NPK International Inc (NPKI) 2003 Q2 法說會逐字稿

Thank you for holding.

I would like to remind all participants your lines have been placed on a listen only mode until the question and answer session of today's call.

At this time I would like to turn the call over to Mr. Matt Hardey, Newpark's CFO and Mr. Jim Cole, Newpark's Chairman and CEO who will introduce the call.

You may go ahead.

Good afternoon.

This is Matt Hardy.

I want to welcome you to Newpark's Second Earnings Quarter Conference Call.

Please be aware during the course of our call today some of the comments we make will undoubtedly constitute forward looking statements within the meaning of section 27A of the 1933 Securities Act.

We ask that you read the press release disclaimer for a reference to those portions of our recent public filings that disclose the risk factors and uncertainties that affect the company and the markets we serve.

Last evening Newpark reported earnings of 1.8 million or 2 cents a share for the second quarter of 2003 on just over $92 million in revenue.

And 3 million of net income or 4 cents a share for the 6 months on revenue of 183 million.

Earnings were ahead of a year ago comparisons in a market that you might best call a disjointed personality.

To date in 2003 we have seen total U.S. recount rise by more than 30% and a similar increase in Canada while the Gulf Coast market where a bulk of Newpark has been associated has declined slightly from year end.

Rig activity outside the Gulf Coast market in the U.S. and western Canada is up by more than 40% to date this year.

And Newpark has participated and done well in many of those markets.

If I were to take you back five years ago, Newpark's revenue exposure out side of the Gulf Coast market was essentially zero.

We were 99% tied to the fortunes of the Gulf Coast.

Newpark's non-Gulf Coast revenue in the first half of 2003 was over 64 million dollars, or about 35% of total revenue.

It doubled in dollar amount from where it stood a year ago with a doubling of operating income on that increase.

At the same time, revenue in the Gulf Coast market at 121 million year to date represents 66% of our total revenue and increased only 4% with a similar increase in operating income year over year.

In short, while Gulf Coast drilling activity has remained flat, Newpark's non-Gulf businesses are improving in response to increased market activity.

Segment operating income in the recent quarter increased by 200 basis points to 8.4% of revenue from 6.4% a year ago and was up 60 basis points sequentially from the 7.8% recorded in the first quarter.

So operating margins are stable and improving across the company.

Before Jim discusses operating results within the business segments within the recent quarter I would like to briefly comment on liquidity and balance sheet changes that occurred during that time.

First, cash generation and improvement of our balance sheet remains an important objective for the company.

We paid down long-term debt by 5.4 million during the quarter and borrowings on our bank credit facility at the end of the period stood at 42 million dollars, with over 40 million of availability under the facility net of outstanding letters of credit.

Our debt to capital ratio declined to 35.8% at quarter end.

And we remain committed to a 30% long-term target.

Capital expenditures equaled 6.2 million bringing the year to date to 12.8 million.

Now, our spending rate will slow across the remaining two quarters of the year as we complete construction of a new Bay Right plant that was required to be moved by the port authority in Houston, and of course has been a major component of our capital costs this year.

With that behind us, we will be facing principally maintenance, Capex and some smaller projects and so we expect to spend about 7 million or so in the remainder of the year.

Depreciation and amortization of the year total 5.5 million in line with our 22 million full estimate for 2003.

Capital spending will be held within that depreciation level.

However, if we see continued slowness the Gulf of Mexico market persisting, it is possible that it may be trimmed somewhat toward the end of the year.

Inventory has been noted as you can see on the balance sheet.

Growth has been centered in Bay Right, drilling tools, and our composite mat inventories.

We're long about $25 million in total, with the concentration in the unsold come positive mats.

The increase in the recent quarter was 3 million with most of that in seasonal log inventory for our saw mill.

The Bay Right inventory we acquired at the end of the year in an opportunistic transaction is working its way down about as planed and we expect to see further reductions in that category throughout the year.

And we will continue to work to reduce inventory using the free cash generated from that process to pay down bank borrowings.

We think accounts receivable will provide an additional source of funds for debt payment.

We implemented steps to change the billing procedures, improve the collection cycle and rework some customer relationships in expectations that we will see this improved and reduce our working capital investment for the remainder of the year.

With capital spending obligations going across the year and efforts to reduce our working capital investments, we plan to make additional progress in debt payment in the second half and remain committed to a long-term far get of 30% or less, believing we can achieve that within 12 months.

With that said, Jim will walk you through operations for the quarter and his view of the remainder of 2003.

Jim?

Matt has laid out the impact of the slow Gulf Coast market and as he pointed out, Newpark is today about 65% tied to this market and I am not and we are not unhappy being tethered to this market.

There are times when you have exposure to certain markets that are a positive and at times when it is not positive.

This will also change.

The phase we are going through as it changes we have a tremendous amount of leverage to this market.

Our assessment to this and there is so much written on it by people closer to macro the view of the market, but ours is simply we go through the transition to depth and transition to drilling risk and identification of prospects.

And it will happen company by company, and we believe the impact of that will still be felt this year as we go into the second half.

And again, as I talk to you about our businesses, we are very leveraged to this with a high operating margin attached to it.

I will talk to you about each one of our three segments briefly.

Let me start with matting.

In the first half of 2003 we achieved or received $1.07 per square foot.

Those of you that are familiar understand what that means.

But we charge for for 60-days, so much per square foot for matting.

That's the standard method for charging. 15% of that price increase, approximately 14 cents per square foot came out of the non-oil field market. 5% of our business was conducted outside the oil field and we received a 14% -- a 15% overall price increase on 5% of the business.

This is telling you we have better than three times the price out of the non-oil field market.

If I define what that means, our largest would be the utility, second would be events such as the U.S. open the LPGA, concerts, and other singular events around the country.

And this is a market we have penetrated the last year and will be a growing segment of our business.

