NPK International Inc (NPKI) 2003 Q1 法說會逐字稿

Good morning and thank you for standing by.

All participants will be able to listen only until the question and answer session of the conference.

With us today are Jim Cole, Newpark's Chairman and CEO; and Matt Hardey, Newpark's CFO, who will introduce the call.

Thank you very much.

Good morning and welcome to Newpark's First Quarter Earnings Conference Call.

Before Jim discusses the quarter, our operating results, and how they fit within the context of our plan for the year, I'd like to briefly discuss with you some items on the balance sheet.

Particularly, some of the changes that occurred during the quarter.

Of course, cash generation and improving of the balance sheet from operations is among our most important objectives for the year.

If you look at the balance sheet that was included in the press release, you'll notice that long-term debt increased by a little over $8m since yearend.

That was offset to some degree by an increase of $5m in cash.

So net debt increased by about $3m.

In the quarter, we took advantage of an opportunity to purchase at a discount, about $10.5m of barite inventory that was at our mills, consigned to us by our supplier.

The transaction arose when that supplier decided to exit the business, and we put out a nice discount on the transaction.

The incremental borrowing related to that transaction will be extinguished from normal consumption of that inventory over about seven months.

We drew about $10.5m to fund it. and, in fact, by the end of the quarter, that amount had been paid down to $8.2.

So it represented the entire increase in long-term debt.

It has subsequently been reduced another $1.3m, and we look forward to come out in an orderly fashion over the next several months.

Depreciation in the quarter was $5.3m.

That's against an annual plan level of $23m.

Our capital expenditure plan for the year remains under $20 million.

And the first quarter saw $7m flow through in capital expenditures.

Those amounts should decline in future quarters based on our project plans.

Although, among the larger items in the first quarter was approximately $2.4m, for the construction of a new barite milling facility in Houston that's not scheduled for completion until late this year.

The barite transaction that I just discussed contributed to increase in inventory in the quarter; but, in addition, I want to remind you we're carrying about $15m optimal levels in our inventory of composite mats for resale.

We expect to see that reduced from ongoing sales during the current calendar year, which should contribute to cash flow and allow further reductions in debt.

Our 2003 operating plan anticipates generation of $20m of free cash flow, which of course will be ear mark for the reduction of borrowings under the credit facility.

We remain committed to a target debt to capital ratio in the neighborhood of 32%.

We believe we can achieve that by year end.

With that overview of the balance sheet out of the way, Jim will now walk you through the operations for the quarter and our view of the remainder of the year.

Thank you, Matt.

We, as you've noticed in our press release, feel that because of the material changes in the model for each of our business units, we have discussed more of the sequential changes; and I believe that for the next few quarters, they will be the most significant comparisons, as we have very substantially changed the -- all of our business segments from the prior year.

And -- so I will discuss today these business segments.

But also I will talk to you about -- first, the market.

And there's an interesting anomaly that to the casual observer doesn't make sense, but I think I can try to explain it.

And I'm not 100% sure that we have the full answer on it, but I will try best to explain that.

The overall market measured by you as rig activity on the first reporting date, on the 3rd of January this year, were 837 rigs.

And for those that follow the industry -- they are saying, "Don't fall asleep, yet, guys; we'll get through this."

But on 4/4, it was 972 or a 16% increase.

That's pretty healthy.

But people were asking me, "Do you think when we'll get back to 1000 rigs?"

Well, we are.

We're already there.

However, rigs are not equal, as you -- in the service side of the business.

On the Gulf Coast of the United States, where Newpark normally gets close to 70% of its revenues, that rig count stood at 230 on the 3rd of January and by the 4th of April had rode down to 208.

They're down 10%.

So as the US rig count across the board went up 16%, this historic heavy gas laden Gulf Coast market, which is, not coincidently for the industry, the heaviest producer of service revenues, not just Newpark related companies.

But I believe Newpark is probably as leveraged to this market as any company.

I can't explain but we're on the top edge of that one at least--was down ten.

And this is where the gas is produced, majority of the gas is produced.

So it's kind of a head scratcher, but I think the answer is not as complex as people would like to make it out to be.

From our perspective, the transition to higher risk deeper wells is in process and it's a new way of looking at the industry by many operators and the higher risks profile and having to generate prospects and sell them is part of the [indiscernible] factor.

However, the good news on that transition is that 208 has now inched back up to 225.

While it's not what it was in January, all indications of people have slowly been turning back to work as they identify prospects and they sell their projects and begin to go to work.

So I think there was good news coming in the Gulf Coast.

The better news is that concept that a rig is not a rig (inaudible)bigger rigs.

And every time you deepen a rig by 2,000 feet to 3,000 feet, in most cases you double the service revenues on that rig.

And we know that well.

So, we may not be as high in rig activity, but there may be a lot more bang for the buck, as our customers look for bigger gas reserves and higher risk wells that carry within those service revenues.

So I don't have a projection on the overall rig count, but I have a projection that the ones that are working are going to be bigger.

And that's pretty universal to our customer base.

And the good news is we have customers, now, that are starting to make wells at depth.

