Tortoise Midstream Energy Fund, Inc.
Q4 2008 Earnings Call Transcript

Published: 18 Feb 2009

[Operator:]

Welcome to the NATCO fourth quarter and year end 2008 earnings call on the 17th of February 2009. [Operator Instructions] I will now hand the conference over to Mr. Andy Smith, please go ahead, sir.

[Andy Smith:]

Thank you. Good mornings, this is Andy Smith, Vice President Finance for NATCO. Thank you for joining our fourth quarter 2008 earnings conference call. You should have a copy of our press release, which we issued this morning. If not, please consult our website where it is posted at natcogroup.com for a copy. Our first order of business today is the Safe Harbor disclaimer. Statements made in this call that are forward looking in nature should be considered forward looking statements within the meaning under Securities Laws and Regulations and as such, may involve risks and uncertainties as described in NATCO filings with the Securities and Exchange Commission. On the call with me today are the Chairman of the Board and Chief Executive Officer, John Clarke, NATCO’s President and Chief Operating Officer, Patrick McCarthy and Brad Farnsworth, the Company’s CFO. Let me turn it over to John.

[John Farnsworth:]

Thank you, Andy, good morning everyone. On today’s call, we will review fourth quarter and full year 2008 results, provide an overview of current activities and market conditions by region, and share some thoughts on priorities, contingency plans, and the outlook for the balance of the year. I will also use this opportunity to congratulate Brad Farnsworth, who has announced his plans to retire at the end of March, and congratulate Andy Smith, who will assume those duties at that time. Gentlemen, all the best. But first, for the quarter, as discussed on our last call, our expectation of an improved fourth quarter was borne out by a strong performance in the face of both deteriorating commodity prices and economic conditions worldwide. Our results were helped significantly by the expanded backlog of global projects in our Integrated Engineered Solutions segment and a strong showing out of North America in our Standard and Traditional group, offset in part, by the continuing recovery efforts in automation and control. Our backlog of work, standing at $280 million at year end 2008, now actually exceeds $350 million. The award of the final $87 million in stow, related to the large CO2 Project for Petronas, offshore Malaysia, which we have been working on for months, under two LOIs. The final PO was officially received earlier this month and announced this morning. Today’s backlog amount exceeds Q3 ‘08’s record and points out again the vagaries of predicting which month around quarters end or beginning will a job ultimately, book. IES brings almost $200 million of work into the year, before the Tanga Barack Cluster Project or TBC project hits the books. While S&T brings about $80 million, even after both segments accounted for about $10 million net of negative adjustments due to FX changes in Canadian and the U.K. currencies. Run off of this backlog will serve as the underpinning of our revenue and earnings, for 2009, as we respond proactively to changing market conditions in North America and the rest of the world. Revenue for the fourth quarter was $186 million up 18% over the same period in 2007 and up 17% sequentially as well on a strong showing from S&T which benefited from two successful earlier acquisitions as well as still healthy sales of equipment and services which were up 25% during the quarter compared with fourth quarter 2007. In addition, increased bookings of long awaited IES Projects during the year resulted in a 50% increase in revenue recognized in the segment during the most recent quarter over the third. Revenue for Automation and Controls improved sequentially by 18%; but we have not filled the gap in revenue resulting from the completion of the Kazakhstan Field Services Program late last year. Gross margin percentage for the quarter was 29.5%, a new record. This compares to 28.6% in the 2007 fourth quarter and of the 27.3% posted in Q3 ‘08 when steel price increases and hurricanes cost us about 2 points. Boy those were the days! Importantly both S&T and IES’s gross margins were up in both comparable periods. IES recorded at 38.3% gross margin while S&T hit 26.6%. Our focus on execution has paid off historically and will serve us well as markets tighten and margins likely come under increased pressure. Automation and Controls picked up 500 basis points quarter to quarter to 15% in Q4 ‘08 but it still lags the 23.7% gross margin of Q4 ‘07, again due to the run off of Kazakhstan work. For the full year consolidated gross margin percent was 28.7% flat with 2007 but with a different mix, one led by sales of high value technologies to global markets and a strong showing in our North American business. Total segment profit reported for the fourth quarter was $23.4 million up about 9% from Q4 ‘07 but as expected it was almost double the profit of Q3 ‘08 even after adding back the legal and compliance review costs to the Q3 numbers. Revenue run off from IES projects and higher margins helped drive its Q4 ‘08 segment profit contribution to nearly $14 million back to its Q4 ‘07 pace but more than three times higher than Q3 ‘08. In addition, S&T contributed $10.7 million to Q4 profits, up $4 million sequentially on higher margins on branch sales, contributions from acquisitions Canadian Oil Sands work, and export of parts and equipment to Mexico. The consolidated segment profit also included a second quarterly operating loss from Automation and Controls which we are addressing through stepped up marketing, closer cooperation with NATCO facilities to achieve better facility utilization rates, and cost management measures. It will be a slow process in the current market but we will return the segment to historic levels of sales and profitability over time. For the full year 2008, segment profit was $74.1 million after adding back approximately $10.3 million for the legal and compliance review costs which compared with $77.8 million for full year 2007. Of note, the review itself is complete and any go forward expenses are now related to our efforts to resolve the matter with the government. Segment profit as a percentage of revenue was about 13% for the quarter and 11% for the year normalized. With respect to net income available to common, we reported $13.5 million or $0.68 per share in Q4 ‘08 compared with $12.8 million or $0.66 per share for Q4 ‘07 and $7.8 million or $0.37 per share for the third quarter of 2008. For the full year normalized net income was $41.5 million or $2.10 per share compared with $45.1 million or $2.36 per share for 2007. As a summary observation on the year, it was indeed interesting, one marked by several records, many achievements important transitions, unprecedented market volatility, a few disappointments, and a fair bit of irony. We finished the year with record revenue bookings and backlog. We significantly enhanced our execution capabilities, successfully closed on three growth acquisitions, recruited a number of key leaders while building out our organizational capabilities and global compliance and control functions. We posted the best safety record in our history giving us not only important recognition with our customers but also making us a preferred employer in our local markets. We also transitioned the organization culturally to a global focus with better defined segments, clear goals and objectives, while also dealing with the leadership change and crisis management situation in Automation and Control. We faced crashing financial markets in commodity prices, yet expanded our business and maintained a strong balance sheet. Even a disappointment of the FCPA Compliance matter I believe will ultimately prove to be a valuable lesson in how best in class global companies operate. The irony, I am sure that is not lost on anyone, of course is we participate in the cyclical industry which for a number of factors have cycled down hard and fast. The point is that all of our good work will in fact serve us well even in this market; but the rewards will no doubt be a bit slower in coming. While things are not very pretty out there, we do have a number of things going for us that position us uniquely in our markets. Patrick will address a few of these factors in context of the current market conditions and prospects Patrick.