It is driven by composite mats and our objective is to increase this business over the next several years from 15 to 20% over the total rental market in the United States.

And that would mean not to actually short the Gulf Coast historic market, but to grow the business into the premium end of the market with a premium product of a composite mat system.

In the oil field we have 7 competitors.

And most are facing the 4th out of five tough years.

Inventories are at historic all-time low levels.

The condition of the inventory and the and the finances are poor and the condition of most participants is tough.

We take no joy in that, but most of you that, but most of you are used to listening to the larger public companies.

But there is a tremendous difficulty in the smaller services across the market.

Particularly construction companies like our competitors.

Before the end of this year we should see a major change in the capacity landscape in this small niche market.

This market should continue to tighten as we draw more matting away and into the utility market or the non-oil field premium market.

And as the mat inventories of our competitors continue to dwindle.

So I think that without a market uptick, we're going to see some tightened market and with the market uptick we could be very strong - a very strong market segment.

And we think we will get an uptick in the market, as well as all the factors I described to you playing into the second half of this year and in 2004.

So we feel reasonably good about this niche and we particularly like our movement toward non-oil field rental.

That market, again, we started kicking off in the second half of last year.

Durabase sales is the second part of matting I will discuss with you and we sold 3500 units in the first half of the year.

I could, on a scale of 1 to 10, that would be on the disappointment side of the curve.

We have over 20,000 mats and projects that are designed and being processed and we are more anxious than anyone a this call to have those -- to have the paperwork come through and ship those mats.

That would certainly help our balance sheet and it would certainly help the earnings and we believe a good chunk of those will come yet in this second half.

In addition to -- we described the prior calls, we have gone around the world and opened new markets in Indonesia and Mexico and other markets.

We now in the last quarter began to penetrate a major new market.

And it is not something that is an overnight success.

But for several years we have been testing the affect of the matting on permafrost, the thermal degradation of heat absorbed by putting a foreign substance into the tundras and into the permafrost.

We had good test results on the blocking of UV rays and the heat into the permafrost.

As civilization and development is headed north into Canada and Alaska, there have been more concrete and more structures placed on the permafrost and the radiation through asphalt and concrete has melted many of the projects with permafrost.

And that's just ice.

But once it melts it, it is gone.

And it is a major concern and that's the testing we have been doing the last several years.

Some of the projects we are looking are are aprons for airports, which that testing has gone on with the U.S. government.

We passed that to place them in aprons and those light aircraft and others.

So stay tuned.

Projects are now being worked to replace some of the infrastructure that is causing damage with something they believe will be better, and that would be the Durabase mat system.

It is a major new market, probably possible for some mats to go out the second half of the year.

But I would look in 2004 as being a major new market, potential for the matting system.

The third area of matting I want to talk about is a system we call Bravo.

It is a small mat and over the last number of years whether we traveled the world, showing people mats, particularly the military.

But many other applications we have been asked if we could provide something that wouldn't require mechanization.

Because the Durabase mat weighs 1050 pounds.

You have two forms of bravo mat.

One is a 50 pound that covers 1/7th the same is square footage as you get in a Durabase system -- excuse me an individual mat.

But it can be locked together forming a unit that has great strength.

The 60 pound variety has a thicker skin and recent testing points out it may be is strong as 75 to 80% of the Durabase mat, but can be laid by two people by hand with much lighter equipment.

That puts it into a lot of markets that don't have mechanization.

Particularly in military applications.

The 50 pound variety has been -- we have been testing both.

It will be rolled out in production form, or mode in the 4th quarter of this year.

We have already sold 4200 of those mats to the military for use in the Middle East.

For tent floors and housing.

We sold those out of a prototype line.

We are now in the process of completing our production line, lowering the cost and perfecting that so we can get the production to make it an efficient, profitable unit.

We should be kicking that off in the fourth quarter.

The 60 pound, or the larger variety, which we call for equipment support should be rolling out in the first quarter of next year.

And we believe the smaller mats are a major new market application and those were in direct response to request by customers and we think the military, while a big market we have identified a number of large markets and much interest as we have been introducing what we have been putting together.

I think it is important to note that the production of the Bravo system will be done outside of Newpark.

There is no capital costs associated with that and it should make it a profitable addition to our product line when it comes out later this year.

The second business is the environmental and I'll discuss primarily the Gulf Coast as the primary unit, but we have been telling everyone for several years or the last year and a half that we have shaped this business to what we believe the new reality for the market.

When we did that, we had five competitors and now we are down to two competitors.

And today we have about 67% of the market.

We don't want more than 70%.

We have geared the company toward the premium priced market which are much more difficult to handle, filling fluids and the like that were more difficult to handle.

Let me give you a quick comparison.

Last year, with a relatively flat activity level in the Gulf Coast market, a year ago we did 1,455,000 barrels of waste -- that how we measured the waste.

And this year we did a million 794. have increased it by 339,000 barrels which is greater than the rig count and that's -- and we increased our market share a bit going forward from last year.

Our revenues a year ago were 19.3 million, this year 23.2.

And that's up 3.9 million.

So we are up -- so we are up about 20%.

The income went from 1.6 to 5.9, up 4.3.

That's the shaping of the business and more importantly, good operating leverage better than 100%.

But that wasn't that type of operating leverage.

We reshaped the way we conducted our business and the results are just now showing up.

But we are very positioned information pick up as the Gulf Coast market picks up.

Each 100,000 barrels of additional waste should bring in about 850,000 dollars worth of profit.

At about 1 and a quarter million of revenues.

We are ready, we are set, and all they have to do is go.

We're ready.

As a small note, to meet a requirement in the Rocky Mountains in the most recent quarter, we basically opened a new facility for processing of production water in the Childen-Pinedale play in the Rockies.