It's been kind of a nice warm, fuzzy feeling to see people begin to hit these deeper wells where as before we weren't doing as well as that.

So we're going to unlock the keys to this market yet--and I think it's in process.

So that background which was a major trend in the industry, it's not just in the Gulf Coast.

This is occurring in other markets also--Western Canada, across other parts of the country.

But this is the predominant market for depth--in the Gulf Coast.

I would like to talk about our first three business segments, and I'll talk first about drilling fluids.

Let me remind everyone who followed the company, and the (inaudible) conference call here, you’ve been long suffering to follow us, but hang in there.

Our strategy is to concentrate on the performance end of the fluids business, and the key to that for this company, is the Gulf of Mexico.

And within that Gulf of Mexico, we have six major customers with awarded work for this year.

And what's really important is these really personify our focus on the performance aspect of our business-- the products, the technology and engineering.

These are typically not price sensitive.

They're performance sensitive jobs.

And to give an indication of the changes, of these customers, four of those were not customers, less than six months ago.

And we've just captured those on this basis.

In the month of December, the number of rigs running for this group was zero.

So that is a roaring start.

And in January, slightly over 1, 1.25 and a weekly count.

And by March, we had expanded up to 4 rigs running.

Averaged 2.5 rigs in the fourth quarter.

These 2.5 rigs, which were about 1.4% of the rigs running, generated over 8% of our revenues.

So they are disproportionately important.

Not that every well, not [indiscernible] a little more important.

That 2.5 rigs average in the first quarter would be pressing up to then 6 in the second, and, we think that the percentage of the revenues in that rig will grow to 16% in the quarter--plus or minus.

And as we look forward in the year, we will approach 20% to 25% of the total revenue to be generated by this group of wells.

So these are deep, they're large, they're complex and their performance.

This is what we've got on products and services toward.

This year, fluids has projected within the segment, approximately, a 40% growth over the last year. 50% of that will come out of this group right here, just explained to you, in the Gulf of Mexico.

It's extremely important.

Our future growth will be to do an excellent job or very good job for these six customers, expand within this group, within all of their big activity.

And then increase one at a time to seven, eight, nine, ten and increase the people on the performance end and the trend of the industry is very difficult.

When you're drilling extremely expensive deep wells, high pressure wells, with all the attendant problems, performance becomes more important.

And I'd like to use an example --less than two months ago, a major oil company went out for bid.

And there were four people that did that job.

The four US companies.

Newpark really broke the pencil on this one, and we finished fourth.

We were dead last.

However, that's the largest performance company in that matrix of six I told you about because they explode performance wells out of that.

So when it comes to spreadsheets, we break our pencil.

That's not what we are about.

We're at a performance use of products and the technology end of the business.

In addition to the other two major growth areas for the company would be in Canada.

That is off to a good start.

We expect a good year in Canada, and we're well positioned in that pocket.

Our foreign markets will be up this year, contracts have been awarded, and there will be some uptick across the West and we've already experienced that.

So our close to 30% growth this year is never a cinch in this business, but it ought to be reasonable.

And, we just have to service the customers, stay focused.

And, I think that there was really nothing major to do other than to do it.

Sometimes that's the most difficult, but we think we can do it.

Our second segment, I'll talk to you about is matting.

And there are really 2 keys in this business.

There's lot of sub parts to that, but I'm going to give you the top-down view of it.

Our historic market in the Gulf Coast, rental market--there are a couple of issues I would like to discuss.

One is, the inventory of our competitors is less than half and dropping.

And the difficulty of getting replacement day to day is expensive, and you need a lot of capital to reverse that trend.

And, it would be difficult, not impossible but difficult.

But it is the lowest inventory that we've ever reported and we do that on a periodic basis for our competitors.

In fact, we haven't lost to competitors, but they're not really very viable in the market place.

It's been a difficult year last year.

Typically, the industry replenishes into good times, and if you go back in the industry to '98, '99, 2000, they were weak to pitiful years.

In 2001 we had about 8 to 10 months of growth and then it got rough again.

So over the last 5 years, we have had less than a year of good market.

And the replenishment did not occur for most of the industry.

So we have a very tight inventory situation and Newpark is in an excellent position because we've been waiting for this.

We watched it and we are in position.

The market is improving and watch the rig count at the size of the jobs.

And to show you how it happened in the -- I will talk to you about pricing.

But in addition to the oil field market for 2002, we have penetrated a very interesting market in the non oil field and the utilities market.

And we've now traveled throughout the northeast, northwest, southwest and southeast and points between.

We are bidding and workings for the bush companies such TVA, Bonneville Power [ph], Dominion, not yet but to be done, on the west coast and the southeast.

They come with a very nice premium.

They have never used matting, and it's spreading throughout that industry.

We also have an interesting market in forestry but that's for another year.

It's just now beginning to spread there.

But we are growing outside the oil patch, where we get a higher premium price and it's done totally on composite mats.

So it's a premium product travels very well to a premium application.

To show you the factor of inventory and beginning market pickup, in the fourth quarter, those of you who are not familiar with the company, we typically rent by square foot for 60 days.

