Investors: 2005 Press Release Archive
HSE Integrated Announces Record Financial Results for the First Quarter Ended March 31, 2005
NEWS RELEASE – May 30 , 2005
HSE Integrated Ltd. ("HSE" or the "Company") announces record financial performance for the three month period ended March 31, 2004. HSE will be hosting a conference call and webcast on Tuesday May 31, 2005 at 2:30 PM MST for those interested in reviewing the Q1 results and the activities of the Company with senior management. Participation details are contained in a separate News Release.
Overview
The three-month reporting quarter ended March 31, 2005 was the most successful in the history of the Company because it reflected the full impact of the combination of what used to be Patch Safety Services Ltd. and the seven acquisitions that took place over the course of the 2004 fiscal year ended December 31. This is the first financial reporting period since the expansion of the Company began in June, 2004 that HSE has enjoyed the benefit and impact of all the field service and human assets the company acquired. On a year-over-year quarterly comparison basis, the growth of the Company and improved financial performance in all areas can fairly be described as very positive for HSE shareholders.
The vastly increased capacity of HSE, combined with strong demand created by active levels of drilling, completion, workover and construction activity in the upstream petroleum sector, resulted in significantly improved financial metrics as measured by gross profit margin, EBITDA margin and net income
margin. These numbers validate HSE's business model that expansion through sectoral consolidation with the objective of becoming more efficient financially would be accretive to shareholders. As importantly, the vastly improved operating margins were accomplished primarily through gains in internal efficiency.
HSE is a completely different Company than the one that existed on March 31, 2004. Based on its strong financial performance and the vastly increased size of the Company, HSE now has the critical mass to finance significant and measurable growth internally without further dilution to existing shareholders or incurring levels of debt that might jeopardize the future of the Company should the market in which HSE operates experience one of its periodic and severe downturns in commodity prices and levels of field activity and spending.
David Yager, Chairman and CEO of HSE, offered the following comments on the first quarter financial results.
"A year ago when we began expanding our Company, the objective was to get into the oilfield safety business properly with enough equipment, manpower and field locations to be able to service our major clients rights across the basin in a manner that served the needs of our three key stakeholders - clients, employees and capital providers. It is clear from the Q1 results that this goal has been accomplished. Because of our greater size and financial strength, our clients are taking us seriously as a preferred supplier of their important health and safety services for their ongoing oil and gas development requirements."
Operating Results, First Quarter
Revenue
The Company's business is driven largely by the level of drilling, completion and well servicing activities within the upstream oil and gas sector. It earns its revenue by providing a variety of worker safety and equipment protection services including onsite safety supervision, gas detection and breathing equipment rentals and services, firefighting and fire protection, worker shower deluge services, on-site medical services, and safety training.
The level of drilling, completion and well servicing activity during the first quarter of 2005 is comparable to the same period in 2004 and continues to be high on a historical basis buoyed by high commodity prices. As mentioned above, however, the most significant factor affecting the Company's revenues over the course of the year has been the acquisitions completed between June and December of 2004. Revenues for the first quarter 2005 were $17,305,694 which is up 269% over the $4,690,443 for the same period in 2004.
Due to high levels of activity, HSE has been successful in obtaining higher pricing for its field services. These higher prices have been generally well accepted by HSE's customers because it has been able to substantiate them not only on a competitive basis, but also as a pass through of higher operating costs, particularly fuel and direct labor. Additionally, the Company has observed that its extensive capacity, as well as its ability to provide a wider breadth of services than its competitors, is seen as a competitive advantage by its larger customers. This has enabled the Company to be a price leader in some areas.
Operating Expenses and Gross Profit Margin
Operating expense consists of costs directly attributable to the provision of safety and related services to customers. These include wages and benefits for field employees and contractors, equipment rentals and leases, transportation, fuel, consumables, equipment repairs and maintenance and field office administration including field sales. Operating expense for the three months ended March 31, 2005 was $11,250,105 or 65% of revenues as compared to $3,624,896 or 77% of revenues for the comparable period in 2004. These levels translate to gross margin percentages of 35% and 23% respectively.
Higher gross margin year over year is attributable to several factors. The Company's increased capacity enables it to allocate its resources more effectively and minimize the number of times where, in responding to local demand issues especially during peak activity periods, it has to relocate men and equipment at its own cost. Finally, in the first quarter of 2005, the Company provided a number of services considered specialty services for which it received a premium margin. These services were not provided in 2004.
