McCoy Global Inc. Third Quarter Results Event Date/Time: Length: 35 minutes 1
CORPORATE PARTICIPANTS Peter Watson McCoy Global Inc. General Counsel and Corporate Secretary McCoy Global Inc. President and Chief Executive Officer McCoy Global Inc. Chief Financial Officer Kenny Watt McCoy Global Inc. Senior Vice President CONFERENCE CALL PARTICIPANTS Justin Wu GMP Securities Analyst Sarah Hughes Cormark Securities Analyst Theoni Pilarinos Raymond James Analyst Joe Sirdevan Galibier Capital Analyst Elias Foscolos Industrial Alliance Analyst John Bereznicki Canaccord Genuity Analyst 2
PRESENTATION Operator Good day, ladies and gentlemen. Welcome to the McCoy Global Third Quarter 2014 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, Thursday, November 6, 2014. Representing McCoy today, we have, President and Chief Executive Officer;, Chief Financial Officer; Kenny Watt, Senior Vice President; and Peter Watson, General Counsel and Corporate Secretary. It is now my pleasure to introduce Peter Watson. Please go ahead. Peter Watson General Counsel and Corporate Secretary, McCoy Global Inc. Thank you, Operator. Good morning, and welcome to McCoy Global's third quarter 2014 results conference call. We will begin with Jim's remarks about the third quarter and Jacob's comments on the financial results. Following that, Jim will discuss the outlook, and we will end with a question andanswer session. 3
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 on McCoy Global's third quarter 2014 financial results. I caution you that this disclaimer also applies to and expressly qualifies any forward looking 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. President and Chief Executive Officer, McCoy Global Inc. Thank you, Peter, and good morning, everyone. I would like to begin with an overview of the strategic initiatives that were accomplished during this third quarter. At the beginning of the quarter, we officially changed our name to McCoy Global. McCoy Global is now truly a unified global organization operating under a common brand, systems, processes, and structure. In September, we announced the divestiture of our Coatings and Hydraulics business. This divestiture was the final step in achieving the goal of being solely focused on becoming a global leader in tubular make up and handling equipment solutions. The focus of management and growth capital will now be on operating the core business. McCoy Global continued to execute on a key element of our growth strategy, and opened another regional sales and aftermarket centre in Dubai's Jebel Ali Free Zone. Along with Aberdeen 4
and Singapore, the Dubai facility solidifies our presence in the Eastern Hemisphere, and provides a platform to service our customers from this regional hub and grow McCoy's presence in this area; we product line development projects continued to progress throughout the quarter. New product development remains one of the cornerstones of our organic growth strategy. Operationally, our team continued to improve plant efficiencies. These efforts resulted in shortened delivery times to our customers, and from a financial perspective positively impacted revenue in the quarter. And with that, I will now turn over the call to Jacob for an overview of our third quarter 2014 financial results. Chief Financial Officer, McCoy Global Inc. Thank you, Jim, and good morning. Today, we reported third quarter revenue of 38.3 million, a 9.5 million increase from the third quarter of 2013. Revenue was positively impacted by higher capital equipment sales as a result of increased plant throughput. In addition, we continue to see incremental increases in revenue from our Eastern Hemisphere regional centres. We realized gross profit for the quarter at 36 percent, a decrease of 5 percentage points from the third quarter of 2013. Gross profit percentage in the current quarter was impacted by a greater proportion of lower margin capital equipment sales, customer mix, and foreign exchange. 5
Earnings from continuing operations were $0.15 per share, up $0.02 per share compared to the third quarter in 2013. Higher revenue in the quarter was offset by a lower gross profit percentage and an increase in overhead expenditures. Although overhead expenditures were higher than the third quarter of 2013, they were consistent with the first two quarters of 2014. Net earnings for the quarter, which includes discontinued operations, were $0.21 per share compared to $0.15 of earnings per share in the third quarter of 2013. Earnings were impacted by the sales our Coatings and Hydraulics division, which is still subject to closing adjustments. Adjusted EBITDA from continuing operations in the quarter was 8 million compared to 6.5 million in the comparable period in 2013. EBITDA as a percentage of revenue remained strong at 21 percent. McCoy's backlog at September 30, 2014, was 32.6 million, a $12 million decrease from June 30, 2014. The decrease is a result of the shipment of orders carried over from the prior quarter and an improvement in plant throughput. At June 30, 2014, McCoy had working capital of 71.1 million, including 32.5 million in cash and cash equivalents and no debt. At this point, I'll now turn the call back to Jim. 6
