NPK International Inc (NPKI) 2002 Q2 法說會逐字稿

Good day, and welcome to the earning call. All participants will be able to listen only, until the question and answer session of the call. With us today is Jim Cole, Chairman and CEO, and Matt Hardey, CFO, who will introduce the call.

Thank you very much Jennifer. Good morning and thank you all for joining us for Newpark's second quarter earnings conference call. Please remember that much of what we say today during the call, will constitute forward-looking statements, as we share with you our outlook for the remainder of year. These statements are based on our best available knowledge of the business and the conditions we will face, and council has asked that I remind you to look at the forward-looking statement section of any of our recent SCC filings for guidance set for the nature of those risks. That said, in our comments we will be talking about the information that was distributed in last evening's earnings release, and the accompanying data tables. If you don't have a copy of that release, you can can obtain one from the investor relations page of our Internet website at Newpark dot com. Let me lay out a framework for our discussion today.

By way of contrast the quarter truly represents what we believe the trough of Newparks market compared to the peak a year ago in the second quarter. The US rig count is down by 35 percent across that period, from 1,239 rigs last year in the second quarter to 808 this year. The Canadian rig count is down 43 percent from 251 a year ago to 144 in the second quarter of this year.

Let me highlight in that frame of reference the impact of this down cycle on Newparks financial results. Our total revenue in the quarter just released was 77.6 million a $30 million decline or 28 percent below last years level.

On that chain our pre-tax income dropped by $14.2 million which is a 46 percent operating margin if you will the wrong way, the result of the operating leverage and the contraction. While much of that change was price related in the Gulf Coast Mat business where we have practically 100 percent margin on pricing, its also indicative of the manner in which earnings can and should respond in recovering markets which Jim will discuss with you in a few minutes.

Newpark remains profitable in this down- turn as compared to the 1999 cycle largely as a result of cost cutting measures that we began to implement this time last year. Included in those measures was a $1.8 million benefit in the recent quarter from an interest rate swap that we initiated last November.

As we live with that transaction we recognize that that's not our expertise and frankly we were glad they've had the opportunity to wrap up that squeak at the end of the recent quarter, creating a cumulative $2.4 million benefit during its seven month run.

Future interest rate reductions we plan to achieve from reduction in borrowings. Now I'd like to briefly take you through the variances from the second quarter of last year contained in the release.

In the revenue in our integrated services segment declined from last years peak by $20 million or 53 percent to the recent trough. For the contribution from this segment declined $10 million and effected 50 percent margin in the contraction.

The largest part of the decline $8.8 million was a result of pricing in the Gulf Coast rental market, that dropped by a dollar and five cents a square foot from $1.69 last year to 64 cents this year.

Lower composite mat sales in the period accounted for $7.8 million of decline. Both of those were very significant to the change. In the

segment the revenue decline was 6.1 million from last years peak to 47.8 million this period, with a corresponding drop of $3.6 million operating costs.

While we were surprised by the severity of this years seasonal decline in the Canadian market our US market revenue declined only 13 percent against the 35 percent drop in rig activity which we believe is quite testimony to the progress that business unit has made in the last year.

In our E&P business year over year revenue declined $4 million with the operating contribution dropping 3 million. That revenue decline was exclusively volume related as waste volume dropped 37 percent in line with the rig count change.

The operating contribution in the recent quarter, carried the burden of 2.1 million of contractual obligations that expired on June 30 and will not recur. Yet another way as a result of our cost cutting moves profitability would have been down only a million dollars exclusive of the non of the now expired contract.

So that's just the severity of what we've been through the last year and truly the peak to trough trip has not been fun but let me with that said talk to you about changes from the first quarter this year.

The

and integrates services revenue dropped by 4.3 million dollars sequentially

almost entirely on lower sales of our composite

that changed with the company by 1.8 million dollars of

and operating profit which clearly effects the effect of margin of this composite

.