And we are approaching after six or seven weeks of virtual sellout of our capacity in the market, at capacity it should bring in at least a penny a share of additional earnings.

And a good return on investment approaching -- it won't be a hundred percent, but won't be far off.

But we can expand that as we go forward for increments and add even more to that income.

And it appears to be a play that not only helps our environment tall position in the company, but also assists us in our drilling fluids and other operations in the area.

By solving customers problems.

My third segment I will talk to you about is Newpark Drilling Fluids.

And I'm going to give you some numbers and won't try to beat these to death.

In the first half of 2002 the total drilling fluids did 89.9, rounded to 90 million bucks.

In the first half of this year we did 107.

So we are up 17.3 million in revenues.

Our income went from 7.5 million last year down to 5.6, not real happy we are down 1.9 million dollars.

So an increase in revenues brought a lower income.

Let me dig farther and talk to you about the non-Gulf Coast revenue.

A year ago we did 36.9 million and made 3.6 million income, just slightly less than 10%.

Outside of the Gulf Coast, non-Gulf Coast.

This year we did 62.2 million and made 7.8.

We more than doubled the income on 69% increase.

Oh, how it is to have a market.

The activities up in those markets.

We are performing what our products and I hope in some small way it shows that when given a small market increase or market increase, Newpark can perform.

And our folks and products are performing in those markets.

In the Gulf Coast, a year ago we did 53.4 million in revenues it and this year, the first half, we did 54.4.

We are down 7.6 million in the Gulf Coast.

And our income went from from positive 3.9 to a negative 2.2.

We are down 6.1.

The major projects we geared up for our customer base are yet in many cases to start.

We are, like most of the industry, waiting for this transition to take place and we still feel extremely confident that it will.

But it has not been fun waiting.

In fact, I talked to our people and they said, we are frustrated.

I said, do not feel like the Lone Ranger.

There is an industry getting frustrated.

But we will be fulfilled because these projects are going to come.

Had Newpark been flat with last year in the Gulf Coast which would have been laughable nine months ago to say that, we'd earned another 5 cents in the first half.

It had kind of that impact.

And we will get back to those levels and exceed those.

And with that I think we'll turn it over to questions and we'll see if we can satisfy your questions.

Sue, back to you.

Thank you.

At this time we will begin the question and answer session.

If you would like to ask a question, please press star 1 on your touch tone phone.

You will be announced prior to asking your question and to withdraw the question press star 2.

And our first question comes from John Tasdemir.

Go ahead.

Thanks.

Good afternoon, guys.

Good afternoon, John.

Let me just hit on a couple things real quick.

I might come back for questions later, but just starting with the mat business, you know it looks like just in total the margins were up significantly.

I mean, suggesting your incremental margins were pretty huge there.

Was that -- can you attribute that to anything particular there?

Is there anything normal?

Much of that, almost all of it is due to the change in the pricing for matting over the comparable periods.

We have done $1.07 year to date, it is a big improvement over last year at this time.

That's a big improvement over last quarter though.

I mean, not the pricing necessarily, but the margins were up, weren't they?

I don't think they moved around too far, John.

Maybe I've got a mix up in my numbers already.

But, okay.

Let me move on.

Yes.

The fluid business.

Jim, can you talk to me a little about the actual market, your customers out there, your market share in the deep drill and drilling for the business, you know, what do I need to be looking for here?

Can you comment a little more on that business in particular to maybe market share penetration or thought process of when projects get started.

I'll try.

We basically were -- we moved strongly with some of the major companies and they were headed -- I'm going to give you a background.

They were headed for a good number of rigs working and one in particular went from 6 to 1 rigs.

Working.

And now virtually not working.

We have projects that were -- they are two weeks or a month away, but they have been that way for the last three to four months.

So it has really been a frustration.

They've got the money.

They've got everything, but they are still tweaking their geology.

It's almost a whole potpourri; you have you a customer drilling a well to delineate a formation and find a better well in the delineation and it throws off their geology.

And there is a deep well they have shutdown now and try to figure out what happened.

So I think we've got people probing formations and they are finding in many cases they are finding stuff, but -- and they are going back now -- it is kind of like, as you explore deeper in many cases, you then take the actual results of a well and go back and have to compare against the seismic and the pictures.

And then we find more one-off, then just rolling on to the next one, and then we find we drill a well and then stop as they do evaluations.

I don't blame them for doing it because they are expensive wells.

But it puts us -- until they develop a better pattern we may be at least have been the last six months in a one-off pattern.

Now let me stop and tell you there are six major customers that we identified who were using technology.

Of those six, two have shut down.

One, as I explained to you, shut down because of -- they were more successful than they planned and were surprised by the result.

So they are going to go back to work and they have prospects, but it will be later this year.

Another is down to 1 rig.

What was a growing customer and just -- and we don't know.

They don't talk to us to tell us why they do it.

But the others are -- they keep moving along with one or two rigs.

So we're still improving in that area, but it is not to the function we basically felt it would be at this point.

Jim, can you give me a sense -- you know, we've got a month almost in the first quarter.

I'm sure you have a sense of who your customers are and what projects are going to right now.

Obviously, later accounts, in the third quarter will be higher than the second quarter because of averages or whatever, but I guess what my question really is, what can we look for in terms of revenues in the drilling fluid business in the third quarter?

I mean, I don't really have a sense right now from what you are telling me if there will be growth there or if it is going to be based on where we are today, or if it is a function of what is going to count with -- happen with the rig count?

I have done this more with the second half than the first half.

I haven't done it by quarters much because we get a little antsy --

I understand.

But in the second half I would expect our revenues to be up --.

Go ahead.

I'm sorry.

I think the revenues for the entire company will be up more than 15% in the second half versus the first.

I guess I really don't want to pin you down on that guidance.

