CARBO Ceramics (CRR)

Q2 2010 Earnings Call

July 29, 2010 11:00 a.m. ET


Gary Kolstad - President & CEO

Ernesto Bautista - CFO


Jeff Tillery - Tudor, Pickering, Holt

John Daniel - Simmons & Company

Blake Hutchinson - Howard Weil

Steve Ferazani - Sidoti & Company

Brian Uhlmer - Pritchard Capital

Jeff Spittel - Madison Williams

Roger Read - Natixis Bleichroeder

Craig Stone - Kayne Anderson

Mike Mazar - BMO Capital



Hello and welcome to today's CARBO Ceramics Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised, this call is being recorded today, July 29th, 2010, and your participation implies consent to our recording of this call. If you do not agree to these terms, simply disconnect.

I would like to remind all participants that during the course of this conference, the company will make statements that provide information other than historical information, and will include projections concerning the company's future prospects, revenues, expenses or profit.

These statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause 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. Kolstad, please begin your call.

Gary Kolstad

Good morning, I want to thank you for joining us to discuss CARBO's second quarter results along with our outlook for the remainder of 2010. This morning, we reported second quarter revenues of 111.5 million along with net income of $18.7 million or $0.81 per diluted share, an increase of 61% and 100% respectively from last year's second quarter.

Global proppant sales volume totaled 314 million pounds for the second quarter of 2010, representing a year-over-year increase of 45%. North American proppant sales volume increased 42% year-over-year, while international proppant sales volume increased 61% compared to last year.

Demand for our products has been maintained by the economic success that our clients have experienced when using our highly conductive proppant in both oil and natural gas plays. Several operators continued to report excellent production results in both of Bakken and Eagle Ford plays and the well is utilizing CARBO Ceramics proppants.

Demand for high-quality Ceramics proppants in these two plays continue to grow as operators realized the benefits of economic conductivity particularly in the presence of multi-phase flow. Although we were able to marginally draw down from our finished goods inventory during the second quarter, we remain capacity constrained, and as mentioned on last quarter's conference call, we expect proppant sales volumes to track closely with our production capacity over the next several months.

Construction is progressing well on the third 250 million pound production line at our Toomsboro, Georgia facility, and we still expect this line to commence startup in November of this year. We continue to see solid revenue growth in the Falcon Technologies business. Falcon is well-positioned to benefit from the increase focused on global environmental stewardship in the oil and gas industry, in particular, Falcon's products provide E&P operator to build either reduce the business risk of sales.

During the second quarter, our commitment to technology development continued as we expanded our iProp family of detectable proppants with the introduction of CARBONRT, an innovative, environmentally responsible, non-radioactive traceable proppant. In addition, we contained a ramp up the production of CARBOBOND, our resin-coating ceramic proppant, at our New Iberia resin-coating facility.

CARBOBOND is being successfully deployed in wells and client interest remains high. We experienced the year-over-year increase in operating profit of 101% due to increases in sales volume and average selling price. SG&A and other operating expenses for the second quarter of 2010 increased $3.6 million on a year-over-year, largely due to the inclusion of the Falcon Technologies business which was acquired in October 2009.

Net income for the second quarter of 2010 increased 100 percent, or 9.3 million, compared to the second quarter of 2009.

We are pleased to have announced an 11% increase in our quarterly dividend, illustrating the Board of Directors' confidence in our current and future financial strength of the Company.

Now moving to the outlook. Our near-term outlook on natural gas, like many in the industry, remains cautious given the backdrop of weak natural gas fundamentals. However, we are encouraged by the price of oil which may keep activity at healthy levels for the second half of 2010. Demand for our products is strong and we continue to anticipate that our ceramic proppant sales volumes will closely match our production capacity for the remainder of the year. As a reminder, our current capacity is approximately 300 million pounds per quarter. As stated previously, we were able to marginally draw down our finished goods inventory in the second quarter, but we do not anticipate being able to replicate this strategy during the second half of 2010.

Production on Line 3 at our Toomsboro location is anticipated to be startup in November of this year and we are excited to add additional capacity with Line 4, which is expected to be complete in 2011. When combined, these two lines will increase our productive capacity by 40 percent or 500 million pounds. As we mentioned in the past, in addition to our commitment to grow our production volumes, CARBO's growth will come from our ability to remain a leader in the development of technologically advanced proppant systems. As such, the opening of our new CARBO Technology Center in Houston during the third quarter is a key step in that process, and will allow us to better collaborate with our E&P clients in the development of products that enhance Economic Conductivity.

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