Thank you, Jacob. Before we open 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. The declining oil price presents some uncertainty, as it has potential to affect our customers' capital equipment orders. Our international and offshore customers typically have longer planning time frames with larger and more complex projects, so they tend to be less impacted by short term fluctuations in the price of oil and gas. North American markets look somewhat of a mixed bag going into 2015. Oil and gas prices will ultimately determine how much activity will take place, and as we continue to prepare our budgets for 2015, the coming weeks and months may influence our outlook. That said, we remain committed to our strategic plan entering into 2015. The continued development of our regional locations is timely. As our customers enter a period of uncertainty, aftermarket revenues will likely increase as repairs and maintenance become more attractive. One other important perspective to remember is that McCoy is heading into 2015 on solid financial footing and does not operate in a high maintenance CapEx environment. Our growth strategies will continue to be executed as we take a longer term view on creating shareholder value. In the near term, our current level of backlog should support stable financial performance for the remainder of 2014. 7
I would like to now open up the call to a question and answer session. Operator, please provide instructions to the listeners. Q&A Operator Certainly. Thank you. Ladies and gentlemen, if you would like to ask a question, press *, 1. To withdraw your question, press the # sign. And if you are using a speakerphone, please lift your handset before entering your request. We'll stand by a moment for the first question. And our first question on the line comes from Justin Wu with GMP Securities. Your line is open. Justin Wu GMP Securities Good morning. Good morning, Justin. Justin Wu Good morning. Yeah. My first question's I guess more of a macro, what your customers what you're seeing in terms of your customers or what are your customers telling you, given where oil prices are? Have you see any signs of project deferrals? And generally how you feel about next year? 8
Kenny Watt Senior Vice President, McCoy Global Inc. Hi, Justin. Really, as Jim alluded to, there's obviously some uncertainty in the marketplace just now. We're still seeing some solid quotations, and we're not really seeing any deferred activity for 2015 at this present time. Justin Wu Okay. And what's your current mix of offshore versus onshore on the equipment side? Kenny Watt Justin, that's a very good question, but it's quite a fluid situation as far as our equipment use. Typically, our equipment can be used in an onshore and an offshore environment. We're starting to see some high dollar projects coming on the horizon that will require more offshore high tech, as we previously stated, equipment. But I would suggest we're probably pretty evenly split offshore to onshore. Justin Wu And I know you guys have done a pretty good job where you've tried to diversify the revenue mix to kind of move away from, or maybe focus less on the CapEx side and try to get into the OpEx budgets of your customers. And service is one element, and the other area I want to talk about is software. So I was wondering if you can comment on perhaps what percentage of your revenues are currently coming from service, as well as software sales. 9
Hi, Justin. It's Jacob here. On the last call Jim mentioned that we're starting to look at how we report our operating results from a segmentation perspective, and we're continuing to work towards that goal. In the short term until we get that project finalized and reported we're not in the position to disclose to the market those numbers. Justin Wu Okay. Perhaps if you could then on the software side if you can update us on how sales have been going with wetorq and weverify? Maybe if you can, just any kind of volume numbers in terms of units sold? Kenny Watt We're not in a position to disclose the numbers, Justin. But we're seeing a steady increase in enquiries and sales in the software side of the business. Justin Wu Okay. And okay, maybe if I could just lastly in terms of on the margin side, you guys mentioned it was negatively impacted by mix, understandably, given the delayed shipments tends equipment tends to have a lower margin and you had a big shipment there. I was wondering as we look into the backlog what the product mix looks like in the upcoming quarter? Kenny Watt Justin, it is very mixed, and we're seeing a similar projection in the backlog mix of the business that we've seen in the last quarter. 10
