NPK International Inc (NPKI) 2004 Q1 法說會逐字稿

Good morning and thank you for standing by.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question and answer session to ask a question please press star one.

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

Sir, you may begin.

Thank you very much Valorie.

Good morning and welcome to Newpark's first quarter 2004 earnings conference call.

I trust that those of you on the line have copies of the earnings release that was distributed last night.

If for some reason, you don't have the complete document, that's available for download on our Web site at newpark.com.

Our counsel has insisted that I remind you to review the disclosures that appear on page three of the press release, immediately following the text portion of the release with respect to the forward-looking statements embodied in the release, and that you may hear in the course of today's conference call.

As you know, yesterday we reported first quarter earnings of $0.02 a share in line with the consensus expectations.

Most notable among those results was the continuing change and the mix of revenue towards the new markets that we have been developing, and a way in a sense from our historic Gulf Coast markets.

Total revenue increased by 15% from the year-ago quarter, with drilling fluids expanding by 31% on the strength of a double in their revenue from the Mid-Continent region of the US and significant growth in the Italian business units.

We also achieved a modest increase in environmental revenues on the strength of the Canadian and Western US markets that we serve, and our industrial disposal business.

Together, these more than offset the activity-related weakness that we saw in the Gulf Coast revenue during the quarter.

A half of that weakness came from lower volume related activity with the remainder from lower average revenue per barrel, due to changes in the mix.

Mat revenue declined 8%, related primarily again to Gulf Coast activity without significant help from mat sales in the quarter, but in contrast to the 2003 first quarter results, which saw the peak pricing for mats that year, mat pricing in the rental business is currently on an upturn, and we believe the story for the immediate future is fairly positive in 2004.

Jim will cover this with you in just a few minutes.

The cash we generated from operations in the quarter helped to fund $2.6m in capital expenditures and minor increases in working capital with the remainder used to reduce borrowings.

Accounts receivable turnover improved by seven days from December 31st and that helped to reduce the working capital requirement for the period.

We ended the quarter with debt at about 35.7% of long-term capital, continuing our move towards 30% objective which remains important to us.

We expect that capital expenditures will continue at a similar pace throughout the rest of the year barring any major change in the markets that we serve.

Under the structure of the new credit facility that we closed earlier in the quarter, Newpark faced no significant ratio test in the quarter.

Those of you who follow Newpark from the credit side will find the EBITDA summary and details reproduced in the press release.

With that said, Jim will now walk you through operating details for the quarter and our perspective on the second quarter and the remainder of the year.

Jim?

Thank you.

I will -- first a couple of comments on the market.

It's a split personality or as -- a letter to your boss who would be like pick and sale of two cities, the best and the worst of times, and the Gulf Coast has to be in that worst category and the best is almost any place out.

And so we basically get to operate with similar products and similar ideas and service, and a very split market, and the big activity in this historic market for Newpark, the Gulf Coast has actually declined from 2002, which wasn't very stellar.

And in the offshore market, an important ingredient is actually substantially lower than 1999 in activity.

We do not see the activity picking up quickly, but we do see deeper wells having a significant impact to offset that, as we go through this year.

Other markets, many of which are pushing record levels of activity and frankly are pushing many of the service companies to limit -- to stretching the limit of capacity to service those markets and we are adding capacity to expand our services in all of those markets as we speak based on the demand.

Over the past five years, the strategy of Newpark has moved off of the Gulf Coast and five years ago, over 90% of our revenues were generated in this historically strong market.

As Matt pointed out and you see in our press release, in the most recent quarter 46% of our revenues came out of this market.

That's always a good news, bad news because we would like it to be much stronger here and we think that there will be some improvement but it will be a transitional type of improvement segment by segment I would say.

I will now discuss the Newpark segments very briefly with you and I'll begin with Drilling Fluids, 34% of the revenues were Gulf Coast, 66% were in the other markets.

The growth of 31% growing from

with $50m to over $66m was the comparison between the first quarter of last year and this quarter.

The only reason why I repeat numbers like that, I would like to come back and use those numbers a moment to give you some comparative discussion.

The Gulf Coast was flat and all the growth came from the other markets.

In 2003, Newpark Drilling Fluids revenues were $216m.

We gave guidance a few months ago that we believed that the revenue for the company would increase by 30% this year and if you do your mathematics on that and it's pretty simple, that would put this year's revenue at about $280m as a general guidance.

If you took the first quarter revenues and you annualize those, the result would be $265m.

As we passed the first quarter and based this on our market outlook, we believe that that guidance is still in place for that revenue level.

