NPK International Inc (NPKI) 2002 Q4 法說會逐字稿

Good morning and welcome to the Newpark conference call.

All participants will be on a listen only mode until the question and answer section.

With us today is James Cole, Chairman and CEO, and Matthew Hardey Newpark's CFO.

Sir, you may begin when you are ready.

Thank you very much and good morning.

Thank you for joining us this morning.

Last evening, we issued the release that incorporated full year 2002 and fourth quarter results for Newpark Resources and inline with the guidance we had provided in the February 10th update.

I have a few comments on financial topics surrounding the release, which will be followed by James Cole's commentary on operations and the markets we serve.

First, let me make a few comments about the balance sheet and Newpark's financial condition.

Newpark ended the year with long term debt at just under $174m, equal to 36.3% of long term capital.

We believe that in improving market in 2003, we will make substantial progress toward our 30% target ratio, which remains a long term objective for the company. at year end were $37.5m and we are glad to say Newpark is in compliance in all respects with all its bank agreement.

While we expect to reduce debt during the year, we think we should expect to see increase use of a line when we release first quarter results.

We recently took advantage of an opportunity in the quarter to purchase at a discount our consign BayRight inventory as we changed vendors.

In the process of doing that, we funded approximately $10m, which will flow back from operations over the next six to eight months.

BayRight, as you know is an essential ingredient in our drilling fluids business and we have found a substitute vendor and have a good working relationship there as well.

While we have not discussed since our second quarter, I will remind you that included in the full year results you see effects of none cash charge that occurred in the second quarter, arising in connection with our redemption of a Series A preferred stock.

We do not see any similar items arising any time in the future.

You will also note on the balance sheet that the holder of the remaining preferred sock has converted about $18m of the Series C during the second half of the year.

The net preferred stock on our balance has now declined below $42m.

During the year, Newpark produced over $29m in cash flow.

By cash flow using pretax income plus depreciation, what we had to work with.

And invested $8.4m in net working capital additions, $15.4m for the full year in net capital expenditures and reduced debt by approximately $2.4m.

Of course there were other transactions and flows through the company and these will be detailed in the cash flow statement when we file the 10-K.

A portion of the increase in working capital and inventory particularly, accounts receivable and inventory, I should say particularly relate to the expansion of our drilling fluids to the European markets where trade terms typically run longer than the domestic market.

You remember we did the first acquisition in May and we subsequently bought out a minority partner later in the year and another venture in that same company.

Our domestic investment in working capital is above our target levels due to payment terms extended on some sales and $3m of sales that were completed at the end of the fourth quarter.

We are working to improve this.

We recognize that the receivables turn over has extended out and that's an objective for 2003.

Pull that investment back into cash.

Mat purchases for our inventory throughout 2002 added a net $7m to the inventory change and we expect to recover that also from sales with proceeds of all of these objectives allocated to reducing utilization of our bank credit facility.

For the full year Newpark produced $41.8m of EBITDA, which included depreciation of $21.8m with $5.1m of that in the fourth quarter.

We anticipate that depreciation would increase slightly in 2003 due to continuing asset additions and we have planned for $18m in capital expenditure in 2003.

And that would be compared to about $22m of expected depreciation for the upcoming year.

Much of that capital expenditure is back weighted and will not be formally committed to until we see how rapidly the market progresses.

Our tax rate for the recently completed year was 40%, that's a function of low earnings and the non-deductible nature of some normal business expenses.

We believe you will see the tax rate average about 37% for 2003.

And finally, let me remind you that the consensus of current estimates for Newpark is about 30 cents for 2003, with 3-cents of that in the first quarter.

Any improvement above those numbers is dependent want the continuation of favorable market conditions, which Jim will now address.

Thank you Matt.

My discussion will focus on the three business segments and within each of those I will talk about the strategy of each, which you can read on our presentation on our web page, the market condition currently in progress in that market, and our progress we're making within the strategy and within that market segment in the current time.

And so I'll start with drilling fluids and I'm not going to read the entire strategy, but I want to remind you and paraphrase it, but basically, we have developed a high performance set of products, combined that with our environmental expertise, for drilling deeper, high performance more complex wells.

That doesn't mean we don't do mundane or smaller wells, as our customers require but our growth has been, and our direction is toward the high-end of the market and that's where we're driving this company.

We are not looking to be the largest, but we are looking to be high performance company.

And we believe that's the trend of the market.

That is a paraphrase, if you want to read that, it's on our web page.

Often times we measure market by activity or rig activity.

So let me give you some numbers here and I'll try to keep this simple.