That is a typical rental.

The oil field average 60 cents a square foot in the fourth quarter, but it was picking up through the quarter.

It actually led a much higher rate than we entered.

We averaged 70 overall in the extra dime came out of utility work or premium work.

So, the averaged 70, 60 in the oil and gas for that initial rental period and 10 cents in the utility market.

In the first quarter we averaged $1.17, so we are up 47 cents a square foot.

And the utility added a premium of 14 cents and we averaged a $1.03 in the oil field, our typical rental market.

As we go through this year, if we operate and we rent--we have about 4.6m added about 4.6m-- 4.8 Matt was helping me with numbers, 4.8m square foot in the first quarter, which is a little over 19m square feet laid in the first quarter on a annualized basis.

If we averaged 18.5m, with higher rental, it's worth $9--over $9m of pretax income.

That's pricing.

That's part of the same bottom line.

And we're already there.

Utility will shown up in our extended rents that's where we.

Last year we did 5.6m, 2m in the first quarter and it's growing.

So, we have the positive of prerentals coming, (inaudible) by higher prices and better wells, and we have the pricing increase in place for the year.

But—I’d like to say this in a funny way, but I really don't think we can mess this one up.

We've been planning for it and I think this one is a real deal.

Also, not minimizing what we said in fluid, but this is real deal.

The second key for our matting business is the composite mat sales.

This has caused us a lot of uncertainty in the past because we're penetrating markets around the world that had never used matting.

So you study, and you study, and you study.

But 2001 our the first full year of selling mats we sold 21,000, 14,000 were in Western Canada.

We've topped that since we started a couple of years before that with wooden mats and we demonstrated that matting will work in the muskegs (ph.) and the soft ground in the off-season in Canada.

In 2002 we sold 0.

In Western Canada, we sold 7,700.

So we went down from 21,000 of 7,700.

The bad news is, it dropped.

We lost the Western Canadian market last year.

The good news is we penetrated seven worldwide markets.

That study was beginning to play.

And in 2003, we believed that we can achieve plus 18,000 of mats and that extra 10 this year will be a nice addition to the year -- this year's profitability.

And we sold 1,600 in the first quarter, but we've many mats on the board now, on projects around the world.

So stay tuned, we have got a good shot at the 18,000.

We've also have introduced some new products.

I am not adding anything for the year, but they all have very, very good potential.

Some of these you've seen, if you look at our website - I believe it's on our website and please take look at it.

It's still being tested and reviewed.

But a lot of interest in that small mat, it does need machination.

Stay tuned, there is more coming in the matting business.

The third business segment is our environmental business, and I will talk to you primarily about the gulf coast.

And our goal this year is 4,000 barrels of waste received.

Last year we were 3,250,000.

First quarter was slightly under 900—not 871 a little over $13.

We think that the 4m is very achievable goal.

The difference between last year and this year was $750,000 barrels equaling 5 cents or 6 cents difference a share for the company.

The cost model market is set.

One year ago in the first quarter we had five competitors and today we have two.

And we have refocused ourselves to the premium end the market and stay focused.

And we think we are headed where the market is headed--to the premium into the market.

I have talked you about the three segments.

Let me just go back and talk you for a moment about -- remind you.

NESI--our environmental company at 4m, barrels achievable, not a cinch, but achievable.

People ask that if we could beat it.

Yes.

And we should be in the ballpark.

Matting--pricing is up and that will affect re-rentals.

And the projects will give us that utility.

Price and utility are key to re-rental business so we are about to get both of them, so hang on.

Mat sales, I have described those to you, and in fluids, we finally we will begin to get a payday towards the premium end of the market that we have worked so hard over the last two years for--deep drill - the deep drill family and our other businesses (inaudible) upticking.

So, on this year the analysts have us at 24 cents, and one is at 30.

We don't dispute it.

We just got to go to work and on that behalf important thing for us as we enter the year at 2 cents.

We have got to exist at a lot higher rate, demonstrate the earnings capacity.

And we think that the market trend headed our way.

We've got the products for it.

And so we will just keep you posted as we play it through.

We have made the investment.

We have got to exist this year showing that we can make the profit returns on it to keep you people interested in whether we are a viable investment.

And with that said, Lori, I think we are ready for questions.

Operator.

Thank you, sir.

At this time we are ready to begin the question answer session.

If you would like ask a question, please press "" "1".

You will be announced prior to asking your question.

To withdraw your question, you may press "" "2".

Once again to ask a question, please press "" "1."

One moment please.

Our first comes from John Tasdemir.

Sir, you may ask your question.

Very good morning, guys.

Good morning, John.

Good morning, John.

Couple of questions, one on the start of joint (ph.) fluid business just kind of going to through several numbers you're talking about in terms of how much - you know, those new customers are contributing in terms of like percentages of your joint fluid revenue.

Just going to the math, I think, you said they contribute about 8% of the joint fluid revenue in the March quarter to debt it 16% in the June quarter.

If that's right you know, the math is, that's $4m right there in growth from $54m to about $58m.