I guess what I'm trying to get a sense is --

I don't know how to do it other than to explain it that way because it is made up of so many parts.

But I would say that we would expect internally to have about a 15% improvement in revenue in the second half versus the first half.

Okay.

If you don't want to go here, then let me know.

But I guess what I'm asking is, on the drilling fluid business, this in the third quarter, obviously the rig count has been lackluster, if you ask me in the offshore.

You pinned me down on that one.

Directionally for the September quarter over the -- the third quarter over the second quarter, can you give me just directionally what is going to happen with your joint fluid revenues?

If you don't want to go, there I understand.

Now, let me say, are you talking about the total drilling fluid business?

Yes.

I would say -- I would say it ought to be up at least 10% quarter over quarter, maybe more.

So directionally up not down?

Absolutely.

I just wanted to make sure that was clear.

That's all have I for now.

I'll turn it to somebody else.

Thank you.

Our next question comes from Steven Gengaro.

Thank you.

Good afternoon, gentlemen.

Good afternoon, Steve.

Back to the fluid side again if you don't mind, can you give as you sense for two things.

Can you dig a little deeper on the Gulf Coast side, say that the revenues -- the higher revenues and the pretty meaningful drop in operating income, can you give us -- what's behind that?

Is it pricing?

Can you give us more details there?

Our pricing would show up in your -- there is two elements of that.

Our margins have held fairly consistently.

They have held.

The specialties provide that offset if we wouldn't have had the market slowness, there are the -- there is pricing pressure across the commodity side of the business.

For instance in the caustic sodas and the barites and the gels and things of that nature which are considered commodity.

In the specialty end of the business, we are selling enough to offset that to hold on margins.

It is really where we got trapped is a bit is that we geared our business because we have geared toward the performance.

It's people intensive to a degree to do the high performance work and we pay the price to be geared for a higher level of revenue.

We lost revenues, number one, and we have not participated in the low dollar bid.

Because that would be -- we are going to be patiently -- work on what is our culture and that is our performance end of the business.

We have paid a price.

Our cost structure is up in the quarter or the half and while revenues are down, the margin have held.

But that's really an offset, have we not had this slow market, our margins would have been up fairly sharply.

I hope that answers your question, if not we'll go deeper.

No, that helps.

But I guess the follow-on is, in the Gulf Coast region, is there -- can you give us a sense or do you have a feeling for market share there now relative to 12 months ago?

Well, we have about 13% of all the rigs, but I couldn't give you a clue about market share.

I don't even care.

It isn't about -- let Veroid worry about that or Intec or somebody who thinks that is important.

I care about us doing our performance, high end business and frankly had two customers not shutdown on us, we would have doubled our earnings in the quarter.

I'm not going to complain about the storms, that's minor.

The gist of it is we are basically -- you know, it is basically very high end project oriented.

Now, we have penetrated three new major customers in the period.

So we are continuing to expand that base, so stand by.

We are going to stay true to our culture and you will see a good result over time with it.

I don't think there is anyway to make up for the revenue loss of those margins, Steven and that's where the center of the story is.

I just wanted to be sure there was a market share to climb up related to performance and it sounds likes that the case.

It is not on performance, it is just people that need to go to work.

So we will wish them the well and believe they are going back to work.

Very good.

And then just as a final question, on the mat side, can you give as you sense on what's going on with Tumex?

Is there progress there or an update?

We have projects for 5900 mats that are -- that have been in some stage approved.

Our people go down and actually design these, so it is not something that is a mystery.

We actually walk the ground and design the location with their personnel.

As you may well know, in Tumex they had a re-organization started six weeks ago and it is not quite complete but some of the orders are being forwarded into their purchasing arm now and the areas will come along here, we believe, later in the quarter.

At least in the fourth quarter.

These are real projects to be drilled, -- multiple 20,000 foot wells off the same pad and it is a priority we have been told for Tumex.

And there is no way environment tally for them to do that without doing it this way.

Very good.

I appreciate the answers.

Our next question comes from Corey Greendale.

Hey, guys.

Good afternoon.

Afternoon.

A few questions here.

First of all, the EMP segment, I wanted to ask you about the competitive landscape and any changes you may foresee in the landscape as a result of U.S.

Liquids announcement that it is getting out of that business.

Do you want me to respond to that?

Yeah.

Okay.

We have -- the U.S.

Liquids as we have read the press releases is in process of selling their -- some of their businesses to an investment group.

And then we received a number of calls that that would have a major impact on our business.

And I'm going to have to give you a short history without being negative.

I think that would have had a major impact 15 years ago.

But there has been an enlightened market out here where people have had to clean up what goes on the ground.

And their waste streams go on the ground and it is as simple as that.

And there is a long-term stream of liability tied to that.

And there are people that will go to something that will save them 50 cents or a dollar a barrel, but most all the land [INAUDIBLE], I think virtually without exception had to be cleaned up later by the industry.

And that is inescapable.

So I don't really think so and besides, when we are talking about the premium side of the market for Newpark, we are talking about oils and sophisticated fluids that are generally by companies that plan to be in business for long-term.

And so they basically are concerned -- generally concerned about that liability issue and the affect of the -- let's say more -- I don't want to use the wrong term, but more difficult fluids to treat and we have been doing it for 23 years and you can't find a pound anywhere.

We process it and recycle it and it is gone.

So I think we build a reputation and I don't think it will be soiled by somebody that comes in and claims something like that.

I hope I answered your question.

Yeah.

Yeah.

I think you gave a 67% market share number.

You thinks that where it stays going forward?

I think that somewhere in the mid 60s to 70%.

After we get above that we start chasing ourself.

Then pricing becomes a huge element.

Remember this, waste is a funny thing.

It is not just the disposal.

It is the delivery infrastructural system.

Have you to take it from the customer and deal on a service basis and you have to move it efficiently and cost is a very important consideration.