I'll start on 01/01/03 and this is the [Baker Hughes] account.

And I will go to 2/21/03, which is the last one I had prior to this conference call.

In that period, from the beginning of the year until third week of February, the U.S. rig count went from 862 at the beginning to 928 for an increase of 66 rigs or 8%.

That doesn't matter whether it's 20,000-foot well or a [post hole], that's just a rig count.

Just an indication.

The Gulf Coast, where the larger wells are generally, and a more gas prone area of the country, the beginning of the year was 329, and the rig count was 321 decline of 8.

While the country was going up 66 rigs, this very important Gulf Coast market went down 8 or 2%.

Now, that's not necessarily greatest indicator for Newpark because our operations and all three of our operations are heavily weighted toward this Gulf Cost activity.

So, not to dismay because we are very confident we see signs of turning as I talk further, what happened to Newpark during this period and across the U.S?

We began that January 1 with 99 rigs operating out of that 862, and on 2/21/03, we had 113, up 13 or 14%.

So we outperformed the market that went up 8% across North America.

We went up a little more.

Gulf Cost market, which went down by 8, or 2%, we went from 41 to 48 or up 17%.

So we made a more pronounced improvement across the market in the Gulf Coast in our drilling fluid business.

Now, these are all comparable and we count our rig count like [Baker Hughes] is supposed to.

That's a rig that's actually consuming.

Now there's more to the story, because if I told you we were going to go up with the rig count, you’d say, okay that's optimistic and nice, but let me give you a more important, as we discuss the Newpark strategy, let's talk about major projects.

Major project for us is defined as deep water and all these projects are not [one-off] jobs.

They're multiple wells in sequence.

Major [sub-salt] deep wells, major geologic deep wells, all with multiple wells with the rigs or major platforms.

These are, when we start, generally the revenues will flow.

Not always every day because they complete and do things but you'll have on going work and they're usually -- these are all -I believe I'm correct, most of these are in development mode, so they are not exploration where you get real ugly surprises, but there are always surprises.

Now, all of those seven major projects, we began working on most of these as much as a year ago.

Everything went slow in 2002, very frustrating but we're about to get the rewards of almost of a year of work.

Six of the seven have been officially awarded to Newpark and the seventh, we're mentioning it, we're not 100% there, but we’re confident that we will be awarded it also in the near future.

Not let me give you, I'm not going to mention any company's names.

There are four major companies involved, some with multiple projects.

And they are large companies but I'm going to give of a sequence pre-storms.

We can never forget about those tropical storms.

January, February, March, and April.

So, I'm going to give you pre storms.

And tell you how many projects.

Pre-storm we were working on three.

Unfortunately two of those three got direct hits and damaged.

In January we had zero.

In February 1.5.

The reason I say half, we got some revenues from that customer base, but it's complicated, but 1.5 would be a good way of summarizing it.

And in March three, and April will be six or seven.

So we're coming up the side of the mountain and to let you know the importance of these seven projects.

In North America, it will be about 3% of rigs but over 25% of the revenues for the year.

It will account for almost 50% of the increase which will be between 35 and 40% for the entire company.

Now rigs are not equal, but this is what we have been designing our company over the years and these are the wells that we have been pointing to for years.

It just has been slow coming but they're delayed by the storm but it's something coming.

You'll say "is that all that is" and the answer is absolutely not.

Our technical group and staff are working on good number of other projects.

Some are starting on land or on the shelf on one-off but we are working our way forward.

Now there are few characteristics of these.

They all require performance.

They all were held by another fluids company.

They all were looking for an answer they did not get from the other company.

They are high margin, and it's right on track.

Right on track with our strategy.

This is what we're about.

And our job is to make those seven projects, 10, 12, and 15, this will be the greatest plug of the growth of our company and it's done by technical and performance.

And if we pull this off as we think we will demonstrate as we go forward this year, we'll be rewarded for the investment and the effort we've made.

The second area I'd like to talk about is Canada.

And I don't have to tell you how important that is to the gas market.

I'll give you a little history.

First quarter of 2001, 2002, and 2003 to date.

The average number of rigs done on the same basis in the market in 2001, first quarter, which was a pretty decent year, like one of the best ever, the average was 504 rigs.

In 2002, which we like to forget, 379, then it got really bad.

That's and everybody knows that's a seasonal peak.

We are through 2/21.

About two rigs under 2001, but we'll exceed it because we're running about 550 right now.

So as we average the quarter, 2003 will be greater than 2001.

In 2001, with the 504 rigs, Newpark averaged for the quarter 46.

