WSP Holdings Limited Q4 2007 Earnings Call Transcript

| About: WSP Holdings (WH)

WSP Holdings Limited (NYSE:WH)

Q4 2007 Earnings Call

March 25, 2008 10:00 am ET


Paul Ludig - CCG Elite Investor Relations

Longhua Piao – CEO

Xizhong Xu - Director and Assistant General Manager

Yip Kok Thi - Chief Financial Officer


Alex Harbin – Toll Cross Securities

[Richard Zafroni] – Wafra Investment Advisors


Welcome to the WSP Holdings Fourth Quarter and Full Year 2007 Earning Conference Call. (Operator Instructions) I would now like to turn the call over to your host for today’s call Mr. Paul Ludig with CCG Elite Investor Relations.

Paul Ludig

Good day everyone and welcome to WSP Holdings Fourth Quarter and Fiscal Year Ended December 31, 2007 Earnings Conference Call. With us today are Mr. Longhua Piao the company’s CEO, Mr. Xizhong Xu, Director and Assistant General Manager and Mr. Yip Kok Thi, Chief Financial Officer. Before we get started I would like to remind our listeners that managements prepared remarks in this call contains forward looking statements that are subject to risks and uncertainties and management may make additional forward looking statements in response to your questions.

Therefore the company claims the protection of the Safe Harbor for Forward Looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to risks such as but not limited to fluctuations in customer demand, management of rapid growth, intensity of competition from other providers of OCTG products and services, general economic conditions, geopolitical events and regulatory changes and other information detailed from time to time in the company’s filings and future filings with the United States Securities and Exchange Commission.

Although the company believes that the expectations and such forward looking statements are reasonable there is no assurance that such expectations will prove to be correct. Any projections as to the company’s future performance represent management’s estimates as of today, March 25, 2008. WSP Holdings assumes no obligation to update these projections in the future as market conditions change. I will now turn this call over to Mr. Piao the CEO of WSP Holdings for opening remarks in Chinese.

Longhua Piao

I would like to thank everyone for joining us for the WSP Holdings fourth quarter and full year 2007 conference call. This is our first earnings conference call with investment community so I would like to take a moment to describe the company and its products before we go on to the business overview and financial results.

WSP Holding is a leading Chinese manufacturer of seamless casing, tubing and drill pipes used in oil and natural gas exploration, drilling and extraction. We manufacture and distribute what are commonly called Oil Country Tubular Goods (OCTG). We manufacture products that lead the standards of American Petrol Institute and also non-API products. WSP has a strong focus on research and development of new products and our product mix has shared technology intensive non-API products to meet the needs of our customers.

We have a very well established a biometric custom base and we sell OCTG to major oil and gas companies throughout China. We successfully compete against other OCTG companies in China based on the high quality of our product, price and services. WSP’s products have been gaining international recognition and exports account for 58% of our revenue in 2007. In 2008 we plan to develop more export sales along with our manufacturing capabilities in the international market.

Two thousand seven was an important year for WSP Holding. We increased our sales revenue, changed our product mix to feature, emphasize sales of high performance non-API products, expanded our manufacturing capabilities and successfully completed an initial public offering and the listing on the New York Stock Exchange. The $212.5 million in net proceeds before deduction of unrealized discounts and commissions an offering expenses from our IPO will allow us to continue to expand both our manufacturing capacity and support international expansion efforts.

WSP Holdings looks forward to an exciting 2008 in which we will leverage our high performance products and an efficient manufacturing to grow our share in both domestic and overseas markets. Mr. Paul will now provide you with the rest of my detailed remarks in English. He will be followed by our CFO, Mr. Thi who will discuss our financial performance for the quarter and year ended December 31, 2007 in more detail.

Paul Ludig

Thank you, 2007 was a landmark year for WSP Holdings. Net revenues grew by 32% over 2006 to $483.8 million. Gross profit grew by 47% to $125.8 million. Gross profit grew by 47% to $125.8 million. The net income for 2007 was $74.6 million or $0.97 per diluted ADS. In addition to this outstanding financial performance the company expanded its presence in the Peoples Republic of China and global OCTG industries. While increasingly positioning ourselves at the high end of value added products in the OCTG industry.