Then you have to dispose of it.

It is really a three step phase and it is a transportation service and high level service business and a disposal business.

And generally why everybody has gotten in trouble financially in the past, they forgot about the first two.

It is absolutely critical because a boat sitting there at $200 an hour or 300 on the bigger ones, they are not going to wait.

You have to move that boat and clean it effectively and it takes a lot of infrastructure.

If Newpark would start to get into the business today, I don't think we could afford to get in.

I just don't.

It would be a difficult business to enter today.

But we start it 23 years ago and we built this infrastructure over time and it is very service oriented and the transportation is extremely efficient, about 65 cents a barrel to move that waste through our system.

So we developed this and we are the pioneers in it.

I am not saying somebody won't -- can't come in the market.

But there are been 14 before that came and left.

I think it is also interesting to note, Corey, there was a fair amount of publicity last year when they engineered a transaction to acquired some transfer stations.

In spite of their attempt to develop the business, the market share results don't bear out that it has had significant impact to date and I don't think you could say enough about Jim's comments with respect to the reliance of our customers on us for safety, for quick turn around and permanent disposal.

Those out there drilling in the offshore gulf where the rig volume continues to rise.

As a result of last year's regulatory change, are extremely sensitive to the environmental consequences and we are glad to be able to address that with them in a way that earns their trust.

Thank you, that's helpful.

Turning to the fluids segment, I was hoping you could provide a little more of the quantitative detail you gave last quarter.

I think you said in Q1 there was an average of 2 1/2 rigs running for those big projects and it was 8% of fluid revenue.

Do you have estimates of parallel numbers for this quarter.

No, I actually don't.

But in a couple days, I will have those and share them.

If any of you want to know that number, but we don't have that today.

But it is a -- we can get that and share that with you.

Do you know how many rigs are running from those projects right now?

Let me just think a minute.

Bear with me.

I would say six.

But I'll -- Matt will verify that.

And then one more quick one.

You said, I think, in the first quarter there was some affect on fluid margins from international start up costs.

Was there anything of that sort in the second quarter?

No, actually we got into the sweeter portion of those wells.

They drilled the top holes first and then got into the more lucrative parts of the wells.

We should be there for a while.

We are getting the benefit.

If you were to even that out which you can't do, it hurt the first quarter to the betterment of the second quarter.

That's it, guys thanks.

Our next question comes from Ben Atkinson.

Hello, yes, I just wanted to clarify, were you saying that you thought that overall company revenues could be up 10% sequentially in the September quarter, or were you referring to the fluids business?

Actually when we answered the question it was referring to fluids.

But I could place something close to that across the whole company.

And I apologize.

Maybe I am asking something the same in another way.

We have been talking about fluids a lot, but it is important.

What do you see in this so far this quarter?

Are you at the run rate today?

It is interesting because we had major products delayed from the second quarter into this quarter.

So we have some better wells running.

And I can't tell you for sure, but it's better, but I can't tell you for sure that we are at the 10% rate yet.

Okay.

And, Jim, you know there has been a lot of talk about companies really holding back on spending, you know, the quiet healthy cash flows they are getting from the higher commodity prices.

And what I am hearing you say on delays is that it is kind of tweaking related to geology or how are we going to get this -- these hydro carbons out?

Could you just talk a little about, you know, give us color on what you see from your perspective on this issue of companies holding back in spite of the good commodity prices?

I'll tell you what we did early in the year.

We went out and talked to a lot of companies.

The companies were very kind to share with us and they said they shared that how much different the seismic imagery was at depth versus shallow.

How they had to go deeper.

The difficulty of drilling deeper and then the risks of doing so because it is such an exponential game, the whole size and depth becomes so much bigger that there is a rule of thumb in some deals every 2000 feet you double the size of the cost and so you encounter such differences that the drilling operations, they are seismic which means prospect identification.

Because so few wells have been proportionally have been drilled at depths.

It is almost like going into a frontier in many instances.

And that's why, like the well I mentioned earlier, they had drilled a successful well and these wells were over 25,000 feet.

And those are hoorah wells for us.

They are very important.

We do all this company's work.

They build a delineation well and it was so different.

It was very successful, but it was so different they had to stop and redo all the imagery because they were not supposed to be better.

I think as they drill these wells they are learning a lot.

And the learning curve would be rapid as they learn, and it will be company by company as they drill these wells, they will learn and get a better pattern for what they are seeing and imagery versus what they are seeing out of cores and our of logs.

And see, in a lot of other places in the world, when you drill a well they say give me the offsets.

So as a planning company we go in and we will go, okay, look, there are five offsets and here is what you should expect.

When you drill a depth, because there aren't that liability of offsets.

They are like Luis and Clark.

They are headed for new territory.

But the industry is -- this Gulf Coast provides a majority from the gas for the United States.

And it is going deeper.

We are going to have to get it and they are drilling holes now and they are beginning to correlate pictures and results.

But because it has been so infrequent in the past or such a small proportion, we see this begin to pick up.

But I don't think it is going to be boom.

It will be somewhat limited by the equipment we have also.

It is going to be a steady increase, we believe, but also it doesn't take many deep wells to offset a lot of shallows.

You spend a lot more fluids -- fluids for instance will double every 2000 feet.

And if you start from 10 and go to 20, that curve is pretty sharp.

On the amount of revenue.

And these are wells that are primarily gas?

Except for deep water where you get oil in those deeper depths.

On the shelf and in most places you are getting gas.

Okay.

Thank you very much.

Our next question is from Andrew O'Connor.

Good afternoon, Jim.

Good afternoon, Matt.

Good afternoon.

In light of your prior comments, Jim and the questions that have been asked thus far, can you hazard a view on or share your comfort with a third quarter earnings estimate of 6 cents and a full year estimate of 20 cents a share?

