease in operating days. Currently, our fleet of rental top drives stands at 135 units, the same number of units we had at the end of Q3.

Aftermarket sales and service revenue was $15.4 million in Q4, down from $16 million in Q3, and $18 million in Q4 2011. The decrease from Q3 is due to a slight decline in service and repair activity during the quarter, primarily in the Middle East region. Our Top Drive operating margins were 25% in Q4, an increase from 24% in Q3 and 23% in Q4 2011. The increase from Q3 is primarily due to the mix of new top drive models delivered during the quarter.

Revenue from the Top Drive segment for all of 2012 was $357.8 million, an increase of 4% from revenue of $344.7 million for 2011, primarily due to an increase in the number of units sold during 2012, coupled with an increase in revenue from our aftermarket sales and services.

Top Drive sales for all of 2012 were 131 units, of which 121 were new units and 10 were used units. This compares to 115 units, of which there were 106 new units, 5 used units and 4 consignment units sold in 2011. This 121 new units sold in 2012 was a new unit sales record for the company.

Full year operating income margin was nearly 25% in 2012, down slightly from a 26% operating margin in 2011. Margins in 2012 were negatively impacted by incremental warranty expense of $4.4 million specifically associated with the gearbox housing issue for our new ESI model. Excluding the impact of the ESI warranty expense, our Top Drive operating margin would've been 26% for 2012.

Now on to Tubular Services. Revenue was a record $50.3 million in Q4, up from $47 million in Q3 and $46.1 million in Q4 2011. Automated casing running revenue was a record $39 million in Q4, up from $36.5 million in Q3, as a result of more sales of CDS units and a higher job count during the current quarter. Our Q4 2011 automated casing running revenue was $35.7 million.

The number of jobs utilizing our automated Casing Drive System was 947 jobs in Q4, up from 902 jobs in Q3 and 865 jobs in Q4 2011. A higher automated job count was primarily due to increased demand in Latin America.

Our CDS fleet was 306 units at the end of Q4, the same as at the end of the third quarter.

Conventional casing running revenue increased to $11.3 million in Q4 versus $10.5 million in Q3, primarily due to increased activity in the Middle East region.

Our Q4 2011 conventional revenue was $10.4 million.

Overall, Tubular Services operating income in Q4 was $6.9 million with an operating margin of 14%, compared to operating income of $5.3 million in Q3 and $8.3 million in Q4 2011. The increase from Q3 is due to improved margins for automated and case -- and conventional offerings and increased sales of CDS equipment delivered during the quarter.

Revenue for the Tubular Services segment for all of 2012 was $182.4 million, an increase of 21% from revenue of $151.1 million for 2011. The Automated Tubular Services revenue included a $6.7 million of CDS equipment sales for 2012, compared to $2.3 million in the prior year. And $10.2 million of revenue from our Multiple Control Line Running System offerings compared to $5.6 million in 2011.

We performed a total of 3,525 automated casing running jobs in 2012, compared to 3,557 jobs performed in 2011. Operating income from the Tubular Services segment for 2012 was $21.7 million, up from operating income of $16.7 million in 2011.

Full-year Tubular Services operating margins improved to 12% in 2012, up from 11% in 2011.

Now on to corporate expenses, which were $8 million for Q4 compared to $6.5 million for Q3 and $10.1 million in Q4 2011. The increase from Q3 was due primarily to increased long-term incentive compensation expense. For all of 2012, corporate costs decreased to $30.3 million compared to $38.1 million for 2011, primarily due to decreased short-term and long-term incentive compensation expense. Research and engineering cost for Q4 were $2.7 million compared to $1.8 million in Q3, and to $3.2 million in Q4 2011. For all of 2012, research and engineering costs were $10.5 million compared to $12.5 million for 2011. The decrease from prior year is primarily due to the absence of CASING DRILLING research and engineering costs after the sale of this business in the second quarter of 2012.

Research and engineering continues to be a strategic investment for the company, and we plan to continue to invest in our proprietary technologies, particularly in new top drive models and add-on CDS technologies. We expect to maintain our R&E, research and engineering expenditure levels at between $8 million to $10 million annually. Our effective tax rate, which is income tax expense as a percentage of pretax earnings for Q4 was 26% compared to 45% in Q3 and 34% in Q4 2011. Our effective tax rate for Q3 included a $1.5 million tax assessment in a foreign jurisdiction.

