CARBO Ceramics' CEO Discusses Q2 2012 Results - Earnings Call Transcript

CARBO Ceramics, Inc. (CRR)

Q2 2012 Earnings Call

July 26, 2012 11:00 AM ET

Executives

Gary Kolstad – President and CEO

Ernesto Bautista – VP and CFO

Analysts

James West – Barclays

Blake Hutchinson – Howard Weil

Doug Garber – Dahlman Rose

Jeff Tillery – Tudor Pickering

John Daniel – Simmons & Company

John Keller – Stephens

Brian Uhlmer – Global Hunter

Robert Richardson – Buckingham Research

Presentation

Operator

Hello, and welcome to today’s CARBO Ceramics Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the 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 26, 2012, and your participation implies consent to our recording 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 call, the company will make statements that provide information other than the historical information and will include projections concerning the company’s future prospects, revenues, expenses or profits. 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 reflects the company’s beliefs based on the 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 your call.

Gary Kolstad

Good morning, everyone. I want to thank you for joining us to discuss CARBO’s Second Quarter results along with an outlook for the remainder of 2012.

Some of the highlights of the second quarter. The sales volume set a new quarterly record despite difficult market conditions, including an oversupply of varying quality Chinese ceramic proppant in North America. We achieved this sales volume record through our continued focus to further expand the use of CARBO’s high-quality, high-conductivity ceramic proppant in the liquids-rich basins, namely the Bakken and Eagle Ford. Although sales volumes were healthy in these basins, infrastructure to support industry activity remained limited.

From a distribution standpoint, we continued to face logistical challenges and higher associated costs during the quarter. Our sand processing plant in Marshfield, Wisconsin became operational later in the second quarter of 2012. Shipments of our high-quality CARBO Northern White sand have started to arrive at our resin-coating facility in New Iberia.

E&P clients’ continued focus on environmental risk reduction led to record quarterly sales for Falcon Technologies. Falcon’s technologically advanced spill prevention and containment systems are widely respected in the industry and provide superior protection for operators of oil and gas well sites.

The board of directors recently approved a 13% increase in the dividend. This marks the 12th consecutive year we have increased the dividend and the board’s decision demonstrates continued confidence in our long-term cash flow outlook.

A brief review of our financial and operational results. Revenues for the second quarter of 2012 increased 19%, or $27.9 million, compared with the second quarter of 2011. North American proppant sales volume increased 17%, while International proppant sales volume increased 20% compared to the same period last year. Operating profit for the second quarter of 2012 increased 2%, or $0.9 million, compared to the second quarter of 2011. The increase in operating profit was primarily the result of higher proppant sales volumes and a greater contribution from some of the company’s other business units, partially offset by changes in product mix and increases in freight, logistics, and SG&A expenses.

Net income for the second quarter of 2012 increased 7%, or $2 million, compared to the second quarter of 2011. Our average selling price declined 4% sequentially and about a quarter of that was due to the selling price decline was due to field trials.

Now turning to the outlook. As we noted previously, 2012 will have its share of challenges due to the shift in activity away from natural gas basins towards the liquids-rich basins in North America. We expect to see a very volatile, competitive environment in the second half of 2012 due to three main reasons: the continued oversupplied proppant market, low natural gas price, volatile NGL and oil prices and a continuation of higher distribution costs.

These three factors will lead to increased pressure on proppant pricing, proppant volumes and margins for the rest of the year. Regarding pricing we will continue to execute field trials in the third quarter of 2012 and although the price concession is limited it will affect our average selling price.

In addition, we will continue to manage the price volume relationship to efficiently utilize our plants and positively affect our financial results. The Canadian activity typically benefits volumes in the third quarter; however, activity coming out of spring breakup has been very slow. We are working to manage distribution cost in today’s fluctuating environment. We are deploying capital and long-term investments which will help us deliver products more efficiently to our clients.

Now looking at some project updates. The construction of our Marshfield resin-coated plant has been deferred at this time. We continue to monitor market conditions and will modify the project timeline accordingly. Work on the Millen, Georgia ceramic manufacturing plant project continues and we estimate the plant could commence production before the end of 2013. Resin-coating production in New Iberia will likely be limited through the third quarter of 2012 as we build a sufficient inventory of CARBO Northern White sand.

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