And, I also noticed, you know, that's with all the else being equal.

Yes, I also noticed in the quarter some margins, you know, went from 3.1% to 4.8% and I would suspect that has a lot to do with those customers and those customers, at a higher margin - is that the right assumption?

I think that they are higher margin -- that's a good assumption.

We generally use for higher grade products with them and part of the also the part of the margin growth going forward is our that operating leverage runs about 35%.

It could be higher in this premium product and lower in certain markets, but 35% so as we fill our health and our coverage on the operating leverage you'll see our margins get back.

I think we - we'll be driving back towards 10% as we exit the year.

Okay.

Then on to the mat business one of something I saw was that - you know, we had a pretty good growth and obviously pricing and rental.

But margins slipped some degree over the total.

And is that largely due to the decline in composite mat sales?

Yes.

And of those 1500 mat sales, were those the standard, you know, bigger mats that $1500 mats or were they smaller ones?

That 500,000 - little over 500,000 were sold at no - virtually no profit of these small mats.

And that was done for the government for usage in the Middle East and we produced – it isn’t that the pricing is not correct.

We had to hand produced of good quality, the line wasn't set up.

We had to do it in two and a half weeks to make a shipment and so they were basically, we really didn't do it for profit, we did it for the market study, which they were willing to do a non-(inaudible) basis.

But we actually made a few bucks on it.

But we also, in the quarter our margins were impacted by the start up of that new product.

So, we are now mechanizing that.

We're not doing it.

We're actually doing, but we could do so, but we are going through now the mechanizing.

So we'll make our more standard growth profit margins in the future, but that's the end of it today.

But in the first quarter, we had a (inaudible) of sale with virtually minimal profit on it, just to meet that government requirement for the Middle East.

And then we - I could say we did the government a favor, but we will see if it pays off, we think it will be good.

So going into the second quarter you said, I think you said, that you had about 1600 mats, already showing up for the second quarter?

Yes.

We'll have an improved second quarter.

Okay.

And would those likely be at better margins now is that you are going start up to behind you?

Yes.

Yes, we will see our margins with that -- I think there is a thing in the mat business going forward.

More because we brought the distribution system around the world.

And what I mean is when you are in Russia you need to use locals and when you're in Indonesia you need to use locals, and in certain North American countries and that around the world.

So we have a commission structure.

So our margins that you saw 2001 will be down a bit.

But I still think our margins will be in the 40% range, but that was the prices high it was because we've got a commission structure, where it's facilitating sales.

So we had a some diminish on going, may be, 5 to 6 or 7 points in margin but will stay in the plus 40% range.

But we will have that start up March that we have in the first quarter.

Did I answer your question John?

Yes you did.

And the only last question I had, you know, obviously you had a huge pricing improvement from December to the March quarter, and obviously you know, I think we had some snows and somewhat bad weather in Texas and Mexico, you know, might have tightened up work a couple.

Are you guys - you know, with that $1.17ish number.

You think that's likely to hold, you know, kind of go into the second quarter.

It did in April.

So that we like that in May.

The answer is, yes.

We think it will -- and the key is that, let me just tell you the key, John.

The key isn't to drive places up because if we

Correct.

We've made a mistake in the past.

We drove the price up to $1.40 - $1.50 and that has a tendency to attract investment, but a $1 - $1.05 doesn't have the same joy to come in and spend new.

So, we'll probably hold the pricing in the oil patch more in that $1 - $1.05 range but we'll pick up premiums as we go forward out of the utility and other non oil field markets.

Okay.

Well last - last one, sorry.

Go ahead.

Into the second quarter, obviously things for you guys are ramping up -- in the ramp up stages and probably don't really start to get that huge earnings growth until may be in the third quarter, not huge but, you know, what I mean...

I like that concept though.

Yes, 5 cents is consensus right now, you know I would think that that's -- not the things aren't improving but that's probably in the high end of the range, or do you think that's reasonable at this point.

Just improvement will be pretty significant from March to June, is five reasonable as well?

Right now, we would say it should be.

I'd say that it should -- it should be reasonable.

Okay.

Well, thanks guys.

you got a chance to do better and you might.

But yes, I think it's reasonable.

Okay.

Appreciate it.

Thank you.

Andrew O'Connor you may ask your question.

Good morning, Jim.

Good morning, Matt.

Strong Capital [ph].

Good morning.

Jim, I wanted to know in light of your comment, I think I heard you say that you expect average x rigs in the second quarter versus 2.5 in the first, so then for drilling fluids, how do we see volumes and pricing trending in the second quarter relative to the first quarter?

Thank you.

I think that -- let me talk volumes first.

Okay.

Canada will be down because of they're break up season so you go from Canadian revenues of around $12.5m will be down--I would like to make a number now and the Canadians are listening in to the call I can make them squirm a little bit.

But we'll be down at least $5m.

Okay.

And so we'll have the up shift across the Mid-Continent and the US market particularly in the Rocky Mountain which is not a huge market but it's a -- we have a lot of ridge going to work so we'll have a pretty substantial up tick across Oklahoma, West Texas and the Rockies which will offset about two thirds of that Canadian downtick.

