Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Steven W. Krablin - Chairman, President and Chief Executive Officer

James M. Mitchell - Senior Vice President and Chief Financial Officer

Analysts

Collin Gerry - Raymond James

John Tasdemir - Tristone Capital, Inc

Chris Glisten - Simmons & Company

Joseph Gibney - Capital One Southcoast, Inc.

Terese Fabian - Sidoti & Company

Brian Uhlmer - Pritchard Capital Partners, LLC

Victor Marchon - RBC Capital Markets

T-3 Energy Services, Inc. (TTES) Q1 2009 Earnings Call May 1, 2009 11:00 AM ET

Operator

Good morning everyone and welcome to the First Quarter 2009 Earnings Release Conference Call for T-3 Energy Services Inc. Hosting today's call will be Steve Krablin, T-3's Chairman, President and Chief Executive Officer. Today's call is being recorded.

I'd now like to turn the call over to Mr. Krablin. Please go ahead, sir.

Steven W. Krablin

Thank you, Melissa and thank you everybody for joining us on our call today. I'm Steve Krablin, CEO. With me today is Jay Mitchell, our CFO.

Before we begin, I'd like to remind everyone that during our call, we may make certain forward-looking statements, which represent our beliefs and expectations about the future. A complete explanation of forward-looking statements as well as numerous risk factors and uncertainties will be discussed in depth in our annual report on Form 10-K and I encourage each of you to refer to these documents as you are deemed to get.

With those preliminaries out of away, let me first say that I am very excited about once again being at T-3. I was one of the original directors, when it was a private company in 1999. And served I as a director through its reverse merger into a public company in 2001 and on until 2004. So, been away about five years. So, I feel like I know the company a bit, but I'm learning a lot in this last month here as well.

I've been in Houston for about 30 years. Moved here in 1980 and have been in the industry as well during the entire time. So, I've seen many ups and downs and unfortunately 2009 looks like it's more headed down right now. But this is a cyclical business. It will turn around again. And we want to make sure that we come out of this downturn or a stronger company than how we went into it.

My most recent background was with National Oilwell. I was CFO there until the merger with Varco in 2005 and we started at National Oilwell in 1996. It maybe interesting to put in perspective that in 1996 National Oilwell was about the same size as T-3 is right now. So companies can grow rapidly in this industry and we plan to take advantage of every opportunity to do so here at T-3.

Now, what attracted me to come back to T-3, maybe the same thing that attracts you to be an investor in T-3 or to follow us. It's a good company. It has great products and reputation. It has excellent management throughout the organization. And very important in these times, it has an un-leveraged balance sheet.

Over the last few years, I think T-3 has done many things right. It's growing its business internationally and in my view it's had remarkable success as an OEM and in the design and manufacture of blow-out preventers and other pressure control equipment.

I was surprised and everybody I have visited with is surprised that T-3 has actually manufactured and sold 800 blow-out preventers. Most people think it's less than half of that number; I did. About two-thirds of those are of the ram type and about a third of those are annulars. And so we've had great acceptance in the industry over this period of time and we intend to continue to lever that success.

Now, 2009 is going to be a very challenging time for our industry and for T-3. I mean we're not going to be any different than everyone else in this group. Directionally, our business is driven by the rig count and not just the domestic rig count, it's the international rig count.

So, you do need to factor in the worldwide areas when you're doing that; when you're looking at how to project our business and outlook. Domestic drilling is down of course about half from where it was. International is a bit better but it's also down.

Pricing for us so far has fallen maybe 5 to 10 %, depends on the product. So we're seeing some pressure there. And of course our bookings and backlog have been declining.

And it's likely that this trend is going to continue through 2009. The rig count is certainly, the experts expect it to continue to fall and we certainly don't have any reason to disagree with that.

If that's the case, then it's likely that our first quarter will be the best quarter of 2009 and we'll continue to have a downward slope on the trend through the year. But we're also going to be prepared for the eventual upturn and I expect that to be in 2010 sometime. And we want to make sure that are company is prepared for the turn around that will occur.

Downturns aren't all bad though. Many times in the downturn if you want to look for the silver lining, you can focus more on your customer services, you can develop new products and that's the time when you make acquisitions that actually strengthen the company for the future.

So, while you'd rather have an upturn, you need to be prepared for the downturns and make the most of those because in this business, they occur. Its just part of what we live with.

This is little bit about our strategy for 2009. Like many others we're going to focus on the international markets and the offshore markets because that's where the business is. We will continue to emphasize service to our customers. I think we can we've become very close to a number of them, had great success and we'll continue to do that.

We intend to keep our costs in line with our revenues. This will mean that there have to be reductions. We have to look for cost savings and products and people. But we want to make sure that we maintain our core competencies throughout this.

We're going to focus on our balance sheet, particularly the accounts receivable and inventory positions. We want to make sure that we're collecting money that's owed to us. Cash from operations and from reductions on the balance sheet, not only lower our debt but they position us for the next phase in the upturn when we can advantage of some of things that will be available to us.

We're also going to emphasize the expendable side of our business. We've sold lot of razors in the past and now we need to sell more of the razor blades. The sale of these 800 BOPs and the other capital equipment that we had, we have done a great job of getting those into the field. We haven't kept pace with the elastomer, the expendables that go into these products and we need to refocus on that and we plan to do that in 2009.