If the mat sales that are coming down the pipe get here and we have the improvement that we feel we'll get in fluids, we should be close to that.

Okay.

And just a note of clarification, Matt, the notes payable shown on the balance sheet for the second quarter, are these -- is this the foreign line of credit?

Is that correct?

We do maintain a foreign line of credit for our Italian drilling fluid subsidiary and that's what you are looking at.

Thanks very much.

Good luck, guys.

You bet.

Our next question comes from Janet Nevone.

Hi.

Hi, Janet.

Let me start with mats.

If you had told me you were going to have an average price in the neighborhood of $1, I would have expected better profitability.

So I have to conclude that the extra inventory is resulting in cost absorption have you to work through.

Can you quantify that?

When you say you have 25 million of extra inventory, does that mean we have one more quarter of similar margins on the mat business?

I think there are two issues there, and I'd like to try to un-confuse it a bit..

The first thing is utility is of the highest importance in terms of generating revenue from the mat rental business.

We can get $1.07 a square foot, but if you are running 40 or 50% utility, you miss a lot of opportunity so you lose the gross margin you need to cover your fixed costs.

In that case -- this is Jim Cole.

Every 1% change in the utility and on a revenue basis we ran in the first half of the year, 42% utility.

There is the result of your slow market.

Every 1% change in that equals $670,000 a year in income.

And we believe that the mat fleet can run between 55 and 60% utility in a more normalized market.

So your margin squeeze on the mat is basically the low utility at 42%.

I'll let Matt finish on the excess mats that are not in the inventory.

There's two issues there.

The principal one, of course is, the item we carry in the inventory line on the balance sheet represents the mats we have acquired for resale for the projects that Jim outlined for you a bit earlier, that are still waiting to develop and waiting for the purchase orders.

The mat inventory we rent in the Gulf Coast market is carried in PP&E and is a separate inventory.

Okay.

So when I look at numbers say, installation and re-rental, in a particular quarter --

Yes.

And I see somewhere between, you know, 25,000, 30,000, where am I needing to go for my 60%?

You can't determine the utilization from the data that's contained in the press release.

We have an inventory of approximately 100,000 mats in service in the Gulf Coast market and we are focused on moving a significant number of those, perhaps 5 to 10% outside of the oil field to get a better return in utilities and events and non-oil field type transactions.

You could, in a sense, take that hundred thousand mat inventory and back into what revenue it should produce on a square foot basis and you would determine that our utilization right now is about 42% year to date.

If you want to run a number, just get your pen ready and I'll give it to you.

The average mat at $1 a square foot for 60-days will generate $672 per year.

That's -- that would be at $1 per square foot that would be 100%.

So that would be $67 million for 100,000 mats.

At a 50% utility, on an annual basis, of $34 million.

And at 60% -- 60% of 67 million dollars.

About 40 million.

Yes.

So if we tell you you have a hundred thousand mats at a dollar square foot I have given you 56 dollars per month per equivalent mat.

And don't take me any further because then you could spend the next week and get really confused.

I gave you the high point and that's just -- that will give you a 98% model to test that business.

So the point is, at 28 million, we were 42% against that theoretical capacity in the most recent quarter.

Or said another way at 60% utility we should be generating about $10 million a quarter in revenue and we generated 6.4 in the most recent quarter in that line.

It is really the utility factor.

Our pricing is up because it is such a shortage of inventory.

If the market picks up, our utility will go up through the roof and we will approach and every time the utility goes up one point we will get 670,000 pre-tax, you can count on it.

But the utility factor is the margin factor and we have probably gone into too much detail, but I hope we tried to answer your question.

Janet?

Yeah.

Okay.

If you would like to call back and Matt will give you more detail on it.

I want to go through some of the numbers because I do see -- you know, your square footage for each quarter, I have seen that go down.

I have seen the pricing go down, but seen the revenues go up.

It varies.

You have to see all the factors and re-rentals.

Let Matt go through it with you.

It is complex enough that I don't think people want to spend the afternoon -- but it is important so please give Matt a call back so he can take you through it.

And then to, you know, get back to the drilling fluids, if I look back historically, say a year that was sort of what you would have considered sub-par margins in the drilling fluids business, how much -- wasn't most of the business gulf business then?

I would say the gulf business was a larger business unit, yes.

Right.

So the break even has moved to somewhere in the neighborhood of a hundred million a year annualized for the gulf?

Or 25 million a quarter?

No I think I calculate the break even at about 22 million, about 88 million.

That's about our break even.

Okay.

And the non-gulf --

I got to tell you the way we calculate this.

Sure.

All the laboratories and all the support for the entire company is charged to the gulf.

So it is our own mechanism of culling the gulf.

There are other -- for instance the OGS labs are charged there, and all the mixing for all the products and the support for marketing and advertising and so everything is charged into the Gulf Coast so it isn't a pure comparison.

Okay.

But in a way it is constituted with those extra charges and we have it at 88 million dollars as a break point.

And then for the non-gulf is that a hodgepodge.

Can you generalize about a break-even?

Or is part of it Europe, part of it Canada --

I wouldn't do that.

But we can work it up.

Some of those guys are listening on the phone and you are not a hodge-podge.

But because it is regional with the Rockies, West Texas and Oklahoma and Canada and other places, each has their own business model.

So it isn't like we could throw a blanket over it and each has an individual business break-even model.

But it is available and we can calculate it and I do from time to time.

And, you know, how do you expect that mix of business to be over time?

I believe that the largest long-term growth because of the predominance of high performance will be the deeper Gulf Coast, particularly the shelf and deep water market.

So I think that will be over the next year the biggest growth element.

The second largest growth element will be the foreign market.

That has come up substantially.

And I think the Canadian market would be the third and that will be because of the type of drilling, not the number of rigs.

Okay.