WSP Holdings is positioned to take advantage of growing need for high performance products used by the oil and gas exploration companies as they pursue new sources of energy in increasingly challenging operational environments. The oil and gas industry is looking for new sources of oil and gas to meet the worlds increasing demand for energy. China’s surging demand for energy is driving a large part of the world’s growing thirst for oil and gas.

Between 1997 and 2006 China’s crude oil consumption grew at an estimated compound annual growth rate or CAGR of 6.5% and natural gas consumption grew at an estimated CAGR of 13% according to the BTU statistical review of world energy in 2007. As existing easy to reach oil and gas fields become depleted exploration drilling and extraction must take place in increasingly high temperature, high pressure and corrosive environments. This in turn requires increasingly sophisticated OCTG products.

Higher performance seamless OCTG products accounted for 80% of OCTG expenditures in 2006 up from 69% in 1997. The global seamless OCTG market is expected to grow from $14.5 billion in 1997 to $20.2 billion in 2010. The seamless OCTG market can be broken into two segments. American Petroleum Industry (NYSEMKT:API) standard products and non-API products which are customized solutions that require more technology and intensive manufacturing.

Approximately 25% of the seamless OCTG market is composed of non-API products while 75% is API products. WSP China manufactures and distributes over 400 types of API and non-API products including casing, tubing and drill pipe. We also sell pipe connectors and green pipe which is unprocessed pipe. In recent years we have been shifting our product mix to increase the contribution of higher profit margin non-API pipe. Sales of non-API products grew from 11.3% of revenues in 2006 to 31.5% of revenues in 2007.

Non-API volumes grew from 22,910 tonnes in 2006 to 93,467 tonnes in 2007. This shift is in our product mix with the primary driver between our gross margin improvement in 2007 to 26% from 23.3% in 2006. This trend has continued in the first few months of 2008. In January China Petroleum and Chemical Corporation Northwest Oilfield branch placed an initial order for 3,700 tonnes of non-API products following a three trial wells tested casing and tubing solutions. WSP China also signed an agreement with Tarim Oil Fuel Company a subsidiary of PetroChina to test our products in its own three trials wells test.

In our Jiangsu Fanli subsidiary recently obtained a manufacturing license from the Chinese government to produce high quality non-ATI seamless pressure pipes used for boiler manufacturing. WSP Holdings has well established customer base and we sell OCTG products to major oil and gas companies throughout China. In January 2008 WSP China was awarded the “AAA” Grade Supplier Certification by Daqing Oil Field Materials & Equipment Group which procures production materials and equipment for subsidiary of PetroChina Company Limited the largest oil and natural gas producer in China. This type of recognition demonstrates the strong position WSP Holdings holds in the domestic market.

Another key strategy is to increase exports to higher priced and higher profit margin markets where we can leverage our highly efficient, high volume manufacturing base in China. In 2007 sales revenues from exports accounted for 58% of total revenue up from 51% in 2006. WSP Holdings has obtained certifications which enable us to sell directly to large international oil and gas companies allowing us to bypass distributors while building the value of our brand with important customers.

We are able to provide global service in regions including North America, The Middle East, Asia, Africa, Russia and Australia. In 2008 we plan to continue expanding direct sales to international customers. Supporting the expansion in Chinas oil and gas companies into international markets. We also plan to open sales and after sales representative office in key markets. We are actively pursuing seamless price manufacturing joint ventures outside of China and plan to establish a sales representative office in the United States in the near future.

WSP China currently has eight trading lines and one drill pipeline providing us with 572,000 tonnes per annum of finished products threading capacity. At 650,000 tonness per annum of pipe processing capacity. We have begun to deploy the cap rates in our IPO to start to increase our production capacity of both non API and API products. In November 2007 we expanded our drill pipe capacity from 12,000 tonnes per annum to 24,000 tons per annum. We also plan to open two new plants, a manufacturing plant in Liaoyang, Liaoning Province for hot rolling, threading and heat treatment and a pipe threading line in Songyuan, Jilin Province.

