NPK International Inc (NPKI) 2004 Q2 法說會逐字稿

Good day.

All sites are now online in a listen-only mode. (OPERATOR INSTRUCTIONS).

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

Please go ahead, Mr. Hardey.

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

I should remind you to please review the disclosures incorporated into the recent press release at the bottom of the text, particularly with respect to the forward-looking statements that are included in the release and that we will be sharing with you in the course of today's comments.

Our comments today are based on the best information available to us as of the close of business yesterday.

However, any number of external factors affecting the business could change our ability to achieve any of the goals that we discuss with you today.

This is true, of course, in the current quarter of tropical weather season in the Gulf of Mexico, just as it was for the recent protracted seasonal break-up in western Canada that disrupted operations in that market.

Because of the number of factors that impacted the recent quarter, we are going to spend a bit more time today covering the numbers and identifying those factors to be sure that they are well-communicated.

Last evening, we reported earnings for the second quarter ended June 30 of $1.3 million, or 2 cents a share, on $104.6 million in revenue.

For the six months ended that same date, we reported earnings of $2.8 million, or 3 cents a share.

I'd like to highlight for you two factors that directly affected net income for both the quarter and the six-month period presented.

First, as I alluded to earlier, our Canadian operations experienced probably the most severe seasonal downturn that we've seen since we've been in that market.

This was due to an extension of road bans that normally occurs early in the quarter but was protracted as a result of very poor weather conditions and unseasonal rain in that market.

The revenue decline from the comparable quarter of 2003 was on the order of $5.2 million this recent quarter with a corresponding direct impact to earnings of $1.8 million.

That's about 1.3 cents a share seasonally, year-over-year -- (technical difficulty) -- (technical difficulty) – public, will provide Newpark a full recovery of those costs over the term of the settlement and more importantly, will resolve the underlying issues that resulted in the litigation in the first place.

This effort cost the Company a penny per share in each of the first two quarters of 2004.

Now, between these two issues, I've just described for you 4 cents a share in first-half income effects, an amount that exceeds pure reported earnings thus far this year.

Said another way, but for those items Newpark could have reported 7 to 8 cents a share in the first half of 2004.

I make this lucky point not so much to excuse first-half performance but to point out that the fundamental operations of the Company are in fact improving and have simply been masked by these issues.

Jim will walk you through the operations in more detail in just a few moments.

Before I go past the legal proceedings, however, let me also point out that, on May 14, Newpark was awarded a judgment in the pricing litigation that we filed with our mat supplier several years ago.

The effect of that $15 million judgment will be to reduce the cost of mats to the Company over time, improving returns in the Mat segment.

During the quarter, Newpark sold 5,500 composite mats compared to 2,200 in the first quarter this year.

While apparent pricing on those sales, as outlined in the press release, declined sequentially, most of that decline reflects our recent success selling used mats out of our Gulf of Mexico rental fleet -- our Gulf Coast rental fleet, I should say -- in order to boost utilization of that fleet and improve our return on assets.

As the proceeds of these sales is collected, we will continue to allocate that cash flow to debt reduction.

Still, a majority of the mats that were sold were new mats and together with the adjustment to the inventory account related to the pricing litigation, contributed to a $6.4 million reduction in total inventory since March 31.

Also during the quarter, I would point out to you that we collected the full amount of an $8.2 million note by which we financed part of the sales price of a shipyard that we disposed of in 1996.

Collection of that note also gave rise to 800,000 of interest income that benefited the quarter that had not been previously accrued.

Proceeds of the collection were applied to reduce borrowings under our bank credit facility, and we ended the quarter with bank borrowings of $36.5 million.

We had $35 million of the facility unused at the end of the period and about 13.5 million of letters of credit outstanding.

Long-term debt at the end of the period was 34.6 percent of our long-term capital structure, down from 37 percent at 12/31, as we continue to work on strengthening the balance sheet.

Working capital at the end of June was 131 million.

It rose 5.4 million from the first-quarter level but I would point out that in that, Accounts Receivable decreased by 2.4 million.

If you do the calculations, you'll see that the collection cycle has improved from 97 days at year-end to 90 days at March 31 to the current 85 days.

We anticipate that there will be some further improvement across the remainder of the year and we will not let that go untouched.