Justin Wu Okay. Great. Thank you very much. Operator Your next question comes from the line of Sarah Hughes with Cormark Securities. Your line is open. Sarah Hughes Cormark Securities Good morning. Can you give us idea of how much of the Latin America contract shipped this quarter? Sarah, it's Jacob here. Well, we shipped about $5 million of that order this quarter. Sarah Hughes Okay. Okay. And then I noticed G&A, if I look sequentially, G&A and marketing they were down sequentially. Is that just kind of timing of quarterly? Or had you made any kind of adjustments on that end? Sarah, it was just timing. I think we've seen that number starting to stabilize a bit, not the big increases. Sarah Hughes Yeah. 11
Going forward there are a few initiatives that will require some additional investment, but I don't foresee the big swing that we've had over the past few years, but there will be some incremental increases. Sarah Hughes And I guess on that note, so obviously an uncertain environment going into next year with potential of order declines, given what's going on in the oil price. How do you look at is there room to like move your G&A down if that scenario unfolds? Or how are you thinking about that as you look into next year? There's certainly a base level of G&A that we need to sustain the operation no matter what. There's obviously some ability to scale back if we need to, but we'll make that decision when things do happen. But we have no plans in the short term to scale back our G&A. We're moving forward with our strategic objectives as planned. Sarah Hughes Okay. And then inventory, kind of just trying to get a sense of kind of what's the plan there. It was around 39 million this quarter. Like will we see some initiatives to try to bring that down over time? Or is that just going to be the new level? 12
Kenny Watt Hi, Sarah. It's Kenny here. Sarah Hughes Hey. Kenny Watt There are initiatives underway just now and obviously that is a number that we're targeting, and we would expect to see that coming down. Sarah Hughes Okay. And your CapEx for next year, would it be significantly different from what you're seeing this year? Or is it fairly similar? On the CapEx, Sarah, I think this year we've actually had very little maintenance CapEx, and what you're seeing is for the most part some growth CapEx related to our international or our regional locations. Sarah Hughes Right. 13
Next year, we're just putting together our budget right now, but I don't anticipate a large maintenance CapEx needed for next year. So any CapEx that we do have in our budget for next year will be primarily related to growth. Sarah Hughes Okay. And then just on the new products, so you have the webuck, I think you said Q4, and then the wehold in 2015. When would you expect on the webuck, assuming it's successful, that you could start to see some more material kind of commercial sales in terms of timing? Kenny Watt We've actually completed the final testing. We're actually quoting the customers just now on the webuck. So we're optimistic, should I say, in this quarter that the webuck will be to market; wehold remains on target for Q1 next year. Sarah Hughes You ll still launch it in Q1 you said? Kenny Watt Correct. Sarah Hughes Yeah. Okay. Okay. That's it for me. Thank you. Operator 14
Ladies and gentlemen, again as a reminder if you would like to ask a question, please press *, 1 now. Your next question comes from the line of Theoni Pilarinos with Raymond James. Your line is open. Theoni Pilarinos Raymond James Hi, there. A lot of the questions were already asked, but I just had a quick follow up on the new products. So it sounds like the webuck is going to be you'll start seeing revenues next year. And then as for the wehold, what are you expecting there? Kenny Watt Sorry, Theoni, just to clarify. Both products are being quoted to the marketplace just now. The webuck we're targeting for this quarter and the wehold for Q1 next year. Theoni Pilarinos Okay. Thank you. I didn't quite catch that. Also distributor sales, it had a little bit of an impact on the margins this quarter. What percentage of your total are through distributors? And where are these distributors located? Well, it's Jacob here. We don't disclose customer mix and who our customers are and where those sales are going. Theoni Pilarinos 15
Okay. We did see an increase in those sales this quarter, which did impact margins. So I'll kind of leave it at that. Theoni Pilarinos Okay. And you can't even provide like a rough is it 5 or 5 percent of your sales generally? Or It varies from quarter to quarter, so we don't disclose that at all. Theoni Pilarinos Okay. Thanks, guys. Nice quarter. Thanks. Thank you. Operator Your next question comes from the line of Joe Sirdevan with Galibier Capital. Your line is open. Joe Sirdevan Galibier Capital 16