For all of 2012, our effective tax rate was 33% compared to 35% for 2011. Going forward, we expect our tax rate to be between 30% and 33% for 2013.

Turning to the balance sheet. At December 31, 2012, cash and cash equivalents were 22 point -- $22 million compared to $23.1 million at December 31, 2011. During 2012, we used cash from operations to purchase and build capital equipment and to purchase inventory to meet forecasted customer demand for new Top Drives, CDS tools and aftermarket sales and service parts. Additionally, during 2012, we paid off $6.3 million of debt assumed as part of the 2011 acquisition of Premiere Casing Services in Egypt.

Total capital expenditures were $13.6 million in Q4 compared to $15.8 million in Q3 and $14 million in Q4 2011. Our total capital expenditures for 2012 were $63.7 million. Today, we project our total capital expenditures for 2013 to be between $30 million and $40 million, based on current market conditions. However, this number could fluctuate if substantial additional Tubular Services opportunities present themselves, particularly in international markets.

I'll now turn the discussion back to Julio.

Julio Manuel Quintana

Thanks, Bob. Let me recap where we are. The fourth quarter continued to show positive momentum in our business. Revenue of $137.6 million and operating income of $17 million were both up from last quarter. For the full year, we delivered record revenue of $553 million and increased our operating income and net income dramatically from 2011. As Bob mentioned, we delivered 28 new units and 2 used units to third parties during the quarter. We ended the year with a backlog of 28 units, down slightly from 30 units we had in the backlog at the end of Q3. Today, our backlog stands at 27 units. The total number of Top Drives delivered increased to 30 in Q4, up from 28 units delivered in the third quarter. The total number of Top Drive orders received in Q4 was 29 units, with the majority of these coming from international customers. We are still seeing about 6 to 8 new orders a month, which is consistent with our discussions last quarter.

After a softening in the second half of 2012, the current backlog and sustained order activity provide a level of confidence that the product sales business will remain steady in the near and medium term, driven mostly by international demand.

Manufacturing capacity continues to remain at 12 to 16 units per month, depending on the models produced. This is the same as it was at the end of the third quarter, and up from 11 to 14 units per month at the end of 2011. Keep in mind that our capacity serves both our third-party sales, as well as our internal demand for rental fleet additions. During the first half of 2013, we will manage our cost to ensure reasonable alignment between order flow and manufacturing capacity.

Aftermarket revenue improved 15% over last year. We are keenly focused on this business and believe as we continue to improve [indiscernible] Top Drives remain working and our install base continues to grow. Today our install base stands at nearly 1,200 Top Drives around the world. This install base increased by over 12% in 2012 and more than 20% over the past 2 years. This base should prove to be an annuity and provide organic growth for TESCO in future years. Our aftermarket business also forms a platform for our rig maintenance business, which is a key part of our go-forward strategy.

On the rental front, we had consistent revenue from our rental business compared to the third quarter, even though operating days decreased slightly from prior quarter. As we have done historically, we continue to work the right balance between selling used Top Drives from our fleet and maintaining a healthy utilization rate. During the second half of 2012, we experienced some softening in North America, which has now stabilized. However, I remind you that 71% of our Top Drive rental fleet is deployed in international operations.

Switching to Tubular Services. We are proud of our accomplishment in Tubular Services in 2012. Automated casing running revenue was a record $39 million in Q4 and we generated an improving $6.9 million operating income with a 12% OI margin. We performed 947 automated casing running jobs in Q4, up from 902 in Q3. We are confident that our automated casing running activity will continue to increase in the coming quarters, consistent with our belief that our every rig with a Top Drive will eventually run casing with an automated system such as our CDS. Just as importantly, we have been committed for several quarters to turn this business from a loss to a substantial contributor to the bottom line. We have consistently improved margins over the last 2 years and we'll continue to do so. Our activity increased in the U.S. Gulf of Mexico, and our MCLRS business contributed $10.2 million of revenue during the year compared to $5.6 million in 2011. We expect activity with this business to remain steady in 2013.

We're also currently expanding in several key international markets, which will help drive profitable growth in this segment going forward. With some new product offerings and continued focus on cost and efficiency, we are taking steps to continue to improve the profitability of Tubular Services. We're committed to making this business a major contributor to TESCO, both in revenue and to the bottom line.