As with many companies in the oilfield service business, personnel costs represent the largest component of operating expenses. The Company employs a mixture of employees paid a base salary plus a per-day work bonus and contractors paid on a day-work basis. Maintaining an appropriate mixture of employees and contractors enables the Company to manage its margins during periods of fluctuating activity levels.
Sales, General and Administrative Expense
Sales, general and administrative ("SG&A") expense consists of costs not directly attributable to the provision of services for customers. These include costs generally associated with corporate head office functions and services, administrative personnel, corporate sales and marketing costs, liability insurance, professional fees and investor relations. Many of these costs are relatively fixed in nature and do not vary directly with activity. The main exception to this is revenue-based commission amounts paid to corporate sales staff.
SG&A for the three months ended March 31, 2005 amounted to $1,418,740 or 8.2% of revenue. This compares to $308,421 or 6.6% of revenue for the previous year. The increase year over year relative to revenue reflects the increased corporate infrastructure that was required to be put in place to manage the
much larger organization as well as the greater emphasis, and expense, that has been placed on Corporate level sales and marketing versus field-based sales.
Amortization
Amortization for the first quarter of 2005 was $788,764. This compares to $144,644 for the same period in 2004. The increase in amortization expense reflects the impact of the significantly larger asset base acquired by the Company in 2004. Most of the increase in the capital asset base took place in the second half of the year, with the largest increase in the last month.
The increase in long term debt interest costs is attributable to the additional debt acquired as part of the financing of the Company's 2004 acquisitions as well as to the debt acquired with SDS Group Inc.
Liquidity and Capital Resources
The Company's principal sources of capital are cash flows from operations, borrowings under an established credit facility with its senior lenders, convertible debentures and equity financing.
Cash flow from operations - During the first quarter of 2005 the Company had cash flow from operating activities of $4,251,558. This is an increase of 488% over the $723,270 generated during the same period in 2004. This increase, reflects the contributions of the seven acquisitions which were acquired subsequent to the first quarter of 2004.
Cash flow from financing - The Company views its revolving lines of credit with its banks as a financing activity. The Company's financing activities in the quarter were limited for the most part to scheduled debt repayments. Cash flow from operations permitted the Company to pay down $352,974 of its operating lines
in the quarter.
As at March 31, 2005, all companies within the consolidated group are in full compliance with their debt covenants. The Company is in negotiation with its two primary lenders to consolidate its lending facilities. The Company expects to complete this consolidation prior to the end of the second quarter.
Cash flow from investing - During the quarter the Company invested a net $189,294 primarily into field safety equipment as part of a capital replacement program. This compares to $166,320 for the first quarter of 2004. The Company has an extensive capital expenditure program planned for the balance of year which it expects to commence upon consolidation of the banking facilities mentioned above.
Liquidity - During 2005, the Company expects to generate sufficient cash flow from operations to finance its capital expenditure program. In 2005 the Company will proceed with consolidating its two credit facilities and optimizing its term debt and operating line structures. In the course of doing this the Company expects to obtain sufficient financing to deal with investment opportunities as they arise.
Outlook
Because of high oil and natural gas prices, demand for HSE's services remains very robust. The outlook for drilling and completion activity in western Canada for the remainder of 2005 is very positive. We expect that high activity levels will continue so long as commodity prices remain at current levels.
As HSE entered 2004, its objective was to become the largest and most respected supplier of industrial safety and related services to petroleum and other resource industries. It intended to pursue a multi-faceted strategy to increase capacity, expand its market to upstream and non-petroleum industry applications including environmental services, and build on its expertise by providing its customers with a broader suite of safety services and solutions. Management believes that in 2004, this objective was achieved and that the financial results for the first quarter of 2005 validate the expansion initiatives.
Forward Looking Statements
Statements in this document that may be considered forward-looking are based on management's current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated.
Complete Information
The information contained herein is summarized and should be read in conjunction with the Company's Interim Quarterly Reports, the Audited Financial Statements, including the Notes to Financial Statements, and Management's Discussion and Analysis, which are filed with relevant securities commissions and are posted on SEDAR at www.sedar.com.
HSE Integrated Ltd. trades on the TSX Venture Exchange under the symbol "HSL"
The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.
For more information please contact:
David Yager, Chairman & CEO
Telephone: (403) 266-1833
E-Mail:
Tony Hidalgo, Chief Financial Officer
Telephone: (403) 266-1833
E-Mail: