T-3 Energy Services Q3 2007 Earnings Call Transcript

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 |  About: T-3 Energy Services Inc. (TTES)
by: SA Transcripts

T-3 Energy Services, Inc. (TTES) Q3 2007 Earnings Call November 5, 2007 3:00 PM ET

Operator

Please standby, we are about to begin. Good day, everyone,and welcome to the Third Quarter 2007 Release Conference Call for T-3 EnergyServices Inc. Today's call is being recorded.

Now, for opening remarks and introductions, I would like toturn the call over to Mr. Michael Mino, Vice President and Chief FinancialOfficer. Please go ahead, sir.

Michael Mino

Thank you. Good afternoon and welcome to our review of thefinancial results for the third quarter of 2007. A copy of the press releaseand the quarterly report on Form 10-Q covering our financial results are postedon the Company's web site at www.t-3 energy.com.

Mr. Gus Halas, President, Chairman, and Chief ExecutiveOfficer, will be joining me for this afternoon's conference call. We will beginwith some opening comments and details regarding the third quarter's financialperformance, followed by a question-and-answer period.

Before we begin discussing the financial details, pleaseremember that during the course of this conference call, participants may makecertain forward-looking statements regarding various matters related to ourbusiness and company that are not historical facts, including future financialperformance, operating results, and the prospects for the oil and gas servicesbusiness.

As you know, and it's difficult to make projections or otherforward-looking statements in a cyclical industry such as the risks,assumptions, and uncertainties involved in these forward-looking statements,including the level of crude oil and natural gas prices, rig demand, andoperational other risks which are described in the Company's most recent Form10-Q and other filings with the U.S. Securities and Exchange Commission.

The forward-looking statements are based upon management'sexpectations and believes and although these statements are based uponreasonable assumptions, actual results might differ materially from expectedresults due to a variety of factors.

The Company assumes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

For a discussion of additional risks and uncertainties thatcould impact the Company's results, please review the T-3 Energy Services, Inc.quarterly report on Form 10-Q for the period ending September 30, 2007.

Also note that certain information discussed in newsreleases is considered non-GAAP financial measures. Non-GAAP financial measuresshould be viewed in addition to and not as an alternative for the Company'sreported results.

That concludes the preliminary details of the call. I willnow turn it over to Gus.

Gus Halas

Thank you, Mike. As you have seen from our press releasedated November 5, 2007, we had a good quarter with earnings from continuingoperations of $0.58 per diluted share. These earnings compare favorably withcontinuing operations earnings of $0.46 per diluted share for the same periodending September 30, 2006.

While our Q3 results were good, we believe that theseearnings would have been slightly higher, if not for three mitigating factors.Specifically, a lack luster Canadian market, inadequate product pricing on twolarge orders shipped with mid 2006 pricing structures, and one shipment withinefficient machine tool utilization.

This situation will be remedied upon completion of theexpansion at our Cyprus facility and the installation of a 6-inch barhorizontal boring machine, which will be operational January '08.

As of September 30th, 2007, backlog was at $58.7 million.While achieving a Q3 period over period revenue increase of 20%. Outstandingquotes in the pressure control group are at $201 million as of November 2nd,2007.

Based on historical hit rates, the outstanding quotaactivity should yield favorable results. T-3 believes backlog volumes willcontinue to fluctuate due to the growing international sales.

International orders tend to be more complex, due to severalfactors, including financing, legal arrangements, agent structures, engineeringdemands, and delivery logistics. Our strategy has been and continues to betterposition ourselves to capitalize on the strong drilling activity in the oil andgas industry and developing international markets.

Our customers continue to validate our business strategy todevelop as a major original equipment manufacturer.

T-3 Energy's original equipment product revenues accountedfor approximately 76% of total revenues for the third quarter of 2007 ascompared to 65% of total revenues for the third quarter 2006. This 11% increaseof OEM products sold demonstrates T-3's energy commitment toward developing aninstall base in order to increase long-term shareholder value.

We also continue to develop new products. Since April 2003,we have introduced 86 new products, up from the 64 that I mentioned in our lastquarter's conference call. To support this effort, we have recently designedand manufactured our T-3 diamond series model 6012 sub C double ram blowoutpreventer.

This proprietary BOP will enhance our offerings in themarketplace by adding an additional sub C line of products to our traditionalsurface drilling products.

Further, we have received commitments for our new T-3 wellhead system, which incorporates our new diamond series production gate valvetechnology and our new under balanced drilling down hole deployment valve wellhead system.

