CARBO Ceramics Inc. Q4 2007 Earnings Call Transcript

Feb. 1.08 | About: CARBO Ceramics (CRR)

CARBO Ceramics Inc. (NYSE:CRR)

Q4 2007 Earnings Call

January 31 2008 11:00 am ET

Executives

Gary Kolstad - President and CEO

Paul Vitek - CFO

Analysts

James West - Lehman Brothers

Roger Read - Natixis Bleichroeder

Dan Pickering - Tudor Pickering Holt

Steve Ferazani - Sidoti

Matt McGeary - Sentinel Asset Management

Robert Christensen - Buckingham

John Langston - Hodges Capital

John Licata - Blue Phoenix Incorporated

Gregory Macosko - Lord Abbett

Patrick Flavin - Flavin Blake & Company

Operator

Hello, and welcome to today's CARBO Ceramics Incorporated fourth quarter and year-end 2007 Earnings Call.

I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will increase projections concerning the company's future prospects, revenues, expenses or profits. These statements are considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause the actual results to differ materially from these projections. These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the company's press release and public filings.

Your host for today's call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics. Mr. Kolstad, please begin with your call.

Gary Kolstad

Thank you. Good morning everyone and thank you for joining us to discuss our fourth quarter results. This morning we reported fourth quarter net income of $13.6 million or $0.56 per share on record revenues of $93.7 million. For the full year, the company recorded net income of $53.9 million or $2.20 per diluted share on revenues of $340.4 million. This quarter was highlighted by record profit sales volume and record revenues and operating profits at Pinnacle Technologies.

Looking at our fourth quarter results. I'm very pleased with our continued revenue growth. We established a new quarterly record for revenue in the fourth quarter. The revenues increased 8% compared to last year, as profit sales volume of 246 million pounds was the highest quarterly volume in the company's history. Pinnacle's revenue of $15.6 million increased 43% from last years fourth quarter.

At the top line, the profit business continues to perform well. the sales volume in north America increased 3% compared to last year's fourth quarter, despite an increase of only 2% in the US natural gas rig count and a 19% decline in the number of rigs actively drilling in Canada.

Overseas, proppant sales volume grew 11% compared to the fourth quarter of 2006 with the most significant increase occurring in Russia. We remain excited about the opportunity in Russia and are seeing strong demand for our proppant.

While we continue to increase revenue in this business, operating profit and margins declined from a year earlier due to increased costs associated with our major capacity expansion, increased production expenses due to rise in cost for bauxite which is our primary high strength raw material, and pricing pressure in some of the international markets.

Our depreciation and amortization costs for the quarter increased $1.8 million, compared to the same quarter last year, primarily due to the completion of our new proppant plants in Russia and Toomsboro, Georgia. In 2008, these costs will increase again as we have these assets on the books for the full year as opposed to a partial year in '07. The solution of course for this issue is to increase the volumes, and we have a strategy for that with a new product introduction and I'll talk about that a little bit later.

Our bauxite raw material costs will continue to be a challenge for us in 2008. Our costs for these materials are expected to increase somewhere between 15% and 25% in 2008, and we will work hard in the pursuit of a long term source of these materials, so that we compliment our strong position we already have in our lightweight raw materials.

The proppant pricing is held up in North America, but we are seeing some pricing pressure in select international markets. And with our increased global capacity we will be more aggressive in pursuing some of those markets moving forward.

Pinnacle Technology continued its impressive performance in the fourth quarter, posting gains of 43% in revenue and 44% in pre-tax income compared to last year, while the majority of Pinnacle's revenue continues to be generated from frac mapping, we see excellent growth in the software and reservoir monitoring business as well.

SG&A expenses for the fourth quarter of '07 increased $500,000 compared to the same period last year, but declined from 11.6% to 11.3% of revenue. The net result of all these changes is that the operating income decreased $1.9 million in the fourth quarter as the decline on the proppant operating profit was partially offset by the results of Pinnacle.

Our net income for the fourth quarter decreased $1.3 million compared to fourth quarter of '06, and we also had interest income declined $300,000 compared to last year's fourth quarter due to lower cash balances as a result of our capital spending plan and manufacturing capacity. Our fourth quarter '07 results were also aided but a slight reduction in the company's effective tax rate due to favorable changes in state tax laws.