Thank you. Good morning. A couple of quick questions; just following on on distribution of the products, can you just sort of comment a little bit on your relationship with National Oilwell Varco? That would be one question. And then secondly, could you give us a bit more colour on capital expenditures, just following up on Sarah's question. And then finally, in light of the capital expenditures you expect in light of the slowdown, I'm kind of just interested in how you view your cash position and what you plan to do with that? Sure. I'll tackle the first question. It s here. Joe Sirdevan Thanks. With respect to National Oilwell Varco, they're a good customer of ours. We sell to pretty much all the blue chip customers in the space of energy services and contractors. So they're on the list as well. One area where we're particularly successful in helping them is with their offshore rig packages for ultra deep water and floaters. So that relationship continues. We've been working with them for a period of time. When their customers specify casing tongs for their rig packages, we've been their supplier of choice. That relationship continues, and so I guess the best way to put some sort of reference point is if you see their backlog on those package deliveries which they disclose, 17
understanding that not all orders do require this particular equipment that's a customer's choice but when they are, we do participate. Joe Sirdevan And can you give us a sense of how much of revenue is tied to Varco right now? We don't disclose revenue Joe Sirdevan Okay. By anyone. And you had a few questions on CapEx as well? Joe Sirdevan Yeah. CapEx and then the cash position. On CapEx, maybe could you clarify a little bit what you're looking for there and I'll try to provide... Joe Sirdevan 18
Sure. So you mentioned that not much maintenance CapEx in 2015, but some growth CapEx. I'm just kind of can you kind of give us a sense of is it investment in expansion of production capacity? Is it new international offices? Just sort of where you're going to spend the money. And then if you could maybe give us some quantum of the spend? And then finally a sense of then how much of your cash today do you sort of see as being free and able to be used for other sources? Sure. A good question on the CapEx, and it's actually a pretty simple answer. It's largely going to be used to grow our regional centres from a growth perspective. We don't have too much growth capital right now in terms of our existing plant facilities, so it'll be largely growth in our international locations. Joe Sirdevan Okay. In terms of number, we're just in the budgeting process right now, so we don't have anything finalized that we're comfortable talking about at this point. Joe Sirdevan Okay. Fair enough. Okay. Can you give us a sense of more or less than D&A? 19
It will probably be more than depreciation. Joe Sirdevan Okay. And then finally on the lovely cash position, what are your thoughts there? We re right now, obviously, sitting on a very nice cash balance and we have no debt. There is a lot of uncertainty right now obviously in the market. And that leaves us in a pretty good position and some flexibility to do a few different things, depending on what happens with the market. We're certainly putting together a strategy on how we'll deploy that, and hope to have something more definitive by the end of the year and early into next year. Joe Sirdevan Okay. Thank you very much. Operator Your next question comes from the line of Elias Foscolos with Industrial Alliance. Your line is open. Elias Foscolos Industrial Alliance Good morning. Morning, Elias. Elias Foscolos 20
I've got a question just diving a little deeper on the inventory question. I think in the MD&A there was a reference to increased throughput, and yet that inventory was up. So in another words, backlog was down and the implication was, well, we're able to turn through backlog a lot faster, but yet inventory was up. So I'm trying of reconcile the two because normally they go hand in hand, and here there was a bit of a disconnect this quarter. Absolutely, Elias. On inventory maybe I'll just elaborate a little bit too before I get into your question. Certainly there are lots of initiatives right now to target inventory reductions, but there's also going to be some areas of the business that strategically will require additional inventory as well. Our international locations will require additional inventory, and we ve started to obviously see that over 2014 as we stocked our shelves with aftermarket product. We also will need inventory to support new product lines, and we've certainly seen that as well this year as we build up inventory for products, such as the wecatt and other we products that we've brought to market and are bringing to market. So certainly at the plant level we will target initiatives to lower our inventory needs, and there will be some offset for some of these other reasons. What I will also say, though, is we ve mentioned a lot over the past few quarters on our ERP project and initiatives. And we continue to definitely refine those processes and gets some more efficiencies and functionality out of the 21
