Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the CE Franklin second quarter 2008 results conference call. (Operator instructions) I'd like to remind everyone that this conference call is being recorded on Friday, July 25, 2008 at 11:00 a.m. Eastern Time. I'll now turn the conference over to Mr. Michael West, President and CEO. Please go ahead, sir.

Thank you, Matt. Good morning, ladies and gentlemen and thank you for dialing in to CE Franklin's 2008 second quarter earnings call. I'm Michael West, the Company's Chief Executive Officer and joining me on the call today is Mark Schweitzer, the Company's Vice President and Chief Financial Officer. I'd like to remind participants on the call that some statements or material discussed today may be forward-looking in nature within the meaning of securities legislation, and I would ask participants to review CE Franklin's 20-F filing available on our web site at www.cefranklin.com, which details the risk factors associated with the company and our industry. On the call today I will review the market activity, update CE Franklin's strategic initiatives, discuss CE Franklin's Q2 and year-to-date results, and the Company's liquidity and capital resources. Starting with market activity, oil and gas industry activity indicators in western Canada were mixed on a year-over-year basis for the second quarter ending June 30, 2008. The average rig count in western Canada increased 12% to 180 rigs operating for the quarter, compared to 161 the prior year. Well completions decreased 15% for the quarter, gas well completions were down 21% and oil well completions were flat. The total number of wells completed in the second quarter were 2,607. There are a number of factors contributing to the lower activity levels. Q2 is a quarter seasonally constrained by weather conditions referred to as "break-up" as the ground thaws and the moisture comes out of the ground it makes many areas inaccessible to heavy equipment and work is put on hold or deferred. Although oil prices have remained high, gas prices have only recently shown signs of positive recovery. The higher gas prices have occurred after E&P companies had planned their 2008 capital expenditure budgets. Many E&P…

(Operator instructions) Your first question comes from Sean Boyd of Westcliff Capital Management. Please go ahead.

Good morning. How are you doing Michael, Mark?

Good, Sean, thank you.

I guess I'd like to start off with the obvious here. There's two parts to this. Given what we've seen up until the last week or so, in terms of the better than net gas prices and increases in activity, especially down here in the States first and it seems to be coming up into Canada, the back half of the year. Can you just tell us where you're thinking you might see activity levels? So what you think you'd see on a year-of-year change in the rate count and then on completions.

There's a lot of different opinions out there, Sean, everyone from Lehman's to CAODC to PSAC have given guidance and everyone of them has improved their outlook in the last half of the year. If you took a consensus averaging of what they're looking at, you'd say activity levels are probably up close to 10% year-over-year in the last half of the year. When you break it down, in some of the companies that are reporting capital budget shifts, the larger companies, the ones that do over a billion dollars a year in CapEx are only shifting their budgets slightly, anywhere from 2 to 5%. The companies would spend somewhere between 300 million and a billion, more aggressively shifting their capital budget focus. So that may be a long-winded answer to -- basically consensus is close to 10% on a year-over-year basis in activity level improvement, and I concur right now with that being the case. And there is a potential that it could do better than that as well.

Got it, okay. And while it's extremely early I realize, and I'm not sure any of us has a real understanding as to what the sudden disinterest in natural gas is, has been driven by, but I have to ask is there -- has that changed anything? Has that filtered through to you in any way in terms of maybe, I don't know, maybe some real smaller private operators decreasing orders or getting a little nervous due to the recent downturn in natural gas?

Yes, nothing that's filtered through to us yet. Obviously, any time that the price comes off like it has in the last week, it causes people to step back and look and reflect. Some of the things that affected the downturn in Canada but didn't affect the rest of the world: the royalty review, the appreciation in the Canadian dollar, the royalty trust conversion to a direct tax model and some of those things. That's all settled right now, and you know, even at the gas prices back in the $9.00 range, we should be economically competitive in Canada in order to compete globally, so I think the industry needs to continue to do a better job of improving its efficiency, its planning and its overall supply chain costs. I think that's where we excel, and so you know, even with the retraction in gas prices, I would say that I would still be comfortable with the market activity guidance I just gave unless the price, you know, comes off a lot further than what it has.

Got it. It's there. And so going back to that prospect of, you know, 10% year-over-year increases in activity, maybe a little better, walk us through how we should expect that to filter down into the two segments, capital projects and MRO.