Finally, as we look forward to 2013, it is worth noting some of TESCO's accomplishments during 2012. One, we increased our revenue from $513 million in 2011 to $553 million in 2012. Two, we increased our operating income from $42.5 million in 2011 to $76.8 million in 2012. Three, we completed the sale of substantially all of the assets of the CASING DRILLING segment and recognized a pretax gain of $12.4 million. Four, we increased our adjusted EBITDA from $85.7 million in 2011 to $111.3 million in 2012. Five, we increased our net cash position from $16.4 million at December 31, 2011, to $21.8 million at December 31, 2012. Six, we funded a substantial increase in our working capital from cash provided by operating activities. And finally, we amended our credit agreement to provide a revolving line of credit of $125 million, and had no amounts outstanding under our revolving credit facility at December 31, 2012.

Overall, it was a good year for TESCO. I want to recognize our nearly 2,100 employees who made this tough year a success. Thank you.

Before we take some questions, I would like to give investors an update on our CFO search. We have been actively interviewing candidates to fill Bob's role. However, at this time, we have not yet named a successor. Bob has kindly agreed to stay on with TESCO beyond today until his replacement is identified. I thank Bob for his professionalism and willingness to help us through this transition.

We will now take some questions. Janine?

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Robert MacKenzie of FBR Capital Markets.

Megan Repine - FBR Capital Markets & Co., Research Division

[Audio Gap]

for Rob. So my first question is can you please provide what used Top drive revenue was for the quarter?

Julio Manuel Quintana

Sorry, I didn't catch the name. Who's calling for Bob -- for Rob?

Megan Repine - FBR Capital Markets & Co., Research Division

Megan Repine.

Julio Manuel Quintana

Megan, okay. Sorry, can you repeat the question?

Megan Repine - FBR Capital Markets & Co., Research Division

Sure. What were your used Top Drive sales during the quarter in terms of revenue?

Robert L. Kayl

Yes, the revenue, Megan, was $2.4 million for the quarter. And the full year was $13.5 million.

Megan Repine - FBR Capital Markets & Co., Research Division

Okay. And I think you touched on it on the call but can you please clarify, can you give us any color on MCLRS revenue for the quarter and how it compared to the third quarter of this year and last year as well?

Robert L. Kayl

Yes, so for the quarter-on-quarter comparison, in Q3, we did $3.4 million, and in Q4, it was down slightly to $1.9 million. Q4 of 2011 was a very strong quarter in the MCLRS business and that was just over $4 million, a year ago.

Julio Manuel Quintana

And as you think about going forward, Megan, I don't -- I said steady for 2013. I think it could be a little bit lower in 2012 or at, I don't expect it to exceed 2012 when I talked about a steady business for 2013.

Megan Repine - FBR Capital Markets & Co., Research Division

Okay. That's very helpful. And if I could just one more. You have a lot of people excited about more horizontal drilling in the Permian. Can you talk about how meaningful an impact this could have on your CDS business?

Robert L. Kayl

Sure. We basically were nonexistent in the Permian a couple of years ago and we very rapidly moved our North Texas and East Texas operations into that arena and done quite well. We expect that to continue to shrink in for us as has South Texas for the foreseeable future. So we're very excited about our business there.

Operator

The next question is from Josh Lingsch of Simmons & Company.

Josh C. Lingsch - Simmons & Company International, Research Division

Julio, good progress in Tubular Services revenues and margins. And just to try to drill down on that a bit. I mean, previously, you've talked about this business being a 20% operating margin business and not getting so caught up in absolute number but as you move to '13, could you kind of just walk us through the roadmap of market improvement from here considering MCLRS work is being -- is expected to be strong and improving CDS sales?