The 2 cents in the quarter by all account was a disappointment.

The improvement within the Company has been masked by those impacts that I've described for you, and we remain committed to improving the balance sheet and helping that will be strength from operations in the second half of the year that Jim will now cover for you.

Thanks, Matt.

Matt has, I think, thoroughly discussed the first half of the year and the most recent quarter.

I'm going to be the one that looks forward and explains why we believe we will have a substantial improvement in the third and fourth quarters of the year.

I will start with -- I will discuss each of our three segments and I will summarize it, but I will start with Newpark Drilling Fluids.

I think we've already pounded (indiscernible) Canada to death and if you think that the people in this room are frustrated, you ought to go up and visit the folks in Canada.

It has been (indiscernible).

But the good news is, this too shall pass, and it is.

We also are like all things in this market, there's a (indiscernible) in the U.S., there have been delays in major projects, but let me remind you that we have been telling everyone that we've picked up over 20-plus new customers in the year and we have 27 priority customers and contracts, and sometimes that has to begin to play into revenues and income.

So I'm going to talk to you about the good news.

Those customers and those contracts are already beginning to play, and I'm going to use -- and I'm going to talk this from the U.S. activity -- the U.S. activity only.

Okay, in the first quarter of 2004, in the United States, that excludes any of our foreign operations and Canada, we had 131 average rigs operating, which we add the Drilling Fluids.

That compares with 103 rigs in 2003 in the first quarter, or a 27 percent increase.

The U.S. operations (indiscernible).

In the second quarter, that increased to 152 rigs running in the U.S., over 113 in the like quarter of 2003, a 34 percent increase.

We had a ramp-up near the end of the second quarter, a very substantial ramp-up and in the month of July, we had averaged 170 rigs versus 110 in July of a year ago and the quarter of a year ago; it's up over 50 percent from a year ago.

You can see the progression as we've gone to work, which -- that's the story that's been masked a good bit by the things that Matt talked about.

That major ramp up has been in the last several months.

Let me go back and state this a slightly different way.

In the total U.S. market where we work, we had, in the first quarter, 16 percent of all the rigs operating.

In the second quarter, 17 percent and the month of July, 18.5 percent.

Actually, last week, we were at 19.1, so we are penetrating the market by anybody's account -- the customer base, market position, numbers of rigs operating.

Now, that's got to convert to revenues and income.

In the first half of the year, in the United States, U.S. market, the revenues progressed from 70 million last year, I rounded slightly, to 97 million this year, up 39 percent on a rig activity that was up 30 percent.

That's year-over-year, so six months, six-month revenues were up 39 percent and the -- on a rig activity of 30.

In the second half of the year, we expect this trend to continue up right through the bottom line.

We have been telling everyone in the year that it probably would be close to $280 million for the year.

Slightly under 125 -- 124.6 -- that will absorb the disappointing second quarter in Canada.

We are more than making that up.

To track earnings on an incremental basis, will track at about a 30 percent on the increment, so we will see a very sharp increase in our profitability, going forward.

The last point I would make on drilling fluids -- I don't think we have to -- we are still getting new customers.

I don't think we have to do that necessarily.

I think we've got the business.

I think we just have (inaudible).

We are seeing some hot indications slow the indication of pricing beginning to firm in the Fluids market, particularly in the Gulf Coast market.

So, stand by because the margin points are important too.

In that Gulf Coast market, we did improve our margins quarter-over-quarter by 2 percent, 2 full margin points in the first and second quarter.

So, I think we will continue to see margin improvement as we go forward, as well as revenue improvement.

The second segment that I will talk about is our matting business.

If you look at the company that performed this op for us in the quarter, first and second quarter, they went from a $400,000 loss to a $3.5 million profit, or a $3.9 million incremental gain, 3 cents positive.

So, there was the offset to the severe breakup quarter-over-quarter in Canada.

In the first quarter, they averaged 85 cents per square foot for mat rental.

In the second quarter, $1.04 a square foot.

The difference between that and a small increment of about 10 percent in volume is worth about $1.5 million or a penny a share of that 3 cents increment.

Additionally, as we go forward, because of the limited inventory capacity in the market, which continues, and the increase in our non-oilfield premium price, we anticipate that we will average, in the second half of the year, at least $1.25.

We are currently in July at $1.15 and climbing.

With that increase, you will see a substantial improvement in profitability, as we go into the second half of the year, off of the levels that we achieved in the first half.

We sold, in the first half of the year, 7,700 composite mats, which is about the level of the 7,700 we sold last year.

Every indication is that that will continue as we go into the year and we will have some improvement in our per-unit pricing based on The Loma case settlement that Matt described to you.

We are now shipping into Mexico for the rainy season and believe that there could be some impact of that, even though we don't know for sure the extent of that.

But we are now officially entered the rental business and actually we have a rental billing now in the southern part of Mexico, albeit small but we have 6,000 mats that are being moved down there and we are pretty confident that we will be able to rent those mats primarily to Pemex but to other parties.

As I look forward into the second half for the matting business, pricing will be up.

Volume should be up.

We're not looking for the Gulf Coast to be a sharp recovery.

We see major projects and we see non-oilfield projects that have some substance.

Mat sales should hold up and possibly increase.

Mexico will be a positive; it cannot be described.

In the rollout of our Bravo mat, we're making sales now but we will have to (indiscernible) watch and to see how significant that will be, but it could be a nice (indiscernible) for the second half.

Everything for matting appears to be on the upswing; it just has to perform.

Fluids and matting are taking this bird off the ground.

Our environmental company is the one that is most impacted by the weakness in the Gulf Coast and in particular, the drilling that occurs in the water, so that's offshore and inland.

Those markets are down 6 to 8 percent year-over-year, and that's our primary market.

The outlook for those is not that buoyant, so we look at that being a rather flat market.

We believe there may be some signs of a little improvement but not material.

The pricing that slipped in the period for this year has really been more the mix problem of land becoming more predominate, which (inaudible) carries a lower price.

We look at the Gulf Coast probably, if we had to step back from it, a small gain but not material as we go into the second half.

A positive will come out of West Texas, which is rocking.

It's a small operation, but it is very profitable.

Canada's recovery will be very important and it will occur.

The Jonah-Pinedale is a strong market for us.

So, we will see a contribution, an improving contribution for environmental, but most of that contribution will come out of the non-Gulf Coast operations.

One longer-term point I would like to make is that we have been working for the last year on the technology that would, for the first time, take contaminated waters that are produced, such as Jonah-Pinedale and coalbed methane, and on a mobile basis ,bring that to a dischargeable or a potable level; it depends on how far you want to take that.

We have field tested it and our first production unit will be in Wyoming in September.

This has had some reasonably significant long-term implications but we will know more about it as we go forward.

But we certainly have the regulators that first time take a waste product and make it a usable product as being very excited (sic).

And we have some customers that are somewhat excited.

Stand by;

I don't see it having any impact for this year, but it could have an impact longer-term.

As I summarize the second half, I'm going to use the second quarter as a base.

I'm going to reiterate some things that Matt said in his summary.

In the third quarter, we see Canada improving in Fluids by a penny.

It could be better.

If they're listening, don't hold back -- and I know they won't!

In the U.S., we see minimum 3 to possibly 4 cents difference.

So Fluids ought to provide, off of the 2 cents we earned in the quarter, 4 and possibly 5 cents difference.

This is as straight as we can be based on the jobs and what I indicated, the activity we've already accomplished.

By the way, I didn't say it but a great deal of this gain has been because of high-perform water-based fluids.

So, let me go back (indiscernible) understate the importance of this system that we have been working the last (indiscernible) deep drill and the flex drill system.

Matting pricing (indiscernible) at least worth a penny in the coming quarter.

We would like more but let's leave it there. (indiscernible) will be a small gain, primarily because of the non-Gulf Coast markets.

If they are listening, they don't have to lay back in the Gulf Coast but they don't have much of a market to work with right now.

In the SG&A area, we will not duplicate the $1.2 million of litigation nor will be duplicate the $800,000 accrued interest gain we had, so those offset to some small gain.

I don't think that's significant but I wanted to be sure we didn't leave it unstated.

We see that there ought to be at least a nickel gain and like they say, stuff happens with monotonous regularity, but I think that everything we've told you is factual as to this morning and the number of activities and projects.

We see that possibly the second quarter was -- we've made enough alibis about that.