I think you'll see the capital projects increase a little more than the MRO. When they increased these CapEx budgets, it's to build new facilities or new exploration. MRO is a little more consistent. It's maintenance, repair and operating piece, so the increase that we're looking at, the majority of that will be in the capital project side of the business.

Okay and obviously given your performance in the past where you guys have generally exceeded activity and actually in the last quarter by quite a bit, that would mean considerably higher growth than the 10% year-over-year overall activity.

Our commitment remains the same. We need to -- and it's been consistent in the six years that I've been here -- we'll outperform the market activity on a year-on-year basis in topline growth. And with the investments we've made in our distribution center and expanding some of our branch operations network, being well-positioned in Northeast BC and in Southern Saskatchewan and being in the right size facilities now, we'll get the discipline and incremental flow-through that we've shown in the past as well.

Very good. I appreciate that additional color. Moving down below the revenue line, if we could, on the margins, we do have higher steel costs here, and I'm just wondering last year I think the company ran in the neighborhood of 18% margins. That was, of course, or that -- I guess we have the impact of the steel costs now. We also have the acquisitions running full bore. That will be probably a pretty minor impact, but can you help us on that? Because you are -- at the same time you ran, you know, darn near 20% in the last quarter, 19%, a little over 19% in the first quarter. Can we think about 19% to 20% margins here or do we have to think about something more like that 18% from the back half of last year?

On the product margin piece, you get a little bit of -- it gets interesting. The conventional business, the conventional oil and gas business and the service diversification has helped our margins grow. Just commenting real quickly and I've even noticed there's a couple of our competitors dialed in to listen to the call. Some of the activities and actions going on in the marketplace are counterintuitive to where the pricing's going with steel, et cetera. So we're still at a very competitive environment where folks are still liquidating inventories at a time when the replacement cost is going to go up exponentially. So I'm hoping the industry will get a little more discipline as we go forward. The oil sands piece as we continue to grow that strategy, the oil sands product margins are traditionally at lower margins than our conventional oil and gas business, but the overall EBIT margins are very similar. So the product margins are lower, but a lot of the infrastructure costs we've already invested in, so we get the incremental flow-through on that. So you might see, depending on how quickly the oil sands business mixes into that, you could see the margins drop back to 18% blended in certain quarters, depending on when the projects actually are billed. But they would -- if you saw the margin erosion like that, you wouldn't see EBIT erosion at the same time if that helps you at all.

That does. That's interesting and that brings us to my oil sands question in that I want to make sure I've got some okay numbers on this. And specifically, I had that you did about $25 million in oil sands in '07 and maybe …

Yes, $24.7 million or something. You can round it to $25 million, yes.

Okay and that was about $19 million in '06?

Yes, a little less than that but yes.

Okay and so I thought it was interesting in your opening comments there saying that we now expected to modestly outpace '07, so just for an over or under, is that, you know, does that mean just a few percent better or this acceleration? Because as I recall, this was a business that once we get through these long sales cycles, we should really see an inflection. Are we now thinking that inflection starts in '08 a little bit? Can you just give us a little more color in that improvement in your guidance?

Yes, there's, you know, we've continued to be aggressive in our sales and marketing strategy in oil sands and our customer list continues to expand. And we've just been successful in a couple of projects where the work will be done in the lower half of this year, which gives us comfort moving that number up nominally. And then I have way more confidence that the $60 million number that we've guidance on next year will be delivered. So it's just a case of winning a couple of projects in the $2 to $3 million range that gives us comfort that some of the revenue will fall into the third and fourth quarter this year.

Got it. Okay, helpful. And if I could, just on the other -- on that breakdown, can you -- and if you've provided this in the past I apologize -- but can you just give us what the production services in international businesses were in '07 and '06, just annual revenues?

International year-to-date in '07 was $2.7 million so pretty close to what it is this year, and in 2006 the international business was about $4.6 million by the end of the year on an annualized basis, and in '05 it was $5.4 million. And the production services, I can only give you the annual numbers off the top of my head. The annual production revenue in 2006 was $6.9 million, and I think the year before that it was just under $6 million. You can find that in our annual reports where it breaks down the Western Canada oil field, the oil sands, the production services and the international revenue for the last three years.

Okay, easy enough. Last question is on the SG&A. We're running a bit higher. We obviously have the acquisitions integrated at this point. If I think about, you know, $17 to $17.5 million a quarter, is that a fair number into the back half or should we expect that to be up or down?