Second quarter sales at 12 hundred units were down 38 hundred - down from 38 hundred in the first quarter and well below our earlier expectations for the quarter. A number of those orders were simply delayed until the later part of the year but we expect to see these numbers improve in the second half.

revenue increased by 5.7 million or 14 percent to 47.8 million in the quarter - very close to what we had suggested to you in the last conference call. While the apparent operating contribution from that revenue declined by 500 thousand but that's not the whole story, if you look a little deeper - you'd find that our U.S. market revenue increased 25 percent quarter to quarter in spite of a flat rig count.

The U.S. operating profit increased but the effect of that was masked by a 2.1 million dollar decline in Canadian operating profitability as their revenue dropped 5.6 million dollars sequentially on the prolonged break up season in the second quarter.

Overall, we were quiet pleased with the continued progress of our fluids company. In the EMP waste business revenue was up 1.1 million and a quarter. Operating contribution increased by about half a million dollars on flat volume and pricing.

The good news is the final stage of our cost reduction plan is now in full effect as of July 1 and we mentioned that to you earlier.

To sum up with a few statistics - EBITDA for the quarter was 11.5 million dollars, our capital expenditures were 32.2 million in line with our expectations and our working capital investment before the effects of the

acquisition - where about six million dollars in the quarter.

As of June 30th Newpark had funded 37.5 million dollars against its bank credit facility leaving 46.5 million dollars of availability, after

of the credit and other obligations. Debt as a proportion of our total capital was 36 percent - in line with where is was at the end of the year and we believe coming down across the rest of the year from cash flow from operations.

With that long summary now out of the way, Jim will now walk you through our business outlook for the second half.

Thank you Matt. And Matt's covered the historic comparison peak to the trough and the sequential quarters, I'm gonna talk about the near term in each of the business segments going forward and the outlook as we see it today. I'd like to give you a few pointers of how we feel about the market - we do believe the second quarter was a

the bottom and we get indication of that by the activity level within our own business units which are beginning to pick up already.

We also believe that recovery will be slow as uncertainty still abounds in the industry and the hangover from extremely poor industry performance still haunts the - everyone. But it's still a healthy industry and this is the healthiest industry in a down turn I've been through - this is the ninth one - this is the best we've ever seen - though it's still a healthy industry.

The weakest market we feel will be in land on the Gulf Coast for the remainder of this year, even though, we believe it will a slow improvement, it will be the least approving, the strongest will be, the off shore market, from our indications and we also believe that Canada has already begun to improve, as we've already experienced that in our business units, and others we've talked to, are experiencing the improvement in Canada, all be it, from a very poor second quarter.

Though, we look at the improvement in Canada, the off shore market, but we aren't looking for any really strong rebounds, due, to the uncertainties that we see, still have to be resolved, and primarily, a lot of that around gas which other people, you all understand, here on this call.

Now, I will talk about the three business segments, and I want to use a comparison because here we come off of a base in the second quarter, where we are barely profitable, at about 77 million in revenues, and that basically we have an analysis projection, out there, which I'm sure, everybody's not real comfortable with, as nickel.

I want to talk about, why we're reasonably comfortable with that nickel. And so, let me first talk, we have, we have a negative we have to overcome, and that is positive, that was the 1.8 million debt swap benefit we received in the most recent quarter, and if you want to know the impact of that, at about a penny and a half a share.

So, the good news is, it was good, but it's not going to reoccur, unless Matt pointed out, as we studied the effects of hedging and these types of swap, it was not an expertise that we want to deal with, so we cashed that out, and we were pleased we were able to do so.

So, we're starting from what would be apparently, a negative position as we talk about our business operations, which are, which we think will be fairly solid, on a positive side.

Let me start first, with our environmental service company, its 725,000 barrels in the second quarter, at approximately $13 a barrel.

The positive factors that we have already began to experience, are the synthetic base regulations are pushing volumes upwards.

July, has already shown a fairly sharp increase in our volumes, number two, we have a competitor that has announced exit from the market.

So, that's a small one, a few months ago, this is a larger competitor, and they've announced exit from the market.

And the third is, as Matt pointed out, our cost structure has been brought into line, but has been reduced by over $2 million for this current quarter.

So, we see that the effect, we think that revenues will be going up, but the contribution will be going up much more than 100 percent, because of the cost reduction as well as the improvement, in the business.