system. And one of the areas that we are going to be able to deliver on over time as we mature there is on targeting some inventory reduction. Elias Foscolos Okay. Thanks very much. That clarifies that to me a little. The next one, it's going to be a little bit technical, but I'll throw it out anyway, on backlog. Backlog, since the majority of the revenue you bring in is in US dollars, do you mark to market that at the end of the quarter? Or do you adjust that in into Canadian dollars when it comes in. Is that question clear? Yeah. It's clear, and what we do obviously for reporting purposes when we disclose it it's marked to Canadian dollars at every period end. Elias Foscolos Okay. Internally each location will report their backlog in whatever their functional currency is. Elias Foscolos Right. Okay. So essentially that is the adjustment in Canadian dollars as of September 30th? What we reported in the MD&A is in Canadian dollars. 22
Elias Foscolos Yeah. And it's taking all the orders through the quarter as of the exchange rate on September 30th? The orders taken will be mark to market that period end. Elias Foscolos Yeah. Okay. Great. Elias Foscolos That's all for me. Thanks very much. Thanks, Elias Thanks. Operator Your next question comes from the line of John Bereznicki with Canaccord Genuity. Your line is open. John Bereznicki Canaccord Genuity 23
Hey. Good morning, everyone. Hi, John. Hi, John. John Bereznicki Just a related question on the international locations; presumably they're hitting their stride. Are you seeing uptake on the consumables here quarter on quarter as we go forward? Kenny Watt Yes, we are, John. John Bereznicki Okay. And I take it you still have plenty of capacity left to meet that growth, given the recent expansion? Kenny Watt That's correct, yes. John Bereznicki Got it. Okay. Terrific. Would you disclose what kind of utilization you're seeing in that expanded facility right now? How much room are we talking about? Kenny Watt 24
John, it s a good question, but we're not in a position to disclose that, but there is expansion capability. John Bereznicki Got it. Okay. Thanks. And then just a big picture question; you're seeing new rig build announcements in the land market as recently as yesterday, and conversely a lot of chatter about deepwater pricing. Can you kind of characterize maybe what you're seeing in the land and offshore markets right now? Because obviously a lot of mixed signals right now. John, this is Jim. You're absolutely right, and for some reason the market always decides to do this just as you're entering budget season. On the offshore, as I think I alluded to in my preamble, the offshore market gives us more visibility. Those are typically longer term contracts, and I know that in everything we're reading and you're reading, I'm sure, there's a lot of noise around day rates and utilization and all that kind of stuff. But for us on the new rig build side there is better visibility because it takes quite a period of time to build those rigs. So that stuff will stretch out even because those are committed orders, that ll stretch out throughout next year likely. With respect to drilling, offshore drilling contracts, they tend to be longer in length, of course, which is helpful to us. So on the offshore side we see a bit more stability going into 2015. 25
Now, an extended period of downturn would certainly start to affect things like 2016 for us, or maybe the back half of next year to some extent. On the land side it is really like I described a mixed bag. We hear things like there are new rig builds. It depends who you listen to. It sounds like shale oil exploration is going to continue at least going into 2015. Will they remain as active as they are? That's another question, but right now it kind of feels like shale oils in certain areas of the US in particular are going to continue to be strong. What's going to be challenging in other types of exploration in North America land is another question. So it's really difficult on the land side right now, particularly in the Western Hemisphere. John Bereznicki Right. Okay. No, I appreciate that, and appreciate the colour. That's it for me. Thanks. Thanks. Operator Ladies and gentlemen, again as a reminder, if you would like to ask a question, please press *, 1 now. You have a follow up question from the line of Justin Wu with GMP Securities. Your line is open. Justin Wu 26