[Patrick McCarthy:]

Thank you John. Good morning everyone. Our Standard and Traditional Business segment completed an extremely robust year in the fourth quarter. This segment includes US Branch operations for Aftermarket Parts and Services and US and Canadian based manufacturing and branches. Our 2008 acquisition of Linco, whose core business is custody transfer measurement systems and commerce sales, fortified our position in the Williston Basin and the Bracken Oil Shell. Also included is Mexico and some of our aftermarket international part sales. Approximately 80% of 2008 revenue is US based and we enjoy the largest market share of any equipment supplier along with the largest service fleet; therefore as we manage the business in 2009 we have established phased plans to account for the changes in commodity prices rate counts and spending patterns. Our US business is divided into three regions

[Bradley Farnsworth:]

Thanks Patrick. John and Patrick have covered much of the segment financial results as well as market conditions. I will address some income statement items and also highlight several balance sheet items. Depreciation and amortization as for the quarter was $3.9 million, increased over the prior year by $1.2 million due to the amortization of intangible assets related to acquisitions made over the past year. Interest income for the quarter was $146,000 [inaudible] at December 31 with $10.9 million of this amount invested in highly liquid instruments. Our cash balance has declined from $63.6 million at December 31, 2007 primarily due to using cash to acquire Linco and Connor Sales during the year. Interest expense for the quarter was $308,000. As of year end our outstanding debt balance was $13 million which was largely incurred to fund a portion of the Connor Sales Acquisition. Other than that for the quarter [inaudible] $1.1 million. This amount largely represents net foreign exchange realized due to our own subsidiaries contracting in currencies other than their functional currency. The US dollar strengthened during the quarter against the pound euro and Canadian dollar which was partially offset by weakness against the yen. Our effective tax rate for the quarter is 34%. This rate reflects our combined Federal and State statutory rates, and at this point, the tax rate of approximately 35% for the full year 2008. We’ve made classification changes to our balance sheet which shows the activities related to percentage of completion accounting. In the current assets section, we’ve split out costs and estimated earnings and excessive billings on uncompleted contracts. In essence, this $31.2 million represents amounts that have been billed, or will be billed, to customers in the future as progress milestones are met. Conversely, in the current liability section, we have spread out billings on uncompleted contracts in excess of costs and estimated earnings. This $51.1 million represents the amount of progress billings invoiced to customers for contract milestones that have already been met. As of year end, our networking capital position was $85.6 million, as compared to $110.3 million as of December 31 2007. This lower level of working capital is due to a decrease in cash of approximately $45.9 million largely related to funding acquisitions, increases in accounts receivable inventory and prepaid expenses totally $54.8 million, which are largely due to the acquisitions of Linco, Connor Sales, and the higher level of business activity. The net increase in accounts payable of crude expenses and taxes of $7.5 million, and an increase of advanced billings and payments from customers $29.4 million. Good will and intangible assets have increased by $47 million over the prior year, due to the acquisitions of Linco and Connor Sales. Capital expenditures for the quarter were approximately $12.3 million and these are broken down as follows

[Andy Smith:]

Thanks, Brad. I’d like to spend some time providing a little extra color around NATCO’s operating expense growth in 2008, plans to maintain or reduce operating expenses in 2009 and our expectations for capital expenditures in 2009. During 2008, our selling, general, and administrative expenses grew to $122.9 million - an increase of approximately $37 million over the prior year. Several items contributing to the year-over-year increase are worth noting. First, 2008 SG&A includes approximately $10.3 million associated with the company’s long discussed legal and compliance review. Expect further costs in 2009 exclusive of any potential penalties or assessments that are unknown at this time to total under $1 million. Second, our late 2007 acquisition of Concept and our 2008 acquisition of Linco, Connor Sales and PAAI contributed to approximately $8.2 million of incremental SG&A expense in 2008. Our non-cash compensation expense associated with stock option and restricted stock grants which totaled approximately $8 million exceeded recognized 2007 expense by approximately 3.7 million. The approximately $14 million of remaining increase can be split between direct operational expense and back office support functions as follows

[John Clarke:]

Thanks, Andy. In closing, let me make a few brief comments as to where we find ourselves and the priorities we have for 2009 and beyond. Needless to say, it will be a challenging year; it’s one that we did not expect, but one that we will have to manage with the focus on near-term realities, balanced against still valid long-term strategic plans. Those of you that follow this closely can appreciate that we have been building a company for growth; not only in North America but globally as well. It’s meant significant investment in organizational capabilities, infrastructure, product development and commercialization and systems. Much as this may seem out of place, if current market conditions were to become permanent, but they won’t. Demand will come back; the markets will improve, and our products and technologies will remain extremely relevant to the markets we serve. In the meantime, our focus will be on two fronts

[Operator:]

[Operator instructions] Your first question is from Neal Dingmann from Wunderlich Securities.

[Neal Dingmann:]

John or maybe Patrick a couple of questions. First, for you John, as far as on the guidance, a couple of things. One, I assume that doesn’t bake in any… some of the contracts that Patrick mentioned that’s out there and secondly, I know when Andy talked about the assumptions behind there, obviously, the rate count seems to be, maybe, going a bit lower than the assumptions and if oil prices don’t return the oil might be a bit lower. Would that have to factor into play, later in the year, as well?