And I'm not going to estimate the percent per share on that, but it will be a substantial improvement in this business unit, we've been operating at around a 10 percent minus, eight to 10 percent, pre tax operating and we'll see it begin to get back into the mid 20s, or protein 30 percent as the volume improves, so, we're going to see a recovery of the improvement of margins in this business, fact of what has been our historic levels.

And we are really from a service stand point, and a equipment infrastructure stand point, we are today in excellent condition as the market improves. We just recently opened a new transport station in

which add to volume as we go forward. And that's it, on-line we're waiting for the final coast guard approval so that's soon to be for this quarter.

The second operational service is

. We sold 1,200 composite mats in the last quarter. We had a number of orders which were delayed in the quarter which we believe will be coming into the second half of the year. We are fairly confident cause these have always been the best thing but we have the South American Indonesia and military orders all in process moving through.

We've received information that one of those orders has been approved and which should go in this quarter. We think that the improvement will be at least 4,000 mats over the 1,200 in the last quarter and the effect of this is a substantial improvement in profitability. 4,000 mats is about 6.5 million of revenue and you can figure about 45 percent contribution on those type of waters.

Secondly, our mat rental business has improved in Western Canada from of the very low second quarter, we lost $800,000 in that business in the second quarter and that would be profitable and so that contribution should be pushing almost rounded up slightly to a penny a share improvement quarter over quarter.

So, we have two major improvements with the sale of composite mats which we feel fairly comfortable and the mat rental business which we feel extremely comfortable because the mats are out there, out working. Gulf Coast which has been the most severe down turn because of the pricing impacts, slight improvement but not material. We have a opportunity to change the way the business is being conducted on the Gulf Coast and we're going to take the opportunity to re-adjust this business so it will stay down a little longer, the pricing will stay down.

So, there will be some adjustment but we'll get our benefit in the long-term. We should do better long-term than we've done historically if we were able to successfully do what we're doing in the Gulf Coast. We put no benefit for that, the primary

benefit will come from composite sales and our improvement Canada into the third and fourth quarters.

Drilling fluids, a little background. Getting a lot of continued interest and on our deep drill product line, some of that is by the increased performance and the success we've had with the product but also the regulations. Also the industry are looking for answers off the absolutely pathetic performance in many of these areas in the 2001 area and if you want to find out what pathetic means, spend enough time and talk to the industry and you'll find out that we did not perform throughout the entire industry and drilling difficult wealth.

So we are getting a lot of opportunity their and its and we're gaining market share, we've picked up 12 new customers in the first half of this year.

We are picking up new customers as we speak. We've moved up strongly in the offshore Gulf of Mexico market and we will continue to make strides in that market on wells that are committed to the company and they are better then decent wells. They are excellent.

If I gave you some nail sketch, we think we will increase in the U. S. Market, primarily, the Gulf of Mexico and that's good revenue and we'll continue to improve in this area. Canada will rebound, just for a point of reference, we averaged 39 rigs running in the Canadian market in the first quarter. Nine rigs in the second quarter and we're back in to the mid 20's now. So it's recovering.

So the revenues and income will recover with that, and that was our area that was hurt, that fluids companies were master the good performance of fluids in the last quarter and our foreign operation continues to shine for us and that will be an improvement in the coming quarter.

We increased revenues in drilling fluids from the first, second quarter by 14 percent and that also covers a down turn in Canada, which was fairly sharp. So we actually did over 20 percent or 25 percent in the U.S., so we were up sharply. We think that we should improve at least 15 percent in the coming quarter and we are not counting on a whole lot of rig activity due that, that is really market penetration and approvement Canada.

We think it's pretty solid, and the margins on that, on the income is off, should be in the 30 percent range. It could do better, depending on the mix of deep drillness and good mix potential there.

In summary, we believe that the improvements in our environmental company are really solid. The costs are gone, the competitor has announced the withdrawal if any company sent ways to a person's withdrawing from the market now, I don't think a past an IQ test.