In 2002 in that first quarter, on the 379 rigs that were in the market, Newpark averaged 31.

In 2003, we’ve averaged 56 on 500.

On market presence is beginning to come up a bit and the real key to this year and as we talked to our customers is how they drill coming out of the break up.

And we have indications that they will be more active this year than last year.

So we're always starting the year with a good leg ahead of last year.

Our wells are improving.

And we are optimist that we'll certainly continue to pull ahead of 2002 and 2003.

Canada should be at least 15% of Newpark's growth this year, year over year.

And for those of you, I'll come down and tell you what growth means as people have laid this out.

The next area focus is in Europe through our company ABBA.

And the major contracts, off-shore Africa, two of those contracts are in place, and they are well priced, well placed and not conjectural.

They are happening now and building as we talk.

That will account for about slightly less than 15% of this year's growth.

So, let me summarize quickly, the major Gulf of Mexico project, which are six of seven awarded and fully running in the second quarter.

Canada and the international will account for something around 70-75% or more of our total growth.

Where is the rest going to come from?

And it will come from, as people return to work in North America.

And as they add depth, that will fill our growth.

If all we had tell you about today was that latter part, it would be a disappointing morning.

Our total growth is planned to be about $70m net product line this year.

If we add some projects, if activity is greater, if depth grows we add some more contracts and we have an opportunity to exceed that, but we feel as we speak this morning, fairly comfortable that we ought to be able to at least meet the growth projections that people have laid out for us in this company.

And when I talk about $70m, we put it in all our material, can you count to 30% incremental margin on that growth.

So, you can add -- do the math simply.

I think we have a real opportunity within that product line.

I'll talk about matting.

The strategy is two fold in that company.

As all of you know, that are interested in the company, is that we're developing a third base composite mat system.

And we basically have as strategy taken what was a regional business to the world.

And our first strategy was to expand that to eight key markets around the world.

And I’ll talk to you about that progress.

The second leg of the strategy was to change the way billing is happen -- we bill a customer in our historic rental business on the Gulf Coast.

I'll talk to you about that background of strategy, let me talk to but this company.

In 2002, let me first give you sales.

In 2001 we sold 21,000 composite mats, the majority was sold in western Canada.

In 2002, and we sold slightly fewer than 8,000 mats.

They were all over the place.

They were in many markets.

None in western Canada, as I can recall, maybe a few hundred.

Now in 2003, what changes did we make in 2002, we introduced matting at seven major new markets, which were Russia, and they're working.

Middle East, orders are going that way and if you guess they’re military related, you're right.

Alaska and the Artic, they're working, South America, Mexico, utility markets and Indonesia.

Major markets and very happily as we look at 2003, we have every reason to believe that we'll be a return of our biggest market in western Canada.

We now have -- you can give all the literature you want and look at websites and look at all the pictures, when you get mats down and they work, it really helps in a marketplace.

We spent 2002 putting mats down in a lot of places in the world and we're pretty assured we're going to start getting follow on orders.

I can't sit here this morning and tell you how many mats we're going to sell, but we believe that you will see orders begin to pick up.

We got a good number of mats pending now but they are not finalized.

That sounds vague but with we've made great progress in the year in historic DURA-BASE mat.

Secondly, as we work through the markets in the world, you go to many strange places where mechanization is not available.

Some of those are military applications with parachutes and temporary sites and remote areas.

Tundra where they can't put heavy equipment and the like.

There was a screaming need for a small mat.

And in 2002, we actually research the market and developed a lightweight mat.

If you'd like to see what it might look like, you can look at the Newpark web page and Matt would you please give them instructions, so everybody may look at it.

The new mat is called the DURA-BASE SP-12.

Meaning it’s about 12.25 square feet.

The best way to access the pictures and story, from our home page, which is www.newpark.com, click the link to our SOLOCO operating company that you'll find in the left side of the screen.

When the SOLOCO web page comes on your browser up on your window, look at first the item at the far right-hand column under a caption labeled “News.” You will see story about the ST-12 product and if you click on text, that will bring you to the story and photographs of this new lightweight mat.

Tomorrow, Saturday, they will air-lift the first 2,100 of these to an unknown destination in the Middle East and the following week, they the pick up another 2,100.

We have a number of people becoming very excited about this for temporary housing, for walkways, light equipment, it weighs slightly under 50 pounds.

If you see the picture, you see one person handling them.

The large DURA-BASE mat sells for $17 a square foot.

And if you recall that, that weights about a 1,050 lbs.

This mat, sells for about $10 a square foot, and the slightly heavier version, which can be used on light-equipment will sell for something in the range of $12 a square foot.