Little uptick in the foreign that our biggest growth if we're up 8% to 10% in the quarter that'll come out of the Gulf Coast and it needs to because it hasn't really.

For the Golf Coast it's flat and rigs in flat in activity in three -- in the last three quarters.

So, it's time to shine and we've got the rigs started so the growth of about 8% to 10% has to come out of the Gulf Coast.

Okay and this is on a volume basis or -- we're talking 8 to 10% volumes here in the second quarter versus the first?

Yes.

That'd be sequentially.

Pricing about the same?

I think that what you get on that uptick out would be at least 33% to 35% increment on the sales.

So we would rather see us move up from sort of about a 4.5.

You’ll see an uptick about 33% on the increment -- incremental revenue.

So, except for what I said, incremental revenue ought to carry about 33% pre-tax contribution.

Okay, I’m with you.

And then, I guess, what would this relate -- what would this equate to then on a revenue per rig basis for the second quarter?

In the first, you guys averaged $1.2m per rig.

I think that ...

Can we take a stand at that?

Yes, I think, our rig count will be down in this quarter.

So you can pretty well run really this is, you're a way out here now.

We're in a middle of one on this one.

All right.

Let's go for it.

The -- we're up for about, let's use, $4m; so we're $58m, $59m -- but probably $58m in revenues; and our rig count in Canada average about $51m or $52m in the quarter -- $52m or -- someone is helping me.

But we're down about 30 to 33 rigs in Canada, because we averaged about around 10 in the breakup.

And it's picking up -- we got a lot of programming, but it'll pick up more in June, late May and June, than it did across the breakup period.

So let's say we're down 30.

We'll have -- it would be up to $58m, and we'll probably drop about across the market 15 rigs, about 10% less rigs.

So you'll see per rig pickup, particularly, because of the pickup in the Gulf Coast area and because of the decline in Canada.

But across the board, we'll probably have 10% less rigs and about 8% to 10% less in the revenue.

So that would get you to about a 1.6 run rate in the quarter, if I those fall together exactly that way?

So, now that we're trying to swim our way right back out of the middle of the pond, I'll try to give you a concept but I think it will be in the ballpark.

You're right sir.

Good luck guys.

You bet.

Luck helps.

Brandon Macmillan, you may ask your question.

Yes please, guys could you talk about the - it's not in the release may be mentioned it I missed it.

I wasn't on the earlier call but the just a year over year drilling fluids, why with revenues up almost $10m is actually a decline of over $1m in operating income in that segment?

Yes.

I do with that, we have $6.4m of that increase was in our foreign operations and they had major startup on several contracts and so the profitability was minimal this period, that will catch-up in a later date.

So that takes your biggest chunk of your revenue increases with virtually no income and the remainder is the -- we have structurally during the year changed that model that's why we -- you missed that feel, so we went up sequentially more because the business model is so different with the foreign operations.

And we've added facilities and technical in the year.

So, our cost structure is different.

But you'll see a minimal increase on 10m,and say well this outfit doesn’t know what it's doing and at times I actually feel the same way.

However, the answer is, as I laid out for you, we have a different cost structure, but it's in place as we go into 2003.

And that was really put in place based on the market we see coming forward, has been less but bigger rigs.

Most rigs running are bigger rigs.

So, I think, it's a combination of two items on the -- as you compared last year and that's foreign with its start-up in the first quarter this year.

And the number two is the - the cost structure is up.

On a gross margin basis, we're in line, but it say, was a cost structure that was most impacted as we looked at those model in 2002 to prepare for 2003.

So, Jim, could you talk about that a little bit why will it have higher cost to service a model where you see fewer, larger rig deals?

We opened new facilities, added new tech staff, change of service capability as we go through the year.

But, business as conducted two years ago and really last year will not be the way that business we've conducted and so we adjusted that business model and then during that we added to the monthly or the quarterly expense level.

So, is there a - the last thing that I understood you mentioned that the year over year comparison weren't appropriate.

But if we make these adjustments and then look at going forward, are you going to benefit from this in a way that you expect to see, sort of, growing revenue per rig count?

Sort of, those numbers moving up and will you be providing those?

You bet, we will, number one.

And number two; the best way to take this is, I think it was John Tasdemir, who asked the question, is that we're up $4 or $5m net.

We ought to get somewhere around 35% on that increment, because the cost structures in place and the investments made.

So, we're to have a -- if it's done perfectly, we may push, of course, to 40% on the increment.

But nothing's perfect, so I think use about 33% to 35%.

So you have to see the profits respond as the new business model that we've developed to explore it.

Did I answer your question or did I seem like I was dancing around it?

No you did fine.

Thank you, I appreciate it.

Thank you.

Corey Greendale, you may your question.

Hi, guys.

Corey from First Analysis.

Good morning, Corey.

Good morning.

A couple of question.

First of all on the mat segment.

You have talked about pushing to a third day rental model from the per square foot model.

Is that in place and was there any contribution there in the quarter?

There is not in pricing, everything is set up to do that but frankly we want to let the industry in the next few months to sort out to see who the survivor's employers would be.

We've actually been surprised at the -- a little bit surprised at the weakness in the inventory and the financial muscle of some of the people, the long-standing competitors.

So right now we're just kind of -- that in time go by to see which is the most proper way to implement that so I would look at that being the second half of this year.

I think it's important, Corey to note that the benefit of going from a term rental to a day rate rental is really not something that's going to have a huge impact during an up cycle.

The benefit for us for doing that really has more to do with when the market softens up in the next down cycle, being able to achieve better utility.

So we're going to continue the strategy, but I wouldn't accept any major change in your model in the near term as a result of that.

Okay.

Thanks for that.

And then, on the major project in the food segment.

What do you think is driving that timing of those and how quickly they are coming in and wrapping up?

First of all my comment as I come in to slowly which is always seems to be the way but what's driving them really is the development over the passing of deeper gas reserves or the deep water deep oil reserves.

And every company is operating on a different -- 5 to 6 companies are operating at a different time dimension, but what's happening now is they're actually going to work.

The rigs are being committed we’ll spot a major project in this week.

In three weeks we'll spot a second well, we're one of the major players, and then a few weeks later, may be a month later that we should have a third rig waiting for that company.

So these are projects that don't creep up on you, these are projects that are planned.

Most usually, a weeks, months in advance and mostly the months and it's just when they're beginning to start, some of these projects, we thought, would start - have started in the first quarter, and a couple of them last year.

So it's been a, however real -- how do I say?

A puzzler.

It's a puzzler but we've been talking to the customers and they basically have been happy to rerun their seismics.

I can't blame someone who's going to grow a $20m well from having to want to redefine their target before they do it, and then carefully plan the well because that's a whole lot of money.

And I think it's really -- shows the high risk that the energy -- the higher risk profile wells they're drilling and the care that they are taking to try to learn how to do those properly.

And I think it's one of the most exciting transitions that I have been party to in this industry.

Okay.

And then finally, was there any quantifiable effect from the adverse weather in the quarter?

Probably, but we don't look at it that way.

You know, when you work under weather, we don't put out a press release that it was a great quarter, it was sunny every day and therefore we gained a penny a share because we had good weather.

So it's pretty hard to come back and moan about bad weather.

Great.

Fair enough.

Thank you very much.

David Snow, you may ask your question.

Yes.

I was wondering if the incremental margins are 67% in the way stop (ph.), why aren't you going to be able to up go on your average margin up more than your target of getting up into the 30s by the end of the year.

Why shouldn't you be able to roll over to those margins and you've pretty much restructured your business to be focusing only on the premium so why don't it all go to that incremental margin?

David, I think you're mixing product lines.

Let me talk about incremental margins in each of the three products segments. 67% to 70% is a good increment in the environmental field in the Gulf Coast.

That's what I was asking about.

Yes.

That's right.

In the drilling fluids, it's more in the 35% range.

It could - if you do enough deep drilling it could approach a bit higher than that.

In the matting business when you get into things, I would use 50% across the board but it would - it may do a little better than that because we're also price sensitive and we're also re-rental, which is virtually 100%.

So this 50+% on the increment has we go in through on site business.

So actually, fluid has been lowest at 35 and the highest at about double of that for our environmental business and then about the middle for our matting.

David, just one other comment on that if you -if you take the 750,000 barrel expected increase in the waste business this year, that's in our plan at the current average price.

At the 65% margin increment, you come right back to the 5 cents per share impact that Jim used for that business this year so, I believe those numbers are consistent.

Well I understand that but I thought you'd restructure so that you're entirely higher into the end of the market.

So I should think that 67% would apply to some of your other business that you've structured as well I guess out there.

No that each business has its own incremental margin as I outlined 35, 65, 70 for the grace purified fluids and

I'm just on the environmental, not the other two?

That it's driven of the price.

Okay.

So, if you basically are dealing with $13 and 67%, 70% of that looks at basically do is deduct the variable cost per barrel to get $12.50 $13 price which is the premium side of the business and that's really the average, so if you take about $3.50 half of that, after 13 bucks its 9.50 divided by $13 which is ask one of the calculators?

73%

And we put a little "aw-shucks" factor in that you got first 70% so - its -- we can do little about it.

Okay.

Now where are the six new customers are they in the shallow water of the on land, and do you see deep drilling in the shallow -- coming shallow water?

Okay.

These are on the shelf and some on jack-up, so its shallow water and others on floaters or in deep water.

So it varies by customer and some customers will have them in some part of program awarded will be in deeper water and some in shallow water.

It's in water, so in the Gulf of Mexico.

And by the way have other rigs working in the Gulf of Mexico for an array of customers.

These are high performance using, primarily using our deep drill product line that are very difficult wells that have been planned separately [ph].

We have isolated them as being the real focus of the company, using what we believe is our technology.

We see deeper wells going on the -- in the land market; in the shallow water on shelf beginning and in - the on deeper parts of the Gulf also.

So, for example, we're planning one well on the shelf - excuse me that will in the 1000 feet of water.