We also plan to have a strategy of pursuing select acquisitions. There will be opportunities probably later in 2009. And we'll look at what any of them that make good financial and strategic sense to us.

Now, let's us talk a little bit about the examples of implementing this strategy. We've had success with our operations in Dubai and Mexico. In fact, each of those operations had better results in the first quarter of this year on a sequential basis than in the prior quarter.

So, those operations are going to good and of course Mexico and also Brazil will be good markets in 2009. In addition, to our local operations in Mexico, we've also sold blow-out preventers and other pressure control equipment into that market.

As to Brazil, we've had sales to Petrobras and we're working now on a new 18 inch 10,000 subsea stack for an offshore contract that will go into Brazil.

Our wellhead business, we've also had some real success there outside the U.S. and this is in West Africa, in North Africa and in Canada. So, we are having success moving internationally and we continue to do that.

As we go forward, we may find that it makes sense for us to have operations in Brazil perhaps Southeast Asia, perhaps even though small operations in Africa to support some of these operations. So that is a direction that we plan to go and we've done it already in some locations and know how to do that going forward.

Now, T-3 Engineering is one of our core competencies. We plan to take advantage of this slowdown by relocating our engineering staff into one location in Houston. This will allow us to better utilize our staff. It will allow the engineers to share ideas among them. And we think that will have some benefit for us not only short-term but long-term.

The Internet Group will continue to work on new products. If you can make things lighter and more compact in this business, that's good and the market will appreciate that and they will be still buying things that can meet that criteria. In fact, if you're at OTC next week, you can stop by our booth, we'll have the short stroke BOP on display there and we can show you that as well as many other products.

Another example of things that we're working on in the Engineering group is in our Wellhead group. Wellhead is working with a large EMP company to design a very specialized frac menthol (ph) system that will intend to serve multiple wells. SO this is a product that we think has a lot of potential for us in the future.

On the lowering cost side, of course we're a capital equipment business, so we trail a little bit behind the trends of some of the other companies. But we have reduced our workforce by about 10%, most of that is after the first quarter, in fact a significant part of it is today. So most of this will actually take place in -- will have the benefit of it in May.

We're also working at increasing the source of raw materials from our operation in India. We're working to bring on new products that would makes sense out of the Chinese markets and we're working on overall vendor reduction programs to continue to push down our prices, so that when we talk about having price reductions on our selling prices we can still maintain our margins as best we can.

On the expendable side, I mentioned some of the areas there that we plan to work on more in 2009 is in the elastomer products. There is many rubber products that go into the BOPs and these not only get used up -- you not like sell them initially but during the testing process for pressure control equipment, these were out and had to be replaced.

There is a repair and service business that we need to continue to emphasize again. And we're going to refocus on a trade-in policy for BOPs that we've had it for sometime but what this is a kind of market where, where that will have benefit for us.

On the acquisition side, I think the combination that we made with Azura recently is good example of kind of a tuck-in acquisition and we would like to look at more. For Azura, we got some really good people. We improved our staff and we got product drawings. They had customers that we didn't have. So that lets us get into more companies. We had overlapping operations. And we were able to close some of ours, close from theirs and come out -- we believe that this will let us come out a much stronger organization.

And in particular, they had operations up in the Northeast in the Marcellus area and that will be a good market going forward. I don't think anyone has any doubts of that.

So with that kind of overview, I'm going to turn it over to Jay to go through the financial side in the quarter and give you the background on that.

James M. Mitchell

Thank you very much, Steve. As all of you've seen in today's press release, T-3 did earn 6.6 million or $0.52 per diluted share for the quarter excluding two items that's 2.5 million after-tax or $0.20 per diluted share of severance cost related to the leaving of our former CEO and about a 0.2 million after-tax or $0.02 per diluted share related to third party costs that are associated with Azura acquisition that Steve just discussed and that we previously announced.

These are third party costs. There are also some third party costs associated with an abandoned acquisition to get to that total 0.2 million. We're expensing these Azura cost under the new FAS 141(NYSE:R) GAAP, whereas in the past these would have been actually capitalized.

Including all these items, the first quarter's net income was $3.8 million or $0.30 per diluted share. As I go forward and discuss all the numbers today, I'm going to exclude those numbers, so that we can look at numbers on a comparable basis here.

As Steve already mentioned, the environment we're facing right now is very challenging. The average worldwide quarterly rig count was down 21% in Q1 versus where it was in the fourth quarter and here at T-3 our revenues sequentially declined in line with that, just over 20%, 20.2%.

And our customer base predictably shifted as we saw some pretty large decreases from our domestic land and even jack-up customers and the business became more focused on international and specialty items, while customers are looking try and cut spending in particular areas.

As you know, we do report in one segment, but we have three business units and I'd like to give some details on the three separate units to talk a little bit about how the results did come out for the quarter.

At PCG, this our pressure control group with the BOPs and all the pressure control equipment, revenue decreased to 49.9 million. Now that represents 79% of the total company revenues and is a sequential decline for this business unit of 17 %. Now these revenues were actually tempered by a backlog decline and the actual bookings for Q1 decreased by 26% and our book-to-bill ratio here for Q1 was just under 0.7.

Of the overall revenues for shipments for Q1, about 70%; that's 34.8 million, went to non-international locations or non-U.S. locations. And that compares to about 60% which is where we were in Q4. So again a proportional shift towards international.