So I don't think and that's a benefit to us and we think that there'll be a small, small plus in rigs but not much. But that's pretty solid, we think our

is solid in Canada and the composites and we believe that we've got a solid improvement coming in to part drilling fluids.

We you net these swap out of that, we are pretty comfortable that we can meet the nickel that's out there, we'd like to say that we can beat it but let's just meet it, that would be a nice change for Newpark and we are very focused, we don't have to spend any capital to do any of this stuff, we don't have to go out and get anybody, we don't have to acquire anything. We just need to perform, where we're sitting in the market and the market conditions were in.

I think that we have an opportunity to begin the improvement from the base of the second quarter. We think that the opportunities in the fourth quarter, will continue to show improvement, unless there's something that really strange happened. The year is projected at 15 cents, which means we are going to do about 90 plus percent of that in the second half of the year and we think that we can achieve that.

So we are going to see some pretty sharp improvements going forward and that we really feel good about our position with our products and services and position, as the market really begins to rebound in 2003 or whenever it decides to do it. Cause we're in good shape in our balance sheet and our services and our products are very focused.

And with that we'll open it for questions.

Thank you.

If you would like to ask a question at this time, please press star, then one. You will be announced prior to your question. To withdraw your question, please press star, then two. Once again, if you'd like to ask a question, please press star, then one now.

Our first question comes from

.

Hey, good morning guys.

Morning John.

: Just a few questions.

First on the drilling fluid side. You guys improved your revenue, pretty nicely, obviously I guess, coming out of the U.S. mostly, sequentially. But operating income fell a bit. Why the decline in margins?

Number one is, we - from first to second quarter, we lost 2.1 million. We made in Canada 1.1, in the first quarter, and lost a million in the second. We were up by over $1 million in the U.S. market. The U.S. market tracked fine, it's just the collapse at Canada just covered it up.

: So, your - you said your operating income was actually $1 million better in the U.S.?

Yes.

: OK. You just lost in Canada. And I guess, it's just.

Yes they should. They just turn out the lights.

: Yep.

And we're back up now, to mid-20s on the rigs, in July, versus, we got down to four rigs running for a while. And so it was - we had - basically the sharp turn around in Canada, but the sharp decline, really impacted us and covered the improvements, which were continuing in the U.S. market.

Unfortunately, so much of our costs in Canada is fixed in staffing and so forth, and when you know you're going to have that sharp dip there's not a whole lot you can do to pull costs down to try to avoid the seasonal loss. But, as Jim said, as the third quarter and fourth quarter roll around, you'll see that improve, we'll get that back.

: Right. That makes some sense. I just wanted to make sure

, you know, trying to, you know, more competitively price your product, or something. But ..

Our margins actually, from a gross margin standpoint, in the quarter, they were actually improved from the first quarter.

: Good. And Jim did I hear you say that you expected growth in the fluids business by 15 percent in the third quarter?

Yes.

: OK. OK.

Let me move on to the composite mat business. You, you know, kind of disappointing that, in the quarter. You mentioned that, you know, you think a lot of that's been pushed back. I guess, why have those projects been pushed back? What is your visibility that you'll, you know, get the 4,000 mats this quarter?

I think two - there's just - we have an order that, nothings a

, but we have an order that's been put in, a requirement for the military for 6,000 mats. And it takes five levels of approvement, and it's in the last - it's in the last signatures, it's in the Pentagon for the last signature.

And that - it's torturous.

: Right. So..

I've seen them do it. But it's in the home stretch.

: So of that 4,000 kind of mats, you're looking at for the third quarter, how much of that has to do with the military orders?

I would put it this way. It's 5,000 mats, 'cause before improvement, the orders that are pending, for the company now, are 24,000. And that runs from Indonesia, and we got a notification in Indonesia that they've approved it. That's a joint venture to major all companies to prove that, so that's approximately 1,500 mat in that order, and that was supposed to have gone last quarter. But basically, the South American projects, the total of all the projects that have approved, we also had with the devaluated of the problem in Argentina, there was some people in some of the companies down there had to go get partners when they were about ready to spring on their contracts. Pipelines are going in, and they haven't begun drilling yet, and they're the reason to build the pipeline, so they're playing catch-up, but they had to go get a partner, about a week ago they announced their partner, so, in fact two partners. So the indications are that that's going to come along because they're going to have to play catch-up, so there's at least 24,000 mats in orders that have been previously approved, and for various reasons, have been delayed. But we're not saying we're going see 24,000 mats in the second half, actually we've pulled that down to about half of that.