Operating income that we felt that we could achieve at least a 10% pre-tax on operating income was 8.2 in the quarter, however in the quarter there was a non-recurring, or as Matt would say, an unusual legal expense with the plaintiff not the defendant, for about $850,000, and as we got past this quarter or that non-recurring item in that quarter, we would have had almost a 10% annualized return because that would have brought the EBIT for the quarter to about $6.3m slightly under 10%.

So I think that we feel fairly confident today with the guidance from Drilling Fluids.

Now in the two markets and I will start with the Gulf Coast, we have 18 contracts or technical service or service preference what we provide with the First Call, or with a preferred supplier or we have the contract.

And in the Gulf Coast, coincidentally we have a similar number that are in the other markets that are non Gulf Coast.

In the non-Gulf Coast markets, every one in the 18 is active and is pushing at levels that were on the top end of our expectation for the most part.

In the Gulf Coast, six of the companies have not yet gone to work and the others are lagging as I've just started - I think it just started in the first quarter and a get a partial quarter.

So we see two stories, Gulf Coast that is struggling to get started as they go through this risk transition today, and the other markets that are absolutely knocking the ball out of the park.

And one other point, about eight days ago we were just awarded for major oil companies their first call preferred supplier on technical preference for the North American line.

So we base it to the US line.

So we continue to penetrate the market.

We see activity in the Gulf Coast appearing to once you get started, more the larger rigs and projects that we've been waiting for appear to start and we see that as we go forward, the first quarter will be a base and we should see improved revenue in this important market as we go through the year.

So, we remain confident about our guidance and the improvement we see this year in our Drilling Fluids.

All of that growth has come out of market penetration and primarily led by technical products and our services.

The second segment is matting, where four points I'd discuss briefly, Gulf Coast rental in the oil field, the non-oil field US rental market, which is a new market we are penetrating with drill-based Mat, drill-based sales, and the new product called Bravo, which is a small handheld matting system.

I will focus first on where we will get the most improvement in the next quarter, and that is in Gulf Coast Rental.

I take you back to the third quarter of 2003 only because that was the bottom pricing in the market at $0.73 a square foot.

And then it improved by the fourth quarter to $0.81 a square foot, and for those of you who are not familiar that rental is generally for a 60-day initial period, and we price that by square foot in the oilfield market.

In the first quarter, we had improved to $0.83.

So, and then in April our average would be a $1.5.

So from the bottom of the market we began to tighten the pricing, bring that pricing forward, we've improved by over 40%.

We believe every indication because of the lack of inventory in the market, a fairly solid even though not growing dramatically, a solid market based on - it's a balance between the amount of inventory available and the market demand.

Based on that balance we should hold that $1.5 level, it could advance a bit as we go forward but this is oilfield pricing.

Very significant will add to next quarter's results and it's in place, and we've been telling you how long that - all along that we saw we could improve pricing in this market based on this balance between demand and supply if inventory were here, and it's taken a while to get that balance.

To further enhance the balance we've been moving inventory to other markets.

Our drill bases has gotten acceptance in a number of markets; primarily the first market I'll discuss with you is the utility, construction and other markets and it's a -- well it's small today.

Only a couple of thousand Mats are devoted to that market, we have projects coming up that would take multiple times that as we go into this year.

So you'll see a dramatic growth in that market, but significant is we get about two and a half to three times in net pricing in that market.

So the return on the investment and the profitability is dramatically enhanced by this.

So we have two positive within our historic rental, it's the expansion of the non-oilfield market in the premium pricing and the pricing improvement in our historic market as a point.

I take a point, the second quarter this year has an opportunity to rival the results we found, that we saw in the 2001 market mid-year.

And I went back through our - all of our history; based on today's structure we see a much improved outlook for this market in the coming quarters and particularly in the second quarter.

We are also looking to expand and we are very excited about the movement of Mexico, and every indication is that could be a very substantial market.

As it is developed over the next several years fully we'll be moving our Mats in there this quarter, and we have indication of a lot of demand for them.

We began working in Mexico with the Dura-Base Mat several years ago and have been working on development in this market over the past year.

Second, the next area I will talk briefly about is the sale of Dura-Base, we sold 2200 Mats in the first quarter.

I think that's under achieving, I will provide you with all the potential sale we have because they are significant.

All I've to say is we will tell you about it when we could show you the money.

We have done enough discussion of this one, I think that we will talk to you as we, will announce as we post the sales for the contracts, and the same is true with

.

We have great products, we are aggressively selling them.

I think you will see the results if you go to the year book.

Let's stop, we wasted a lot of time.

Now, I will just show you the money when it comes.