We have ordered production equipment for our new threading line in our Wuxi facility and expect to start production in September 2008. Our goal is to position WSP Holdings at the high end of the international seamless pipe industry which means R&D is a key element of our business plan. Non-API research and development focuses on the development and the application of new materials that design of premium connectors the improvement of production techniques and development of a quality control system.

In summary, we believe that 2007 was a very successful year for WSP in which we exceeded our financial goals and laid the groundwork for the next phase of our growth and continued international expansion. We believe that the combination of high energy prices, depleted reserves and growing expenditures on oil and gas exploration create a very favorable environment for future growth. With our IPO completed WSO Holdings has the world class technology, efficient manufacturing base and strong balance sheet required to become a leader in this market.

I would now like to turn things over to Mr. Thi the company’s CFO who will present the company’s financial results for the fourth quarter and fiscal year ended December 31, 2007.

Yip Kok Thi

I would like to thank all of you for joining us today on this call. Having become a public company in December 2007 this is the first time that WSP is reporting its financial results to the investment community. It is my pleasure to report that company had a successful fourth quarter and full year 2007. Our 2007 results exceeded expectations for revenue, net profit and earnings per EPS. These results were because of the company’s successful expansions of its manufacturing capacity, strengthening its non-API business and increasing OCU’s.

For the fourth quarter 2007 our net revenue was $139.9 million an increase of 18.2% from $109.8 million in the fourth quarter of 2006. This increase was mainly executed through the growth of sales volume and selling proportionally more higher priced non-API production. Non-API production accounted for 34.4% of the company’s revenue in the fourth quarter of 2007 up from 17.1% in the fourth quarter of 2006.

Here is our Non-API product were $44.7 million in the fourth quarter of 2007 up 137.2% from $18.8 million in the Q4 of 2006. API product sales were $65.6 million in the fourth quarter of 2007 a 20% decrease from $82 million in quarter fourth 2006. Non-API product volume was 24,368 tonnes in the fourth quarter of 2007 up 108.6% from 11,680 tonnes in quarter four of 2006. API product sales volume was 58,406 tonnes in the fourth quarter of 2007 a 19.7% decrease from 72,693 tonnes sold in the fourth quarter of 2006.

Sales of other products mostly green pipes were $19.6 million in the fourth quarter of 2007 up 117.8% from $9 million in the fourth quarter of 2006. Gross profit for the quarter was $33.2 million an increase of 33.8% from $24.8 million in the fourth quarter of 2006. Gross profit margin was 25.6% up 300 basis points from 22.6% in the fourth quarter of 2006. Our gross margin because we continued to optimize the profitability of our sales mix and increase output while controlling production costs.

Operating expenses for the fourth quarter were $10.1 million an increase of 107.9% from $4.9 million in the fourth quarter of 2006. Operating expenses increase because of general and administrative expenses associated with professional and listing fees related to the becoming a public company. Product marketing and sales expenses and new share base compensation expenses that did not exist in the fourth quarter of 2006. Operating expenses are expected to grow regularly from this level in the future because of expanding operations, existing and professional fees and the expenses associated with stock option transferred to employees.

Operating profit for the quarter was $23 million an increase of 11.4% from $20.6 million in the fourth quarter of 2006. Our operating margin was 17.7% versus 18.8% in the fourth quarter 2006. Operating margin decreased because of increased expenses related to supporting company growth in becoming a public company.

EBITDA was $22.4 million in the fourth quarter up by 8.2% from $20.7 million in the fourth quarter of 2006. Net interest expense in the fourth quarter of 2007 was $2.8 million compared to $0.8 million in the fourth quarter of 2006 due to increase short and long term bank loans used for working capital. Net foreign exchange loss in the fourth quarter $1.6 million compared to loss of $2.2 million in the fourth quarter of 2006. Net income for the fourth quarter was $16.7 million an increase of 6.5% year over year from $15.7 million in the fourth quarter of 2006.

