Tesco Management Discusses Q2 2012 Results - Earnings Call Transcript

Tesco (TESO)

Q2 2012 Earnings Call

August 06, 2012 11:00 am ET


Julio Manuel Quintana - Chief Executive Officer, President and Executive Director

Robert L. Kayl - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Josh C. Lingsch - Simmons & Company International, Research Division

John R. Keller - Stephens Inc., Research Division

Gregory M. Macosko - Lord, Abbett & Co. LLC

Douglas Garber - Dahlman Rose & Company, LLC, Research Division



Good day, ladies and gentlemen, and welcome to the Tesco Corporation Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Julio Quintana, President and CEO. Mr. Quintana, you may begin your conference.

Julio Manuel Quintana

Thank you, Michelle. Good morning, ladies and gentlemen, and welcome to TESCO's Second Quarter 2012 Earnings Conference Call. I'm Julio Quintana, TESCO's President and CEO, and I'll be hosting the call. Bob Kayl, our Chief Financial Officer, is with me on the call. I'll begin with some general comments on the quarter, then Bob will give you an overview of our financial results. Following Bob's remarks, I'll return and provide an update on our business and plans for the future.

Before I begin, it is important to note that during the course of this call, Bob and I will make forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and Canadian securities legislation. These statements are based on current expectations that involve risks and uncertainties, which could cause actual results to vary from those anticipated. These risks and uncertainties have been and are more fully described in our annual reports and quarterly reports filed with the SEC and with Securities regulatory authorities in Canada. You should not place any undue reliance on these forward-looking statements made in the conference call, nor do we intend to update these forward-looking statements.

Also, we will use certain non-GAAP measures. The earnings release issued this morning contains an explanation and a reconciliation of these measures to GAAP measures, and we refer you to that release for additional information.

Now on to our second quarter results. We reported net income and EPS in Q2 of $13.1 million or $0.34 per share on $136.7 million of revenue compared to $14.4 million of net income or $0.37 per share in Q1 on $152.4 million of revenue. Operating income increased during the quarter to $24.6 million, up from operating income of $19 million for Q1. Operating margins increased to 18% for Q2 as compared to 12% in Q1. This quarter's results include a $13.3 million pretax gain on the sale of CASING DRILLING business, which is included in the aforementioned operating income. When the results are adjusted for the gain from the sale of CASING DRILLING, as well as other one-off items, which we will discuss shortly, operating income would have been $14.7 million or 10.7% OI margin and then EPS would have been $0.22.

We ended the quarter with a backlog of 41 units with a potential revenue value of $57.3 million. Today, our backlog stands at 42 units. The sale of CASING DRILLING is the second quarter -- excuse me, the sale of CASING DRILLING in the second quarter opens a new chapter in the history of TESCO. We have created excellent organic top line growth over the recent years and have struggled at times with one-off costs as we have grown internationally. With the focus traded as a result of the CASING DRILLING sale, our go-forward strategy will have in its core an obsession with execution excellence. This focus, coupled with our innovative culture, should provide a solid foundation to deliver new products, improving operating results and ultimately long-term value for our shareholders.

I will get into this in more detail after Bob summarizes the financial results. Bob?

Robert L. Kayl

Thank you, Julio. I will discuss our second quarter 2012 operating results by business segment and then give some comments on our corporate and research and engineering expense.

Starting with Top Drive. Revenue totaled $90.1 million for the quarter, 15% higher than the same period last year but down 12% sequentially from prior quarter. The decrease from prior quarter is primarily a result of the lower number of Top Drive units sold, mostly associated with the lack of production of our ESI model, which was recalled in the first quarter due to gearbox supply chain issues. We sold 34 units for the quarter compared to 39 units in Q1 and 24 units in Q2 2011. Of the 34 units sold for the quarter, there were 33 new units and 1 used unit from our rental fleet. Of the 39 units sold in Q1, 35 were new units and 4 were used units. With the 33 new units delivered to customers in Q2, we ended the quarter with a backlog of 41 Top Drive units with a potential value of $57.3 million.

During Q2, we continued to see moderate Top Drive sales activity, and today, our Top Drive backlog stands at 42 units with several sales pending. We do not include a sale in our backlog until the contract is signed and we have received a nonrefundable deposit, if required by the contract. With that, 8 ESI units dropped from the backlog as a result of cancellations. Top Drive rental revenue was $33.9 million in Q2, down slightly from $34.6 million in Q1 and $34.7 million in Q2 2011. The decrease from Q1 was due to a decrease in the number of operating days. Currently, our fleet of rental Top Drive stands at 130 units, the same as at the end of Q1 2012. At quarter end, we were in the process of adding 7 new units to our Top Drive rental fleet.

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