[John Clarke:]

Yes, let me address guidance a little bit. The reason that we have put those assumptions in there is to let you know, exactly, what we are thinking about, in terms of what the market may look like. On the rig count front, we are talking about average rigs and not the absolute level drop from the peak. So I think the jury is out as to where both rate count ends up and commodity prices settle out. To the extent they are different than our assumptions, up or down, then they will obviously influence where our results finally come out. In terms of the assumptions around bookings, we have made as good a guess as we can as to what we believe a core level of bookings will be for 2009 and that’s what’s baked into or baked into our forecast. So at this time, as we said, we’ve made no changes to that forecast, but we are watching the markets evolve and, certainly it is not a time to be heroic in looking at raising numbers, but yet we’ve got confidence, certainly, in first the first half of the year that allows us to defend the numbers that we’ve got.

[Neal Dingmann:]

Sure John and then one other question, John. As far as, some of the assumptions on additional contracts for additional work, you mentioned the possibilities in Brazil. I was wondering how much or what you see for that market, at least, near term or is that more of a latter ’09 environment and then, secondly, I haven’t heard much lately on Modac, Japan on the offshore business, what’s going on there?

[John Clarke:]

I will take Brazil and then Patrick can address Modac and mop up on Brazil, as well. I think a general commentary about where our global business is, is activity continues to progress, but it clearly has slowed in terms of pace of awards. As Patrick said we see fewer bigger opportunities in the first half of ’09. There are still the block and enactment stuff out there that we are continuing to chase and projects continue to move forward. But we are going to have to be careful in terms of what our booking assumptions are going to be. With respect to Brazil, Brazil has an enormous budget that they talk about for the next I guess it is a three to five year forecast that they put out. And we expect to be very active down there. We are trying to find the country manager for Brazil to step up our local presence there. I think that market will continue to be very strong for all players but certainly it will depend on where prices settle out, where costs settle out, as to when projects are awarded, but certainly towards that second half of the year we believe it will be bigger and better than it is right now.

[Patrick McCarthy:]

One last point Neil, on Brazil, for us the continuation of the relationship as it relates to the technological side of our business is extremely encouraging and as I mentioned in the third quarter of this year we look to start up a pilot of tests at one of their facilities onshore one of Petronas’ facilities as it relates to the compact coalescence and we continue to have dialogue with them on many different technologies. As far as Modac, the Naga, Japan office had a record bookings year in ’08 and a good bit of it had to do with the relationship with Modac. In fact, in the month of January, Naga, Japan had some nice bookings again from Modac so we continue to be encouraged and develop that relationship as it grows.

[Neal Dingmann:]

Two last questions maybe for you Patrick. One on Saudi, how quick could you see that ramp up and then just a separate question maybe for you, John lastly. Just on the aftermarket business but definitely a lot of your membranes now really getting out there in the overall market. How big can this business be for ’09 and will that just continue to expand in 2010 and beyond?

[Patrick McCarthy:]

On the Saudi joint venture we fully expect to open the doors around June l of this year and we look to the first six months of opening the second half of ’09 to be somewhat slow but again as we look to 2010 and as that market place rejuvenates and makes some awards in the second half of this year, again we have expectations of running that shop at some high utilization rate as we enter 2010. In terms of the aftermarket and the membranes and service, yes the continuation of installations out there, it’s extremely strong. For our aftermarket position ’09 I don’t see that as any banner year, but we surely will have growth in that business as we look out 2010 and beyond.

[Operator:]

The next question is from Colin Gerry from Raymond James.

[Collin Gerry:]

I guess I wanted to get into the guidance a little bit more. Correct me if I am wrong, you did not provide first quarter guidance, correct?

[John Clarke:]

That is correct.

[Collin Gerry:]

Is that a way we are going to go about going forward, just stick with full year annual guidance?

[John Clarke:]

Yes, Colin, we announced the ’09 guidance back in early January. We said at that point in time that we were not going to give quarterly guidance.

[Collin Gerry:]

Oh that’s right. Well kind of in that vein, we saw IES revenue number jump up pretty big and I guess I am just kind of trying to get a better sense of the timing of how we see this backlog converting into revenues as we go through 2009. So should we see kind of similar levels from the first half of the year in the mid-sixties range? That number tends to jump around quite a bit and I am sure it is an ever changing target, but how do we see the timing of the revenue in that particular backlog?

[Patrick McCarthy:]

Colin, I think you are probably thinking about it right. I think what you will see is that it will ramp just slightly through the first, second, and maybe third quarters and start to trend back down. Again, it depends on bookings, obviously, throughout the year, but just given the backlog we’ve got, it will trend back down sort of in the fourth quarter and then most of what we’ve got in our backlog as of year end and even with the project that we just announced will be completely run off by early 2010, so if you think about the $280 million, that’s not overall backlog, but the $280 million, I guess it’s now $260 million, is the IES backlog after the $87 million. We expect to see all that go through revenue in the next five quarters. Again, with a lighter contribution in probably the fourth quarter of ’09 and the first quarter of 2010.

[Collin Gerry:]

Okay, thanks, that’s very helpful. Then just kind of following up on the Saudi joint venture, I think in the past you gave us a sense of what you thought the revenue potential there was. I know the timing’s been pushed back a little bit, but on an annual basis, has that revenue potential changed with commodity prices? I guess what do we see in the first year contribution from that vein?

[Bradley Farnsworth:]

I think our expectation of what the Saudi project will do has not changed. I think the timing is still a little bit up in the air as to what that ramp looks like. A lot of that work was going into the upstream, the downstream, and the Petro chemical business. The upstream projects seem to be proceeding, albeit a bit slower. The downstream refinery projects have definitely been put on delay. Not canceled, but certainly delayed for a while. We believe that when the market is back on all fours that the potential opportunity there is between $50 million and $100 million of revenue, [eight aids] to the venture itself, and then recall the structure is that we are selling our higher value technologies products to the joint venture who then resells those to the marketplace.

[Collin Gerry:]

So your portion of the $50 million to $100 million is in addition, to what you sell into the joint venture?

[Bradley Farnsworth:]

Correct.

[Collin Gerry:]

Okay, and then Andy, you gave us a lot of color on the SG&A front. Do we have a figure for 2009 SG&A? Did I miss that? Or some sort of guidance in terms of percentage, how do you see that playing out over the next year?

[Andy Smith:]

You know, we haven’t provided that, Colin. As a percentage I think we’re going to try to stay with relatively low growth going forward in 2009. We’re coming off a number where $123 million. It’s going to sort of see how the year plays out. Right now we’re holding things flat. But you know as we kind of leave the year with a higher run rate than we had earlier in the year, you’ll see some tick up into 2009 and then again as the market plays out we’ll sort of see where we go from there.

[Operator:]

Your next question comes from John Tasdemir from Tristone Capital.

[John Tasdemir:]

Just a quick one, just remind me, I know [Lingo] was early in the year, but Connor, I’m looking at the S&T business. Was the growth from the September quarter to the December quarter, was that all organic or was there some rollover from acquisition?

[Bradley Farnsworth:]

It was not all organic. We did have a higher contribution from Connor, although it did grow sequentially. The Connor contribution was, and I can just give that to you here real quick, 12% or 13% in the fourth quarter.

[John Tasdemir:]

In total, but you had a lot of the Connor sales already in September, so I was just wondering --

[Bradley Farnsworth:]

We had about $4 million of growth nil the quarter.

[John Tasdemir:]

Okay, that answers the question. You talked about that business going forward already, but pretty solid numbers there. Let me kind of take a big leap. I know you already talked about 2009 guidance and crystal balls are still pretty cloudy on that one, obviously. When we start to think about 2010, a lot of what’s driving your 2009 growth is a lot of the stuff that you’ve gotten recently with Southeast Asia and other projects that you’ve gotten over the last six months of 2008. I guess it sounds to me like you think the timing of that starts to roll off in terms of as it works through your backlog into the fourth quarter this year, you start to maybe taper off a bit. I guess my question is, when do you think things need to start kind of resuming, kind of a picked up growth rate for you guys to be able to see the 2010 number in the integrated engineering solutions business. I guess I’m not asking this very well, but if you get an order six months from now, let’s say business starts to pick up again or oil prices are higher, does that start to roll through your 2010 P&L?