These new product introductions come as T-3 commences onresearch and development programs related to nonmetallic sealing technology,commonly referred to elastomers. A newly formulated elastomer compound has beenrecently developed for use in harsh drilling conditions that is now underphysical testing by a third party analytical firm.

In the past year and a half, we have also expanded ourmanufacturing capacity to increase the volume of products manufactured, with aprimary emphasis on our pressure and flow control product line.

We invested approximately $7.6 million during the first ninemonths of 2007 and during 2006 on this expansion effort, which includesincreasing our BOP manufacturing capacity, expanding our BOP repair capabilities,and the opening of new facilities.

The effects of our BOP repair expansion project should beginto show favorable results in the first quarter of 2008.

To support our manufacturing capacity expansion efforts, weintend to continue to expand our geographic areas of operation, with particularfocus on field services and repairs for our wellhead and pipeline valve productlines.

We are expanding our wellhead and pipeline valve repair andmanufacturing services by establishing facilities in areas we believe will havehigh drilling activity, such as the Barnett Shale, Cotton Valley, FayettevilleShale and the Rocky Mountain, along with Appalachian regions.

Specific domestic growth opportunities under evaluationinclude Oklahoma, Colorado, Georgia, Pennsylvania, or West Virginia.International opportunities include South America, Middle East and the formerSoviet Union.

To provide the highest level of growth potential,manufacturing capacity improvements and geographic expansions must be coupledwith strategic acquisitions. As I have stated in the past, our acquisitionstrategy focuses on three key considerations.

Existing product growth, expansion of our product linesthrough complimentary products, and/or geographic expansion. To support thiseffort, we have recently completed the acquisitions of Energy EquipmentCorporation and HPT Products.

These acquisitions not only validate our growth strategy,but also support our commitment to developing as an original equipmentmanufacturer. T-3 will recognize the combined financial results of EEC andHP&T for both November and December of 2007.

These acquisitions should also promise to create bothfinancial and operational synergies. Potential synergies that should berealized include marketing, operational rationalization, engineering andproduct design, financial, and support services.

EEC's Houston-based operation provides as a best in classproduction facility that T-3 hopes to leverage for all premium valvemanufacturing. As part of this effort, after-market services andremanufacturing activities will be rationalized through T-3's existing manifoldvalve service operation.

In addition to the domestic rationalization efforts, theacquisition of HP&T brings to T-3 an opportunity to extend itsinternational manufacturing presence to India.

EEC and HP&T bring to the T-3 family of productspatented and proprietary technologies that further solidify our position as anoriginal equipment manufacturer focused on both drilling and sub Capplications.

These new products include EEC's patented, HP&T gatevalve technology and HXC choke technology, of which both have been successfullyincorporated into EEC under balanced drilling manifolds, flow back manifoldsand well servicing manifolds.

Additionally, EEC's proprietary technologies provideopportunity for technology transfer within T-3's wellhead and drillingproducts. Specifically, EEC's patented HP&T 15,000 PSI drilling gate valveshould provide a technological platform for the development of T-3's new15,000, PSI production gate valve.

Conversely, T-3 anticipates that EEC will benefit from T-3products, particularly product pull-through and packaging opportunities thatwill now be created with significant expanded product catalog, as well asopportunities to incorporate T-3's programmable logic controllers and manifoldcontrol panel applications.

EEC has experienced success in penetrating internationalmarkets, with its patented and proprietary products. Combined with T-3'scurrent international sales efforts and the expanding product offerings createdby the combined company, T-3 believes it will accelerate its internationalsales growth potential.

The combined efforts of both EEC and T-3's internationalsourcing efforts should also yield favorable results with respect to productmargins due to improved leverage with suppliers. Other sources of EEC productmargin improvements have been identified related to the consolidation ofsupport efforts. T-3 will focus on the integration activities throughout theremainder of 2007 so that synergy effects may be realized in 2008.

With that, we conclude with a management discussion portionof this call and I'll turn it over to Mike Mino for the financial results.

Michael Mino

Thank you, Gus. As outlined in our earnings release, incomefrom continuing operations was $7.2 million, or $0.58 per diluted share, up 41%and 26% respectively from $5.1 million, or $0.46 per diluted share for thethird quarter of 2006. Year-to-date 2007 income from continuing operations was$18 million, or $1.52 per diluted share.

This was up 35% and 24% respectively from $13.4 million, or$1.23 per diluted share reported in 2006. Revenues for the third quarter of2007 increased 20% to $53.2 million from $44.2 million for the same period in2006. Year-to-date 2007 revenues increased 30% to $153.1 million from $117.9million for the same period in 2006.