Q1 2009 PCG shipments were all also about 45 to 50% offshore, which is up from where we've been in the past for all of 2008. If you remember, we were just over 40% of our revenues for shipments to offshore.

Moving on to Wellhead. Our Wellhead revenues decreased 31% sequentially, which compares to a 30% decline in the average U.S. rig count for the quarter. Of the overall revenues here, the Q1 revenues were about 0.1 million or 2% outside of the United States. So this business is one that historically has not had a lot of sales outside the United States.

But as Steve just mentioned and just went through, we have been adding a considerable amount of focus to international orders in this business unit, where we're focusing on situations where we can provide especially engineered solutions. And we're beginning to see some of the fruits of the labor.

Steve mentioned, in Northwest Africa, in Canada, we have had some benefits there. And the international orders we've received since the end of the quarter are approximately $3 million. Now, these are going to be longer lead-time items, so there is going to be delivery for a lot of that past Q2. But it certainly shows that we are having some good success with some of the international focus that we have had in this particular business unit.

The previously announced Azura acquisition did contribute a small amount of revenues, about 771,000 during the quarter. And I'll speak a little bit more about that in a few moments. But that was less than one full month of revenues right there.

In our third business unit, the Pipeline Valve Group, we had revenues decrease about 29% sequentially. Again this is in line with the U.S. rig count decline. On a positive note though, the bookings for this business unit did increase to about 4.1 million during the quarter and that's up from about 2.1 million in Q4 and to book-to-bill ratio, as you can see, was just about 1.0 even.

We're showing some success in the focus that we've shifted here, where we trying to get more service revenues. The Q1 service revenues for this business segment, our business units were 27% of the total quarterly revenues and that's up from 17% sequentially.

Although, there are some areas here within this particular unit that are remaining less profitable than others and we're continuing to focus on what cost reductions we can have here.

Back to the consolidated revenues. We see that the mix of revenues have shifted from Q4 as a percent of revenues a little bit. Service revenues were 15% of total revenues in Q1 2009 compared with 16% in Q4. And the international shipments, actually they are up quite nicely. They represent 56% of total shipments in Q1 compared with 46% in Q4.

The gross profit was 38% compared with 39% sequentially. That is a slight decline and if you look at the products and services gross margins on service revenues held constant at 41%, as well as the gross margins on products also remained constant at 38%. So, our overall decrease in margins in the quarter is really due to the shift in the mix as we had a little bit more -- a little bit less in the high service margin services.

As we discussed in our last call, we have been adding some standard class repairs to help meet the budget requirements of our customers and we've not really seen any material impact of this on the service revenues yet, which is part of the reason for the decline in some of the service revenues. In fact, our customer repair revenues at PCG were actually off 36% sequentially, as some customers delayed spending, which is discretionary spending. This is the first number to come down and should be the first number we start to see going back up on the other side, although we've not seen any evidence of that coming anytime soon.

Moving down, total quarterly SG&A was 13.9 million, again excluding the numbers that I discussed above. The SG&A expenses were down sequentially, about 0.2 million from 14.1 million in the fourth quarter and this is despite some higher bad debt reserves that we had, which normally do occur during the quarter, but again coming down slightly sequentially.

Excluding future payroll reductions, which I'll discuss in a moment, about 1.5 million to just over 2 million of our consolidated quarterly SG&A cost are variable in nature and are currently being reviewed for cost reduction plans. You can see the numbers come down sequentially a little bit. Hopefully, we'll be continuing to bringing that down a bit.

I'll come back to the cost reductions that Steve talked about with headcount reductions in just a few moments, but you can see when you look at the operating income for the first quarter of 2009, which decreased by 6.1 million from the first quarter and from the fourth quarter of 2008 that it is going to be important for us to look at our overall costs.

The decremental margin from the sequential quarter is 38%. This is not out of line with expectations and if you look at what's happened to the individual business units, PCG was down 3.7 million, pipeline down 0.8 million and wellhead actually decreased 2.1 million from the fourth quarter.

Income tax expense for the quarter was 2.1 million, which represents an effective tax rate of 35%. Going forward, we see that as a fairly normalized rate and anticipate our effective rate for the remainder of 2009 should be in the 35 to 36% range.

Our balance sheet, we did have some things that went well in the accounts receivable side. We're at 46.7 million and that includes some additions from Azura, about 2.3 million of additions from Azura, down from 47.8 million at the end of the year. The DSO about 64 days, little higher than we'd like to see and we continue to focus on that.

On the inventory side, we had about 62.3 million. This is including 2.6 million from Azura. Unfortunately we've not seen the liquidations here on the inventory side that we've been focused on trying to get. I think this is something that we will begin to see; the improvements in this quarter and hopefully we'll start to see some of the cash coming in from that. Certainly something, we as a management team are spending a lot of time focusing on right now.

Because of the inventory numbers though, the cash flow for the quarter was a little below what we would have hoped for. Our operating cash flow was 5.1 million. CapEx for the quarter 1.5 million, leaving free cash flow of about 3.6 million.

Again, this is a positive number. I think certainly, it's good to have cash coming in rather than going out. But it does reflect the need for some more balance sheet focus. We have time to focus on the balance sheet because we do have good liquidity. As Steve alluded to earlier, we're not a very leveraged company and our balance for debt at March 31, 2009 was 24.0 million.