When we're in full production, and that method is yet to be determined, we have several alternatives and we would like to run this through our current facility.

We have to do an experimental prototype run in the north.

But as we go forward, we think that the opportunity to have a similar amount of gross margin on -- as we have on our base system.

This is not in any way, rob or take sales from the larger mat.

These are opportunities where mechanization is not available.

Generally when you have mechanization, the bigger mat is preferred.

These are more remote areas.

In the Gulf coast market, a very interesting as change is occurring.

Number one is the inventory is the lowest we've ever recorded in the competitive market, and the condition of their wood is in reasonably mediocre to less shape.

The activity is picking up.

It started about three months ago and it's not steady but it goes in rounds and we got another round of good going now, and we are very pleased.

Pricing has picked up over 50%, and will hold.

What really happens to us is as it holds for a while, we run it into re-rental, which is really nice.

That is really profitable and that's where we make money on this business.

It's called utility - the re-rentals.

But with the current inventory situation and the current up tick that is occurring in the market, in this year we are going to attempt, we believe we have a good chance of carrying this out, change from a 60-day per square foot rental to a per-day.

Per-day is how we've introduced this to the utilities and they love it.

It works very efficient and it is actually an advantage to both parties, we are not looking to raise the price.

We are attempting to change the utility of our rental fleet.

Every 1% change in utility, i.e. from 50% to 51% in our mat fleet is worth over $700,000 in pretax income with no investments.

And we believe we can get at least 10 points higher utility by changing this method.

And it's really by aligning the objectives of both the operator and the rental company and working together to increase that rental without costing either party more.

We just want to make more money.

I think it's not trying to push this off to another party.

We have been working on this for the last two years, the time is ready, 2003 is our time to pull the trigger on this but it will be soon, but it will be a few months off yet.

The third business segment is our environmental company.

In the last year and half, we told you the positioning we made for this company.

We told you the regulations have changed to improve that market, and the market it serves is down 2% in rig count for the first two months of the year.

We're not just made it all.

Because what we see coming is when markets pick up and the drilling deepens, we are very positioned, and that strategy is to focus on the premium portion of the E&P waste market where the customer’s requirement for services and security are understood and accepted.

And rather than maintain an 85% market share, which is historical been our strategy, 67-70% strategy will make more money.

We have adjusted our service, adjusted our cost, and they ring the bell and the games begin, we are ready and you will see the very good marginal returns on incremental revenues in the [65 to 70]% range in that business.

That will depend on that activity.

I don’t know, other than polishing that, what we can do.

They are polishing their cost, and they are continuing to keep their head in the game.

I covered our three business segments, the strategies, our current condition, and my closing comments before questions are, we made our investment, we haven't made a return them yet.

Products that we've paid a lot of money for are developed and introduced, and they work.

We are confident that the market is coming.

Our customer base is building and if we're even remotely half right, the rewards will follow and with that we'll open up for questions.

Operator, we're ready for questions.

Thank you.

If you would like to ask a question, press star one on your phone.

You will be announced prior to your question.

Once again, to ask a question press star one now.

John Tasdemir (ph), your line is open.

Hi, one of the first things that jumps out at me, is the direction on the pricing on the mat rental segment.

Can I infer that some competitors were forced out of the market based on pricing that we saw the previous two quarters, that weeded some out?

Or is that just a pick up in activity?

I think I would best say that what happens is -- let's say four or five months ago, the rental fleet has contracted.

When you have old wooden mats, every time you pick them up and put them down you will lose 10-15% or more.

And one of the signs you always get is when people are buying loose lumber to hide their mats.

It means the mats won't allow for safe operations.

So over the last year we have seen more that, but it's really a [attrition] of mat fleet where today there's no wood available, no mats available, and very little capital to invest.

So they're living off of an older inventory which is dying.

So we haven't officially lost a competitor, but all of the competitors have lost capability in the marketplace.

And I'm not going to sit and predict whether we lose competitors but it's a tough business out there now.

Okay and along those same lines, is the state of the market in terms of the inventories of the mats in the industry, is that one reason why the environment is more favorable right now to be able to go after this day rate type of approach, which sounds very good.

The answer is yes.

When we began the concept, our competitors had about 80,000 mats, and it's under 30,000 today and it's dropping rapidly.

We monitor that all the time and we saw the condition of the fleet and the condition of the market and we realized that we actually hurt our company by six or seven cents a share last year by not [propping up] the market like we usually do, and we suffered a bit in that market, so our long-term objective is the one I spoke about this morning.

And last question I had, I just want to make sure that I had this right.