The year-to-date 2007 financial results include anonrecurring charge net of tax of $1.9 million associated with the change incontrol payment and the immediate vesting of previously unvested stock optionsand restricted stocks held by Mr. Halas, the company's Chairman, President andCEO pursuant to the terms of his then-existing employment agreement.

The year-to-date 2006 financial results include a charge netof tax of 300,000 related to terminated public offering costs. Excluding theimpact of these change of control and public offering costs, the company'syear-to-date 2007 income from continuing operations and diluted earnings pershare increased 47% and 34% respectively from $13.6 million and $1.25 perdiluted share in 2006 to $20 million and $1.68per diluted share in 2007.

For the third quarter of 2007 and year-to-date 2007, T-3reported adjusted EBITDA defined as income from continuing operations,excluding the change of control compensation charge and public offering costs,plus interest expense, net of interest income, provision for income taxes anddepreciation and amortization of $12 million, and $33.9 million respectively, a25% and 37% increase over the same periods for 2006.

The third quarter revenue increase was primarily due toincreased customer orders at higher prices, attributable to improved demand forour pressure and flow control products. This increase is also the result of ourincreased customer orders for our pipeline and wellhead product lines, due togeographic expansion and original equipment product sales.

T-3 original product revenues increased approximately 39% atthree months ended September 30th, 2007, as compared to the three months endedSeptember 30th, 2006. The increased revenue was facilitated through T-3's 2007manufacturing capacity expansion plan and process improvements.

Gross profit as a percentage of revenues was 36.4% in thethree months ended September 30th, 2007 compared to 38.1% in the three monthsended September 30th, 2006. Q3 2007 gross profit margins were primarilyaffected by three key factors.

Three large product orders shipped with low margins,increased depreciation costs associated with expanded manufacturing capacity,and inefficient machine tool utilization for the production of large pressurecontrol products.

The three product orders were shipped with mid 2006 pricingand included cost overruns resulting in unfavorable product margins. Operatingexpenses as a percentage of revenues were 16.5% in the three months endedSeptember 30th, 2007 compared to 19.7% for the same period in 2006.

This decrease in operating expenses as a percentage ofrevenues is primarily due to operating expenses consisting primarily of fixedcosts, along with variable costs, such as payroll and benefits, not increasingproportionately with the revenues. This decrease is also due to 400,000 ofpublic offering costs incurred in the three months ended September 30th, 2006.

This is partially offset by increased general insurancecosts and engineering costs. Income tax expense for the three months endedSeptember 30th, 2007 was $4 million as compared to $3 million in the threemonths ended September 30th, 2006. The increase was primarily due to anincrease in income before taxes.

Our effective tax rate was 35.6% in the three months endedSeptember 30th, 2007 compared to 36.8% in the three months ended September30th, 2006. The lower rate in 2007 period resulted primarily from higherdeductions for certain expenses related to production activities and theincreased availability of foreign tax credits, partially offset by the increasein our federal statutory tax rate from 34% to 35%, and certain compensationexpenses being nondeductible under section 162-M during the three months endedSeptember 30th, 2007.

As you have seen in our recent filings, the EEC and HPTacquisitions generated revenues in EBITDA in excess of $33.5 million, and $7.1million respectively for the six months ended June 30th, 2007. On an annualizedbasis, revenues were in excess of $67 million and EBITDA is in excess of $14.2million.

The pro forma effect on T-3's diluted earnings per share forthe six months ended June 30th, 2007 is accretive by approximately $0.29 or$0.58 on an annualized basis. Going forward, the company believes there arevarious positive effects of the financial and operational synergies that existbetween T-3 and these acquisitions.

Such synergies include, among others, improved productoffering and pull-through with enhanced product reputation, expanded customerbase and middle east representation, immediate accessibility to premium valvemarket and sub C market, immediate accessibility to premium valve technology,reductions in efficiencies in SG&A overhead expenses, operationalefficiencies through facility rationalization and or restructuring and improvedleverage with suppliers and improved in-house load cost country sourcingthroughout T-3 products.

The company's integration initiative has already commencedlast week, with the expectation that it will incur minimum integration costsand the aforementioned synergy affects will be realized in 2008.

With that, we conclude the financial discussion portion ofthis call and I'll turn it back over to Gus for concluding comments.

Gus Halas

Q3 financial results continued to demonstrate strongperformance by T-3. Product engineering activities continue to develop T-3 asan original equipment manufacturer of oil and gas products. Our stable backlogand strong quoting activities demonstrate that oil and gas equipment customersfind value in our products and services.

