On April 9, The Wall Street Transcript interviewed Michael S. West, Chairman, President and Chief Executive Officer of CE Franklin Ltd. (CFK). Key excerpts follow:
TWST: What is CE Franklin?
Mr. West: CE Franklin is an oilfield services distribution company. We sell primarily to E&P companies and to engineering and fabricating companies that do work on their behalf. We sell over 40,000 SKU items including pipes, valves, fittings, production equipment, fiberglass pipes, consumable products, protection equipment, and more important, we sell product expertise and logistics expertise to accelerate our customer's lifecycle and lifting costs. We distribute those products through 42 locations in Western Canada.
We operate a hub and spoke model with our distribution center in Edmonton, Alberta, that services and feeds inventory into our 42-branch network and also sells goods directly to customer sites for project work to be done on site. The company has been in business for over 50 years and went public in 1993. It is a combination of Continental Supply and Franklin Supply merging to become CE Franklin. Five years ago, there was a management change made and we reinvented ourselves and have been a significant growth story since then. In 2002, we had revenue of $255 million, and we closed 2006 with $555 million and went from negative earnings to $1.22 earnings per share last year.
TWST: If this conversation had been held a year ago, what would have been the goals and your expectations? Give us a report card on how you have fared.
Mr. West: Our expectations really haven't changed over the last five years. We said we were going to create value for all our stakeholders, customers, employees, vendors, communities and shareholders. We are going to do that through operational excellence and by gaining market share. Our commitment to the investment community was to outperform the market activity in top-line growth - in other words, gain market share in sales with strong, disciplined incremental flow-through to the bottom line. We had set targets five years ago, getting our EBITDA as a percentage of revenue up to 7.5%. That was a lofty goal from five years ago when it was 0.7%, and we have done that.
Our sales growth has more than doubled the market activity growth. We have been in a hot sector with strong activity levels, and the last year was another year of record activity levels. But more important, the company outpaced the market activity with top-line growth, and still had strong disciplined incremental flow-through. In 2005, the previous record for the company was $1.01 per share; this year we delivered $1.22. So we continue to grow and improve on what was already a record year. We continue to execute our long-term strategies and grow and differentiate ourselves from the competitive space and gain market share.
TWST: What are the priorities and the agenda for the next 12 months?
Mr. West: Our agenda has shifted a little bit. What we did over the last five years is to fix our existing organic business. We became operationally excellent and gained the market share that I just referred to. What is on the agenda for the next 12 months and for the next three years is to start to diversify what we do. Right now, we distribute over 40,000 SKU items that I talked about earlier to the E&P companies, which install the product, and that is the end of our participation in the product lifecycle. We would like to get more involved in the products full life cycle and servicing of the product from the time it is originally installed through that life cycle. There is a service component that is done to that product, and we feel that we should be involved in that process.
There are a lot of good service providers in Western Canada providing the service, but the gap that is missing, and that we feel is a good niche, is that nobody is managing all components of the products full life cycle. A valve, for example, is taken out of production, refurbished and repaired. There are service companies doing a great job of servicing the product, but they don't have the ability or wherewithal to track and redeploy that asset for the end user. Through acquisition, we expect to enter this space and get involved in the service refurbishment repair of product. It would be incremental revenue and higher EBITDA margins as a percentage of revenue than our current business. We have already invested in the inventory management tracking system. That is where our skill on expertise is right now. We would be able to utilize our inventory management system to redeploy those assets and further improve our customer's full life-cycle cost and differentiate us from the competitive space, which will just help our organic business grow.
Our second opportunity for growth is the oil sands. Only 4% of our revenue right now is attributable to oil sands. All of our growth in the last five years and our strategic direction and attention was paid to conventional oil and gas drilling. We have a strategy for gaining market share in the oil sands, mainly in the pipe, valve and fitting products through projects. We executed one small project last year for about $13 million, which proved to us that we have the right marketing strategy and the ability to market and win one of those projects and, most important, operationally execute that project and deliver it. We have the reputation and credibility of being able to deliver on oil sands projects, and we have now set up a functional group that is committed to oil sands growth full time. Our commitment to the marketplace is to grow our oil sands revenue to $25 million in 2007 and $60 million in revenue in 2008.
Those are the things that we think are the most exciting or are going to have the most impact on our earnings as we look forward in the next two and three years. We have also started some international diversification. We opened our first non-Canadian location in Libya. We are in a partnership with local Libyans as well as Wilson Supply, which is a wholly owned sub of Smith International, which owns 52% of our stock. So this is our first venture into international markets, and based on how successful we are in Libya we eventually hope to be in a couple of other marketplaces internationally. Those are what we are calling the other three pillars to our growth, along with continuing to improve our existing organic business.
TWST: What should investors focus on as far as key metrics or events or combinations? What matters as they track your performance?
Mr. West: I think that they should look at whether we continue to outperform the market activity in top-line growth. So we're gaining market share and having disciplined flow-through to the bottom line. We will continue to report out on our strategies to diversify ourselves, and investors should watch to see that we're going to reach our commitment of $25 million in the oil sands revenue in 2007, growing that to $60 million in 2008. There's also our services diversification, ensuring that we actually get those transactions done and create value. Shareholders should access that we continue to do what we say we're going to do. This management team has built a solid track record over the last five years. We have made public declarations and commitments, and we have delivered on them. The challenge is that as we make new ones, we ensure that our track record of delivering continues.