OK.

So it ought to happen, but the military order is 6,000 mat, and it has war need, and so it ought to get some priority, and we mean to confirm that it should, but those sections, that's why we've took the 24 and kind of whacked it in half.

Well OK, thanks Jim. I might come back but I'll leave you guys for some other questions.

Our next question comes from

.

Hi, good morning.

Good morning, Justin.

One and two I guess follow up a little bit on some of the last questioning regarding the mat sales, you mentioned that expect an incremental 4,000 mat sales in the quarter, does that include the 1,500 that you expect from Indonesia?

The Indonesian mats would be included within that. That's 1,500 and 24,000 that as of yesterday, finally got approval, but running about three months late, or four months late.

OK and when you look at the orders that slipped from Q2, I mean how many mat sales are we talking about that actually slipped from Q2 to Q3?

Well, probably, I don't know because, I just can't answer the question. Everyone of the projects seemed to slip in this oil patch environment that we're in, but each has it's own kind of story, so it's whether or not suddenly an Argentine company has to take up a partner from the trouble that they had before, it goes on and on, but I don't think I can say that it's 5,000 or 2,000 or 6,000 mat, except they were orders that specifically supposed to go on, it's not that specific to deal with it in that manner. We had felt in the quarter that we would sell about four or five thousand mats, but we think we'll sell about five thousand next quarter, one thing about it with three months closure, those rascals doing it, but we're getting indications that the projects are real and that they're beginning to ask for transportation, information and shipping and that sort of thing, so they're getting close.

OK, and then I guess one more point of clarification, do you expect five thousand in Q3? Your expecting around seven thousand in Q4 to get you to the 12 thousand

rate for the second half?

I think that's reasonable, that's what we would kind of feel. And that's about half, that means about a half of the mats, and we pick up, you know we sold 150 and we sell 200, we pick up each quarter you know, 1,000 1,500 mats from small sales now because that's building. Yeah there's, if you throw it all in, it if all happened which it won't, we could sell anywhere from 24 to 28,000 mats in the second half of the year but that won't happen so we've cut it in half.

Some of these are happening and we have indications why they should, we've talked to the people et cetera.

OK with the month of July behind us, how may mat sales have you booked so far this quarter?

We've booked probably small stuff, 600 500?

500.

About 500.

500, OK. And the last question I have on mats, where was your inventory at the end of Q2 and where is it now?

Round about 20,000 mats in inventory and a little up north is 20,000. So, it would be a real happy occurrence to sell about 12 or 14,000 to those. So, that would be 100 cash flow coming out of inventory. Inventory of mats is too high, but at this junction.

OK then does that employ with you know, orders in half, lets say 24,000 mats and about 20,000 in inventory, does that employ that you guys are looking to cut back on production and if so?

Yes we already did. We cut it back this year and the question will be this other indications of interest and we'll make that determination on the level of production for next year later in this year as we get more clarity on the sales and the backlog of potential orders.

OK. Last question I have and then I'll let someone else get on. Regarding, you mentioned the waste disposal that you had a competitor that left the market. I have seen recently that Trinity had left the market, they sold their sights to US Liquid. Is that the competitor you're referring to or is there another one?

That's the competitor we're referring to and don't ever assume cause someone may have done a little business with somebody. Your going to get it because you have to go out and get your environmental work and the other point is that one's not done and when it all uncovers you'll find it's not merely as it seems on top. Just keep digging.

I just want to make sure that there wasn't someone else that has left.

That's basically at the stay tuned, it's not done.

OK, thanks very much.

Our next question comes from

.

Hi guys, it's actually

.

Hi Rob.