We also had LCs outstanding of about 1.1 million. But this 24.0 million compares to our outstanding debt balances of 18.8 million as of year end. And the increase which is 5.2 million relates primarily to 8.1 million paid for acquisitions and we had some fairly large tax payments that were due during the quarter about 4 million as well.

As a reminder, because we've had questions on this, we pay commitment fees on $180 million on our senior credit facility and that does not mature until October of 2012. We currently have no plans or needs to renegotiate that facility in the current environment.

We are watching our covenant compliance closely and are in very good shape right now. Our senior credit facility consists of the following financial covenants. It has an interest coverage ratio. There is a minimum allowed of 3.0. We are at almost 33. We're 32.9 right now.

It has a maximum leverage ratio of 3.0 times debt-to-EBITDA and we are currently below 0.5. Again, this is very good. And while we don't anticipate any liquidity issues in the remainder of the year, what can happen as our EBITDA goes down we can be limited on what the total draws are we can make under the facility under this particular covenant.

For instance, as of 3/31, our total availability that we could drawn including what's already outstanding in LCs, is not the 180 we paid the commitment fee on, but is really about 160 million and there are more details of that in the Q if you want to go through that. But that has to with the LTM EBITDA.

We are forecasting for the company to continue to be cash flow positive for the remainder of the year. So, liquidity should not be an issue. In fact, we'd like to be in the position to be debt free on or around the end of Q3 this year.

We may choose to borrow for some reason if we take advantage of some of the opportunities that are out there. But we'd like to be in that position and certainly that's a target we have internally.

I talked a little bit about the bookings for PCG and pipeline groups, but I would like to provide some additional color here. You remember our total Q4 bookings for the company were 60.5 million and they are down unfortunately in Q1. This is the third consecutive decline in bookings for the overall company, where we had bookings of 46.1 million. The book-to-bill ratio is 0.73. So the backlog did decrease to 59.4 million at March 31.

This was down 16.7 million, 22% from the sequential quarter but I think its notable that this is actually flat with where we were a year ago, in the first quarter of 2008. The revenue shift is evident in the backlog as well. We're approximately 70 to 75% of what's in the backlog right now, is for non-U.S. orders.

In addition, to the decline in bookings, I guess if you look at the activity in the world you can see that the rig count has continued to fall since the end of the quarter. And obviously, this is concerning and as Steve mentioned, we're looking more closely at the business, including maintaining tight CapEx or CapEx or non-acquisition CapEx during the quarter as I mentioned was 1.5 million. This is down 59% from Q4.

As Steve mentioned, we're looking at sourcing initiatives and cost cuttings for products bringing in the door, but still this is not enough and we do have headcount reductions going on throughout the company.

We are reducing our work force, a lot of that's happening today by about 10%. The total charge for this is estimated to be in the $100,000 range. So another big charge coming through. But the estimated annualized savings which should begin in May will be approximately 3.7 million. This breaks out two-thirds in the cost of goods sold and one-third in the SG&A line.

As the environment in our backlog continue to decline, we will likely have further reductions in the future and we'll be focusing on unprofitable locations, non-productive overhead but making sure that we have people who can be replaced and we have the ability to exit as a stronger company than we came into the downturn.

Also, in connection with the acquisition that we've mentioned earlier, we are in the process of consolidating roofline (ph) for areas, where we now have overlapping facilities and we estimate this consolidation to be complete certainly by the end of Q2. And we will incur some costs associated with that of about 1 to $200,000 related to lease termination cost for some of our facilities that Steve mentioned earlier we will be shutting down.

Speaking of the Azura deal, as I mentioned earlier, they added about 771,000 in revenues for less than one month of revenues in the first quarter.

They also contributed a loss for the company of about 41,000 but this is during the transition period when we're moving inventory locations and people and trying to implement some sourcing initiatives and we are in the process of removing some SG&A costs, including facility leases, vehicle leases, scorclip (ph) leases and some personnel as well.

The transition time should take 60 to 90 days and we should be on pace to ramping up to, in the 3 to 3.5 million in EBITDA range as this becomes a fully integrated part of our Wellhead group. So with a little bit of a detriment for us on the earning side in Q1, should provide a little bit of benefit in Q2 and the ramp up should really be here as we go into the third quarter.

Let me make couple of housekeeping comments here. The share count for weighted average shares outstanding is 12.6 million for the quarter. The decline from where we were last quarter is first of all not that large but has to do with a slightly lower average stock price for the quarter. The total anti-dilutive stock options that are out there are about 1.1 million.

With that, I will conclude the management discussion. And I'd like to turn the call back over to the operator to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We'll go first to Collin Gerry with Raymond James.

Collin Gerry - Raymond James

Hey, good morning.

Steven Krablin

Good morning.

James Mitchell

Good morning Collin.

Collin Gerry - Raymond James

Well, Jay thanks for all the detail. My fingers is going to hurt from typing as fast I could. There was some numbers you went you through pretty fast. Could you give us the revenue per business unit on the pressure control both with that breakout, the pressure control, wellhead and pipeline.

James Mitchell

Sure. The sales for PCG were 49.9 million, wellhead was 8.6 million and the pipeline was 4.3 million.