Now the profitability we have seen in the non-gulf, if we were to look at that, is that the kind of profitability that is sustainable or are we seeing one time positive results or one time -- you know?

I think that something in the pre-tax law will be 12 to 15%, depending on a mix of that is sustainable.

More than 10 and probably up to 15, but in the 12-13% range is sustainable.

Now, you used to site similar margins for the gulf business on a mid-cycle basis.

Is that still true?

I think so.

That's where your big operating leverage and highest increments lie.

We just have to get people to work and that's where we use more -- I'm sorry, I can't say which is the high performance fluids, but we use those in Canada and the other markets.

But, yes, there is a -- the reason you have a better operating leverage in the Gulf Coast is because a lot of it is offshore and they come and pick it up at the docks so you don't have a transportation element cost to absorb in the margin.

And how is deep drill going in terms of acceptance?

It is doing well.

We just need more people drilling to use it.

We have a lot of projects that will use the product.

We just need to get somebody to get them moving.

And I thinks that just a factor of time and I think it will happen.

Thanks.

Our next question comes from David Snow.

Yeah, hi.

I'm trying to first of all get the 97 cents per square foot for the Gulf Coast mat rental pricing referenced in the press release for the second quarter.

What was the comparable Gulf Coast rental price for the first quarter.

It was about 1.03.

1.03.

So given how tight it is, why did you see it pull back?

It is just a question of mix.

We had fewer projects working outside of the oil patch and so the bias was toward the oil patch that carries a lower pricing.

But this Gulf Coast is always oil, I guess, isn't it?

Isn't all your Gulf Coast --

I'm sorry.

Let me clarify something in your earlier comments.

Our total pricing for the quarter was 97 cents a square foot for all markets.

It says here in the press release, 97 cents for the Gulf Coast mat rental pricing.

Then I probably mis-spoke.

It is about -- versus $1.17.

It is -- comparable for all markets and it is $1.17 for the first quarter.

Same situation.

Now, the components of that were in the second quarter, the recent quarter, 85 cents for the oil patch in the Gulf Coast versus $1.03.

And the difference between those two -- the higher price we actually realized across the entire fleet was a result of the outside of the oil patch rentals we were able to do each period.

Okay.

Let me change then and ask about your composite matting for Canada.

I was on a conference call a moment ago and they said they were using wooden logs in the Northeast British Columbia to make it a summertime play and not just a winter time play.

Why is not composite matting being used up there?

Incana has used both.

For the play up around --

Greater Sierra.

Little Sierra.

Yeah.

The wood works fine.

And we have placed a good share of our fleet up there in that play.

And it is fine.

And there are other plays where in certain localities, the composite works better.

So, the customer has a preference and they used both.

If they want to use wood, whoopy-do.

Use it.

As long as we benefit.

And we are a wood composite and soon to be a Bravo.

And we go and apply the system that fits the customer's need.

Clear and simple.

Are you supplying the wood for most of their --

a good chunk of it.

A good chunk of it.

Very good.

Thank you.

It is on our website too.

If you want to -- do we have that on our website?

Yeah.

We sure do.

Look at the article on our website on Incana.

In fact, just for reference, in today's Oil and Gas Journal there is an article of another customer of ours using the mats -- the composite mats -- in Canada.

So, it appears at today's issue of Oil and Gas Journal.

It is the article on Apache.

Terrific.

Thank you.

Our next question comes from Bill Brady.

Bill?

Let's go on.

Okay.

Our next question comes from Paul Lloyd.

Thanks.

I had the same question as the earlier gentleman about mat pricing, but I guess now that I think about it, your overall number was 97 cents in the second versus $1.17 in the first.

I guess you the the same trends in gulf and non-gulf down a little.

Was that due to lower utilization?

A little pricing pressure?

No.

What you had is you just had less -- you had less of the non-oil field in the second quarter.

We just had a bigger proportion of it in the quarter.

So -- I may have misunderstood something.

So when you say 85 cents second quarter in the gulf versus 103 first quarter in the gulf, that's not necessarily all oil field?

That's oil and non-related.

That's just oil field.

That 1.03 to 85 is oil field only.

The total includes the non-oil field also.

Okay.

That's correct.

Okay.

Thank you.

Yes.

Our next question comes from Jason Salch.

Yeah.

Jim, can you explain to me again, I didn't really understand when you said the big problem with the fluids business was the two -- that two of your six big customers shut down.

I know we just heard that Anadarko is in the process of shutting down, but I didn't know it was an ongoing thing.

I actually had been hearing the rig market in the gulf was tightening up and that people had been not shutting down but had been gearing up.

Can you describe what kind of a customer would be shutting down this environment?

I didn't say shutting down, Jason, as if they were going out of business.

They just stopped from their projects to do evaluative work.

It varies all over the map.

Is this El Paso or something?

I would really rather not name names.

But it is not El Paso.

It is basically companies that want to evaluate their seismic and evaluate their geology and that's all.

I could do it for them but I don't know anything about it.

I thought your product that you had been successful in penetrating majors, that Exxon liked your product and Conoco may have been mentioned and ENI.

I don't know, I didn't think these were the kind of companies that -- that didn't do things they said they were going to do.

I can understand other companies.

We felt the same way.

And then they proved us wrong because they did take a break.

They took a big time out.

And why are they taking this time out?

I don't know.

If you own them call them up and ask them.

Basically for the reasons I have been describing, the geology and checking things out.

When they find wells that surprise them on the upside you think they would go drill.

But the problem is they were so surprised geologically they want to go back and evaluate where they are with the whole reservoir and their whole geology.

I don't know.

It is extremely frustrating to see this process, but some of the older people I talk to said this is going to take a little time, and they were absolutely more than right.

So what you are saying is you are finding that operators are just more careful in this environment and they are just not running pell mell into things.

When something occurs, they didn't have to make a production target for the quarter so they decided to so if they are doing the right rate and are behaving in a less panicked manner than say they did in 2001?

Plus the types of wells they are drilling costs so much more, they are trying to learn how to do it so are using every well as a learning experience.

Okay.

Well, let's hope they learn what they need to learn and will go and move on with their business.

Amen.

Our next question comes from David Bovie.

Hi.

I was wondering if you could explain the process for deep water well, you know the drilling companies go through, and how our fluids play into the process, at what point, you know, our fluids accelerate, the usage our fluids accelerate in the process?

That's such an encompassing question.

What I would like to do with it and not to avoid it, because you get into so many things that are technical in the -- in how fluids work down hole in the deep water and you get into things such as viscosity and ECD's and a lot of things of that nature.

What I could -- what I would do is if you would call Matt Hardey, he will line you up and if this is open -- and this is open to anyone on the call.

If you had enough people at the same time, if you want to do this, we can line you up with some people that will do this in English, and they would explain this process so you would not hear it from a layman like myself, but from people who know what they are talking about.

I could give you a generalized answer, but if you want to know that answer which is important.

It is important for other products and fluids, if you would call -- and we will basically set up a conference call with some -- a group of folks that would be able to tell you exactly how to do -- give you is a small course on exactly what you just talked about.

Or the question you just asked.

Okay.

All right.

Thank you.

Our next question comes from Steven Gingarel.

Thank you.

Gentlemen, just a quick follow-up, I know that in the past you have -- I believe in the past you had mentioned Anadarko being somewhat important to the fluid business.

In fact, remains so.

Is there any ramifications from -- I don't know, they didn't -- I don't think they have actually said it publicly on a press release, but the fact that it seems like they are shutting down a bunch of rigs here.

Is that playing a role in the third and fourth quarter numbers?.

I think to some degree it does.

We are on some fairly substantial projects in the gulf that will take some -- some will take the rest of the quarter to finish.

But there is -- there is some potential of that I guess.

And there is a follow-up, Matt, I hate to do this to you again, but just I want to understand this, the gulf coast mat pricing, did it go from $1.03 to 85 cents from the first quarter to second?

The oil field piece of it did exactly that.

And it is 16 or 17% drop.

What causes that?

It is strictly a mix of work we are doing in a particular period, Steven.

You get a well that's further off the way from settled areas out in the marsh and you will get a better price and something that is a farmer's field and less expensive.

Very bluntly, we've got a number of customers -- we have a number of competitors that are in -- that are really separate and pricing is under some pressure and so we have -- we usually get a premium, but it was mixed in with pricing pressure.

So we are down to 85 cents last quarter, offset in part by some of the non-oil field.

And do you have a feeling for what that looks like in the third quarter?

Has it changed direction at least or is it --

No I think I would hold it very similar.

It is yet to be played out, but I would hold that in the same as what we did in the last quarter.

I think our hope and our plan for remainder of this year and next year as we diversify away from the oil field with part of the mat fleet is to raise that pricing level, but we just have to give it time and see how well that works.

Steven, also I think it was a remarkable effort to go from 60 cents to $1 in six weeks late last year.

So we moved it back up to $1 for that market.

It will fluctuate a little on mix, but I think if you were to pick up across the land market, 8 or 10 more rigs, we are pretty low-level. 8 or 10 more rigs, you would see that price move into the 20% rapidly.

You won't be coming from 60 cents, but coming from 90 cents or 85 or 95 cents depending on the mix of work.

So, we're sustaining a reasonable pricing in a very slow market.

Okay.

That's enough.

I understand it better now.

Thank you.

Once again, if you would like to ask a question, please press star 1 on your touch tone phone.

And our next question comes from Janet Clay.

I just wanted to review the mandatory amortization schedule for the bank line.

There are none, Janet.

There are none.

Okay.

So the debt pay down that you are anticipating for the rest of the year --

It is all on the revolver and it is all voluntary.

But that's also, given your outlook, I guess that would be to make sure you don't violate the leverage test of the bank agreement?

No, actually, given what we expect in earnings we don't perceive that to be a problem it is a question of reducing interest expense and learning for more efficient in management of accounts receivable and inventory.

Okay.

Thank you.

Sue, I think we have time for one more question and then we're going to have to call this to a halt.

My next question comes from David snow.

Just to follow-up once more on the mat, what did the non-oil field prices do, rental prices between the first and the second quarters?

They went up significantly, David.

You don't have numbers?

The non-oil field pricing in the first quarter was $3.02 a square foot.

In the second quarter it was $6.26 a square foot.

Great.

That's a real positive trend.

Why do you think we would like to put 15 and 20% out in that market?

Okay.

And can you give us a quick update on how your foreign business overseas and so forth is going?

In which market?

In the drilling fluids you acquired some beachheads at the middle of last year I thought.

In the mid -- in May of last year we bought a company doing about 10 million a year and right now we are running about 40 million.

On a annualized run rate.

So it has -- it was a nice acquisition that continues to grow and that's basically our foreign in the fluids.

We look at -- we actually could grow more, but except we are having to build the infrastructure and company to service it properly.

And the other area of growth for us is really in the matting business and we penetrated those markets and now we are waiting for the second orders out of all those markets which are supposed to be coming in the second half of the year.

Are you making money on that foreign drilling fluids business or is it all being spent on infrastructure?

We are making money.

Pretty good -- what kind of margin?

I think we're running about 12 -- 12, 13%.

Great.

Thank you very much.

Okay.

Thank you.

Operator, we want to wrap it up now just for the sake of time and schedules, but we appreciate everyone participating in the call today and if there are any questions we haven't answered, we certainly will be available, just give Matt Hardey a call here.

If not later today then certainly tomorrow and we will do our best to take care of those off the air.

Thanks very much and we look forward to talking to you again next quarter.