Justin did a good job exploring the mat side of the business and now I want to touch on drain fluids a little bit. You guys mentioned that Canadian revenues were down was it 5.6 million subsequently, is that correct?

That's correct.

So then if I assume that the rest is US that means US drain fluids revenues were up 11.3 million sequentially.

We had three million from all that was new so you take three off of that number and your right.

OK so three million. OK so then US revenues rose?

25 percent.

Yeah 8.3 million on which, 1.1 over 8.3, 13 percent. OK so that backs up, I was having trouble getting to your 15 percent incremental that you gave and all that explains it. OK. Right, on the waste side. What's the outlook for volume this quarter. You know it continued to disappoint this quarter, and it seems like you're getting less volume for rig than you used to, I know, some of that due to competition, but, shouldn't that be heading back up with competitors exiting the market?

Well, that's just happening, if I, we had a fairly substantial improvement in the month of July, that's the best month we've had in a good while, so lets be sure that we can go times three, if we do, we'll have better numbers than we gave you.

But the company that exiting, despite what their announcement said, got about in the recent past, somewhere between 90 and 100,000 barrels, a quarter, and primarily off shore.

And I would say that, we should pick up the majority of that, at least with the foreseeable future. So, I think we're seeing, we went out a monitored the market on a per revenue per rig received by us, and in the recent months, we're up about 20 to 25 percent of the off shore market. So, we are starting to see that effect before this company exited the market.

We've already seen about a 25 percent, and the most, the only change has been the regulatory change with synthetics, that would have effected that, that we could monitor the market place, so, I think that if you're going to see an up tick in the off shore market, most of our competition on the land and in the barge markets, and that's come down but the off shores picked up the sharpest, and that's our highest price, we averaged the highest price there because of the service element to that.

I don't know if I answered your question.

Well see, so then by

you expect a further volume increase in the third quarter?

Well, I'll tell you what, just the month of July, which is our best month in a while, is an indication, yes, the answer is absolutely.

OK, what kind of incremental margins do you think we can look forward to in that segment?

I think, now that we've gotten our cost structure in line, we should get a cost in the 75 percent range, we have nothing to add to infrastructure at this point, it's all variable, so you should be at least 75 percent.

That's third quarter over second quarter?

That correct.

OK, and that includes...

Other than that, because there is a $2 million cost reduction, $2.1 million cost reduction that will be affected in the third quarter, that was not in the second, so I think you'll see your incremental margins go over 150 percent, because of the cost reduction.

Having confuse you that way, we're feeling like as Jim said earlier, you're going to see a return in that business to its more historic rates, if they do, 10, 12, 13 or $14 million, what ever it is in the quarter, and contribute that at 25 percent operating, 20 to 25 percent operating, as opposed to 8 or 10, there will still be a big improvement.

OK, it will be over 25 percent.

And that's just based solely on the ending of the US stock contract?

No, it's based also on the improvement of market conditions with the exit of one competitor, who was taking a fair piece of the off shore, and the impact to the synthetics range. But, we decided in the press release, as Jim mentioned, the fairly substantial increase in waste per route from the off shore market, second quarter over first quarter, and I think that is significant. We had hesitated to talk about that in any detail until we had better data, but I think the answer is in the numbers at this point.

OK, great, going back to drilling just for one more second here. What kind of an incremental do you expect on the Canadian market bouncing back? I know your revenues were down 5.6 million, your operating profits looked like it was down, was 2.1, do you expect to get most if not all of that back in the third quarter?

I think that in Canada, we were off the base, we would get a two to 2.5 million depending on how the things start to up their improvement, and it will have a reasonably good incremental margin because of the fixed element of that. If it came down hard, it would come back up reasonably well, but I would think it ought to be in 35 to 40 percent incremental margin rate, and the question really is, our

counts up, it's just how things start and how they weighed up and thinking about that on the rig, but we ought to be a minimum of two million, we could be 2.5. At one time, we would have said three, but we're not sure right now, but it is definitely an improvement.

OK, thanks Matt.

Our next question came from

.