Collin Gerry - Raymond James

Okay, perfect. Okay. So, going back to some of the issues you kind of mentioned, we're seeing the economy obviously fall like a rock here. Are you all getting any kind of shift in the customer orders from, say, new capital equipment and going back to the remanufacturing business. Can you see that as people bring rigs in the yard and they need some work, but its been working for five years straight and they need some work to be done or CapEx budgets is just going down uniformly.

James Mitchell

I think for the most part the CapEx budgets are going down. I don't think we've seen a big pickup at this point in the repair and maintenance side. It is there, but it probably hasn't really kicked back in on that front yet. And, its one of the things that its easy for the drilling contractors to defer initially and as they get a handle on where the business is headed, they'll come back and do some of that later on. Even before the rig goes back to work, they'll start prepping up some of this equipment. But for right now that's a weak area as well.

Collin Gerry - Raymond James

Okay. And then switching gears a little bit. You mentioned how your offshore part of the business is growing. I think it maybe about a year ago you won the $12 million jack-up award of the two packages in West Africa. I guess, first, have you delivered on those packages or are those still earning revenue. And I think at that time there was six possible orders in the queue. Have any of those materialized or kind of what's the status, generally speaking, offshore.

James Mitchell

As for the orders that were out there one year ago, I think anything that was a year old has been generally delivered at this point in the game. As for the six specific orders that we would have talked about in March of last year, frankly that was before I think Steve or I was here. So we'll have to look and see what the answer is to that. Right now, about as I say, a substantial portion of our backlog right now is for the offshore folks. So it may still be in there. I just don't know what those six particular ones would happen to be.

Collin Gerry - Raymond James

Okay. And then talking about the backlog, could give us sort of a run rate, 59 million right now. How much of that do you think goes up ships in this next quarter, the June quarter and maybe the third and fourth quarters.

James Mitchell

If you look at the businesses that we have, we talked about the revenues, Collin, a few seconds ago.

Collin Gerry - Raymond James

Right.

James Mitchell

And the PCG business and the PVS business, they were about 50 million plus another 4 million, call it 54 million or so in total. Right. Those businesses about 70 to 80% of what they do comes out of backlog. So you're looking at a substantial portion of that going out in the next three, four or five months is how quickly that backlog will be coming down.

Collin Gerry - Raymond James

Okay. Perfect. That's really helpful. Thanks guys. I'll turn it over or maybe re-queue.

Steven Krablin

Thank you.

Operator

We'll take our question from John Tasdemir with Tristone Capital.

John Tasdemir - Tristone Capital, Inc.

Hey guys. Steve, welcome back to the industry, hadn't talked to since you've come back. I know the industry is happy to have you back and so is the Wall Street community. And I wouldn't -- with the stock off 20% when they announced your appointment as CEO, I wouldn't take that too personally.

Steven Krablin

Yeah, thanks for reminding me that, John.

John Tasdemir - Tristone Capital, Inc.

Anyway, I think Collin might have just helped answer the question I had. But you talked about the revenues being down sequentially about 20% and you said that was kind of in line what the global rig count did.

But if I remember correctly, the fourth quarter I think was I thought was a bit higher than it should have been because of some late third quarter orders. They were deferred due to the hurricanes. So, I'm just wondering if the slope of that decline might not necessarily been a steep as it appeared given the fourth quarter might have been a bit higher than usual. Any thought there?

James Mitchell

The fourth quarter did have some carry-over that came in from third quarter. If you look at the rate of bookings, those have come down Q4 to Q1 by about 24%. That's probably a good indicator of where things are going forward.

I'm trying to remember the amount of revenue that we had in the fourth quarter related to the hurricane was about 8.5 million. If you want to try to normalize that, those were orders that had sort of carried forward from third quarter.

John Tasdemir - Tristone Capital, Inc.

Okay. Well I mean, I guess the reason for that question is just trying to -- in comps trying to do a two or just trying to think about the slow trajectory of the slope in terms of the revenue and the backlog peal off, that we should be expecting over the next couple of quarters. And I think may be you've given us some -- enough to think about on that and maybe we'll follow-up with your later but that's kind of what I was getting at unless you had anymore color you could provide.

Steven Krablin

We struggle with the same question, John. The rig count is probably is much of a directional indicator as we have and it certainly isn't perfect for saying its off X percent, therefore our business on X are up. Why? But that's probably the best that we have as well.

John Tasdemir - Tristone Capital, Inc.

Yeah, understood. And then finally Steve, one last kind of big picture question that I know you guys have been thinking about quite a bit. So, obviously the rig market booked on rigs and booked on BOPs and the market for that stuff has gone away and people say the markets' overbuilt and you're not need to build any new stuff for a few years now.

But when we think about your BOP business, how do you think about that from a big picture perspective. Can that business -- I mean obviously the lag recycled but when is that business -- when do you see some I guess clarity on when that comes back and it also sounds like you are obviously focused on doing all the other things around that BOP business and maybe deemphasizing that business today versus your other businesses. Can you walk me through your thought process?

Steven Krablin

I think the BOP business is going to tend towards the offshore side. I mean that's where the contractors still have a lot of business. I don't think on the land side that we can buck the trend there much. I mean if there are down rigs and have BOPs that are down or pressure control equipment that are down in those areas, they can move it from rig to rig. It's not that big a deal. So that will be a slower part of the business.