Julio Manuel Quintana

So again, right, we talked about the various aspects of growing that business, and we kind of remind everybody, right? So the first one was is to get more focused on operational efficiencies in North America, which constitutes 1/2 of our business and that continues to improve. So for example, expand a little bit in Megan's question about the Permian, as the Permian converts from vertical non top drive drilling to horizontal top drive drilling, that just place right into what we do best. So getting those kinds of efficiencies going in the key basins is fundamental for us. That's one. The second one you already mentioned, which is MCLRS business needs to stay reasonably strong. It doesn't have to continue to expand off Mexico but at least stay reasonably strong, where it was in the last few quarters. And I think that will continue. The third piece is the international critical mass, that's been our single biggest issue, is getting the volume of work internationally to drive profitability. The 2 biggest problem areas for us have been Latin America and the Middle East. Latin America has made some strides, Middle East has made a lot of strides. In fact, the result of our acquisitions in Egypt, we actually yielded positive results there for the last several months. And so we see Middle East continuing to be a stronger contributor and Latin America following right behind it. So we've got to get that to happen. And the last part, which of course is critical, is the CDS product sales. We had a strong product finish in CDS product sales. We really expect 2013 to be a still great year for that part of the business. And that's important because we expect it to be good year for CDS sales in spite of a soft product sales business in North America. So that really talks to that business. So when you put all that together, Josh, if those things continue like we think we want to drive them in addition to some of the new technologies we're adding like dynamic cementing, and we're pretty confident that we will keep driving that profitability up and continue to drive the top line growth. So we're pretty excited about Tubular Services.

Josh C. Lingsch - Simmons & Company International, Research Division

Okay. Great. And then just a quick follow-up on that. Have you seen -- have you witnessed any benefit from the supplier agreement with the Schlumberger with respect to CVS sales or is that something that's still out on the horizon that is yet to be recognized?

Julio Manuel Quintana

No, we have recognized some sales, I can't tell you off the top of my head what we had in Q3 and Q4, but we have recognized some sales from the Schlumberger relationship for sure.

Josh C. Lingsch - Simmons & Company International, Research Division

Okay. Great. And then as a last follow-up, revenue per unit increased nicely quarter-on-quarter, nearly 15%, I assume that was the ESI models flowing through. Was there anything to think that either the mix of top drives or the pricing this quarter was abnormal, whether we should -- this is a run rate we could assume going forward?

Robert L. Kayl

Yes, Josh, there really wasn't anything unusual in the quarter. A lot of that is really just the mix of the units sold, as Julio mentioned, with the orders that we're currently booking, the majority of that interest is coming from international customers. And those international sales tend to be bigger units. So therefore, the price per unit usually reflects really where the demand is coming from.

Julio Manuel Quintana

And they also tend to be complete units. So what happens, for example, with a lot of the new builds, when you have a new electric rig been built, say, for North America, the rig contractor will build the rig and they want to build the electrical and control systems into their rig, inclusive of the control system to control the top drive. And so in those examples, H&P may be the best example, we've sold lots of units to them. We'll have sold just the top drive instead of a complete module that goes with it. Where if you sell internationally into an existing rig, you're providing the power source and the top drive and the control system, which tend to drive up the dollars per unit.

Josh C. Lingsch - Simmons & Company International, Research Division

Okay. And any geographic region specifically that's showing strength or is it more broad-based internationally?

Julio Manuel Quintana

Certainly, I think, [indiscernible] probably continues to be our biggest operations just on top drive sales.

Operator

Your next question is from Joe Gibney of Capital One.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Bob, could you repeat the CDS sales information, I think you gave a full-year on '12, I was just curious what it was in the fourth quarter and how that compared on a year-over-year basis?

Robert L. Kayl

Yes, the CDS sales for Q4, Joe, was $2.9 million, and the full year was $6.7 million. And comparing to Q4 last year, which really was the first quarter results, CDS started Q4 of 2011. So yes, Q4 2011 was really first quarter where we had -- where we began selling the CDS units again, that was $2.3 million of revenue.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Okay. Helpful. On -- back on the top drive, geo mix in terms of inquiries here, most of it internationally driven, I understand that. Julio, how would you characterize sort of indications of interest in bidding activity relative to U.S. or North America top drive orders just a -- is it incrementally worse to sort of stagnant in hover mode, just kind of curious, your perspective there?

Julio Manuel Quintana

Yes, I would say that generally speaking, the second half of last year saw a fairly steady drop in order flow and activity. And then, I think, we've kind of settled into this low, but in general, I think the vast majority, I think, what, 26 or something like that, the sales in Q4 were actually international. So really, we do expect to keep it fairly soft, North America top drive sales going and then most of that is going to come from international, I think, for at least the rest of this year.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Okay. Fair enough. And then how should we think a little bit on rental fleet utilization, I know you had some transitory issues in last quarter in few international markets, I understand what's happening in North America, but just curious on sort of rental fleet utilization expectation is at least in the near-term or what's your view, are we sort of turning sideways a little bit, or we incrementally step up international...