We are almost one-third into the third quarter and we're looking forward to the result.

With that, we will open it for questions.

(OPERATOR INSTRUCTIONS).

John Tasdemir.

Good morning, guys.

Great outlook!

Let me ask you, let me we start with the composite mat sales.

You know, I know it's always difficult to kind of forecast that, but at least the matting business helps you out by 2.5 million or so in operating come this quarter.

I'm just trying to kind of go through and forecast, going forward.

You know, what's your visibility on third-quarter composite mat sales as we stand today?

John, at the end of July, we are on track to match the 5,500.

We're moving that, and we have a project that has a very high probability because of -- they tied to a distributorship of a couple of thousand.

I would say there's a decent chance that we will match the first quarter's -- I mean second-quarter sales of 5 to 6,000 mats.

We have some very large orders that I won't bore you with because I can't put the probability on them, but somewhere in the 4 to 5,000 range but let's just let it go.

I think that we have a reasonable chance of at least matching last quarter's mat sales.

Okay, so (indiscernible) at least probably 2000 kind of in the bag and then a pretty good visibility on some additional.

Yes.

Okay.

Switching to the Fluid business -- well actually also on matting -- your pricing is going up pretty nicely.

Is that mostly a result of I guess less capacity or supply of mats in the Gulf Coast region, or what's that a function of, I guess?

I would rate that probably at least two-thirds or more to the non-oilfield market because of the premium that we get there.

The other two pricing, the shortage -- the tightness of inventory.

If the projects come forward as they could, we could actually -- there's upside in the number if a number of projects that are slated to go on the non-oilfield market.

The good news, John, about that is, as we allocate mats into the non-oilfield market, we further tighten the supply available in the Gulf Coast oilfield market.

So it has kind of a -- we get a premium for moving them out and it tightens the market even further.

So I would think, if I were looking at the total of it, I would I think we have a better chance of being higher than lower on that number.

Switching to the Drilling Fluids business, I mean certainly it appears that you've gained market share there.

Can you kind of give me a sense of why you think you're getting that penetration?

Just --.

I think I can give you several.

Most generally, it's performance.

We are a very small company, so we're very focused, so we kind of pick our fights.

I think that a lot of it has come out of our water-based system.

A lot of areas in the country -- and it's happening in Europe, too -- we basically use that water-based system to get better penetration out of the N-100 (ph).

I'll give you an example, just to tell you.

I think it's the product and I think it's performance with the product is (indiscernible) gaining us market share.

We are not doing it on price; our margins are actually upticking, so we're not going out on price.

You know, the customer a year ago in a market that I won't describe will run about 8 to 10 rigs, and we were one of the bidders and somebody went low ball and won the whole contract.

I think they run about ten of them.

Today, we have four of those (indiscernible) drill going to six.

We are just outperforming.

What we did is they simply -- they were drilling wells beside them and we were outperforming the other Bud (ph) company and they basically gave us one, then two then three then four and we're going to six.

That's called performance.

That's how we are penetrating the market.

Okay.

Thanks, Jim.

Good luck there next quarter.

You bet.

Luck helps too.

David Snow.

I'm wondering if you can discuss the general pricing trend in Drilling Fluids and in your premium products.

I don't think -- the general trend I believe is now slowly headed up.

In our premium products, we really haven't had a trend because we really haven't cut the price, nor have we raised it, so it's kind of flat.

But in the mix, the more that you mix that premium product, it helps to improve your margins also.

How much premium are you getting on the flex drill and the other drill versus your basic commodity?

Well, that's a difficult because if you took products, it would be versus (indiscernible) or a (indiscernible), it would be astronomical.

But it costs the mix.

If you do a flex drill or deep drill well, you're going to get 8 or 10 margin points.

I'm not totally up-to-date but more than 6 and less than 10, in that range, and higher margins wells and sometimes even greater, depending on the well.

How many of the flex and deep drill jobs did you have in the first quarter and the second quarter?

I can't tell you that but over 50 percent of our total -- of our operations -- the wells we are on have some component of the water-based system in them.

Just one more question, what's the basic trend of pricing in the Gulf Coast mat market?

Can you give us a total?

We were 85 cents in the first quarter, $1.04 in the second, and we are $1.14 or $1.15 in July.