I'd like to mention a couple of technology highlights that we have developed in the fourth quarter. The most significant is the introduction of the CARBOHYDROPROP, an innovative, high quality lightweight ceramic proppant that is focused on the market for slick-water fracturing. This new product provides our customers with an economic alternative that combines the optimum conductivity with the ease of proppant transport.

In the Pinnacle side of business, we monitored numerous Woodford Shale fracture treatments and published a technical paper at SPE reporting fracture dimensions and complexity comparable to the Barnett Shale, but more influenced by geologic features such as faults and fracture [swarms]. These findings indicate the need for fracture mapping services in the increasingly complex oil and gas formations in North America.

Pinnacle is also supplying geotechnical monitoring services to the Southeast Regional Carbon Sequestration Partnership and these results will provide a foundation for the future development of CO2 capture and storage opportunities.

Looking at the operations and outlook. Looking forward we think 2008 will be another interesting year in our industry. As you've seen and heard from others in the industry, many projections for drilling activity in North America are cautious with flat activity expected in the U.S. and another year of declining activity anticipated in Canada. As a result, growth in our North America business will need to come from increasing market acceptance of our ceramic proppants and our fracture and reservoir diagnostic technologies.

Fortunately, we have the technologies that will keep growing. We intend to address proppant growth through the introduction of CARBOHYDROPROP and continued field trail activity with their light weight products. This new product will help penetrate the market percent base profit in the growing market for slick-water fracturing treatments.

We started selling this product earlier this month and have seen strong initial interest from operators, some of which have not traditionally been big users of ceramic proppants. This product is expected to generate incremental revenue, cash flow on earnings but we'll have lower margins in our traditional ceramic proppants, and this is consistent with the guidance we've been providing for sometime now, that volume growth and not margin expansion will drive earnings growth for the proppant business in the future.

Overseas, the outlook for drilling and fracturing activity is more optimistic and we expect the investments we are making in fixed assets and human resources necessary to expand internationally will begin to show results. We expect continued growth in Russia as our plan increases its output and our customers become more familiar with our products and the also the service level we provide in that market. We also expect continued strength in the demand in the Middle East and South America.

In our Pinnacle technologies business, we expect to see some increased competition but had another strong year based on the continued growth in activity in the gas research plays throughout North America such the shale formation. And on international growth, following the deployment of fracture mapping that’s outside of North America.

From a financial perspective, we expect continued revenue growth in '08. We expect margins to be similar to Q4 '07 due primarily to increase fixed cost and that’s primarily depreciation, increased cost for high-strength raw materials and growth in our CARBOHYDROPROP new product.

In addition, the first quarter will have startup cost of roughly $400,000 associated with Toomsboro line two, and approximately $550,000 in costs associated with the idling of the plant in New Iberia. CARBO remains the technology leader in each of its business segments. We have completed a significant expansion of our proppant manufacturing capacity and we remain debt free at year-end. With our capital expenditure requirements expected to decrease substantially in '08, we should generate significant free cash flow.

And this completes our prepared remarks. And this time we will be happy to take any questions.

Question-and-Answer Session

Operator

We will now being the question-and-answer session. (Operator Instructions) Your first question comes from the line of James West with Lehman Brothers.

James West - Lehman Brothers

Hey. Good morning, Gary.

Gary Kolstad

Good morning.

James West - Lehman Brothers

On the new products CARBOHYDROPROP, how many were, if any of the recent field trials have utilized this new technology?

Gary Kolstad

Well, we introduced it in December. I would have to put it as we have seen great acceptance in January because it's just the nature of it, right, we designed something that is both technically superior to existing products plus the economics of it, I don't even think we'll have to field trail it. What we seen from our clients, is that, when we tell them about the product, they compare it with what they are using today. It's a pretty easy decision for them. So, the answer is, it's going in without field trails although we did test some in December, but the acceptance has been very good.

James West - Lehman Brothers

Okay great. And then a second question, different topic on Russia. Is your facility in Russia fully 100% operational now at this point, and are you selling close to full capacity?

Gary Kolstad

I think on the production side, we have seen months where we've hit close to the peak, but not on a consistent basis.

James West - Lehman Brothers

Okay, and then on what point would you consider moving forward with adding additional capacity to that facility?