When we are talking about the drilling fluids and the major projects going from roughly 1.5 in February to six or seven in March, I want --

April, not March.

Sorry April 6 to 7.

We wish March.

And I want to make sure I have the numbers right.

Can you go over the numbers again on the percentage of the revenues and the percentage of the growth for the whole company coming from just those projects?

The percentage of the revenues when they’re operating, they would generate about 25% of the entire revenue for North America.

For the entire revenue of North America drilling fluids.

That's correct.

Okay, and there was a growth figure you threw out.

You said that that should account for a certain percentage of the growth of the company.

The growth in the company will be about $70m, that’s as people are projecting and that ought to account for slightly less than half of that off-shore 7 projects.

That’s a partial year.

Okay.

That does it for me, thanks.

Scott Gill (ph), your line is open.

Good morning.

Good morning.

Back to detail question for Matt.

Matt, you mentioned or made a comment with about the Series A and Series C preferreds, some of which had been converted.

I was writing furiously at the time, and I didn’t get all the details.

I guess the bottom line question is, how much of each of those two issues is still outstanding?

And part that then is, those shares that were converted, when did that happen and is that fully reflected in this year end share number of fourth quarter of 75.5m?

Is that now the fully diluted share number, or does that go up more with this conversion of some of these preferreds?

Good question.

Let me go back over that.

We started the year with $75m in preferred stock.

We redeemed $15m of Series A on May 15th.

About early September, the holder of the B and C shares, which total 60m, two , $30m each, the holder began converting some of the C shares, and has converted in aggregate 18m of the preferred C into common.

Now, much of that has been sold in the marketplace and if you noticed right around Thanksgiving and after Thanksgiving, there were a couple of big blocks that totaled almost 2.5m shares.

We are not privy to what position they have remaining, nor their plans.

But that leaves us with, as you see, a much higher share count as a result of that issuance and actually, we'll enter 2003 with about [78m shares outstanding] and that will form the base for 2003.

Does that answer your question?

Yeah.

So the 18m was converted into, kind of roughly, how much shares?

Well, let me just do a quick calculation.

Roughly 4m shares.

And it's your understanding that that has been distributed during the fourth quarter and that block is largely gone then.

I know that about 2.5m shares were sold.

Because we helped move those blocks in the marketplace.

I don't know about the remainder and they are not likely to disclose that to us at this point.

So the balance on each of these two issues, how much for the one and how much for the other?

Serious B is still at 30m and Series C is just under 12m.

Thanks.

All the dilution is already factored into the share count.

That's already been done during ’02.

That's correct.

Thanks.

Mark Farano, your line is open.

Good morning couple quick questions.

First, just to clarify then on the preferred, I take it there has been no further conversions in the first quarter?

At this point that is correct, and I have no knowledge of any pending conversions.

Okay and then on the expectation for the lower tax rate for 03, I guess I inferred from your comment that although 37 might be the number for the full-year, that say in Q1, that number might be higher?

No, we should be 37 for the year, and 37 fits within the estimates that are out there now.

We were higher last year because with such low income and the effect of the non-deductibility of certain business expenses, we just couldn't avoid effectively a higher tax rate.

Okay and then when you talk about the new mat rental plan, just curious two points on it.

Could you give us a sense of current utilization?

And then second, are you actually selling mats for future placements today under that new plan?

First of all, the new plan has not gone into effect and that will be a rental plan.

Right.

So, we use that same rental plan for the non oil field market.

Okay.

So the model is already there who we rent to, the power industry or utilities or other areas.

So all other industries are following that model.

Only the oil field has to be converted, which is our historic large market.

Those are simply rental markets.

Did I answer your question?

I guess the question would be, are you making forward rentals to the oil industry under that plan.

We have not yet introduced that.

It takes several steps.

It's about a five step process and we are about two steps into it but are waiting for the right time to pull the trigger.

Okay.

You asked all a question on the utilization.

I would say last year we were probably in the -- these are being calculated -- about 44-45% and in good year we are over 50%.

We would like to bring that utility factor up in the high 50s to low 60s with this method change.

Thank you.

Once again, if you would like to ask a question, press star one now.

At this time I'm showing no further questions.

Okay.

We appreciate you joining us today.

And we're available and Matt’s available if there are any more questions.

We are at a very exciting time and we see this market changing dramatically and we're excited about our position.

I think you'll become more excited as we hang the numbers.

So we appreciate you're joining us.

Stay tuned.

I think good things are coming.

Thank you.

Thank you.

Thank you.

At this time the conference has concluded.

You may now disconnect.