EEC, HP&T bring with them seasoned manufacturing teamswith best in class engineering organization that is maintaining a long historyof introducing innovative and industry leading technologies. The combination oftheir proprietary products and extensive service capabilities promise to yieldgreat opportunities for the future T-3 Energy's customers.

The acquisition of EEC and HP&T and an expanded seniorcredit facility of 180 million confirms T-3's intentions of fostering increasedproduct and service growth through geographic expansion, product growth, andacquisitions.

Before I turn it over to any questions, one that may havecome up would be the issue of what the impact was on the three items that Ispoke about, specifically the lack luster Canadian market, the product pricingand two large orders, and the inefficient machine tool utilization.

We are calculating that number to be somewhere between $0.04and $0.05 per share on the earnings per share basis. So I know that, that hadbeen a question that was raised, so I wanted to bring that forward.

We'll now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Robin Shoemakerwith Bear Stearns.

Robin Shoemaker - Bear Stearns

Good afternoon, Gus.

Gus Halas

Good afternoon, Robin.

Robin Shoemaker - Bear Stearns

Thank you. Wanted to talk a little bit about theacquisitions, the accretion on a pro forma basis that you mentioned is quiteimpressive. Can you tell us how much debt you will have in '08 that's relatedto the acquisition and a rough level of interest expense associated with thatdebt?

Gus Halas

I think the debt will be somewhere around $55 million to $65million and the interest, we will get you in just one second. $2.6 million forthe year.

Robin Shoemaker - Bear Stearns

$2.6 million of interest expense is what you'reanticipating?

Gus Halas

Correct.

Robin Shoemaker - Bear Stearns

Okay, and so you will draw down on your cash reserves aswell as the $55 million, $65 million of debt?

Gus Halas

Yes.

Robin Shoemaker - Bear Stearns

Okay.

Gus Halas

Yes, that's how we will finding it.

Robin Shoemaker - Bear Stearns

Okay. Also, related to the acquisition is the good will, I'msorry, will this be good will associated with this, or will there be a step upin the assets EEC or HP&T?

Gus Halas

It will be both, good will and a step up, Robin.

Robin Shoemaker - Bear Stearns

Okay. And also the G&A expense that EEC has appears tobe quite a bit lower than as a percent of revenues than T-3. I guess part ofthat is explained by the fact that it was a private company, but do you haveany guidance on SG&A expense as a percent of revenues for the combinedcompany?

Gus Halas

I don't have any guidance on that.

Robin Shoemaker - Bear Stearns

Okay.

Gus Halas

It will be, let me just give you enough to say that we areplanning to be a little bit lower than where we are now, because a lot of theSarbanes-Oxley costs are going to go away, since we were going to be fullycompliant by the end of the year.

And last year, as I have mentioned on numerous occasions, iscosting us over $1 million just to get to this point. So some of that cost willgo away and only the public company costs will be staying put.

Robin Shoemaker - Bear Stearns

Okay. So the roughly 18% SG&A as a percent of revenuesthis year should decline a little bit?

Gus Halas

Slightly.

Robin Shoemaker - Bear Stearns

Yes.

Michael Mino

Robin, also bear in mind that in the second quarter of '07,we had that 123 comp charge of $2.5 million.

Robin Shoemaker - Bear Stearns

Oh, yes, I know that. That, added to it, so exactly. Okay.Well, I will just stop there and let somebody else ask questions. Thank you.

Gus Halas

Okay. Thank you.

Operator

Thank you. We will go next to Bo McKenzie with PritchardCapital.

Bo McKenzie - Pritchard Capital

Hi, guys. I'm going to follow along behind Robin on a coupleof things here. I got the 8-K here in front of me. You talked about $0.29accretion, and I guess Mike did, in the first six months. Is there, is thereany reason that we would be either conservative or aggressive in annualizingthat first six months results?

And to kind of back that question up, if we were to look atthe results through 12 months of 2006 through the results of six months of2007, the revenues are up just under, well, for the six months average almostas much as the 12 months. What's driving that, and is any of that that's goingto fall off during 2008?

Gus Halas

It shouldn't. Let me answer the last part first, and therereally isn't anything that we see that should be dropping the growth. They'reprimarily playing in the areas, their business model is pretty much where we wantto go, primarily sub C, more specialized, proprietary products, higher engineerproducts.

So it is, that's what they have built their reputation on.Their patented valve is really the marquis product that they have.

Bo McKenzie - Pritchard Capital

That's the HP&T valve that you are talking about?

Gus Halas

Exactly.

Bo McKenzie - Pritchard Capital

Yes.