[John Clarke:]

Yes, but the length of the question deserves more of an answer. I think at the heart of your question is what is 2010 begin to feel like and look like and when do we know, your kind of vectoring in on the right analysis and 2010 will largely be determined by what our new bookings look like as we get into the second half of 2009 and that’s the experience that we’ve seen that you've witnessed, particularly in ’07 when we didn’t get the level of bookings and the timing of bookings and we paid the price for it in the early part of 2008, so we have as we say, very good clarity into the project pipeline of opportunities in that business. What we don’t have as much clarity on is the timing of awards when they will hit our books. There are a lot of things that go on in projects that are beyond our control and the GBC project is a perfect example where this is a several hundred million dollars of scope for this project. It’s $100 million deal for us. We would have thought that this thing would have booked in Q4 but here it is, it worked its way through the system and ended up booking in early February, late January of this year, so the timing is the wild card but clearly we’ll know more about 2010 when we see what kind of bookings we have for Q3 and Q4.

[John Tasdemir:]

Great answer to a not-very-well-worded question. Appreciate that. That’s all I have.

[Operator:]

Your next question comes from Steve Ferazani from Sidoti and Company.

[Steve Ferazani:]

Given the timings of the booking in the last bit of the Southeast Asia contract, any idea how those revenues are going to stream over the next few quarters?

[Bradley Farnsworth:]

I think what you’ll see is going back to earlier. I think you’ll see a ticking up slightly in BTO through the first couple of quarters of the year, probably flattening out in the third quarter and then starting to decline. Again, this is all given current market conditions and what we’re expecting in bookings. Probably starting to decline in the fourth quarter and then by the time we end the first quarter or early second quarter of 2010, our backlog in that business… Anything that’s in our backlog today will have been run off by that point.

[Steve Ferazani:]

So you’ll get most of the $120 million in ’09?

[Bradley Farnsworth:]

Absolutely.

[Steve Ferazani:]

So I sort of always thought of that as being a much higher margin type project, yet your guidance sort of indicates declining EBITDA margin. Is that so much pricing pressure on the standard and traditional side? Is that SG&A is still elevated? Can you sort of walk me through that?

[Bradley Farnsworth:]

I think it’s the realization of the North American market right now and as you see rig counts falling and certainly the commodity price environment much lower than it was, even though we were going through sort of our planning cycle, we’re taking a pretty realistic view of what that business will be for 2009 and again we’re at this point, the rig count as it stands today is 500 rigs lower than the average for last year. That’s going to affect American business without a doubt. So what you’ve got is mix. You’re going to have more contribution in ’09 than you had in ’08 from IES and likely lower percentage of contribution from the standard and traditional side.

[Bradley Farnsworth:]

Again, a pretty poor showing out of automation and control. Steve Ferazani – Sidoti & Co. I was actually surprised how well traditional and standard held up this quarter. Is there a significant lag from where we saw rig town peaking in September? Are you seeing it now?

[Bradley Farnsworth:]

There is about a 2 or 3 month lag in that business but as Patrick pointed out, the traditional business has held up relatively well which has a little more visibility rather than our standard products, so we’ve done remarkably well given kind of the downturn in the market that we saw towards the end of ’08.

[Steve Ferazani:]

SACROC, I didn’t hear you mention, throughput there, is that slowing given oil prices or what’s your expectation there?

[Bradley Farnsworth:]

We had an excellent quarter. I mentioned we had a 99.5% run time and met all of the specifications and the throughput as we look at ’09 early on appear to be greater throughputs of C02 gas for the year.

[Steve Ferazani:]

Last question was just on the depreciation number. I know it involved the amortization and goodwill. Excluding potential acquisitions, can you give any sense where you think depreciation is going next year?

[Bradley Farnsworth:]

I think it will be about $14 million to $14.5 million. Included in the fourth quarter was a pretty large chunk of amortization of an intangible that was very short lived associated with one of our acquisitions. There was actually, again this is sort of accounting mumbo jumbo, which I probably shouldn’t say accounting mumbo jumbo, but there was a value placed on an intangible associated with backlog at Connor Sales that ran off relatively quickly and it was done by the end of the fourth quarter of ’08 so you’ll see near term that $3.9 million or so come back in terms of depreciation or amortization.