And the last is our environmental business, Gulf Coast as you see in your press release,

did 802,000 barrels in the first quarter.

That's an annualized study more than $3.2m.

We did $3.3m in '99 and that was pretty lousy year.

So we are experiencing the activity level, this is merely the activity levels of the Gulf Coast.

We do believe there will be some improvement as the larger projects takeoff, particularly in the premium side of the market, which has been hit the hardest, the offshore market has been hit the hardest, the type of projects that've not yet begun.

In the first quarter, the gulf coast softness was offset by the strength in Canada, Wyoming, and industrial market.

We believe that there will be somewhat limited growth over the next few quarters in the Gulf Coast, that's some small amount, but I think that we'll hold our ground and improve with the improvement in the other markets.

I think that - - our begin for the year, it will be drilling fluids, Mat Rentals, and mat sales to lead the charge.

And I think the Environmental company will hold its own and try and improve a bit.

And that's kind of a summary of our operations, how we see the market and the operations.

So, at this point we'll see a little bit of questions.

At this time all lines are in listen-only.

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

You will be announced prior to asking your question.

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

Mr. Tasdemir, you may ask your question.

Hello.

Mr. Tasdemir, you may ask your question.

Hi, guys how are you.

Hi John.

Hi John.

Bit of a interesting way to just to pull out it, but any way.

Questions for you, first of all in the mat business, you sold more mats, you made a lot of ground on, I guess, extinguishing the losses from the fourth quarter in your mat business.

Was that primarily, I guess, as a result of increased mat sales?

No, I don't.

I don't see that.

I think that we -- we made up some ground, I think it is basically Canada was stronger.

We had some sales in Canada of wood mat that we sell to our clients, we gone to the sales business from Canada, and I think it is just a little tightening of expenses down a bit and a few things like that.

I don't think it was any dramatic to speak about.

I think that the dramatic price increase that we see and reduction in expenses and cost will really hit into the second quarter.

Okay.

I think, we just set the table for the second quarter.

Do you expect to see some profitability in the second quarter in that business?

You bet.

This will be, I think, the biggest turnaround in the company would be in the matting business in the coming quarter.

And it is tough mat sales, but from?

Rental business.

Jim, you did mention a couple of factors, one is the market of Gulf Coast will get tighter because you may using some mats out there, and pricing may be up.

And you said, we are seeing expanded prices outside the Gulf Coast market.

Can you specifically tell me what markets you are seeing the most improvement in?

I think, actually the biggest improvement right now is really that in the mat -- in the Gulf Coast mat, little on pricing.

The month of April, not this one month makes a quarter, it was actually very active on volume and pricing.

I think pricing will hold, I am not confident that we will continue the April volumes throughout the rest of the quarter, but -- and we could, but the bottom line, I think the most improvement has been in the rental -- Gulf Coast rental market and that is really, the one that triggered a

it's a lot for the reduction of inventory across the industry including all fleet and the second improvement that's following behind it will be the non-oil field rental that will come with primarily utility business, we are doing business across eight or nine states all over East Coast, West Coast, North, Midwest on rentals.

However, the big jobs coming are utilities in this region that specify the Dura-Base mat.

And so those projects have been, we've been planning for a good while and they should start the later part of the second quarter and they will be a significant follow-on to the improvement in the Gulf Course market of rental.

Okay.

Switching to the fluid business, you guys had some pretty good margins excluding the one-time cost of almost 10%.

Does that margin improvement come from just -- where is that coming from, pricing growth, volume growth, or combination of the two?

That's not really leveraged, I think if you really want to sum it up, I don't think it's pricing, it's more displaying good operating leverage.

The company has an operating leverage typically in the 30% to 35% range and I think that's hard to sum it up.

Okay.

And so -- I mean, no reason to sense that that margin would drop at all over the next few months, quarters?

I don't believe it.

I don't believe it should drop.

Okay.

Well thanks guys.

I appreciate it.

Thanks John.

Richard

, you may ask your question.

Good morning gentlemen.

Good morning Rich.

Back on the drilling fluids a second or just in general,

conference call this morning would support your general comments about the Gulf of Mexico being the worst of times.

That too is very disappointing area so far.

In that regard, relating to drilling fluids again from

comments this morning on drilling fluids, they were asked about our recent price increase by Smith in drilling fluids and they were somewhat skeptical about that being accepted by the marketplace.

Can you touch on pricing as the previous analyst asked about margin improvement, whether you are getting, whether you get or anticipate any price increases, do you have any comments on the Smith increase?

And give us some flavor for how much the drilling fluids are based on the environmentally safer water-based products versus legacy products if you would?