There are still quite a few offshore rigs that are coming out. We would hope to get some new business out of the hat and in particularly international markets. I mentioned the Mexico and Brazil; those are good markets. There are still some tenders of equipment of that type; 4P mix, there are some in the Middle East. Kuwait is still having indications of a build program.

There is actually events where you get some pick ups like that. Will you get it in the near-term from the U.S. land drillers? I don't think so. But I do think that we can work on the remanufacturing side there. That was -- the routes of T-3 was on the remanufacturing side. I think the first OEM BOP we made was probably 2003, 2004; that kind of area. So, we're going to focus on the expendable side. Now, part of that's because that's where the market is. Its not like -- we wouldn't keep telling every people who'd buy them, we would. But that's the direction.

John Tasdemir - Tristone Capital, Inc.

That's helpful, Steve. I appreciate it. That's all I had guys.

Operator

We'll take our next question from Chris Glisten with Simmons & Company.

Chris Glisten - Simmons & Company

Thanks. Good morning guys.

Steven Krablin

Good morning, Chris.

Chris Glisten - Simmons & Company

Taking a look at your backlog, I noticed that historically you've provided kind of a general ballpark figure as to your quote backlog. Do you have that kind of your expectations from that perspective and at this point is that kind of inconsequential?

Steven Krablin

The company in the past has talked about the quote backlog. It is roughly where it has been for the last few quarters. It hasn't changed that much. I really -- and this is kind of my decision. I don't think there is a lot of relationship between quote activity and how that turns into orders and I'm concerned that that could actually be a less than helpful number as we go forward.

We're not making this change because its gone down. Like I said, its about the same. So we'll probably give more directional guidance on quoting activity and what we see the total business is as opposed to saying it's a specific dollar amount, the way we may have done in the past.

Chris Glisten - Simmons & Company

Okay. And have you -- since the end of the quarter, I think you mentioned that year-to-date you had net of 2 to 3 million in order cancellations and then 4 to 5 million of possible delays. Have you seen any additional cancellations and further delays from there?

Steven Krablin

We talked about total cancellations on the last call being about 3.8 million.

Chris Glisten - Simmons & Company

Yeah.

Steven Krablin

And frankly the total cancellations since inception now have actually gone down to about 1.9 million as some of the orders that were cancelled were reorders. And became pushed out orders.

So I didn't talk about in the body of the call because I think it might have been a little bit confusing to say we had net negative cancellations. So, those are really just bookings right. But just to let you know the cumulative numbers now just under 2 million, 1.9 million.

That's not a big concern for us at this time. I don't think we're going to lose much business that we have, if any, from this point.

Chris Glisten - Simmons & Company

Okay. That's helpful. Thank you very much.

Steven Krablin

Okay. Thank you.

Operator

We'll take our next question from Joe Gibney with Capital One Southcoast.

Joseph Gibney - Capital One Southcoast, Inc.

Thanks good morning guys.

Steven Krablin

Good morning Joe.

Joseph Gibney - Capital One Southcoast, Inc.

Most of my questions has been answered. I just wanted to follow-up a little bit more on the consolidating locations. As you all know, there is some opportunities there obviously with Azura. But where else within your sub segments are you looking to do this obviously across the board I'm sure but specifically on surface wellhead that there are more opportunities to do consolidate or is more on the valve side. I'm just curious.

Steven Krablin

Right now on the wellhead side is where we are focused not only with the Azura acquisition but we've also had some locations. Grand Junction was a facility that's already been shut down. And we continue to look to make sure that those do make sense. We'll look on the pipeline to outside as well to make sure that again all the locations we have there make sense and we'll be monitoring the situations sort of month-by-month to see how those operations are actually doing.

Joseph Gibney - Capital One Southcoast, Inc.

Okay. And then in terms of CapEx spend, I appreciate all the color on impairment and G&A and headcount reductions and some of the variable costs there. As you get into the back half of the year, how much more do you think you can reasonably to pairing back CapEx. Or we're should be thinking about in this kind of 5 to $6 million bandwidth for '09 or do you think it'll come down a little bit more.

James Mitchell

I think it may come down a little bit from that 5 to $6 million. What I do expect though is that in Q2 some of the things we're doing relate specifically to some of our sourcing initiatives and in particular in India. I think the Q2 CapEx number is going to look very similar to the Q1 CapEx number. Going forward from there, there is a bottleneck in the system. I am that bottleneck, if nobody else is. So. I think we're going to see some of those numbers come down little bit. But our guys have been doing a good job, running the machines they have and getting a lot of value out of the equipment we already have.

Joseph Gibney - Capital One Southcoast, Inc.

All right. Good deal. I appreciate guys. I'll turn it back.

Steven Krablin

Thanks.

Operator

We'll take our next question from Terese Fabian with Sidoti.

Terese Fabian - Sidoti & Company

Thank you and good morning. I have a question on your gross margins. They seem to be pretty stable from the fourth quarter sequentially and you are going to be introducing some more cuts that will affect both that line and the operating margin. Do you think that there will be stable going forward on the gross margins and improvement on the operating margin based on the cost cutting that you are going to be doing?

James Mitchell

Unfortunately, we are seeing and anticipate that we're going to have continued declines in the revenues which is going to put margin pressure at the gross margin level and at the op income level as well.