Our objective is $1.25.

Based on the non-oilfield premium jobs, which are more than two times the price of oilfield and the continued tightness -- I think that the $1.25 objective in the second half can be reached or exceeded.

I was trying to get the oilfield pricing.

Oilfield pricing -- our objective is to average $1 and we're getting close to that, very close.

That's $1 per square foot for 60 days.

Stephen Gengaro.

Thank you.

Good morning, gentlemen.

Can you give us a sense of two things on the Fluids side?

One, you mentioned as you sorted of picked your battles, as you said.

Can you tell us who you are batting heads with and also, when you're looking at pricing, going forward, what kind of signs you see for improvement and is there any way to quantify the percentage rise you are expecting?

We battle heads with generally all the players, Bayroid (ph) and MI (ph) and so we don't try to line up in a column like the Civil War and start blasting away.

We basically kind of pick our fights.

We don't want the big contracts because we couldn't afford them anyway.

Now, the pricing increase -- I would say that it's really done a customer at a time and a job at a time, but there is a slow tweaking of individual jobs.

For instance, if you've got a contract, you basically work some of the pricing up.

But there's also a costing pressure, too, so it's not a single, one-sided equation.

There's costing freight costs and things of that nature and (indiscernible) hydrocarbon involved in some of the products, so there's a cost pressure and a pricing pressure.

In that, we think that we're going to gain but not materially.

If we gained another (indiscernible) another couple of margin points, that would be significant.

That could be a penny or 2 a share.

I am comfortable that our management -- without being silly about it -- is trying to do that on a customer-by-customer basis, not across the board.

Thank you.

Then the next question is, when you look at the third quarter relative to the second quarter, you've done a good job outlining the potential pluses or incremental positives looking at the third quarter.

Do you see anything or are you concerned about anything or what would you watch for as far as items which could offset that 5, 6 cents of incremental pluses going into the third quarter?

I watch the weather channel every night and watch the tropical update!

That's your main concern, (indiscernible)?

I don't have any control over it, but I think that and we worry about loop currents, which we didn't catch this year; that's been a positive.

People (indiscernible) tapping on the table.

You just worry about -- you know, you just don't know.

We have gone through everything that was within our control before we basically laid out the increment.

I don't see any huge negatives.

It's the one you don't see that bites you, but I think that, if I had to put down the points right now, it would be the -- number one would be the tropics or the hurricane season and do I think we will have one?

You bet.

I'd like a lot of rain up East Coast, but that's a little devious.

But I also think that -- and then I think that loop currents can sometimes slow down your deepwater drilling, and we have three active rigs out there that gives us a nice percentage of play in that.

These are very large wells and loop currents can disrupt that.

So I think those are the two things that could disrupt a bit.

But that's all I know at this point, but stand by.

We will let you know!

Just a final point of clarification -- the 5 cents, I'll call it, of incrementals, is that -- are you building in any sort of disruptions into that number or is that sort of if everything goes kind of real, real well?

No, we put a factor in it; we put a factor.

(OPERATOR INSTRUCTIONS).

Corey Greendale.

Good morning.

Just following up actually on what you were just saying, the 5 cent impact -- is the assumption from the E&P Waste segment flat potentially?

I would say I think flat is safe.

I think it will uptick.

I think it will be up, but I think I would just -- if flat, then you've got an "at a boy" (ph).

On the mat segment, can you quantify how much of the volume was coming from non-oilfield markets?

Let me come back.

Yes, in the total revenue in the second quarter in the non-oilfield, we had about 1.4 million of revenue that came out of that market and we do expect that to increase.

We have lunch today with the biggest customers (indiscernible) outline their projects, so I wish I would have had that lunch yesterday and then I could be more explicit, but I would say that you will see it upticking as we go through the -- and that's -- primarily our largest customers are the utility market.

Let me just take a second on this because I don't want to build a clock when you ask for time of day, but the transmission problems that you read about in the country, and with the new wetlands laws which have been -- when they drilled them the first time, this whole grid, they did it before there was a wetlands consideration and today, they have to red flag all of the lines for wetlands and (indiscernible) is a very good solution for that.

We are seeing that all the way from the Midwest, Minneapolis and Wisconsin, to Minnesota, up the Northeast, even the West Coast has wetlands, which I'm in California and I can't imagine why.

But they basically -- there are so many projects now that we're talking about that we see a buildup as they spend the billions of dollars required over the next decade to build up that transmission grid in the country to meet the electrical needs.

That means changing out polls and hanging new lines -- that we basically see that as a potentially a very major growth market and it's going to prove that, I believe, as we go forward in subsequent quarters.

Who are you competing with on those projects?

At this point, in matting, only the old wooden mats but primarily, at our level, (indiscernible) -- helicopters have been historic and they are very expensive and they're not productive.

Then secondly, you could use dragline mats if you could find the wood, and hardwoods are becoming very difficult to get.

So, I'm not saying that we have all the market but we've got enough of it to take care of a good smile for our shareholders.

On the mat sales, the ones that you've sold already and the visibility on the additional sales, the trend there is still that there is going to be a significant amount of sales from the former rental inventory and the pricing will stay kind of where it was in Q2?

I think there will be minor sales out of the rental fleet.

We are committing so many -- I mean, out of the -- we are committing enough of those into the non-oilfield market that they've become very premium.

In a rental and the non-oilfield market, we can make more money in six months then we make selling it.

It's a 20-year product.

So right now, we accommodate certain people with used mats, as they prefer them, but I think that most of our sales will come out of the new -- I would count on most of it coming out of the new market, new inventory.

Just a broad line -- do you happen to know what percent of revenue in the quarter came from Gulf markets?

The Gulf, it was 49 percent if I remember the data sheet right, 49 percent.

So we are 51 non --?

51 percent non-Gulf Coast.

One quick housekeeping one -- the litigation costs, was it -- the 1.2 million through G&A, was that the only litigation cost or was there anything that ran through any of the specific segments?

No, it's all concentrated in G&A, Corey.

(OPERATOR INSTRUCTIONS).

David Snow.

What was the number of deepwater wells that you had and deep-shelf wells in the first quarter and in the second quarter?

We had, consistently in deepwater -- and I can't answer the deep-shelf wells, they were not -- we had some but I couldn't specifically answer that, but we had three rigs working in the deepwater.

Now, this is two different classifications of drilling.

One is, when you are drilling what we would call, from the mud line, a new well, and then you have recompletions of sidetracks that they do a lot of deepwater to reach out to a new part of the reservoir.

One of our major -- we have two rigs running and they were doing recompletions and sidetracks in the first and second quarters, and they are significant;

I'm not minimizing the significance of those wells because sidetracks out there can run a half a million or $1 million and you can do them rapidly.

So I'm not minimizing those.

Now, we had one mud line well at 30,000 feet, and the mud on that is extremely significant, like in the 8 or $9 million range for a well like that.

We had one of those.

We will have two mud line wells running in the third quarter.

Now, one of them will not be nearly -- one will be in that large category because it's an offset to the one I just described to you, and the other will be significant but it won't be maybe half that size.

Then the other -- so basically, we look for a bit of an uptick in that deepwater drilling, and we will have more -- I can't tell you how many we had because I'm not prepared to answer the question on deep-shelf wells, but we will have significantly more of those running in the second half of the year because we see the projects.

I was just having a difficult time getting the full break-out of the second-quarter mat revenues by the different categories, the Gulf Coast rental.

If you could just run through the total break-up?

Why don't we let Matt do that individually.

David, why don't you just give me a call, if you don't mind, afterwards.

By the way, let me say to everyone on the line, because of a system provider problem, our Internet service is down right now, our e-mail is down.

Those of you who might normally e-mail me the following the call with questions, until such times as that service comes back up, I would ask you, at my own peril, call on the phone and we will just have to deal with it that way until technology gets back on its feet.

But yes David, if you give me a call, I'll break that out for you separately.

It does appear that that was the final question from the phones today.

Okay.

Well, we appreciate your patience.

I would have to say that the quarter was a frustration because we saw so many good things happening and to have it kind of get masked by the things we probably have basically described to you today.

But there's an old statement and I have it on my wall at my office -- "Winners make profits and losers make alibis" and I'm damned tired of making alibis, and so we're going to make profits.

With that, we thank you.

Thank you.

That does conclude today's teleconference.

You may now disconnect your lines.