I'll take your last first.

Over 50% of our projects is our estimate that is using the flex drill or deep drill system.

And it's an environmentally safe product, but it has proven its performance characteristic, if it were environment only, we would be able to make that claim.

But it performs very well and in many environments and again no fluids for every well, but the selected wells, it performs very well.

And that was the primary reason we were awarded that major oil company's North American land business, probably seven or eights rigs for two years.

So, they were just kicking those rigs in now.

So that is, it's over 50% of our business.

Number two, when you talk about pricing and the skepticism, I think it varies by market.

I don't think there's a universal answer for this, but also it varies by the type of business you have.

Now if your company, it goes out like I won't mention names, but the one you mentioned, I'll use that as an example, they did a lot of heavy.

Great.

And the contribution that you are talking about being in Q2, is that, had your contract signed in hand

or that sort of more in the pipeline?

Commodity type question.

While those contracts are very explicit and very tight with large oil companies, and your ability to get price increase during that contract is very limited.

So, I think that, that would be more constrained.

We don't bid those commodity contracts.

Ours are more projected, and engineered to a specific well or design of a well, and then you use the products that are required in that well, not more of a commodity base where they use a broader way of commodity products.

And I hope that made sense what I just said, if not I'll try to explain it in English.

I understand, thanks.

And the third item is, and I 'm not as close to this as some of our people, and if I have to clarify and I'll give you my impression.

In many of the markets, the Barite as a waiting agent because of the growth in the, let's say, Canadian, Rockies, big continent West Texas market, and the depth, they are starting drill deeper there is a greater demand for Barite, and that infrastructure -- that push has been unprecedented since the early 1980, so we're 20 years away.

The infrastructure in that market is more limited, and is causing a constraint in Barite there's been some increases in some of that type of product by Federal, which is a subsidiary of MI they're supplier a wholesale supplier.

Now that's the biggest price increase that I'm familiar with, there are areas where there have been small price increases, but right now I wouldn't count on that being a significant part in the next quarter or two of margin improvement, but I think its inevitable that the drilling fluids pricing will go up, but I can't -- we're not a leader in that so that's not ours to lead.

Did I help answer your question?

Yes, Jim thanks.

Corey Greendale you may ask your question.

Good morning.

Good morning Corey.

I guess starting with the mat business it is just to clarify was there a contribution from the non-oil field rentals in Q1?

What was their contribution?

Yes.

About $500,000 of revenue and very little incremental cost.

So, we're probably best to say that we would add incremental cost of under a $100,000.

Great, and the contribution that you talked about being in Q2, are there contracts signed in hand already or those are sort of more in the pipeline?

There are contracts in process for the larger jobs.

The contracts have not been signed, but they are in process to be signed, but we are designated as the matting company for that.

Okay.

And on the sales, I believe you talked last quarter about kind of try and experiment lowering the price a bit to see what happened with that dynamic effect in Q1?

I'm sorry say it again.

I think last quarter you talked about looking to lower the price on the Dura-Base mats a bit?

That experiment of lowering the price to take to improve the sales which would then allow us the capital to change our production to lower the cost, that experiment is in full effort right now and there are indications it could be very successful, but that is why I say, we'll show you the money on that one.

Okay, and then on the ENP business going back a couple of years you experienced some margin compression in that segment.

I mention at this time, I think you talked about the cost structure being set up for certain number of barrels below which you didn't have revenue to spread over the fixed cost.

Is that still the case, and are we at a level where there could be some risk that are happening in future quarters?

I think that the 802,000 probably we hope and think it will be low for the year and we think we are to at least match last year's 3.6m barrels, while we don't know for sure but everybody tells us, our customer base that they are going to be more active and that will help that business.

We've made a 23% debit margin last year and is really absolutely no reason, our cost structure should be down if anything not up.

So, I think that we wouldn't see that deteriorate a great deal.

I think Corey that the comment you make is right, but the situation is considerably different.

That margin compression I believe was back in the 2000-2001 period, and we went to

restructuring of that unit, so I would agree with Jim, I think that their results are going to be a lot more predictable this time through.

Okay.

Great.

And the improvement that you saw in the industrial part of that business, when you said that was a trend, should we just take that as kind of a nice data point.

I think it was - - we had some one off business, and I think that you'll see it drop a bit in the second quarter, but I think over time, it's still on the

process.

Alright.

Great, thanks a lot guys.

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

There are no further questions.

Alright.

We thank you for joining us this morning and if you have additional questions about the press release or anything that you didn't ask give back Matt Hardey a call and we will have the answers for you.

Thank you for joining us.

Thank you very much.