You know, where the cost has gone up a bit, as we said, we've invested in some new facilities that will facilitate the growth as the activity cycle improves, so we're paying more for larger facilities. Then obviously as lease renewals come up in this environmental cost escalation, we've experienced some building lease increases. The wage, the labor market remains competitive here, so we continue to have wage pressures. The cost of gas to run our fleet of 150 vehicles has gone up quite a bit as well. And then the natural gas cost to heat our facilities in the winter months goes up as well as the price in natural gas has gone up. So those are the factors that are driving it as well as the acquisitions. If you back out the acquisitions and just look at the organic business, our headcount is down year-over-year. Going forward, our run rate in the second quarter looks good going forward other than there will be some incremental people costs as the revenue grows, but again, we'll get the incremental flow through the EBITDA at the 10% or greater going forward if that helps you in kind of modeling what the SG&A piece would be.

Incremental flow-through on your EBITDA or EBIT?

EBITDA.

Right. Okay, that's it for me for now, Michael. Thank you.

Thank you very much, Sean. Appreciate your interest.

Absolutely.

Your next question comes from Ward Grey (ph), a private investor. Please go ahead, sir.

Yes, good morning, gentlemen.

Good morning, Ward.

Couple of questions. First, in relation to the royalty review, is that now finished with the Alberta royalty review? And then following on from that, with your increased activity now in British Columbia and other areas, do you see that picking up and what is the sort of a potential area compared to what it's been in Alberta, which obviously, is the principal area.

First, the royalty review process is over. The only outstanding issue to my recollection is that sin crude and the government are still negotiating. They, sin crude had signed an agreement with the government, I think, 15 years ago, so they're still working on what royalty changes had in the way of impact going forward. Otherwise, the royalty structure is as is. The E&P companies are now adjusting to that, so as we said in April, they did do some slight modifications, which we think will be helpful on a go-forward basis. And, you know, as I've said publically and at a couple of lesser conferences, it's the industries responsible to get into a competitive position where we can compete globally, so it's the service and the E&P companies' responsibilities to adjust to the tax structure and the economic reality and stay competitively positioned. The work in BC is in Northeastern BC. There's large gas opportunities in that region. There's a lot of land sales that are going on right now, so we see increased land sales and directionally we've seen E&P companies start to talk about CapEx programs and drilling programs. I don't know that we have enough information to know exactly what that increase is going to be, but you know, when I talked earlier in the script about what the revenue had increased year-over-year in that area, I think that will remain consistent or might even grow slightly more. And then same with Southeastern Saskatchewan. That's more of an oil-driven piece, and as long as the oil prices remain high and the Saskatchewan tax structure is obviously a lot more attractive, you're going to see those areas grow as well. I wouldn't be at all surprised to see when you talk about the 10% increase that it'll be 10% more in each of the regions as they just continue to grow. That may be consistent although there might be a slight expansion in Northeast BC and Saskatchewan and not quite as much acceleration in Alberta. It's hard to say right now.

Okay and just coming back to the outlook for the second half in the tallying of sales and so forth, in the past you've made comments that when activity changes and you get a lot of sort of walk-in sales that your margin's actually higher than when you're bidding. Are you going to notice a benefit to margin in relation to those sort of transactions because obviously three or four months ago they weren't anticipated?

Actually, the activity level is increasing on both ends, and what happens is that there's a lot more bidding activity, a lot more of the activity that's planned, and so that's been a competitive bid type situation and then as there's more work going on, the ancillary work that ties into that. So the more bid work and the more projects that get started, then the more ancillary and walk-in business to do add-ons or whatever else. So I think you'll see both go up at the same time. And again, we're saying the capital business is going to grow more than the MRO business, and then from that capital business, the majority of it will be more budgeted bid type business or alliance customers that are doing the activity, but there is the -- it will bring the walk-in activity up as well but not at the same rate as the bid or planned work.

Now tying in a comment in relation to inventory reduction, you're still well-placed with your inventories to cope with this extra work that's coming up?

We are positioned, I think, well with our inventory investment. What we are seeing is cost escalations, so some of -- you're going to see our inventory start to increase in value a bit in the short term as we invest, and that's just because the per ton price for inventory is going up. Our inventory turn performance still needs to improve, and we continue to work on that. And year-over-year it was a full turn better this year's quarter versus last year's, but I think we're well positioned. There are material shortages globally. The mills are struggling to keep up. We feel that with our size that we're well positioned in the queue. We try to leverage our procurement with Wilson where possible and those relationships with the mills. And you know, some of the inventory bulge that we saw 18 months ago where we did not cancel purchase orders with those mills will play well now in our position and the relationship we have with those mills going forward. So our inventory investment is adequate, and we'll continue to improve the efficiency, but we'll probably make investments in inventory as the activity level grows.