Julio Manuel Quintana

No, I think, again, much like top drive sales, the second half of last 2012 for North America saw just a continued decrease. I think our current utilization in North America is something just shy of 50%, which is relatively low for us. But I think that kind of stabilizes there. I don't think it goes much lower based on the activity we have now. And then international, I think, will continue to strengthen. I think we'll have a good year this year. We had several moving parts last year but the activity for international market, I think, will be very healthy in 2013. So overall, we should be able to offset most of that North American downturn.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Okay. Fair enough. Last one for me and I'll turn it back. Just an update on Premiere, how things are going, traction with Aramco and opportunities for growth. And maybe getting on some more rigs there?

Julio Manuel Quintana

Sure. No, that's been a great success for us as a whole. We bought that business with plans of jumping into Saudi and into Iraq. Of course, Egypt, as we expected, is actually decreased by about 30%, 40%, I think, something like that. But in fact, we -- when we bought the company, we fully expected that to happen. We've more than offset that with equipment being moved into Iraq and into Saudi. I think the activity level there is we've got something like right to 25 to 30 rigs and that business has continued to expand. I was just through there a couple of weeks ago. We're doing $1 million a month already, and I think that business continues to expand. So I think the Middle East Tubular Services business is going to be a great success story for us for the next couple of years.

Operator

[Operator Instructions] The next question is from Daniel Burke of Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Julio, on the initiative to emphasize third-party top drive maintenance and full rig maintenance, what kind of marker should we look for in 2013 to evaluate progress there?

Julio Manuel Quintana

Yes. So we're in the process, Daniel, putting together a presentation to go out to investors and talk about the whole of the strategy. We actually had, in December, our first ever global meeting of top 100 managers to kick off our strategy. And so we're pretty excited about that. We've not -- I've been traveling around the world rolling it out to all our employees. And I know that I owe that to the investor community in terms of what we're doing. And so that's going to be happening here, I think, for the next several months. But certainly, at some point, it will make sense for us to start talking more about third-party repair and maintenance. I can tell you that we have done more and more of that, talking about third-party top drives now. We've done more and more of that in 2012. I think we have pretty good start and we've done repair and maintenance of third-party top drives in the U.S., in Middle East, in Asia and in Russia, with great success. And so we see that as a key business going forward. We intend to grow that, I think, pretty nicely in 2013. And then the whole rig management strategy is a combination of several technologies that we're developing internally in conjunction with a couple of customers, which I'll talk about subsequent to this call. Also I think we want to do some acquisitions. Again, these are relatively small, I mean, single-digit millions to a couple, $10 million, $20 million kind of acquisitions to shore up a couple of key capabilities in a couple of geographies around the world, and you'll see us push that forward in 2013. And then at some point, it will make sense probably to start reporting more the growth of our third -- our non-TESCO repair work. But I think that would be a little premature right now, Daniel. So just hang on there and we'll start developing that for you guys. It won't be, I mean, in 2013, other than acquisitions of course that we might make that could be substantial in terms of revenue. It's not going to be a major material amount in 2013. But to me, it's pretty critical that -- I don't know if the number is 10 or 30 top drive repairs in 2013, but something in that range just to say, okay, we got this business up and running, we're making money from it and that's the goal, right? So that feels like a reasonable expectation for this year.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. That's helpful. And we'll stay tuned. One other question maybe. In terms of the capital expenditure level for this year, pretty clear that it could be supplemented by acquisitions. But can you just -- in terms of helping us understand the business and the year-over-year decline in CapEx, where are you reducing the growth investments that you were making over roughly the last 6 quarters?