Gus Halas

And for the first time we will be, we have a negligibleamount of weld service business and then 2008 and beyond, we are going to havejust under 10% of the weld servicing work. So it's taking us not only to newproducts and new manufacturing and more into sub C, but also in weld servicingwhere we had a negligible amount of business there.

Bo McKenzie - Pritchard Capital

Gus, so then you're saying that well, let me try tointerpret what you're saying.

Gus Halas

Okay.

Bo McKenzie - Pritchard Capital

2006-2007 showed a lot of growth. There's growth going againinto 2008?

Gus Halas

Yes.

Bo McKenzie - Pritchard Capital

So that if there was $0.29 accretion as per the proxy or the8-K, that number would be somewhat better if there's consolidation benefitstimes two?

Gus Halas

Well, if you're talking strictly, we have to look at it as awhole business, both.

Bo McKenzie - Pritchard Capital

Right.

Gus Halas

And you know that I'm going to be conservative no matterwhat.

Bo McKenzie - Pritchard Capital

Yes, I know, it's going to be dilutive by the time we aredone with this. Just joking.

Gus Halas

No, I understand. We still have to look at the NorthAmerican drilling activity, which is tapering off. We're trying to push as fastas we can internationally and sub C, but it's still a matter of recognition andit's still a matter of making our position well known in that arena.

Bo McKenzie - Pritchard Capital

Right.

Gus Halas

So while numerically, I suppose you could come up with thatnumber, I have to look at the overall picture of what is the drilling activitydo overall, and is 2008 going to be much different than 2007.

So you start putting the macro issues in there butnumerically, what you are saying, I can't argue with that point.

Bo McKenzie - Pritchard Capital

All right. Then to round back, or before round back that,the other parts of what you guys had already been into before. Did youmentioned that drawing debt downs to, what did you say, 55, $55 to $65 million?But the 8-K, I thought it said 40.1. What is the rest of that, just for workingcapital?

What are you buying working capital with this? Where's theremainder of the debt going?

Gus Halas

In the 8-K, it was specifically for EEC, it didn't pick upany information for HPT.

Bo McKenzie - Pritchard Capital

Okay. Got you. Gus, could you or Mike break down for us onthis quarter's revenues exactly what we have got for BOT versus wellhead versuspipeline?

Michael Mino

Yes. Hang on a second. Pipeline for the quarter was about$12 million. Okay.

Bo McKenzie - Pritchard Capital

Okay.

Michael Mino

Wellhead was about 7. I take that I'm sorry, on pipeline,I'm looking more at 7.5. Wellhead was about 8 and the rest would be pressureand flow control.

Bo McKenzie - Pritchard Capital

And of that wellhead, do you know how much was proprietaryproducts versus the kind of legacy business?

Michael Mino

I don't have that information right now.

Gus Halas

On the wellhead?

Bo McKenzie - Pritchard Capital

Yes.

Gus Halas

It would be minimal.

Bo McKenzie - Pritchard Capital

Minimal proprietary products?

Gus Halas

Minimal proprietary products. If you remember, when weannounced last quarter that we had just brought in our first shipments, it hadnot slowed; the flow has not been completely through the organization to thecustomer. So, it will be minimal amount of product, I guess is the answer.

Bo McKenzie - Pritchard Capital

Okay. I'm going to finish this line of question, then I'llgo back and let somebody else ask. The press release is then for a couple largesales that came out several months ago, I guess would then be for revenuerecognition in Q4?

Gus Halas

Yes, what we announced the purchase orders, and that wellprogram may be over a certain number of months. And it will come out in eitherfour or eight or 10 per month. It won't be all at once.

Bo McKenzie - Pritchard Capital

Okay. All right. I'll turn it back over.

Gus Halas

Thank you.

Operator

Next we'll go to David Dowel (ph) with Simmons and Company.

David Dowel - Simmons and Company

Hey, guys.

Gus Halas

Hello, Dave. How are you?

David Dowel - Simmons and Company

Good, good. Gus, I thought I heard you say in your openingcommentary that you're facing some challenges with respect to internationalorders. Can you walk me through those challenges and what you're planning to doto overcome that?

Gus Halas

Well, the challenges are no different than anybody else'schallenges. The contracts have to be a lot, very formalized. They are financingissues, there are logistics issues, and so we have to walk through that sameprocess. If you remember, our organization primarily has dealt in the Gulf ofMexico area. So, we have to install controls and processes in order to insurethat we're able to deal in the international arena.

And so, I think we have gotten most of that taken care of.It's just that for the most part that is and will always continue to be achallenge for us, to be honest with you.