Right. Now, from our own viewpoint, we were looking at timing of your sales compared to the movement in, say, well completion numbers or rig counts. What sort of -- from quarter to quarter is this a quarter late or six months late or what's the –

Yes, for the first time actually, Ward, we're seeing a divergence in the rig count versus the well completions, and that happens from time to time. It usually lasts a quarter, but it's now been two quarters in a row where they've gone in opposite directions kind of thing. And so I think you'll see a bit of a catch-up in the well completion piece, which should help us, a little bit of catch up activity going forward, which should be helpful. And so, you know, as the rigs work, the lag time's been a little longer than normal and some of that was I think some of the E&P companies stopped to reflect on the increases in pipe costs and oil country tubular goods, and so there was a little bit of pause in between them actually finishing off the completions, and so you'll see that catch-up. And the lifetime should be no different historically than it has been in the past.

I noticed I think one of the last months there was a high degree of dry wells. Do you get any well completion work out of that or do they just plug that and just walk?

No, that's -- dusters aren't good for us.

Right. Yes because that could have affected the rig count.

A little bit.

Well completions, yes. And just a follow-on point. You made a comment in relation to the parity of oil and gas. What -- do you use the energy relationship of 6 to 1 or do you use -- other people talk about 11 to 1. What sort of parity would you say between the energy comparing of oil and gas?

It used to be 6 to 1. Right now we'd be happy with 10 to 1.

Yes but when you're using that, saying coming back to parity, you're talking about gas coming back or gas going up? Ideally, we'd want gas to go up.

We were hoping the gas was going to go up a little more.

Yes because I think PSAC said that anything over about, what, $6.00 or something, it justified the investments and so forth. So even at $10.00 or $9.00, it's still -- the activity levels should hold, shouldn't they?

That's a number that's been used in the past, and companies are a little slow declaring what the push point is on a number now. With this new royalty structure, they've been a little close to the vest on what's economical and what isn't. And in some cases, it depends on whether it's deep gas or what it is you're drilling for what the price point is that makes it economical or not.

Right.

But at $9.00, $10.00, it should be economical. As I said, it's economical everywhere else in the world, so we need to be competitive.

Well, very well. Thank you very much.

Thank you.

Your next question comes from Doug Cooper of Paradigm Capital. Please go ahead.

Hi, Mike. Just a quick question. You talked about Saskatchewan being up, I think, 26% year-over-year and I guess, I'm sorry, NBC being up 8%. What kind of base are those coming off? Do you have the actual sort of absolute dollar figures for those areas?

Not off the top of my head I don't, no.

Just ballpark as a percentage of your total sales, would Alberta still be, you know, 70% or…

In there. In around 70%, 75%, yes.

Okay, thanks, Mike. That's all I got.

Thanks, Doug.

Your next question comes from Jackson Spears of Capstone. Please go ahead.

Hi. Congratulations. Those numbers were great, and I'm glad you're feeling better with your outlook. Much improved. What about the cost pressures from suppliers? Are you able to pass most of that along or could that put some pressures on margins going forward?

For the most part, we do pass the costs on, and that's structured into our agreements. Sometimes there's a timing or a notification period that plays into that, but for the most part, Jack, it is a flow-through, and it's never been material to the change in our margin performance, so we've never broke it out or reported out on it.

You mentioned the value of your inventory's going up. Could there be some inventory profit going forward in the third or fourth quarter?

You know, intuitively I would say yes just on the material cost, the replacement cost increase, as you're selling product. But again, it's never been material where we've reported it out. It, you know, may be one tenth or two tenths of a percent for a quarter, but it's never been material.

You have an active acquisition strategy, and you're still looking. What areas are you focusing on and what kind of reaction are you getting from potential acquisition targets?

We look at areas that will diversify the service offering that we currently provide, will expand the product scope or expertise that we currently have that we think would add value to our customers and make sense in the supply chain, and we'd also look at consolidation opportunities within the industry. And again, they'd have to be accretive to shareholders in order to provide value, so we continue to look. And it has to be the right strategic fit and the right strategic price, and so yes, we would like to do more. Obviously, with our balance sheet and our cash position, we're well positioned should we find the right opportunity to execute the transaction.