[Steve Ferazani:]

So you think that’s probably the high number for quite some time.

[Bradley Farnsworth:]

I think it is.

[Operator:]

Your next question comes from Michael Marino from Johnson Rice.

[Michael Marino:]

I was just trying to get a better handle on the 2009 and how you look at your business. You mentioned a lot of the backlog will be run off in 2009. So if I look at the other half of the business, that’s probably half, some kind of rig count fluctuations. Of that other half, how much is truly tied to the fluctuations in the rig count versus I guess there’s an aftermarket component that theoretically isn’t as tied and then SACROC. Is there 25%… what’s maybe a good number to think about in terms of really tied to the wild swings in the North American rig count?

[Bradley Farnsworth:]

I think that’s a great question and if you look at what is exposed to what is really US rig count related, and therefore largely gas-related business, it’s about 20% of our revenue mix, so it’s not nearly as significant a portion as it was several years ago, and that's because of the growth in the global business. Obviously it’s anchored by SACROC in North America and also by a huge commitment of service and aftermarket support that we pushed through our branch system. Again, while we are cautious about the outlook for North America. Our mix of business will give us some protection and I think that also when you look on a comparative basis, we will be able to benefit from the full year contributions of acquisitions in 2009 where for some we only got partial benefit.

[Michael Marino:]

So I guess 20% is kind of North American natural gas and then maybe how much is North American oil projects that have shorter lead times like it’s stuff [inaudible] or the markets like that?

[Bradley Farnsworth:]

It’s probably about, just in the North American business, and when I’m talking about that I’m thinking about the North American branches, that’s probably 7% to 10% of our consolidated revenue. That’s not including the liquid [metering] business of Linco which is probably another call it 7% or 8% of our business.

[Operator:]

Your next question comes from David Nierenberg from Nierenberg Investment Manager.

[David Nierenberg:]

Just wanted to ask you to please give us an update on your efforts to further penetrate the refining business.

[Patrick McCarthy:]

We have had limited success as you know although last year we did have a substantial bookings from Brazil in that sector for us and that product line for us. Unfortunately the marketplace as we look to ’09 as we address the customers, they are as you would expect pulling back and not looking to spend much capital as they take certain product streams offline. We are fully engaged in our marketing communications and marketing discipline and business development within the US as well as we talk to Saudi Arabia, as we talk to Brazil, and some of the other larger markets, so we are enthusiastic of whenever the turnaround happens. We’re in a position with our core technology as we have demonstrated over some of the recent start ups of what we call our dual frequency in the field of applying that also in the refinery sector, so unfortunately the CapEx out of the business for ’09, the first half is going to be pretty much zero.

[Patrick McCarthy:]

Again, David, that represents a very significant market for us over time as crude qualities decline and these guys look for a solution as Patrick suggests around electrostatics and dual frequencies in particular, so that they can run an entire slate approve through their refineries in order to capture the higher value refined products but again it’s going to take them getting back in the mode of spending and investing in their facilities.

[David Nierenberg:]

Okay, but since some of your earlier questions have expressed concerns about 2010 and beyond, your assertion is that the refiners are going to be bringing in a growing portion of, if I can use the word, lesser or degraded crude so that the need that they have for your technology over the longer term does still sound robust to you.

[Patrick McCarthy:]

Absolutely. I think that you can say across the board that all of the technologies that we are bringing not only the downstream market but also the upstream market are in fact just as relevant today as they will be in a more heady market. It’s just a question of getting people to commit to their projects but lower oil prices have been demand driven. They are not because of an oversupply situation.

[Operator:]

There appear to be no further questions. Are there any further points you wish to raise, sir?

[Bradley Farnsworth:]

I’d like to thank everyone for participating on the call. I would also like to extend my personal thanks to the many things that Brad has done for NATCO over time and we wish him every success in his retirement, and we all look forward to working more closely with Andy in his new role as he Chief Financial Officer come the end of March. So thank you all very much and we’ll be in touch.

[Operator:]

This concludes the NATCO fourth quarter and year end 2008 earnings conference call. Thank you for participating and you may now disconnect.