David Dowel - Simmons and Company

Okay. I guess along that same line, do you know how much ofyour backlog at the end of the quarter was related to international sales?

Gus Halas

I think it was about 63% international.

David Dowel - Simmons and Company

Okay.

Gus Halas

And by the way, I believe, and we haven't broken down, buton a year-to-date basis, I think EEC's backlog or shipments have beenpredominantly international sales to the tune of about 65%. The trend is almostthe same.

David Dowel - Simmons and Company

And then also when you looking, I guess the composition ofyour backlog in terms of product or margin mix, what are you seeing there?

Gus Halas

Actually, I'm fairly encouraged by the margin mix. I'mhoping that one unique job that created a problem for us that wasn'tinternational job that, we were challenged with, we have no recurrence. I'vebeen assured that that's been the case, so we should have a fairly constantmargin, targeted margin in what we're going to be shipping in the future.

David Dowel - Simmons and Company

Great. That's all I've got for you now. Thanks.

Gus Halas

Thank you.

Operator

Thank you. We'll go next to Bill Gaenland (ph) withCunningham.

Bill Gaenland - Cunningham

Yes, thanks. If you could just take a look how a factor outsome of the issues you mentioned at the beginning dealing with the pricing andsome of the inefficient machine tools, going forward, with some of thosefactors taken care of, what's sort of a normalized gross margin would you beable to achieve?

Gus Halas

We're trying to make sure that we're at a minimum of 40%margin, gross margin. That's our target. Whether or not we achieve it is goingto be based on market factors, operational issues and I feel pretty good about,but unless something changes drastically in the marketplace we are seen, ourmargins seem to be holding up fairly well, and as of right now, we're gettingsome favorable terms.

I'm fairly comfortable with that level of margins. I don'tthink, whether we hit 40 or not is up for debate, but that's our targetedmargins.

Bill Gaenland - Cunningham

And is there going to be any continued drag from, youmentioned the 2006 pricing issue?

Gus Halas

No. Well, there it shouldn't be. I would suggest therebetter not be. Because we have combed our backlog to make sure that there wereno issues. So, we're going down the path feeling pretty good that there's notanything like that.

We knew about the other jobs we just at the last minute, itwas actually a change from what the customer would or would not accept andthat's what really drove our margin down. We almost had that as a decent marginjob going out up until the last minute.

Bill Gaenland - Cunningham

Okay, thanks.

Gus Halas

All right.

Operator

Thank you. We'll go next to Penny Alexandra with PritchardCapital Partners.

Tom Escott - Pritchard Capital Partners

This is actually Tom Escott, Gus.

Gus Halas

Hi, Tom.

Tom Escott - Pritchard Capital Partners

You touched on one of these three issues. Of the threethings that you said impacted the profitability in the first, in this recentquarter, you've just said that the old pricing, or the cost overruns on ashipment, but that will not be repeated.

What about the other two issues, the machine tool, whateverinefficiencies, and then Canada running very slow? I imagine Canada's notprobably changing any. Can you touch on how this other things will be impactedin this period?

Gus Halas

Okay. Canada, we had already, should have baked into ournumbers. We were not as concerned. But it was, it was a factor that, it was abit softer. But there is a shift in the marketplace to bigger BOPs and theSubsea BOPs that we're working now.

Until we install the 6-inch horizontal boring machine,6-inch horizontal boring machine that we talked about, we have to do with ourexisting equipment, which our biggest is 5-inch and that may not sound like alot of difference, but there is in terms of efficiency.

So the piece of equipment should be installed and fullyoperational by January 1. So that should be eliminated at that point. AndCanada's going to be what it is as far as the pricing and how the review thathas become a lot more rigid and also we've combed our backlog, we feel fairlycomfortably that that should not reoccur.

Tom Escott - Pritchard Capital Partners

So, these three items that caused $0.04 or $0.05 shortfall,I guess two out of the three are probably going to continue to drag through theDecember period and then improve after that?

Gus Halas

The one may, the Canadian issue, if you look at it, ifCanada was $0.01 to $0.02 that we would have improved, and the others were therest, then really, the only one that I'm concerned is the other two, which arethe ones that we should be taking care of is the inefficiency of the equipmentthat we have right now.

Tom Escott - Pritchard Capital Partners

Okay.

Gus Halas

And we're trying to mitigate that factor.

Tom Escott - Pritchard Capital Partners

All right, and then lastly, it wasn't clear to me. I knowyou touched on this, but were there some shipments of well head equipment thathad been booked, or not booked, but orders in process that didn't ship at theend of the quarter that kind of got pushed forward, or did I misunderstandthat?

Gus Halas

No, no. These were as I mentioned in the past, we're bringingin our products, the T-3 brand of products from overseas. We're trying to fillthe pipeline of our products. The large orders that we've received are going tobe shipping at a pre-approved rate, whether it be four or eight or 10 months,depending on the order.

And the pipeline has not been filled, so our T-3 proprietaryproducts, there's minimal impact in this quarter is the only thing that I wasmentioning on that one.

Tom Escott - Pritchard Capital Partners

All right. But should that then be better than that, betterthan minimal in this December period, or are we going to see this same thinguntil sometime into '08?

Gus Halas

We've got most of our products now. That should be minimal,is what I'm, I mean if, unless something changes drastically, the impact ofanything like that should be minimal because our pipeline is filling with ourproprietary products.

Tom Escott - Pritchard Capital Partners

Okay. Thank you.

Gus Halas

But in terms of the shipments, just to clarify, Tom, interms of the shipments, that doesn't effect it, because we will service ourcustomers. We're just trying to service them with our proprietary T-3 products.

Tom Escott - Pritchard Capital Partners

Which carry higher margins, I suppose.

Gus Halas

I hope.

Tom Escott - Pritchard Capital Partners

Okay. Thank you.

Operator

(Operator Instructions) We go next to David Cohen with SIMACapital Management (ph).

David Cohen - SIMA Capital Management

Good afternoon, guys.

Gus Halas

Good afternoon.

David Cohen - SIMA Capital Management

I had the same question about the discrepancy between thepro forma debt in the 8-K and what you said in your remarks. I understand yourexplanation. That leads to me to a follow-on question, which is, would you bewilling to characterize the accretion or dilution that's coming from theHP&T acquisition?

Since the pro forma doesn't cover that, I have no way ofreally judging how that might effect 2007 and beyond. Thanks.

Michael Mino

Yes, I don't think the effect is, there's no dilution on theacquisition of HPT. And I say that because of the EEC had an arrangement withthem to manufacture and sell the HPT products and that goes away with theacquisition of both.

Gus Halas

And just to further elaborate on that, HPT was theengineering arm of EEC, except for a small operation in India, which is usedfor sourcing. So there was in essence some double margins there, and that'swhat we hope will get clarified.

David Cohen - SIMA Capital Management

So, so the degree of accretion of the combined acquisitionsshould be similar to the accretion that's reflected in the 8-K?

Gus Halas

Exactly.

David Cohen - SIMA Capital Management

Thank you.

Operator

(Operator Instructions) Next, we'll take a follow-up from BoMcKenzie with Pritchard Capital.

Bo McKenzie - Pritchard Capital

Hi, Gus. When you put this big 6-inch machine in, how's thatgoing to change your throughput?

Gus Halas

That's part of the overall Cyprus facility that we're tryingto move from the 7 to the 11 stacks of repaired units per month.

Bo McKenzie - Pritchard Capital

But this will be part of the new equipment, is that right?

Gus Halas

It will be both, because most of, most of the sub C workthat we're doing now is in repairs, but the same machine, you can processeither repairs or new equipment. So it will be used for dual purpose.

Bo McKenzie - Pritchard Capital

Okay.

Gus Halas

This has obviously a lot of capacity because it can be run24 hours a day. It's part of the repair facility, but up until this point,we've used the machines interchangeably in order to accommodate customerrequests, be it a repair or a new piece of equipment.

Bo McKenzie - Pritchard Capital

All right.

Gus Halas

What we're trying to do is separate those two, but with theprice tag of almost $2 million for a 6-inch bar, until that's justified, Iwon't spend the money.

Bo McKenzie - Pritchard Capital

Okay. Just kind of for record keeping, you guys haveexpanded up to 25 BOP equivalents a month kind of capacity. Where were you inQ3?

Michael Mino

Q3? The number, actually the number, we've always said $25equivalents, but we shipped 34, but the average shipment was about $270,000.

Gus Halas

Bo, if you remember, and we discussed this, it's 25equivalent units, when you get much bigger, or much smaller than the 15-inchunit that we base the equivalency on, and there's either going to be more ofthem or less of them being fully utilized, and we've had, such as the sub Cunits and the bigger repaired sub C units, the new sub C units, as well as therepair retro fit sub C units are much larger, so there's an equivalent amount.

Bo McKenzie - Pritchard Capital

Okay. In terms of, we've beaten this thing real hard aboutthe choke order that was in there, but if you looked at the average price inyour backlog, you don't know, you guys raised prices some during the course oflast year, would it be fair to assume that the unit price is still trending upsomewhat as you're delivering stuff from nine months ago backlog, six monthsago backlog?

Michael Mino

You're asking if the average cost per item?

Bo McKenzie - Pritchard Capital

The average selling price.

Michael Mino

I think it's going to be pretty comparable. It just dependson the size that we're selling or shipping out.

Gus Halas

And if it has any special metallurgy.

Bo McKenzie - Pritchard Capital

I guess the last one, if we look at the market beingsomewhat sideways, at least for where it currently stands right now in theUnited States, and you were to look at relative scope of the size of the wellhead equipment markets, what's a reasonable assumption about a first full yearpotential market penetration in that business?

On proprietary, on company-branded products, not on theafter-market stuff.

Gus Halas

I don't know how to answer that.

Bo McKenzie - Pritchard Capital

How about, like $49.6 million at 23% margins or something …

Gus Halas

And.

Bo McKenzie - Pritchard Capital

If you're at a loss for words.

Gus Halas

And you know that I won't.

Bo McKenzie - Pritchard Capital

I know.

Gus Halas

I mean, we're still trying to carry our strategy. It's agrowing market. If we get the statistics correctly, that should grow by about,it depends on what you read, anywhere between 20 to 35%, and we're trying, Imean we're still building facilities.

We're still hiring sales people. We're still manufacturing,I mean manufacturing and engineering products in order to meet thatmarketplace. There's just going to be a matter of how well we execute ourstrategy. And I'll keep making the announcements when we do execute well, andwe do get jobs.

There's opportunities that we're working on our targetedaccounts and as we close, and frankly, our acquisition with the EEC shouldhelp, so hopefully we can sit here and look back after the next quarter and saythat we've done a fair job.

Bo McKenzie - Pritchard Capital

Then finally, back on the BOP side, I mean given what yousee in backlog, given what you're picking up in the hit rate internationally,is there any reason to believe the next several quarters would be substantiallydifferent, other than the impact of the choke order that went through?

Gus Halas

Are you talking about in volume or in margin?

Bo McKenzie - Pritchard Capital

Volume and margins just well and excluding the, was it thenew -- let me see if I can say this again, if I look on the T-3 branded BOPside of the business.

Gus Halas

Right.

Bo McKenzie - Pritchard Capital

And I look at your success rate that, I don't know what yoursuccess rate is, but I'm making assumption about your success rateinternationally, given that you're still growing your international bidsoutstanding.

Is there any reason to believe that on the T-3 brandedstuff, things would be any lower in the next several quarters from the BOPbusiness?

Gus Halas

If it holds true the way that we've hit in the past and theway we're penetrating the market and with the combined agents for both EEC andT-3, I hope that we'll be doing better. But we still have to execute.

Bo McKenzie - Pritchard Capital

Right. All right. Thanks a lot.

Gus Halas

Okay.

Operator

Thank you. Next we'll take a follow-up from Robin Shoemakerwith Bear Stearns.

Robin Shoemaker - Bear Stearns

Yes, just one more question, Guys. Do you have a ballparkfigure for what T-3 and EEC, the combined company will spend on growth orcapital spending for 2008 at this point?

Gus Halas

It's about $6.7 million.

Robin Shoemaker - Bear Stearns

Okay. Well, that would suggest a lot of free cash flow, sowould you then apply that to take the $60 million debt down through the year?

Gus Halas

Yes.

Robin Shoemaker - Bear Stearns

Okay. Got it. That's all I have. Thank you.

Gus Halas

Yes, just to follow up on that, one of the main reasonswe're only spending $6.7 million is there were a number of machines that werebought by EEC that, frankly, were not operational in 2007.

I think, if I'm not mistaken, I think they were only usedfor one month?

Michael Mino

If you look at the press release, we spent $4 million forcapital equipment, which included four CNC machines in a building and someland. And they really didn't come on board until July '07.

Robin Shoemaker - Bear Stearns

Okay. So, in other words, then, you foresee relativelylittle need for capital investment on expansion, if you can apply thisinvestment for the full year?

Gus Halas

Exactly and that, as we mentioned during the conference call,we're looking at that facility to be the valve facility for T-3 because theyare very well tooled up to be able to handle all our valve work.

Robin Shoemaker - Bear Stearns

Okay. Thank you.

Gus Halas

Thank you.

Operator

Thank you and we do have no further questions at this time.

Gus Halas

Okay. Well, I want to thank everybody for participating andlooking forward to talking to you at the end of next quarter.

Operator

That does conclude today's conference. You may disconnectyour lines at this time.

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