Julio Manuel Quintana

Yes, so maybe again it helps, for everybody's benefit, Daniel, if I kind of bucket most of our capital into 2 categories. We either buy equipment to expand the Tubular Services fleet around the world. So we'll bid on a $30 million 2-year contract and we need to go buy $15 million worth of assets, so that's 1 chunk. That's about 1/2. Although last year, it was more than 1/2, I think, of our total. But generally, about 1/2 of that CapEx is that. The other 1/2 is when we become aggressive at selling our used top drives, then -- and we want to replenish the fleet, then we'll sell a top drive at $1.2 million, and then turn around and spend another $1 million or so replenishing that top drive with a new top drive, which of course, we don't actually quite see that as CapEx. I know from a P&L perspective, we recognize the sale under top drive sales and then we recognize the capital under rentals but we don't quite see it that way. But that's fine. Those are the 2 chunks. As we look to this year, you start saying, well, okay, how many used units could we sell? We could probably sell a fair amount of used units. The bigger question will be, okay, if we think North America is going to stay soft, for example, through 2013, would we replenish? Probably not. So if we look at North America where we have 35 plus or minus top drives in North America, if we sold 10 top drives out of North America, my bet is we will wait to see what the market is going to do before we replenish it and we'd just pocket that money. And so the result, I think, the top drive rental CapEx will come down in 2013. I would love to say it's going to be all offset by growth in international, which it might be, but that's not clear right now. And then on the Tubular Services side, that really is very much opportunistic. We're bidding all over the world for projects and expansion. And as I mentioned in my -- or Bob mentioned in his comments, if the opportunity comes up to become more aggressive than what we're showing, then we'll go after it but it will only be on the back of a substantial contract when like the one we have in Saudi. So we're not going to be doing a lot of preemptive spec buying, only on the back of the right contracts. So we're, at this point, we're guessing its $30 million, $40 million. Frankly, I hope we're wrong and we invest more and if we do, it's because the Tubular Services business is expanding even faster than we expected. But that amount right there actually would give us a pretty fair amount of continued expansion in Tubular Services for 2013.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. Great. And then actually, I'll bounce back to the first question I asked just to clarify then. So in the near term here, in a 2013 environment, the last couple of years, aftermarket revenues have grown in the 10%, 20% range basically tracking the growth in your installed base. So -- and that growth rate should be at about the same level in 2013 and ramping thereafter as you get more involved in third-party and maintenance activity, is that fair?

Julio Manuel Quintana

I think that's mostly fair other than -- if we talk organic, yes, put aside acquisitions. But even that, I would say we put up quite a bit of units for the last couple of 3 years and we're being more focused on it. So I'd like to believe that we'll do better than we have done in the last couple of years in growing that business.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

OK. So better rate of growth.

Operator

The next question is from Trey Cowan of Clarkson Capital.

Trey Cowan - Clarkson Capital Markets, Research Division

Yes, just to drill down a little bit more on the Tubular Services CapEx. Are you all seeing any expenditures into the Russia region for that?

Julio Manuel Quintana

Want to take it, Bob?

Robert L. Kayl

Sure. It's pretty limited, what we're seeing going to Russia and Europe at this time, Trey. Certainly, that's a market where it's a good opportunity for us going forward but the CapEx that we've spent, probably over the last 12, 18 months, have been primarily in the Middle East region and the Asia Pac region.

Julio Manuel Quintana

I think, Trey, it may be worthwhile pointing out kind of a key part of our go-forward strategy. We're in a lot of places around the world. And one of the things that we have really driven in the organization is go get more revenue with the equipment you have, with the customers you have, in the places that you have. Generally speaking, the Russian market has been primarily a top drive market for us. And what we're saying, go to the places where we're working, Latin American maybe a great example to it, we work in Latin America, and grow that, grow more on the Permian. We have plenty of room to expand market share, let's do that and increase profitability instead of opening up 4 or 5 new geographies that then we have to build up from there.

Trey Cowan - Clarkson Capital Markets, Research Division

Understandable. Maybe I should ask this a different way. What is the lag between strong top drive sales to that translating a few years later or is it shorter timeframe than that in a region for the Tubular Services to catch up?

Julio Manuel Quintana

There's not necessarily a strong correlation. For example, really, the best performing Tubular Services business we have is actually Asia Pacific. And yet, that has not been a very strong top drive sales market for us for several years, it's been a very strong Tubular Services -- excuse me, top drive rental market. So really, we kind of look at it and say where is a place that needs our automated pipeline the most? And usually, it tends to be where there's a lot of problem drilling, horizontal drilling. We help get pipe to bottom kind of stuff. And it may be that, that particular country has a massive amount of [indiscernible] top drives, for example, instead of our top drives. So there's not necessarily a correlation. I do think that Russia is a great market at the right time for this technology. And I'm not saying we're not going to go in there. I'm just saying I'm focusing our team on getting more market share in the places where we're at already to help drive profitability but ultimately, Russia will be a key part.

Robert L. Kayl

One thing you may see us do more of, Trey, is in those markets where we're going to do the Tubular Services service work is we'll try to sell more CDS units into those markets, similar to what we do with our top drive sales.

Julio Manuel Quintana

That's a really good point, Bob. Best example of that, Trey, would be West Africa where we don't have really any kind of service operation in place like that, if there's a company there that wants to do some casing running or wants to buy some of our units, we would sell them. In fact, we're looking at that. So there will be several markets like that where we'll be opportunistic.

Operator

The next question is from John Keller of Stephens Inc.

John R. Keller - Stephens Inc., Research Division

Just want to maybe keep with that last question a little bit, where are you seeing the best traction with the CDS sales so far?

Robert L. Kayl

It's kind of -- I don't know if there's any specific geography, I'm thinking through -- in '12, it was pretty even between international and domestic, we have sold quite a few units domestically last year. Again, because we've changed our strategy in beginning to sell these again, late 2011. So today it's pretty split.

Julio Manuel Quintana

But even internationally, they're kind of all over the place. We don't -- other than trying to understand what we're doing with our service business and then directing people, we kind of sell wherever. So there's no specific geography I would say is more dominant than another.

John R. Keller - Stephens Inc., Research Division

I mean, is this a product that could have some big kind of fleet-wide awards similar to what you've seen in the Top Drive business?

Julio Manuel Quintana

Well, first, the biggest fleet project we've ever done has been with the H&P sale as part of the Top Drive business. We are having some discussions along those lines with certain rig contractors and so that might happen. We're not speculating on that right now. We're basically saying, fine, well sell 3 here and 8 there, to everybody that wants to buy them. But certainly, yes, you could see some additional fleet work in the coming quarters.

John R. Keller - Stephens Inc., Research Division

Great. And then switching gears to Premiere for a second back there, how is the conversion to the automated service gone or is it still pretty much conventional work that you all are doing and how do you see that playing out, I guess, over the course of this year and into next?

Julio Manuel Quintana

Yes. So in Egypt -- well, in general, it's still mostly conventional in the Middle East. In Egypt, we have started doing some proprietary -- or excuse me, automated work. And in Saudi, we are gearing up to do some. But in fact, in Iraq, we do a lot of it. So Iraq tends to be more proprietary, automated kind of work already. And then I would say that Saudi is going to follow closely there because that's a lot of top drive work. But in most of these places, the issue is not that the technology, the issue is for the contractual framework. If one of our customers in these countries puts out a bid for a conventional work, for example, we go win it. You have to really conform with their technical specs and then what you do is you go back to them and then spend 6 to 4 months negotiating why a technical solution like CDS is better. So I fully expect that the Middle East markets, particularly Iraq and Saudi, will convert to CDS, but it will take a little bit of time. It means we make very good money with what we got.

Operator

[Operator Instructions] The next question is from Brent Mattis of Rainin Group.

Richard Brent Mattis

Earlier you said that you were focused on penetrating your existing markets. How do you think about top drive opportunities in Mexico, especially if they allow additional foreign investment?

Julio Manuel Quintana

So of course, Mexico is our biggest -- PEMEX is our single biggest customer. With a customer we have, we think we know how to do business there. We have a great top drive rental business there because we're able to help them keep the rigs running. They have roughly 100 of their own rigs that need to stay operating. As the business there expands to non-PEMEX rigs to outside entities, then clearly, that's a customer with top drive sales market rather than a top drive rental market, I think is what would happen. But at the end of the day, I think PEMEX will still keep their own rigs running and they may bring another 50 rigs from outside sources. A lot of the third-party rigs that are in Mexico today already have our top drive in it. That's one market that we really do quite well in. And so I think that continues. So I welcome additional rigs coming into the country, but if they do they will probably in the form of top drive sales, while we still continue to work with PEMEX to help them with -- on the top drive rental front with their rigs. And of course, the top drive -- the third-party units just helps strengthen our aftermarket business.

Operator

I am showing no further questions in the queue. And I would like to turn the conference back to Mr. Quintana.

Julio Manuel Quintana

Great. Thank you, Janine. So in closing, I'd like to thank you for participating on the call today and your interest in TESCO. In 2013, TESCO will enter its third decade, with a momentum of our base businesses and operating efficiencies gained in 2011 and 2012, we're ready for a very successful 2013. Thank you, again, and I look forward to talking to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's program. This does conclude the conference and you may all disconnect. Everyone, have a great day.

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