You have a number of major customers. Is there any change in their relationship with you? Have some customers now gotten bigger than they were in the past like Petrol-Canada or Talisman?

There's been some M&A activity, you know, Penn West and Canetic merged together to form a bigger company. We didn't have all of Penn West's business. We had portions of it and product mix. There's been, you know, Dura-Vent was acquired by Shell here very recently, nothing that would be material to a change in our results that we would report out. Obviously, there will continue to be M&A activity in the E&P side, and there is a lag. In my own personal opinion, there's a lag in consolidation in the services sector in Canada, and the E&P guys are moving forward. I think there needs to be consolidation in the service section.

Your new distribution center opened in June. How is that going to affect your costs or your modus operandi, your operations?

It actually opened in April, and so it was reflective in our costs in Q2 and was one of the reasons for the increase in the costs. The facility, the way I look at it, is it is more expensive to operate. It's 153,000 square feet. It's got a lot more capacity. It's got the ability to flow about 75% more capacity through it the way it's designed. It is more expensive, but ultimately, as the market activity corrects itself and when it does return and as we continue to diversify our strategies and gain market share, the cost per revenue dollar should actually decrease over time. So it's reflective in our Q2 results and gives us a lot of capacity to execute our oil sands strategy as well as get the incremental flow-through.

Thanks, Mike.

Thank you, Jack.

Mr. West, there are currently no further questions.

Okay, Matt so I'd like to thank everybody for their participation on the call today and their interest in CE Franklin. We look forward to talking to you again at the end of the third quarter.

I'm sorry to interrupt, Mr. West. I do have one follow-up question from Sean Boyd.

Okay.

Okay. It'll just take me one second please. Mr. Boyd, please go ahead.

Thanks. One more if I could, Michael.

Sure.

Your comments there on the center have just got me thinking, and I'm sure you've mentioned it in the past, but revenue capacity at this point on absolute level would be what?

Revenue capacity in what terms? What the capacity level of the company would be?

Yes.

I'm not sure that I know the exact number to be honest with you. We could certainly withstand a 20% to 30% revenue increase without hitting any kind of capacity constraints in the organization, and the facility itself has 75% more capability now. So the distribution center itself, if it had 75% more capability, I could give you a little bit of guidance based on our current revenue stream, which looks like it's on course for about $500 million in that range. We obviously have the ability in our Edmonton distribution center to grow that by about 75%.

Got it, okay. And on the oil sands, just two sides to this: You mentioned the potential margin pressure in the early days as you ramped that, but longer term, does that business have significantly different margins than the oil fields?

Yes, it does. The project work, the capital project work has much lower product margins. There's a lot less infrastructure costs though as well to deliver those projects, so the product margin is lower, and that's on the capital project side where the majority of the spend is in the oil sands right now. On a go-forward basis, we continue to work on our MRO strategy as those facilities are put in place. They do need maintenance, repair and operating equipment, and those will be at higher margins, so eventually you'll see the margins start to come back up. Those projects on that large a scale, a lot of the work that we do, some of the material goes direct from the mill to the customer site, and obviously, we don't need as much of a margin, and we don't have as much cost structure. And then there are other parts of the project -- we're doing the marshalling at our facility, bagging and tagging to go to sites, et cetera, and that's why the margins are different. The work's different.

Got it. But even all next year where we're talking about a $60 million business with an upturn in activity here, hopefully that -- while that is fantastic growth, it is still going to be a small enough component of the overall business. It's probably not -- we're not going to see that much of an impact I wouldn't think on the margins.

On the overall margins, no. You know, like I said, it may reduce by about 1% on an overall gross product profit margin basis, and then on an EBITDA margin basis it will probably be positive actually in our incremental flow-through commitment.

In your flow-through. Got it, got it. And just last thing on that, at $60 million or maybe at the idea of it being a $100 million a year business at some point is the breakout between capital projects and MRO similar to oil fields or different?

Right now it's heavier skewed to capital projects versus MRO. Eventually that will close, but over the next two to three years, it will be heavily weighted towards capital versus MRO.

Like 75%, 80% at least kind of a thing?

Yes.

Okay, thank you very much. Congrats on the quarter.

Thank you.

Please continue, Mr. West.

Okay, Matt. Again, I'd like to thank everyone for their interest in CE Franklin. Any employees who have dialed in, I'd like to thank them for their hard work and the results they delivered, and we're committed toward continuing to improve as we go forward. Thanks, everybody, for your interest. Enjoy your day.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. Please disconnect your line.