Just some follow ups on the new service locations. I was wondering if you could provide a bit of a progress report on Aberdeen and Singapore in terms of your penetration into those markets, and if there's any kind of challenges that you guys see breaking into those markets? Kenny Watt No, not at all. We've got a very strong team built in the Western sorry, in the Eastern Hemisphere. Those markets are progressing well. We saw a big improvement in the third quarter, and we are anticipating that to continue throughout the next several quarters. Justin, it's a staged well, it's a well planned and staged execution. The Aberdeen facility, of course, is the most mature of the three with a nice staff that's now trained and operating. Are they 100 percent fully functional? That still needs more development, but it is the most mature of the international locations. Remember, we've been at this a whole 15 months. But it is progressing on target absolutely. Singapore is coming nicely. It's been open for a period of time, and of course Dubai is just a recent announcement, so now we're going to get that place staffed and shelves filled and all that kind of stuff. So I would just suggest that our business plan for opening those regional operations is absolutely on track and going according to plan, so we're pretty happy about the progressing Kenny and his team have been making. 27
Justin Wu And how long do you guys anticipate these locations take before they start to break even? Kenny Watt Typically, and as we plan, we would do sort of a two year window. We're starting to see some meaningful contribution filtering in through the organizations a little bit ahead of that, but typically, Justin, we d do a sort of two year window. Justin Wu Okay. That s great. And just lastly maybe on the ERP progress. I was wondering if you could comment on how you're seeing the functionality of the system and what kind of efficiency improvements that you've seen out of the system. Kenny Watt We're seeing some tremendous progress in our ERP progress. We've put together an operations operating systems team, and we'll be beefing that up over the quarter. And we're expected to see continuing improvement. It is a long term process, and it's going to be a constant evolution as we move through that in time. Justin Wu Thank you. Operator 28
You have another follow up question from the line of Theoni Pilarinos with Raymond James. Your line is open. Theoni Pilarinos Hi, guys. I just wanted to follow up on the comments about a capital plan that you're discussing for your use of cash by the end of the year. Could you possible mention some of the opportunities that you re looking at? Or have been discussed so far? Sure, Theoni. It's Jim. With respect to our cash and capital allocation, certainly I think we've described that Dubai has just now been announced. We need to some capital will be used to stock the shelves and get operations running. I mean it takes working capital to get these things going. You've got to hire people; you've got to spend a little bit of capital on operating expenses and furniture and all that kind of stuff, but the biggest number would be inventory and capital going towards our new product development. That's a bit part of our strategic plan and so far capital commitment is solid on that front, so there will be cash left there. And other than that, continued some maintenance capital. The maintenance capital in McCoy is not what it used to be. It's a very manageable number now, and so that'll take up some of our cash and capital as well. 29
When we get together with our Board during our budgeting process in December we'll be talking a lot about how we move forward with our capital plan. And I'm really not in a position to elaborate on that now till we've made some firm decisions in the Board meeting. Theoni Pilarinos Okay. I guess it was that last point that I was looking for more colour on. I know you're keeping some dry powder for acquisitions. I m just wondering if there's been any change in that outlook. Absolutely not. And it was like in, again, in my preamble. Our strategic plan is going to continue to move forward, and I know most of the discussion today has been around organic growth. We ve talked a lot today about international locations and we ve talked a lot about new product development of the new products, and even increase in market share in certain products lines. But I'm glad you brought it up, Theoni, because this is the first time it's been mentioned. We absolutely are also continuing to look for strategic acquisitions, and in fact maybe the timeliness is better than it has been. Theoni Pilarinos Okay. Thanks a lot, Jim. 30
You bet. Operator There are no further questions at this time. Please continue. Thank you, Operator. Before we sign off this morning, on behalf of the executive team and the Board of Directors, I would also like to say thank you to Tom Watts, our Vice President of Human Resources, for his eight years of service and contribution to McCoy. We wish Tom all the best in his new career adventure. And thank you to all our listeners for participating in today's call. We look forward to talking to you again next quarter. 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, and enjoy the rest of your day. ***** 31