So flooded and if we're successful and they actually do the project it's going to be drilled to 25,000 feet.

And we just finished the well at 27,000 feet.

Well, now they're discussing whether they drill or not to deepen that almost to 30,000 feet.

That was an offshore well?

Diesel in the water.

We're using diesel on that program I was talking to you about those six companies, those are the types of wells.

We're going to have some that are lot shallow and that they're quite difficult drilling and it's a total mixture across the market.

But it's usually that you need a water -- high premium water based system that works for various regions.

Those six, could you give us some feel as to what the average depth of those would be some 20,000 plus?

I don't think it's germane.

It's not a germane feel on the average depth.

They're all pretty big.

And that's -- we'll figure it out and then I'll be wrong.

No.

That's okay.

Next week.

Got this.

We move the new projects [indiscernible].

Okay.

Thank you very much.

Thank you.

Karen David Green you may ask your question.

Good morning.

Karen David Green, Credit Lyonnais Securities.

I was wondering if you guys could just elaborate a little bit more on the contribution during the quarter for international drilling fluids segment?

I know you talked a little bit about on the cost cutting or start up cost rather but could you just quantify in terms of revenues how much, in all how much revenue you saw in the first quarter?

$6.4m was -- came in from the fluids.

Almost $54 (inaudible) was from that.

We reported $100,000 of EBIT from that unit.

Typically that unit will run at about 10 or 12%.

I started up on land and two are short they were in the start up mode on some major projects that are profitable but you have to set up for them and move in facilities and people.

And so we saw probably 400,000 to 500,000 less in the first quarter of operating income than we would have typically gotten from that and the primary region for that was a start up of those projects.

Do you think for the year that you could achieve close to 50 million in revenues and may be go back to that 10% to 12% margin that you were talking about earlier?

In the foreign markets?

That's correct.

No.

I don't think that we would be more comfortable in the low 30s.

Okay.

And because we don't want to push them beyond the capability, we're currently testing our deep drill in certain markets in the foreign market and [indiscernible] some things that I believe and it's just my belief that in talking to our operational management we could get $50 million of revenues, but I don't think you'd like to resolve.

I'd think we would push that unit past its capability that we need to continue to develop.

And going back to deep drill, how many wells are running deep drill -- a deep drill product at this point in time?

I would say half of our wells a lump sum portion of it I believe this is where they told me they won a portion like an [indiscernible] or somewhere in 100.

They run it in almost in every well because they're going to use a lot of base fluids they're enhancers so they increase the rate of penetration or they inhibit and give you better protection of the well bore.

So I know I'm wrong but it is an approximate.

We're probably running a product of deep drill or a deep drill system on half of the wells but most of that would be or a vast majority of that would be just one or two of the products that we had enhance our water-based drilling force system.

And then one last question.

How much of the revenue in the quarter was for the matt rental business actually came in from non-oil field?

Goodness.

Just an approximate and kind of where do you see that going forward?

Okay.

Well, now we'll come back to an exact number because we should know that.

It was more than $1 million, but I think that we have projects ahead whether they are done or not and in the timing that run $2m to $3m each.

So I would say that -- I would say that it will be a growing part of our mix.

Let me put it this way.

If we would lay 18 -- let's say close to 20 million square feet this year.

I would say that its possible that 20% of that could be non oilfield.

And that's really a guess.

But we've run these drills I think it could be that high and we'll come back [indiscernible] interesting we had actually won that but its very perspective but that's [indiscernible] twice the price.

All right.

Its -- I was talking before this conference call this morning and they've had three or four more project kind of popped up somewhere around middle lands which in some - in various parts of the country.

It's 500 mats, a 1000 mats here there and they go out for a minimum time at a excellent rate.

So it's very nice new markets that have been developed as we go forward.

Great.

Thank a lot.

20% it is a good, and we will come back and tie that down.

We will report that in the future, but the non-OF [ph] deal duly noted.

Duly noted, we've got it underway.

Okay.

We'll report that as we go forward.

Thanks guys.

Xavier Bose [ph], you may ask your question.

Hi.

The Mat business, you break out the installation in re-rental.

What's involved in the installation process?

We dredge forth the mats, physically lay them and then it's all responsibility to pick them up.

And in the installation, that's -- we have an initial mat rental, call it for instance a $1 or a square foot for 60 days.

The cost we deduct from that is transported from the closest point -- that holds good business.

And then the physical laying and picking up the mat.

And that would typically run -- depending on the job, 15 to 25 cents.

So average stays 20 cents.

So if you got a $1 square foot, you'll have about 20 cents a square foot in the physical cost of supporting that.

Now if you do if you do additional work like fabrics and levy building and another -- we get -- we charge for that extra and that's not included, and that's split into the other integrated services.

And that typically runs about 44 to 45% of the total.

Or above 50% of the mat rental line.

That would be [indiscernible] we did certain square footage kind of price.

Then about 50% of that cost would be in that integrated services and physical work.

We get paid for that separately.

So we absorb, we have to pay for out of our own pocket.

That's about 20% cost of transporting in line with picking up the mat.

One of the good news part of it, as your re-rentals expand, that means that they are on the ground longer.

We typically but we rent for 60-day period initially.

The expense that means that they are on the ground longer.

Typically rent for 60-day period initially.

The re-rental volume 30 days -- but there are 50% over days that was 50% of 60 days differential, so if you get $1 square foot for the 40 days eventual that after you'll get 50 cents.

But there is no additional of transport lay pick up so it comes in at a much -- at a higher margin for us and that's why we like re-rentals so much.

So are you saying the average re-rental price is less than $1.17 per square foot?

No, it would be 50% of that because the initial rental is typically for 60 days and the re-rental periods are for 30 days.

So, by arithmetic just cut it half and that's typically what you will see -- if you want to see it differently.

1 to 60-day rate and [indiscernible] 30-day ride at half the original price on it.

Okay.

All right.

It's not exact but that's pretty close.

Okay.

And then when I take the total mat and integration services of 23 million minus out the 7.6 million.

Are those the mat sales or do they include integration cost?

The integration revenue is in that number as well.

Okay.

So, were mat sales in dollars?

Is that on your table somewhere?

It's on top, composite mat sales.

Yes, we were about $3 million in that sales and 550,000 in the small one's and 1.7 million in the - excuse me -- 1,700 of the big one's.

In dollars, it was 3 million?

Hang on a second.

I will get you the exact number.

The exact number, composite mat sales was total of 3.7 million.

That included the 540,000 or so - 540,000 of the small mats, 1,600 of big mats and we've recurring revenue stream of pins and supplies associated with it that makes up the difference.

Okay.

Then that makes 12 million of revenues from the mat business.

I am not sure what that was?

[indiscernible] down because there is some integrated revenues in that line.

I'd say, we would break it out for you.

Anybody on the call who is willing to - be interested in Newpark stock, you want to understand it and we are happy to do that.

And anybody call Matt on this, but if you are going to buy us based on integrated services, don't do it.

The real keys of the mat rate rental but to do your modeling and analysis, we have all the breakout you want and we can break down it to the dollar for you.

But the integrated services that's part of the installation side of the business.

Some of it is. 7.3 million in the recent quarter was integrated services related to installation and 4.4 was other.

Okay.

But give Matt a call, he'll give you more detail on that when you really want.

Okay.

May be you can put out a press release and just kind of give us the?

[indiscernible].

It's not a significant event.

We basically - it's available in models that everybody has out in the Street.

And -- but it's low margin stuff that you support.

The real key to the business is the mat rental.

And so that other is the physical transporting, handling of it that we charge the customer for.

I wish there was good margin in it, but it's pretty mundane stuff.

I guess the thing that gets my attention is, as you give a lot of detail on mat rental, which is 7.7...?

That's 110% of profit there.

That's everything.

I tried to give people a story that tells them what to watch in this company is really significant.

And there're really four items.

That could double and probably make us a penny share or two penny a share, it's nothing -- it's important, because it's a support services but it's like selling a vacuum - a truck loaded deep drove and then make it a big issue about the truck that drove it.

Okay.

And I was just confused because it's a fraction of the revenues from the segment, but it's a 110% of the profit you are saying?

No.

We're going - please, no.

The matting is everything.

We are mat company all that other stuff supports mat rental.

And I'm sorry, I confused you and for other people confused on the call please come back and then we'll - you're right.

If I portrayed it the way you're telling me then we need to put out a press release, because I've really let this one.

Let me just say it this way, the leverage in that part of the business has to do with the volume of mat rented and the pricing on those mats.

And we've broken it out this way so we can give you numbers that can be tracked over time, so you can develop metrics that focus on where the hard of the profitability is.

As Jim said, the other services are not major contributors to EBIT and therefore we don't spend lot of time on them.

We spend more time here than it deserves.

But what you've got to do those to be integrated provider, but they are low margin businesses.

Okay.

And the mat sales type side of the business is low margin, as well, is that correct?

No.

It is not.

And it just happened to be a big start-up period with low sales.

But if you look back at the history, you'll see that it's not, but we've to sell enough mats to demonstrate that it is good margin.

We've mentioned that it's above 40 plus percent increment and that's decent margins for selling the product.

Okay.

Thanks.

Lori, any more questions out there.

At this time, there are no further questions.

Well, we appreciate your patience with us.

And if any of you have some excellent question, particularly on how the integrated services are broken out, Matt is available.

If we feel that there's something that we have misled anybody about we'll certainly bring that up and if it's - bring it up in some form of disclosure.

But on the other side, in the items that we need to that are significant for the company that we need to monitor going forward to disclose, we're pleased - we're not putting any piece of violence [ph] together and trying to move them around.

We're trying to show people how up we can grow and model this business.

But, if there is something that helps you in tracking us, let us know and we'll certainly consider that.

Matt, would you have anything?

I would say that I'm here all-day and easy to reach.

So, if there is any further question, any further discussion needed, don't hesitate us the call.

Apart from that, thanks for joining us this morning and we appreciate your interest.

Good day.

END