Gary Kolstad

Goodness, I don't think we will forecast that today. We would much rather just watch and see -- I think the market is fairly imbalanced there. We like the way things are going, but I think we will have to talk to you later about that?

James West - Lehman Brothers

Okay. And then one last question if I may. On the Pinnacle side of the business, what the great business that really has been for you guys, what's the limitation on growth here? Is it people or is it equipment, is there a way to grow this business faster than the current rate?

Gary Kolstad

Well, we are adding a lot of people, equipment. I think we are growing with the client acceptance of frac mapping. The continued growth happens in some of the new shale plays that are happening and it isn't just the US anymore. So I think that business is growing right along with the client acceptance and industry demand for it. Our other businesses within Pinnacle, we are probably people resource limited, and that's one of the things we are looking at right, as how to grow some of those businesses faster just by adding just the high quality people. And that also includes our geotechnical business; we expect to see lot of growth in that.

James West - Lehman Brothers

Okay, great. Thanks Gary.

Operator

Your next question comes from Roger Read with Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

I guess the question on Gary and Paul, really along the margin side. Could you maybe give us a little more granularity on how much of the -- I guess I'm going to call it margin erosion on a year-over-year basis, but maybe the flatness with Q4. How much of that is field trials?

How much of that is mix issues, cost issues on the high strength proppants and how much of it is sort of Russian or international sales prices being lower due to competition. I mean is the equal distribution more one than the other? In other words, if I look at '09 or maybe the back half of '08, if you would decrease the number of field trials if they are successful in increasing volumes, will we get an uptick in margins?

Paul Vitek

Roger, the impact of field trials is probably the smallest of factors that I referenced. The biggest factors are the increased fixed cost, primarily deprecation associated with the capacity expansion we've completed over the past couple years. And then the impact of the high strength raw materials would be second contributing factors. So those are both much more of a contributing factor than the impact of the field trials.

Roger Read - Natixis Bleichroeder

And the pricing side, internationally?

Gary Kolstad

Well, I would just say that, well, we some of that, keep in mid that it's only 20% of our business. I think as I mentioned one other things we want to do it and it's very obvious to us is fill up the capacity, because we'll see the incremental cash and earnings from that. And we are very pleased with CARBOHYDROPROP and how it's starting out. We do tell you though that we are, it will have lower margins than our traditional product.

Roger Read - Natixis Bleichroeder

What do you think the volumes or I guess maybe not related to -- not certainly what you could sell? What could you manufacture in terms of HYDROPROP volumes for '08?

Gary Kolstad

Well, I think when you look at it and you see what we’ve added, we have an extremely high efficient plan that we built in Toomsboro and we're just starting up the first line there and the new line is 250 million pounds. We basically sold a little over 900 last year. If you put the New Iberia idling of that plant, that means we have capacity around 1.23 billion, 1.24 billion pounds. So you could almost take the whole Toomsboro line too.

Roger Read - Natixis Bleichroeder

Okay, so there are really no limitations to what you can put out in terms of…

Gary Kolstad

No, I don't think so Roger, I really don't.

Roger Read - Natixis Bleichroeder

Okay. And then my final question. What do you plan to do with the free cash flow you're going to generate in '08? I know in the cash balances you're relatively low to date compared to historical, but do we expect or should we expect another dividend increase, or share repurchases on your horizon or acquisitions that maybe help out clinical?

Gary Kolstad

Roger, clearly our preferred use here is to grow our business through acquisitions. Our preferred acquisitions are going to be either product or service offerings that have a technology barrier, and that we continue to rely on the core businesses we have currently.

We're focused on things that improve production and recovery in the reservoir. We like the financial flexibility that our current balance sheet gives us and we think that volatility in the marketplace might provide us with some acquisition opportunities this year, and for that reason our financial restructuring in terms of the stock buyback is not at the top of our list, but as we've said before, we will use that as a benchmark against which we evaluate acquisition candidates.

Paul Vitek

And I think you have seen in our past years what we do with the dividend. So, we would probably expect that trend to continue and we have recently invested in, made some small investments in companies that are developing technology that we think add and just fold into what we do in cynical today. And so, we are excited about the little things and the new technologies that we can bring into the fold.

Roger Read - Natixis Bleichroeder

Okay. Thank you.

Operator

Your next question comes from Dan Pickering with Tudor Pickering Holt.

Dan Pickering - Tudor Pickering Holt

Good morning guys.

Gary Kolstad

Good morning, Dan.

Dan Pickering - Tudor Pickering Holt

Gary, I was hoping that you just might walk us through the HYDROPROP for the marketing picture if you will. I assume that this is going to be, it is more expensive than fracs and obviously and so, what do you tell him the customers the benefits are in terms of increased production or how are you selling this product?

Gary Kolstad

Well, first of all, we did focus on slick-water, we looked at that from a technology standpoint. What could we put out there that would help with the proppant transport? What could we put out there that’s materially different on the conductivity side? And one of things that’s been happening out there is that our traditional products, the cost levels that they are at has driven some operators to use, let's say, resin coated sand.

And so we put out a product there that has superior proppant transport, and I don’t want to get technical here, but Stokes law indicates that the size of the proppant is a very big factor in the transportability. So we put, we have engineered that in there. We have made the proppant a little bit lighter, and then you get to the big story which we have always had, and that’s the conductivity.

And when you look at the conductivity of CARBOHYDROPROP compared to let's say resin coated sand, you are going see things on the order of 50% to over a 100% higher. So, what we are seeing, as we talk to these operators and we've had some success with some of those people that you would admire.

This is a little bit of an easy decision and we priced it at the resin coated sand type pricing. And you have the thermal stability of ceramics. This is just, it really fits the market. And we have also geographically it's not hard for us to tell where our target regions are at. So, we are stalking it in certain spots, and I think now it's just a matter of how do we multiply the communication. So, we are very pleased with the direction we are going. You take that technology for a lightweight ceramics, (inaudible) them, put it all together, having attractive economics it's the good one.

Dan Pickering - Tudor Pickering Holt

And so the customer is going to look at this as he is paying the same as resin coated sand, and he would think that his production is going to go up. As you said 50% to 100%, but I think that's the conductivity improvement. I mean is his production going to go up 5% or 25%?

Gary Kolstad

Well, I think that's for them to model, Dan. We are just at the beginning, we can model that for them, but it's just, when you look at those parts but you didn't understand what I am saying there, this isn't easy decision. Guys, it's a better product. I think one or the other things too.

We certainly have been paying attention to all the other products out there, people want to plastics everything else out there, and when you look at that. We also understand the oil industry. You have to have the economic side, and one of the problem with all the other products that people have thought of putting in there, is they are very expensive. So here you get the trusted conductivity and strength of ceramics that you can put in at the oil industry economics.

Dan Pickering - Tudor Pickering Holt

Okay. And thinking about introduction and new products obviously, overtime there is goal to grow this. Look three years out and I assume that the current sort of shale place continue to grow in popularity. How big a piece of the business in terms of percent of your total profit volume can this be?

Paul Vitek

Well, I think we are still targeting the water fracs, Dan. I wouldn't say this is targeted at the shale, that something that hasn’t been proven yet, but we have very large targets of water fracs in traditional sandstones.

Dan Pickering - Tudor Pickering Holt

Okay. All right. And then, last question as it relates HYDROPROP, you mentioned the goal now is to essentially to make people aware of it. Are you changing anything about your sales force as you're looking our way or you're adding people or is this just training them about the new product?

Gary Kolstad

Well, we started doing that about 18 months ago about the same time I joined the company. We've added folks; we probably got them more focused. You have seen some of that result in the US where we outperformed the market by quite a distance. We are very happy with our results there. So, I think they are already in place, Dan, and we are very focused. We have David Gallagher kind of leading up that effort, and there has been recent training sessions. It’s a very focused effort and I think we have a very good product introduction here.

Dan Pickering - Tudor Pickering Holt

Okay. Fantastic. One other question, as you look at the US market encouraging to hear not a lot of pricing pressure there. Historically, I think what we've seen and at least my understanding is that as activity falls into our gas pricing moderates, you tend to get the pressure pumpers pushing back on you in terms of substituting a price pressure. So you have not seen any of that. What do you think they are paying for in terms of either rig activity or gas price?

Gary Kolstad

You know that better than I do Dan, but I’m not saying we haven't experienced pressure, but you need to get back to the technology side. We're the only ones with the light weights right. We’ve introduced another lightweight product out here. On the heavyweight, you've seeing some movement by the competition to, lets say put another name on it or something, but you still have the specific gravities, they are what they are, you have the volume benefits of the lightweight. So, you have to kind of look at our business, what percentage of our business in the US or North America is lightweight. So that helps the technology side and what we offer helps.

Dan Pickering - Tudor Pickering Holt

Okay, thank you.

Operator

Your next question comes from Steve Ferazani with Sidoti.

Steve Ferazani - Sidoti

Good morning. It looks like pretty good international growth this quarter. Can you give a sense of how much of that is just coming from Russia with the new plant ramping or how much you're seeing in other markets?

Gary Kolstad

We don't breakout Russia for competitive reasons and give individual volumes. I would just say we put in our release that was the major driver, and as we look forward we think that the Middle East has a lot of opportunities, we think there will be in growth in South America. So I would just kind of leave it at that.

Steve Ferazani - Sidoti

Well, if I try it this way, did you grow outside of Russia?

Gary Kolstad

Yes.

Steve Ferazani - Sidoti

Okay. Next question would be on the box side supply now. Have you found a new long-term supplier or where do you think stands in terms of fixing prices there or are you going to be just exposed to market forces?

Gary Kolstad

I'll let Paul talk a little bit, I'd like to just start off by saying, what we did is we had a, we’ve said before we had a single supplier and that person quit the business. So, middle of '07 and '08, we had to build a bridge and make sure we didn’t lose the supply side of the raw materials and not have the product available.

So we had done that. Now what we will do is work on the long-term cost of it and build a long-term business model to where we get our heavyweights back to the competitive position of our lightweights. And now if, Paul, you want to add some to that?

Paul Vitek

The only thing I have to add, Gary, is that in 2007, we saw a net increase of about 10% on those costs. In 2008, based on the strategy that Gary has laid out for multiple suppliers, we expect that those costs would be up again as much as 15% to 25%. The variability there is due to ocean plate rates which has been pretty volatile over the course of the last year. So we do expect to notice a significant increase in those costs for '08, and for that reason we are obviously focused on a long-term supply source, but, as Gary said, we will mirror the position we have in lightweight.

Steve Ferazani - Sidoti

Okay. The only other thing I got is, I know last quarter when we saw US volume sales maybe was weaker and not quite when compared with rig count, you talked about a lot more drilling in shales where you don’t operate. It looks like this quarter the numbers were a little bit better if we compared your proppant sales to rig count. Has anything changed in terms of environment or what you are doing?

Paul Vitek

Well, no, and I mean we are going to se fluctuations in quarters, that doesn’t surprise us at all. We did have a good fourth quarter in the US, it was a record fourth quarter. We had a good year in the US, so that’s probably a little bit of a statement about the earlier question on our marketing and sales team combined with the fact that we are trying to explain the differentiation of our products that are in, myself in particular want us to stress the benefits of the lightweights and the volumes, so that the lightweights compared to the heavyweight products. And so I think there is just, we will see quarterly fluctuations, but we are very happy with the way we are going in the US. And now when you combine another product introduction in to market CARBOHYDROPROP, we can keep on growing.

Steve Ferazani - Sidoti

Okay. Thank you very much.

Operator

Your next question comes from Matt McGeary with Sentinel Asset Management

Matt McGeary - Sentinel Asset Management

Good morning. It's been a few years since you guys have generated positive free cash flow given then capacity expansion. You could have put some numbers around your statement that CapEx is going come down dramatically. I mean we are talking sort of more normalized mid $20 million, $30 million range or is it no going to be that much?

Gary Kolstad

Not exactly Matt. We are talking about $30 million. We probably have $15 million to $20 million in maintenance cap at this point. And there will be additional capital expended to growth of distribution operations in our proppant business and also to expand the chemical technology business. So, at this point our best estimate of '08 capital spending is about $30 million.

Matt McGeary - Sentinel Asset Management

Okay, great. And where do you stand, I mean how should I think about, having exact number to sort of feel regarding capacity, if I look out the next three to five years. Is this going to be regular every few years with a big CapEx jump in your business model or are you okay for a while?

Gary Kolstad

Well, I kind of explained earlier, where we are at little over 900 last year. Assuming, we have it something between 1.24 to 1.35 capacity now. The key to this is to continue to introduce new products in my opinion. So, we plan on doing that. The future may dictate that we will look at geographical opportunities, things like that. So, this was a pretty massive undertaking.

And when you think about that it's really a compliment to the financial strength of CARBO. There is not many companies that could go expand their manufacturing capacity by 70% to 80% and not go into debt. So, we've got a very strong balance sheet finances, and if we find the opportunities and we are still looking for them. As they come up we will be more than ready to add capacity.

Matt McGeary - Sentinel Asset Management

Great. Just one last one. When you look at your international markets where you saw pricing pressure, how much of that was just sort of the normal ebbs and flows of the business and how much of it is sort of a systemic problem? Is that all I mean are you worried there? And I wonder particularly in Russia, if you look at the sort of pricing you're getting there has the financial returns met your goals and you've decided to invest all that money there?

Gary Kolstad

I'm going to let Paul answer just the last part of your question there, but you have to keep in mind that Russia is basically kind of closed market. So, the importing proppant from other places really doesn’t exist or the economics of it don’t exist. So, that market is growing. We think it's fairly balanced and pretty stable, let say on pricing. The first part of your question there, the places we have seen, sometimes they have very unique things like lets say a large contract in a country that maybe problematic for our service company or something like that. So, different things happen, sometimes you have the lower quality Chinese proppant getting imported things like that. So, it's just periodic.

Paul Vitek

With respect to your question about the returns in Russia, keep in mind that at this point this plant has been operating for a less than a year, and during a startup process, you're always going to have hits and starts in your operations and we’ve had a few of those hits along the way. So our cost structure is not yet where we would expect it to be when that plant is operating in what we would consider a normal fashion. So the return in the first year is certainly not where our target returns of we would expect long-term, but there is nothing that's change in that marketplace from what we assumed when we made the investment.

Matt McGeary - Sentinel Asset Management

Okay, thanks guys. Appreciate it.

Operator

Your next question comes from Robert Christensen with Buckingham.

Robert Christensen - Buckingham

Are you indicating that the CARBOHYDROPROP is not suitable for the Shales in the United States?

Gary Kolstad

No, not at all, I’m just telling you that when we looked at the market, our target market we went after places where water frac is being pumped. The biggest opportunity we saw was the Sandstones and so far I realized it's very early time, its one month into this, but so fat it looks like that strategy and marking plan followed through.

Robert Christensen - Buckingham

And is there a product in the works or an existing product that has a shale application, I recall a year or two ago that there may have been field trail of a CARBO product in a shale; we never heard anything about that. What I’m getting at is the shale market is so much larger than sandstone market. And will you ever participate in the shale market?

Gary Kolstad

Yeah, I'd never discount the sandstone market or the tight gas market. The US is just lumpful of that and there will be decades of growth in that. But getting back to the shales, we are currently doing some field trials in there and they are quite different. We mentioned that the last quarter the success with ceramics in the Bakken Shale and there is the FP paper out on that. We have done some things, they are all a little bit unique. We are testing them, but at this point, our first product out, we went after the water for that market. So we are not forgetting about it, but we've got a different market here we are looking for.

Robert Christensen - Buckingham

One final one, if I may. Mexico. When I see Halliburton and Schlumberger go down there and they are drilling onshore and these are pretty deep wells, high pressure, high temperature formations. I believe I hear Halliburton has like 58 wells of 6,500 meters. Is that a potential market for your products? What's going in Mexico now onshore?

Gary Kolstad

Yeah. We were very pleased, we had a lot of growth in 2007. We very much follow the increased activity there in Mexico, absolutely.

Robert Christensen - Buckingham

Thank you.

Gary Kolstad

Thank you.

Operator

Your next question comes from John Langston with Hodges Capital.

John Langston - Hodges Capital

Hi. Thanks for taking my question. Talk a little about North American activity and talked about some of your clients, you're saying that your activity you thought it was going to be flat. I was going to see if you could possibly give us a little more color on what you are hearing from your customers on that activity? Just some anecdotal stuff. Thank you.

Gary Kolstad

Well, the US, I think people are getting more comfortable as it moves forward, and I think we would just have to stick with what the big service companies tell and that’s that they expect it to be flat or a few percentage up. Canada, I think will still be problematic in '08 because of the changes they have made up there. And we think that we will be down just like everybody else does. I personally think that you absolutely can do that forever in Canada and it will change around. Having said that, there is some interesting new plays happening in Canada and one in particular, that's pretty exciting, and really benefits for our Pinnacle business.

So, I think North America, it will do what it does and the US will always, as I have said repeatedly over time, it always has higher lows and higher highs, and we will continue to find the reservoirs both shales, sandstones, everything and develop that and I think some of that will move into Canada. So, long-term North America always remains huge.

John Langston - Hodges Capital

Okay. Thanks

Operator

Your next question comes from John Licata with Blue Phoenix Incorporated.

John Licata - Blue Phoenix Incorporated

Hi guys. Good morning. I guess getting back to Mexico. I guess I wasn't a lot of oil service companies with this past quarter, talking about growth in Mexico, PEMEX, there's some talk about PEMEX, maybe potential of $10 billion worth of contracts. I know last year that you guys participated in a PEMEX sponsored field trail which resulted in with PEMEX using CARBOLITE.

I was hoping you can maybe expand a little bit about your relationship with PEMEX, and is there any potential for them to look at the new CARBOHYDROPROP technology in Mexico. And finally, if maybe you can see if there is, I guess, will Mexico potentially have any use for Pinnacle? Thanks.

Paul Vitek

Yes, absolutely lot of the trends that are in the South Texas area of course extends straight into Mexico. So, you have a lot of similar reservoirs, but you some more complex reservoirs around there as well. I must say, while Mexico was a bright spot for us in '07, its still only around 5% of our sales volume. So, it has a tough time moving the needle.

But yes, in fact I would make a comment that throughout South America we're having more interest in our Pinnacle businesses and that includes everything from consulting to monitoring to the frac mapping. And our relationship, we are very happy with our field trial last year. We try and work those through the service company, so they have great relations with MX help us. So I think everything will just continue on there and our business will probably grow along with the increased investment by MX.

John Licata - Blue Phoenix Incorporated

Great, thank you very much.

Operator

Your next question comes from Matt McGeary with Sentinel Asset Management

Matt McGeary - Sentinel Asset Management

I just forgot one from earlier. Getting back to the cash flow statement. What do you expect for working capital performance, that's been kind of a drag in recent years as well, obviously with the new plant startups, better performance expected there going forward?

Gary Kolstad

Yeah Matt, I think we will see a slight increase in working capital, but not nearly what we saw in 2007, one of the drivers in 2007 working capital was the high-strength raw material issue we are dealing with and we had more high-strength raw material in inventory than we do typically. So I would expect a much smaller increase in working capital in '08 than what we saw in '07.

Matt McGeary - Sentinel Asset Management

Great, thank you.

Operator

(Operator Instructions) Your next question comes from Gregory Macosko with Lord Abbett.

Gregory Macosko - Lord Abbett

Yes, thank you. With regard to just one final question on HYDROPROP. You mentioned resin coated sand, is the new HYDROPROP replacing some of the existing proppants that you are using or selling?

Gary Kolstad

Absolutely.

Gregory Macosko - Lord Abbett

And also could you give us a sense of that?

Gary Kolstad

Let me clarify, you said is it replacing some of the resin coated sand?

Gregory Macosko - Lord Abbett

No, no. I’m saying of the existing ceramic proppants.

Gary Kolstad

No, we targeted the geographical spots where water fracs are pumped and where our current or our previous existing product line was not being used. And we also targeted where they're using inferior products such as resin coated sand. So in our distribution and stocking is based along the same idea. So, we’ve done as this to gain new footholds in the market and replace products that don't provide the same value, not replace things such as our other lightweight ceramics.

Gregory Macosko - Lord Abbett

So you're pretty comfortable whether it's not cannibalizing your existing product lines to any great extent?

Gary Kolstad

Yeah, like I said we're one month into this. People tell me not to be so optimistic, but I’m optimistic about the way its going. I'd like the way we’ve laid out the product introduction and what's happening in our client feedback on it. And so yeah, that we took all those things into account and so far so good.

Gregory Macosko - Lord Abbett

And you have idled and have some idling costs for the Georgia Plant I believe if you decided to start that again, how long would that take?

Gary Kolstad

That actually Greg, it’s the New Iberia, Louisiana plant, it would idling in March or April of this year. And to restart that plant, our best guesstimate is probably three to six months.

Gregory Macosko - Lord Abbett

Okay, thank you.

Gary Kolstad

Thank you.

Operator

Your next question comes from Patrick Flavin with Flavin Blake & Company.

Patrick Flavin - Flavin Blake & Company

Gary, could you discuss the competitive dynamics at present in terms of available capacity, you have raised capacities significantly, and they as well. And in terms of patent lapse issues, and whether they are pursuing product that comes off patent as a competitive feature, and whether any of these things are entering into the price competitiveness that you mentioned earlier.

Gary Kolstad

Okay, that's cleared up. Yes. I would say that if you looked at the products and if you have to differentiate between lightweights and heavyweights, because we are the producer of lightweights. So then when you talk about the heavy weights, I would say that the bauxites and the various people that produce it, they are pretty well in balance. The supply of the intermediate strength is the one that other people have gotten into, including China and stuff like that. So, that one has a surplus.

Our lightweights are still -- 70% of our business still continue to do well, and the other thing that you have to keep in mind that I mentioned it earlier is the lightweights, we fit them to the reservoir. CARBO has the broadest product range and we just broadened it one more time now with CARBOHYDROPROP, but we tend to fit the product to the reservoir and there is benefits as you go along.

The lightweights have a enormous volume advantage versus the heavyweights, so as competitors try to do things such as pricing to maybe capture some of our lightweight areas, they always forget about the volume side of it. And the new products that some folks have brought in there are still heavyweight products.

So, on balance, most of them are pretty decent I think in balance, but once again, our focus is on creating something new, and we have done that. We are attacking a new market. It's doesn't really go after ceramic competitors. We are going after those products that are non-ceramic and once again expand the market for ceramics, because I think everybody knows it just has much greater conductivity than anything else out there. And when you combine this with the economic parts of this, we think it is a lot of appeal.

Patrick Flavin - Flavin Blake & Company

Understood. I was trying to get the competitive dynamics, Gary, in terms of capacity by your competitors, whether they have extended as well?

Gary Kolstad

I think our two major ones, yes. They have added capacity not as aggressively as us. We've betted a lot over the last three years.

Patrick Flavin - Flavin Blake & Company

Okay, so in general there is an excess of supply in the market place.

Gary Kolstad

Yeah, in particular of the one intermediate strength product

Patrick Flavin - Flavin Blake & Company

Okay. And then, in terms of the pattern lapses, are there any coming up here?

Gary Kolstad

Yeah, on June 2009 our lightweights expire.

Patrick Flavin - Flavin Blake & Company

Okay, and do you expect them to pick up on that?

Gary Kolstad

Well, we've built a very, very efficient process there. We sit on the reserves. We have the most efficient plants, high quality plants. We have been working on this for several years. We will keep introducing new products and things like that. And as time as run on, the intermediate strength pattern we had expired I think it was in November of 2006, and you know we haven't seen material changes in our business. Let's say in North America because of that. So, we definitely think long-term and I think we have a good strategy moving forward to how we address all of these things and we see growth ahead.

Patrick Flavin - Flavin Blake & Company

It's nothing like innovation to take care of patent lapses, right?

Gary Kolstad

That is exactly right. Thank you.

Patrick Flavin - Flavin Blake & Company

Thank you.

Operator

At this time there appear to be no more question. Mr. Kolstad, I'll turn the call back over to you for closing remarks.

Gary Kolstad

Okay. Thanks everybody once again for joining us this morning. As we close I want to say that well, the industry conditions in North America that you hear about in all the other releases, they may be difficult in short-term, but we are in a very strong position. We expect to have continued revenue growth. We are excited about the introduction of CARBOHYDROPROP and its ability to generate volume growth in the sluggish Nam fracturing market.

We have the capacity in place to respond to the increase proppant demand. We expect to introduce new product and services in the future. We are excited about the growth in all the Pinnacle businesses, and the increasing complexity of the North America reservoirs continue to drive demand for all those businesses. And we have a very strong balance sheet that will continue to strengthen now that we concluded our recent major capital spending program. And that just provide us with the great deal of flexibility to respond to opportunities. And I hope everybody has good day and we'll see you next quarter.

Operator

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

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