Our diluted earnings per ADS generated for the fourth quarter and December 31, 2007 was $0.20 as compared to $0.21 in quarter four of 2006. Average diluted ADS outstanding increased to 82,418,196 in quarter four of 2007 up from 75 million in quarter of 2006 as the result of our initial public offering. Currently the company has 205 million shares outstanding equal to $103 million ADS. For the full fiscal year 2007 our net revenue was $483.8 million up 32% from $366.5 million in 2006. Regarding our product sales mix we are focusing on higher margin on ADS and other products and export domestic sales to Chinese customers increased by 15.9% from $118 million in 2006 to $205.1 million in 2007.

Export increase by 49.4% from $186.5 million in 2006 to $278.7 million in 2007. Our API product sales revenue fell 3.5% from $299.2 million in 2006 to $288.6 million in 2007. While non-API product sales revenue grew 168.9% from $41.3 million in 2006 to $152.4 million in 2007. Non-API product sales volume was 19,467 tonnes in 2007 an increase of 308% from 22,910 tonnes sold in 2006. API product sales volume was 264,407 tonnes in 2007 or 8.2% decrease from 288,116 tonnes sold in 2006. Other products mostly green pipe were $42.8 million in 2007 up 64.6% from $26 in 2006.

Gross profit for the full year 2007 was $125.8 million an increase of 47.4% from $55.4 million in 2006. Gross margin improved to 26% an increase from 23.3% in 2006. Operating income was $103.6 million up 46% from $20.9 million in 2006 while the operating margin was 21.4% compared to 19.4% in 2006. Net income for the full year 2007 was $74.6 million an increase of 26.6% from $58.9 million in 2006. Our diluted earnings per ADS for 2007 was $0.97 for the year as compared to diluted earnings or ADS of $0.81 for the year 2006.

Turning to the balance sheet as of December 31, 2007, we had $300.9 million in cash equivalent and bank balances up from $79.2 million as of December 31, 2006. As of December 31, 2007 we had $263.1 million in short and long term bank loan. Working capital was $203 million as of December 31, 2007. Our day sales outstanding or DSO was 97 days in the fourth quarter of 2007 as compared to 47 days in the fourth quarter of 2006. Shareholder equity was $341.1 million up from $96.2 million as of December 31, 2006.

Cash flow from operations was $7 million in 2007 and our capital expenditure in full year 2007 was $38.7 million. Now I would like to discuss our outlook for the first quarter and full year 2008. In the first quarter WSP Holdings expect to generate net revenue between $110 million and $150 million and the net income in the range of $40 million to $70 million. This guidance reflects some reasonable pressure in costs in which make up approximately of our cost of goods sold.

For the full year 2008 the company has targeted the net revenue to be in the range of $600 million and $700 million and the net income in the range of $80 million to $95 million. This is equal to $0.78 and $0.92 earnings per ADS assuming an average EDS count of 102.9 million. This estimate is based on the company at existing manufacturing capacity and the expectation for continuing expansion into domestic and international markets for its non-API, API and other products sales.

As said by Mr. Piao expect 2008 to a very exciting year for the WSP Holding as we expand our capacity at the rate of expansions to overseas market and continue to introduce new high performance products in the non-API segment. Chinese and worldwide demand for high quality seamless pipe continues to grow and we are well positioned to take advantage of it. We have a strong relationship that can support both growth potential acquisitions.

Paul Ludig

I’d like to quickly note that all tonnes are metric tonnes and everything in terms of money was US Dollar amounts. With that we would be happy to open the call to your questions.

Question-and-Answer Session


(Operator Instructions) Our first question will come from the line of Alex Harbin with Toll Cross Securities.

Alex Harbin – Toll Cross Securities

My question is specifically on the recent iron ore and steel price rises. Obviously you guys said that this is 80% of your costs. How quickly can you pass through cost increases on to your customers? What’s your ability to maintain the margins that you have got so far and how quickly can you pass on the increases? Is it something where you can do it immediately or does it take time for your customers to adjust?

Paul Ludig

Mr. Thi perhaps you could talk a little bit about changes in recent steel prices also what’s taken place before answering the question directly.

Yip Kok Thi

This year China iron ore and coal and other raw material has increased tremendously. In the past we had no such experience. During the early part of this experience suddenly increasing the R&D line. Part of this price increase we are able to pass to our customer for example our OC export we manage to pass over two thirds price increase of about $140 to our customer. As for the other order those are we got for quarter four to accrue to quarter this year but we expect to pass the cost by increasing the price to our customer in the second or third quarters.

Alex Harbin – Toll Cross Securities

That would be 100% of the cost so that you maintain your targeted gross margins?

Yip Kok Thi

You can look at our 2007 results there has been emphasis on margin growth in the medium to long term we expect to maintain the same gross profit margin as well proven in our sale mix but in the near term we are achieving a challenge of trying to maintain the same margin growth.


(Operator Instructions) Our next question will come from the line of [Richard Zafroni] with Wafra Investment Advisors.

[Richard Zafroni] – Wafra Investment Advisors

I had a question, is it correct that you are currently in qualification process for Shell?

Paul Ludig

I don’t know, can you really comment on how that’s going that may be something that may be premature to talk about.

[Richard Zafroni] – Wafra Investment Advisors

The other question I had is we’ve seen the government of China impose price controls on a number of different products. For example they’ve put caps on Sinopec. I’m wondering if there is any risk of that filtering down the chain to possible price controls in the field sector in order to control inflation.

Paul Ludig

The previous question asked about the rises in prices. Are you asking for a general overview of whether there will be increasing price controls in the future?

[Richard Zafroni] – Wafra Investment Advisors

Yes, basically that when the government, for example has capped certain prices for Sinopec and I’m wondering if the government tries to cap inflation at different places in the economy if they might also cap prices?

Paul Ludig

Perhaps the company can tell us a little bit about its view in terms of whether price controls will be instituted?


I want to make clear whether you are asking if the government is going to control the inflation through the control.

Paul Ludig

Whether price controls will be instituted in the OCTG industry and overall in the oil and gas industry.

Yip Kok Thi

The government is definitely trying to control the price so as to control the inflation but whether the government will continue this control it all depends on the coming economy situation.

[Richard Zafroni] – Wafra Investment Advisors

One last question regarding your free cash flow, I think you touched on some of the things you may do but when you look at the free cash flow that you projected to generate in the coming years its fairly substantial and when you combine that with the cash that was raised from the IPO you are going to have substantial resources at your disposal. Those resources could go towards acquisitions to share buy backs, dividends. In terms of what you could do with that free cash flow can you give us some idea about what your views are? Will there be a meaningful dividend? Do you have potential acquisitions in looking to consolidate the supply market in China? What are you going to do with that free cash flow, it’s pretty meaningful?

Yip Kok Thi

We do have a lot of free cash flow rising from the IPO proceed. We also have planned for our expansions as well as possible integration plan. Right now in our plan is that we would have four things going on; one is we will be spending on the maintainable CapEx, we plan to have a plant in Northeast China producing hot rolling as well as finishing line. We are also going to have a smaller finishing line also in Northeast China. We are going to move on our so called US project though all these will pick up substantially…

[Richard Zafroni] – Wafra Investment Advisors

How much are you estimating all that to cost?

Yip Kok Thi

It would be close to about 50% of our existing cash.

[Richard Zafroni] – Wafra Investment Advisors

You will still be throwing off some meaningful cash flow even after that?

Yip Kok Thi

Yes but the management has further plans which is underway plus these plans will be revealed to the general public when the times are right. It all depends on our expansion plan then we will decide when to tell the general public about it.

Paul Ludig

Generally the company plans to expand manufacturing and become more active in international markets and money will be spent in both areas. How quickly it will be spent will depend on opportunities. Mr. Thi outlined that there are concrete plans to expand manufacturing in China.


(Operator Instructions) At this time we have no questions in queue and I would like to turn the call back over to Paul Ludig for closing remarks.

Paul Ludig

I’d like to thank everybody on behalf of WSP Holdings management team for your participation in this call. If you have any interest in contacting or visiting WSP Holding please let us know. Contact information is available on the company’s website which is Thank you for joining us on this call. This concludes WSP Holdings Fourth Quarter 2007 Earnings Conference Call.


Thank you for your participation in today’s conference this concludes your presentation you may now disconnect.

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