Yeah Jim. You're talking about an improvement in the competitive situation in the environmental business, and isn't it the case that you've had some kind of a non-compete agreement with U.S. Liquids that expired or maybe that's what the $2 million a quarter is about or something like that, and they bought a competitor, and don't you think that that's going pressure the competitive situation in that business or not?

Well, you say bought, or they helped to buy?

I thought they bought it. Maybe you can clarify what's going on with them. I think that that's the competitor that was perceived to be a problem and your basically saying that the market situation, the competitor situation is improving, and I think that we were thinking that it was deteriorating.

Stop a second! Do you ever see an announcement and it's done? They said they planned to do it, and they said it would take 45 day, but they've got to do that, let them do it, and if they accomplish that, then they've got to go into business, and I've never been able to do that. Now I want to take notes if it's done instantaneously, so that everything is instantaneous, now you can buy and sell stock on punching a button, but you don't get into the business by punching a button.

And in addition to that I think that U.S. Liquids has a lot of hair on it which would make it very difficult for that company to get any of the contracts with say X on, and the companies that you're disposing of their liquids with. Isn't that the case?

I'll let the market determine that one. I think that there's some reasonable to that, but they have to go out and see their own case.

OK, so they are answering the market, but you're not worried about it because you're not there yet?

Jason, when you have people going out, let me just explain it. There have been about more than a dozen people that have come in the market and exited it. Generally, when they exit the market, they don't exit in an orderly fashion. They leave a lot of debris behind for the oil companies to clean up the debris. I think you may find that situation true in this exit. And I'm not going to go further, I'm not going to go further until we know a lot more, and if you want to learn more, just read people's financials, but also you can dig in to these things they should not be in an orderly exit from our view of it and we've watched it for a long time and so that's their problem.

So the summary is that they are entering the market but you're not worried about it.

We're not concerned because as they have problems with a flight to quality and after 21 years and no problems we are it, you can read our footnotes you can read our compliance

OK well we've been waiting three years for this new environmental law to get passed and I guess its effective in August and so if the market structure is not going to change a lot I think. It may be worth while having waited this long.

Well we hope that's the case and we believe it is.

OK thanks.

Our next question comes from

.

Thanks

I just had telephoto question I 'm a little confused here.

We can barely hear you.

I'm sorry, I had a follow up question regarding the drilling fluid, you ah can you help me again, just give me the information regarding your operating income in Canada.

Yeah, we were real clear about we'll say again, revenue in Canada from Q1 to Q2 declined $5.6 million.

From 8.6 to 3.0.

In the first quarter they were profitable by a little over a million dollars, a million one and in the second quarter they lost a million, so the operating contribution changed was minus 2.1 million in Canada in the second quarter on 5.6 million lower revenue.

OK yeah, I missed one of the numbers I just want to get clarification on that, so the net would

the margins at

you know are above 15 percent on the operating line.

They were they made just under $600,000 on $3 million. approximately.

OK right, understand, final question then on the drilling fluid, can you help me to understand what your exposure is in the

line to the North Sea.

Ah we've we will we really like not to talk about it, we have opportunities there and we've been planning but I'd really like not to talk about that a lot because ah the North Sea is in one of our expansionists in our top five but we've got several ahead of that and we're we are not and we believe that we're not going to pert for revenues we just have to be disciplined enough to put them in the right place. But I think that the North Sea are in on our plans but I don't to talk any specifics about it.

current revenue mix is really focused in Italy, the Mediterranean, Tunisia and Romania, and Algeria, it is not a player at all in Northern Europe at this point.

But longer term we plan to be there but we have some steps to make to be sure we're there, before we qualify.

Just trying to understand what your exposure is to that market because you know we've heard a lot about the slow down there so I appreciate the help, thank you.

I'm showing no further questions.

OK well we thank you for joining us we thank you for your patience I we feel very strongly that we will be improving as we go into the third quarter and fourth quarter.

I know that I don't know how people want to respond to what we've said today but we believe that the five cents for the next quarter is very doable and we're still comfortable with the fifteen cents for the year and stay tuned and I hope we haven't given you too many details today but we try to be an open book on what we're doing in the company.

Thanks very much we'll talk to you later.

Bye.

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