You saw detrimental margins on op income side were around 38%. I think that 35 to 45% is a good number to look at sort of respectively which means sort of best case we're able to maintain things where they are. But pricing is probably going to continue to come down. And unfortunately, we're having to right size the rest of business to try and keep the other numbers in line. But margin improvement is a little aggressive I think from our forecast right now.

Terese Fabian - Sidoti & Company

Okay. But in terms of the gross margin, it was stable sequentially...

James Mitchell

Yeah, the gross profit margin I think was 38% versus 9. So, down -- so, fairly stable. But off a little bit.

Steven Krablin

Yes. I don't think that will change much in the second quarter or in the near term anyway. That's certainly one of our goals as to pull that overall. And so if we're getting pushed on prices, we have to find ways to push that down through the system.

Terese Fabian - Sidoti & Company

Okay. And then a question on your backlog. I guess it's basically blow-out preventors right in the backlog or are there other pressure control items that are in their absence T wellhead and pipeline segment?

Steven Krablin

It's all type of pressure control equipment that's in there. And of the total number that's outstanding for backlog, I think the -- if you look at the pressure control backlog number, that is actually about 55.7 million and the BOPs in backlog are around 24 million.

Terese Fabian - Sidoti & Company

And you had mentioned before work you were doing on the elastomers are those -- are the new product developments there sort of ready to go to market at this point?

Steven Krablin

We're working on an alliance with someone else. We have our own elastomer products that are manufactured in Canada, and we're looking at an additional alliance that will give us a lot more products and offerings in that area. So, that's something that we hope to finish and get completed during the second quarter. It'll really probably be hitting revenue more in the second half of the year.

Terese Fabian - Sidoti & Company

Okay. And just one last question. On the international offices that you're looking possibly to set up in the wellhead segment if I understood that correctly; would those also be for marketing products or more just for servicing?

Steven Krablin

You really do both if you got to put a location in. You want to do both of -- many of the decisions about where to have a service location is dictated by our customers. If we've been successful in selling new equipment, one of the reasons that you continue to sell equipment is because the customer can depend on you to service it if they need to, get the parts in short order and if you have that operation and have a customer that's bringing into that area, you naturally want to carry the marketing and the customer contact area expand that as well.

So, as an example, the Dubai operation. That's being heavily driven by our customers who purchase new equipment from us and their need for us to be in that area.

Terese Fabian - Sidoti & Company

Thank you.

Steven Krablin

Okay. Thank you.

Operator

We'll take our next question from Brian Uhlmer with Pritchard Capital.

Brian Uhlmer - Pritchard Capital Partners, LLC

Good morning. I just have a couple of quick questions. You mentioned about Dubai and Mexico being up from last year I guess they weren't really doing anything last year, so can you kind of tell us what actual revenue levels they are at?

Steven Krablin

I guess those are joint venture operations. So when they come through on our financial statements that are coming through sort of net income level. Dubai is actually a fairly small immaterial number but its up and the Mexico number is about a little less than 200,000 as the net income that's going to enter our financial statements.

Brian Uhlmer - Pritchard Capital Partners, LLC

Okay. And as far as gross margins go -- and margins look, you are getting any improvements on your raw material price that could kind of -- you can pass along and actually improve gross margins or because your order decline you are saying that's why you think you should maintain them at this level?

Steven Krablin

We are certainly getting some improvement out of that and in particular by sourcing from our own operation in India, I think we've had some really nice hits in achieving some of that that's going through this. It's just hard to know how much pricing pressure is going to get. If we have no more pricing pressure, I think we'll actually improve gross margins. I anticipate that through some point in 2009 there should be another 5 % of pressure on pricing. So, we currently looking at that as a way to offset that as opposed to actually make a gain, but if we are able hold pricing it will be a gain.

Brian Uhlmer - Pritchard Capital Partners, LLC

Okay, and last question on pipeline valves, you said revenues were down in line with the percentage drop in rig count but now bookings are up. Do you feel that segment has bottomed and you're on the way up or it's that just kind of erroneous right know we should still look at the rig count to track that.

Unidentified Analyst

I think for the moment we continue looking at the rig count. We did have a particularly poor quarter in the first quarter from a booking standpoint. So, this quarter we did see a little bit of rebound and we had some success in shifting over to services side.

But I am not willing to call a bottom on any of our businesses at this point right now.

Brian Uhlmer - Pritchard Capital Partners, LLC

Good point. Good point. Fair enough. All right, thanks guys.

Steven Krablin

Okay thanks.

Operator

Will take our next question from Victor Marchon of RBC Capital Markets.

Victor Marchon - RBC Capital Markets

Thank you, good morning. The first question I was just on the wellhead business as you guys talked about focusing more on international, just wanted to see how we would look at it from a ramp perspective as you make way for 2009 and to 2010?

Unidentified Analyst

I am sorry, can you repeat the question you said from...

Victor Marchon - RBC Capital Markets

And just taking a look at from whether it's an order perspective or revenue perspective. How we'd look at the international piece building through the year as you guys look to build infrastructure internationally and focus more on the international sales for that business?

Steven Krablin

On the wellhead side, I think that could be the one group that could actually be improving in the second half of the year. The international focus, we not only have added a lot of new people through the Azura Group but most of that -- many people in that group have actually changed over in the second half of 2008.

So new people, new focus and as Jay mentioned we've had some great success just a sense of quarter end with getting into new areas. So that's probably one of the more positive areas that we have where we think that we can make some in roads in the market where we have a bid i.e. the international market.

Victor Marchon - RBC Capital Markets

And which markets in particular do you all see the opportunities for?

Steven Krablin

Into Nigeria is one area where I think there is some good potential for us and in particular into Canada, to the extent they were calling that in international market, it's certainly outside the U.S. and outside the usual conversation around the U.S.

Victor Marchon - RBC Capital Markets

Okay. And...

Steven Krablin

Ultimately that success is there in Tunisia as well like rock, (ph) I mean there are number of different markets there.

Victor Marchon - RBC Capital Markets

And then I am sorry I missed this but what was the international piece of the wellhead in the first quarter?

Steven Krablin

In the first quarter it was actually about a 100,000, so a very, very small amount.

Victor Marchon - RBC Capital Markets

Okay.

Steven Krablin

But it's since the end of the first quarter that we've received orders of approximately three million.

Victor Marchon - RBC Capital Markets

Okay. And given there is a longer lead time for some of these, is this business kind of start to flow through the international piece, any of these wellhead or just kind of flow through backlog?

Steven Krablin

I think we'll begin to see numbers flowing through backlog and you'll see a wellhead backlog number, touch wood here at the end of second quarter for the first time.

Victor Marchon - RBC Capital Markets

Okay and also just want to ask this on the backlog side as it relates to offshore; could you guys provide a split as into jack up relative to deepwater?

Steven Krablin

I don't have that number right now. I don't have that number to give you right now. Once you follow up, give me a buzz after the call and we'll talk about that.

Victor Marchon - RBC Capital Markets

Okay, that's all I had. Thank you.

Steven Krablin

Okay, thanks.

Operator

We'll take our next question from Bichelli (ph) with Magnum Opus Financial.

Unidentified Analyst

hey, it's a Magnum Opus Financial. Thanks guys for taking the call. Question; in the U.S. there's been a really marked shift away from oil as it focused on cap mentioned endlessly on CNBC all day and really we've seen the price of natural gas just absolutely collapsing, even taken hasn't had hair time (ph) in months. There's certainly a shift in the U.S. Is there a concern worldwide to give up things like oil and gas and move towards clean coal if such a thing exist or solar or wind or on these emerging economies like in Africa, like in the Middle East, can we still count on really the expansion of oil and gas going forward?

Unidentified Analyst

I think you can count on the continued expansion. I mean I think the -- there will be -- but again, there is kind of gets in and everybody gather their own view. My own view is that there will be growth in wind and solar. But that will remain relatively small at least in the next five years, let's call it. It's hard to look out 50 years, but I am real accurate on five.

Unidentified Analyst

Right.

Unidentified Analyst

The -- I think the push will be with all the fines that we've had in the gas side in the U.S. will be moving more towards gas and certainly, if you listen to Jessa Peak (ph) and other people talking, they're are pushing gas as a clean fuel not as a they are trying to decouple the word gas from the word oil.

Unidentified Analyst

Right.

Unidentified Analyst

It's now oil and coal industry not gas.

Unidentified Analyst

Not oil and gas.

Unidentified Analyst

Its gas and wind. So, but I think that's actually a fair way to look at it. It is different. So, I think the gas side will be good but I think in the international markets, its -- they probably have more of an attitude of what's the cheapest of way of actually accomplishing the end as opposed to what sounds green or sounds like it makes the most the best political statement.

Unidentified Analyst

And then do you guys see a real marked shift going forward, there (inaudible) dominate as it say cap and trade passes, say they actually make that a reality of this administration do you see a majority of your business really being derived from outside of the U.S.?

Steven Krablin

I think it will be emphasized but I don't think it's going to over the long-term once we're out of the current down cycle, I don't think it's going to be that dramatic because most of the US business is around the gas side. And when you get into the cap and trade and other items around gas, I think there is going to be a push more towards the compressed natural gas fuelling cars as an example. So, it may be pressure more on coal on the U.S. I think than by the politics side of it'd be on the gas.

Unidentified Analyst

Okay. And then last question, you guys have mentioned new products several times during the discussion, just wondering again, with the previous question, is it still related to oil and gas or are you guys taking a look at really all types of energy sources and being able to develop flow control and things that could be helpful as infrastructure's built out, say we do get wind in five years, say we do get just better solar, say we manage to find a way to do clean coal, are you guys able to diversify or are you interested in diversifying into the other forms of energy?

Steven Krablin

Well so far its all oil and gas and I think we would, we certainly if the markets move away from us, we would look for ways to move with the markets. But again I really don't see that is being anything significant for us in the next five years even.

Unidentified Analyst

Right, definitely I agree that it is not a near future thing, just wanted to see on your radar in terms of product development, how focused you guys were on other segments of energy.

Steven Krablin

Really not that much, because its just not that, it doesn't what we've been doing at this point in time.

Unidentified Analyst

Okay. Well thank you guys, I appreciate it.

Steven Krablin

Okay, thanks.

Operator

It appears we have no questions at this time. I would like to turn the call back to our speakers for any additional or closing remarks.

Steven Krablin

We certainly appreciate everyone joining us today. It was a pleasure for me to be on the first teleconference here and we look forward to visiting with you at the end of our second quarter.

Thank you very much.

Operator

Once again that does conclude today's call. We do appreciate your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: T-3 Energy Services Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts