FINAL TRANSCRIPT. McCoy Corporation. First Quarter Results. Event Date/Time: May 1, :00 a.m. E.T. Length: 27 minutes

Transcription

1 McCoy Corporation First Quarter Results Event Date/Time: Length: 27 minutes 1

2 CORPORATE PARTICIPANTS Peter Watson McCoy Corporation Vice President, Legal and Corporate Secretary McCoy Corporation President and Chief Executive Officer McCoy Corporation Interim Chief Financial Officer McCoy Corporation Senior Vice President, Drilling and Completions CONFERENCE CALL PARTICIPANTS Justin Wu GMP Securities Analyst Cormark Securities Analyst Raymond James Analyst John Bereznicki Paradigm Capital Analyst 2

3 PRESENTATION Operator Good day, ladies and gentlemen. Welcome to the McCoy Corporation's First Quarter 2013 Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. At that time participants are asked to press *, 1 to register for a question. For assistance during the call, please press *, 0 on your touch tone phone. As a reminder, this conference is being recorded today, Wednesday, May 1, Representing McCoy today we have, President and Chief Executive Officer;, Interim Chief Financial Officer;, Senior Vice President, Drilling and Completions; and Peter Watson, Vice President, Legal and Corporate Secretary. It is now my pleasure to introduce Peter Watson. Please go ahead, sir. Peter Watson Vice President, Legal and Corporate Secretary, McCoy Corporation Thank you, Operator. Good morning, and welcome to McCoy's 2013 first quarter results conference call. We will begin with Jim's remarks about the first quarter, and Jacob's comments on the financial results. Following that, Jim will discuss the outlook for the remainder of 2013, and we will end with a question and answer session. 3

4 Please be advised that statements made on this call, other than statements of historical fact, may contain forward looking information. I refer you to the forward looking information statements disclaimer included in today's release of McCoy's 2013 first quarter financial results. I caution you that this disclaimer also applies to and expressly qualifies any forwardlooking information disclosed in today's call. Any dollar amounts mentioned on this call are in Canadian dollars, unless otherwise noted. I will now turn over the call to Jim for an overview of our first quarter President and Chief Executive Officer, McCoy Corporation Thank you, Peter. McCoy's overall revenue decreased 8 percent quarter over quarter. In the first quarter of 2013, McCoy reported Energy Products and Services revenue of 31 million, an 18 percent increase compared to the same period in We attribute this to the manufacturing capacity we added last year, and a relatively strong backlog. Mobile Solutions continues to face a challenging market, however. A 2 percent increase in the segment s gross profit percentage indicates that our efforts to cut costs, improve our subcontractor relationships, and increase our United States dealer network has been successful. McCoy met two milestones in the first quarter of We realized the first commercial sale of our second product from the we product line, the wetorq85, an iron roughneck with excellent range of motion and ease of maintenance. 4

5 We are continuing to develop our we product line. We anticipate the commercialization of these products to occur throughout 2013 and into 2014, depending on successful prototyping and field testing. Our second milestone was initiating our global sales and service model. McCoy established a UK company which will be based in Aberdeen, Scotland as our first international sales and service location. We expect this location to become operational in the second quarter. In 2012, McCoy increased investment in its drilling and completions manufacturing capacity. In the last two quarters we have used some of this capacity to build an inventory of finished goods in order to decrease delivery lead times for standard equipment, and ensure a supply at our new international sales and service locations. McCoy continues to strategically invest in our facilities and management team. We initiated an expansion of our die and insert manufacturing facility in Louisiana, as well as moved our service centre in Houston to a larger facility. We enhanced our drilling and completions management team with the promotion of Milton Young (phon) to Vice President of Operations and Johann Fenger (phon) to Director of New Product Development. McCoy expanded our US Mobile Solutions dealer network from two to four dealers. We entered into new dealership agreements with retailers in Colorado and North Dakota, both of which 5

6 are strategic markets. We expect these relationships to broaden our US presence, and enable McCoy to pursue additional revenue channels. I will now turn over the call to, our Interim Chief Financial Officer, for an overview of our first quarter 2013 financial results. Interim Chief Financial Officer, McCoy Corporation Thank you, Jim, and good morning. In the first quarter of 2013, McCoy reported quarterly revenue of 42 million, an 8 percent decrease compared to the same period last year. Net earnings during the first quarter of 2013 were 2.1 million or $0.08 per share, which is consistent with the same period in Adjusted EBITDA, which McCoy previously referred to as EBITDAS, increased by 2 percent to 4.7 million in the first quarter of 2013 compared to the same period in Adjusted EBITDA per share was $0.18 per share, up $0.01 per share. On a segmented basis, revenue from our Energy Products and Services segment in the first quarter of 2013 was 31 million, an increase of 4.8 million or 18 percent when compared with Order backlog remains relatively strong for this segment, and we're beginning to realize revenue from new product lines and additional manufacturing capacity. Revenue from the Mobile Solutions segment for the three months ended March 31, 2013, was 11.1 million, a decrease of 8.3 million or 43 percent when compared with Consolidated 6

7 gross profit percentage was 28 percent for the first quarter of 2013 compared to 24 percent in Energy Products and Services gross profit percentage was 33 percent, consistent with the prior year. Gross profit percentage for the Mobile Solutions segment increased to 15 percent, a 2 percent increase from the same period in At the end of the first quarter, McCoy had working capital of 50 million, including 16.4 million in cash and cash equivalents. McCoy initiated disclosure of two key metrics in our Q MD&A that provide an indication of McCoy's future performance: backlog and book to bill ratio. The company defines backlog as work that has a high certainty of being performed, and is measured on the basis on a firm customer commitment, such as the receipt of a purchase order. Customer commitments may be defaulted or cancelled, but most are secured by a deposit and/or require reimbursement by the customer if cancelled. Backlog reflects likely future revenues. However, cancellations or reductions may occur, and there can be no assurance that backlog amounts will ultimately be realized as revenue or that the company will earn a profit on backlog work. McCoy's backlog at March 31, 2013, was 47.2 million. 7

8 The book to bill ratio compares the value of net orders received to revenues recognized in a set period of time. This is an indicator of customer demand, as well as sales order processing time. McCoy's book to bill ratio for the three months ended March 31, 2013, was That concludes my financial summary. I'll now turn the call back to Jim. Thank you, Jacob. Before we open up the call to your questions, I would like to talk about the industry outlook and its impact on our business, and then end with a summary of McCoy's ongoing growth strategy. Mobile Solutions continues to face a challenging market. Backlog levels appear to be stabilizing, and we are forecasting a slow but steady improvement in revenue and earnings throughout the remainder of McCoy has implemented cost cutting measures in this segment, and continues to optimize its subcontractor relationships in the United States. Despite a slowdown in the North American drilling and completions market, international and offshore markets have remained relatively strong, and McCoy has experienced an increase in request for quotes for international orders. McCoy will continue to expand our international market sales and service footprint. We are currently preparing our first location in Aberdeen to begin operations in Q2, and are in the process of establishing a second international sales and service location in Southeast Asia. 8

9 Two additional service centres are planned for next year. These centres will enable efficient customer responsiveness with the potential to generate additional revenue. We have successfully commercialized the second product from our we product line. We continue to develop other innovative drilling and completions products. I would like to now open up the call to a question and answer session. Operator, please provide instructions to the listeners. Thank you. Q&A Operator Certainly, thank you. Ladies and gentlemen, if you would like to ask a question, please press *, then the number 1 on your telephone keypad. To withdraw your question, please press the # sign. If you are using a speakerphone, please lift your handset before your entering your request. We'll standby for a moment for the first question. And your first question comes from the line of Justin Wu with GMP Securities. Your line is now open. Justin Wu GMP Securities Good morning. Just my first question is I'm wondering what's changed in the marketplace that now you're seeing some kind of positive trends in your Energy Products and Services segment? 9

10 Because I guess not too long ago, it seems like a quarter ago, that you guys had hit a bit of a soft patch, and I'm just wondering what's changed there? Senior Vice President, Drilling and Completions, McCoy Corporation Hi, Justin. This is. As I mentioned on our last call that we did have a soft Q4 and anticipated a softer Q1. But I think as I also mentioned that we anticipated a recovery really in the second half of the year, and I think we continue to see indications that we will be receiving more orders as compared to Q4. So I think that as companies have their capital spend budgets prepared and now ironed out, I think they're ready to make some moves on that. And so we're anticipating that we'll continue to see an increase in orders and requests for quotes. Justin Wu Okay. So it sounds like last quarter a lot of your customers had kind of hit their year budgets and were kind of slowing down the orders... That's right. Justin Wu Okay. Okay. Now I mean in terms of the size and scale of some of these rig packages you're talking about, can you give us a sense are they larger than normal? And it sounds like you have several of these different packages out there. 10

11 Well, we have a few core customers that we have really established some long backlog orders with those core customers, which frankly 12 months plus. And then we have a few large orders, as I mentioned, coming out or the potential to come out, and those are in the $10 million plus range. Justin Wu Okay. That's helpful. And just my last question is I'm wondering if there's any follow on orders for your I know you have the one order for the iron roughneck. I was just wondering if you have any follow on beyond that as this point. We do, Justin, have some, I think, some great opportunity to secure some additional orders for that. Really since the field testing is now completed, we actually had our sales team in this week undergoing some intensive training in how we're going to launch that product. So I anticipate by the next quarter we'll have some feedback for you on that progress. Justin Wu Great. Thanks, Jim. Operator And your next question comes from with Cormark Securities. Your line is now open. 11

12 Cormark Securities I guess just to start, the wecatt, can you just give us a bit more information on how that's going? Kind of momentum, and the order rates, et cetera, as we move through Q1 and into Q2 here? Sure, Sarah. This is. Hey. We did actually have, I think I mentioned we had our actually open house last Friday in our Edmonton facilities, which was a great event, attended by many customers and suppliers. We actually have a total of 11 orders to date in 2013 for the wecatt, so that brings us up to 30 orders from the beginning of that launch last or Q4 actually. And would most of that be North America to date? That's all over actually. Okay. 12

13 It s not one particular place. Okay. So you've sold that internationally also? Yes, ma am. Okay. Sure have. Okay. And then, Jim, on the Mobile side of things, so are you actually seeing a few orders come in for the back half of the year? Or is it more at this time just talking to customers you think things might be a bit better as we move through 2013 here? Sarah, I think we hit bottom on our backlogs probably in December. Yeah. 13

14 Our backlog in the Mobile Solutions is a bit better than it was, and it's trending upward with quotations, plus increasing backlog. We're not going to get the hockey stick recovery on the backlog with trailers... No. Or Mobile Solutions, but it's slow and steady by the looks of it, but we're trending upward. The good news, I got to tell you, Mobile Solutions is doing a couple of things. They really clamped down on a trend for a lower cycle and they've looked after their costing. So the good news is they're slowly, but surely increasing revenue. They're definitely making money. They're profitable, cash flow positive, and EBITDA positive. So quite frankly considering the market conditions we're pretty happy with what management's done, and we're making money. So I'm feeling pretty positive about Mobile Solutions. Great. And then in your MD&A you talk about on the EP&S side subsequent to the Q1 that you secured a large order in Latin America. Would you be able to provide us the approximate size of that at all if you have it on hand? 14

15 Actually, one of the orders that I referred to in the plus $10 million range. Okay. Now would that have been... Disclosed, Sarah. Pardon me? Just to be crystal clear on the backlog that we disclosed. Yes. That is Q1 backlog. Yeah. And the order that you just referred to is not included in Q1 because that's not just completely buttoned up. 15

16 Right. Okay. And You'll see that in Q2. Okay. And will that get delivered over a year? Or what's the time line on that? Yeah. The contract... Yeah. This is Jim,. It'll be a staggered delivery over the balance of 2012 or And would that be one of the bigger contracts that the EP&S division has received in the past? It's not one of the biggest or it's not the biggest, but it is one of the larger ones. 16

17 Yeah. Okay. And then just a few more things. G&A up ticked in the quarter. I'm just trying to get a sense of the run rate for this line going forward here on a quarterly basis. This is Jacob here. Hi. So on the G&A, I think I've described in the MD&A a little bit how we certainly ramped up our G&A... Yeah Yeah. I think as we get into 2013 that the rate at which we've been increasing is going to slow down quite a bit, and I think we're getting to more of the top of that cycle. So I would expect our G&A to slowly increase over the rest of the year, but not anything that we saw in

18 So I think you're at 6.6 million in the quarter. That could go up a little bit, but that's probably a decent quarterly run rate going forward? Is that a good way to look at it? It's in the range. Yeah. It will probably go up a little bit, but not substantially. Okay. And then lastly, inventory. Are you guys pretty much done the necessary inventory build? Or will you see more on that end? Sarah, this is. We will, as we establish our international service centres, we will be stocking those individual locations. So I think our build is I don't see a substantial increase in our current inventory Okay. 18

19 But I think there will be a I think we've built up where we need to be. Yeah. But we will see a slight uptick in that as we go forward. Okay. Great. That's it for me. Thank you. Operator And your next question comes from from Raymond James. Your line is now open. Raymond James Hi, guys. Couple questions just on the last building off the last one about inventory. Is that the inventory build, is that part of the reason for your gross profit margins being quite strong in the quarter? Or was it a mix with maybe more precision revenues? Or could you provide some colour on that? Hi, Theoni. It's Jacob here. With respect to the gross profit percentage, that inventory build I would say did not have an impact on the profit percentage that we're realizing. 19

20 Okay. So... SG&A efficiencies. It's just better efficiencies? Better efficiencies and stuff we outsource, getting better pricing, a combination of those things. Okay. And in terms of the new technical centres, what do you think the cost was in the quarter that was one time versus recurring? Theoni, this is Jacob here again. To give you an exact dollar amount, it's not overly large, but there was some upfront costs that we've incurred to get the company set up to get some of the initial stages done to get that infrastructure in place. Mm hmm. But if I was to estimate it, I'd say roughly in that $300,000 range in the quarter. 20

21 Okay. And was that incurred for the UK and the Southeast Asian location? Or is that just the UK and we can expect maybe another one in the back half of the year similar? It's a little bit of both, but primarily the UK. Mm hmm. So there'll be a little bit more with regards to the southeast location in Q2. Okay. And just looking at your backlog. It's great to have more colour in your book to bill as well. Just is there any way we can get a sense of quarter over quarter or sequentially? Or are you just starting from scratch here? It's Jacob here again. We're just going to start from scratch, Theoni, and build that up over time that history. Okay. And the last question just has to do with the new product development. Obviously you're getting a lot of traction on your iron neck and your wecatt, as you spoke about. Do you 21

22 think on balance you guys will be looking at offsetting the increased costs in '13? Or will it be more of a cost heavy year and the revenues will accrue later on? I think it'll be a more cost heavy year, Theoni, and we'll be realizing those revenues the back half of 20 actually the last quarter of 2013 and into Okay. Just Theoni, this is, and I know Sarah had asked a similar question about the new products. So one thing we know from experience in the past is, first of all, a good example is the wecatt, that selling 30 in this short period of time, quite frankly, is very, very impressive... Okay. For a new product. I remember when we introduced our WinCatt 10 years ago or more, or I guess it's longer than that, I remember those sales being quite incremental. That was a small little business for a long time, but as products get well known in the marketplace, customers get used to them. 22

23 In this business taking new technology like our WeCATT, which is software and providing data, they want to test. So initially in these 30 I can tell you probably many of those customers will be spending time testing their first orders or order to see if they really like the tool, if it's working to their satisfaction, and things like that. And the iron roughneck's the same. It's building that momentum. So it's key for us to hit the market effectively, and like Jim described, training the sales people on all of the technical aspects and having a good marketing strategy to get out there. But where this stuff really pays off is over time. That's the way new product development is and... Okay. So we have to sometimes be a little patient, but I always look back at our new products and all of even building the die and insert business and things. Once it does, though, get that momentum, that's when it really ramps and that takes a bit of time, but when you look back at some of the things that we've been very successful in, the return on those investments aren't short. That's just the way it is. 23

24 Okay. Great. Thanks. Jim, while we're talking, you had the ERP system going in late last year. Just wondering how that's tracking and if that's maybe part of the efficiencies being shown in the gross profit? Yeah. Theoni, this is. We did have our Epicor online in our dies and insert business in Lafayette. Mm hmm. The end of last year. As far as the other D&C business units, we have not implemented that in place yet, so that's currently in progress. The implementation team is working hard at it. We're making great headway, and we still anticipate that being online the end of the year here, the end of 2013, so no, the efficiencies of ERP have not been realized yet. Okay. Great. Thanks. Theoni, Jacob here. I'll just add a little bit to that in that those efficiencies we ll probably realize more in 2014 than

25 ERP Yeah. For ERP. Yeah. Okay. All right. Great. Thanks a lot, guys. You bet. Operator Ladies and gentlemen, again as a reminder, if you would like to ask a question, please press *, 1 now. Your next question comes from John Bereznicki with Paradigm Capital. Your line is now open. John Bereznicki Paradigm Capital Good morning, everyone. Good morning, John. John. John Bereznicki 25

26 You obviously expanded your consumable segment capacity a fair bit last year. Did you see much impact to that in Q1? Or is that something that's going to be driven by the international expansion later this year? Yeah. John, here. We will see that really come online towards the latter half of this year when we start actually stocking those international service locations, and we're actually continuing to build capacity at our dies and insert business, and looking forward to getting that online, again, the second half of John, just to add to that. This is. The die and insert are a consumables business. The expansion's taking place right now. That was a 2013 initiative, just to be clear. We just are expanding that plant. Last year's major expansion was building the bucking building in Louisiana, which is a capital equipment facility. John Bereznicki Gotcha. Okay. And I'm guessing the consumable segment probably generates some of your higher margins; I would expect that to be impactful not just top line, but margin wise when you start to see that kick in? Yeah. Exactly. That is correct. 26

27 John Bereznicki Okay. Gotcha. And can you give us some capital guidance here for the balance of the year? This is Jacob here. So what I d say on our capital spend is we're looking to do about roughly about $8 million of capital spend on PP&E, and we've got another about $4 ish million on developing our new product development spend. John Bereznicki Gotcha. Okay. And that's all between now and the end of '13 then? Yeah. John Bereznicki Gotcha. Okay. That's it for me. Thanks for the colour. Thanks, John. Operator And we have no further questions as this time. Please continue. Thank you, Operator, and thank you to our listeners for participating in today's call. We look forward to talking to you again next quarter. Have a great day. 27

28 Operator Thank you, ladies and gentlemen. This concludes the conference call for today. I would like to thank you for your participation. You may now have your lines disconnected. Enjoy the rest of your day. ***** 28