NPK International Inc (NPKI) 2004 Q3 法說會逐字稿

Good day, all sites are on the conference line in a listen-only mode.

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.

Thank you, Tasha.

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

Copies of last evening's earnings release are available on the Investor Relations page on our web site, www.newpark.com.

I must remind you to review the disclosures that are reproduced in the release immediately following the end of the text, particularly those with respect to forward-looking statements that are embodied in the release and that will be made in the course of today's management comments.

I'd like to first place our comments in proper context and remind you of the nature of the change that's been underway here at Newpark for the last several years.

If you look back to 1997, just a few years ago, 97% of our the revenue base came from the Gulf Coast market of the Gulf of Mexico from the oil field.

We enjoyed in our -- our two primary product lines market shares in the 75% range in both of those businesses, and understood at that point that we had limited growth opportunities remaining in that market.

In response, we adopted a strategy to diversify the company's revenue base, both in the new products and services, and new geographic areas.

At no time in that process did we imagine that we would see the kind of downturn that in fact has occurred in the Gulf of Mexico, and Gulf Coast drilling activity almost continuously since that date.

Even in the last three years, rig activity in the total Gulf Coast market is down about 25% and down 37% or so in the offshore market, that's really crucial to parts of our business.

Among our responses to this was, of course, a downsizing of our investment in those Gulf Coast markets, particularly in our Mat Rental business, as we diverted resources to fund growth opportunities elsewhere.

Process is continuing.

So that we can right size the company for the Gulf Coast particularly in the matting and the NP waste segments.

I'm glad to be able to tell that you today in 2004, revenue from these new products services and markets amounts to 53% of our total revenue base with more than 75% of our operating contributions coming from new products and services implemented over that period.

Our discussion today and Jim's comments that follow in a few moments are going to focus on our product's progress expanding outside of our historical oil field based market.

Now, that does not imply that we are in any way walking away from those markets.

We believe and I think you will hear today the conviction that better days are ahead in both the matting and the waste business and that both of those are going to benefit from the final stages of our right-sizing process over the next couple of quarters.

Meanwhile, our drilling fluids business has continued to grow and just this year has increased its market position to 20% of the rigs active in the markets they served from 15% or less earlier in the year.

This market penetration is a result of the application of technology and service to the difficult, deep drilling and complex drilling now underway in that market and reflects our shaping in the company for the future in a toughly competitive market.

Now, as you saw in the press release and course knew already, third quarter of 2004 was marked by unusually active tropical weather systems, during the period with three hurricanes entering the Gulf of Mexico in August and September.

Last year, was considerably more typical and was the kind of season that you actually could factor into projections, unlike this one.

And of course, as you see in the financial data that we released, Newpark's generated $6.8 million of pretax level in the nine months to date.

If you add back $15.3 million of depreciation and amortization, you can see that we generated free cash of just over $22 million year-to-date.

That was used to fund $14 million of capital expenditures to date in line generally with our original plan for the year.

CapEx in the quarter was $6.7 million, and a good chunk of that included the infrastructure that we're using to gain cost benefits in our barite transportation and storage supporting the drilling fluids business, as well as the new wastewater treatment unit that we have coming to our Jonah Pinedale facility in Wyoming.

For those of you who are curious, we have posted a couple of pictures of the new plant just prior to final shipment on our web site at newpark.com/nwts.htm.

And if you look at that, and have some questions, just give us a phone call, we'll be glad to talk to you about that.

As a result, total long-term debt at the quarter end was $180 million.

That's 36% of long-term capital.

During the quarter, we structured a couple of term financing of specific asset packages that we had put together over the last year or two.

In particular, we closed a $15 million financing secured by the new barite mills that we constructed, and put that in place during the period.

Net of new advances for working capital needs, we ended the quarter with $31 million of cash advances outstanding against our credit facility and $11 million in letters to credit outstanding with over $28 million of immediate availability in the facility, plus room for growth.

New borrowings during the period were in fact used to fund seasonal inventory additions of about $4.5 million for our sawmill which supports our Canadian mat sales operation and by $5 million of incremental barite purchases to take care of our needs in the drilling fluids unit.

With those statistical things out of the way now, I'm going to turn the call over to Jim for his comments with respect to operations.

Thank you, Matt.

And I'm not going to dwell on the weather.

Matt mentioned we had three storms this year in the Gulf of Mexico.

We actually had three last year, but this one was a little more exciting.

This year was a little bit more exciting.

As we rebuilt Newpark over the past five years, sometimes with that extreme frustration because as we have moved forward and made progress in other areas and we have moved from 3% to 53%, towards that goal which was initially 50%, we found success in that goal of diversification, but we basically did not anticipate the severe decline in the Gulf Coast.

And before I leave weather, I want to say one thing.

I want to tell you some good news on the weather.

We got a glancing blow from Ivan.

If Ivan would have kept coming;

New Orleans would have been a pretty ugly place to be.

And the oil patch would be years recovering.

So, the good news is that I guess -- not good in Florida, but its good for the oil industry that it turned.

Because that would have been beyond devastating, and I'll let those that are analysts discuss that further but we're pretty sure this would have been, so the good news is it's a glancing blow, it affected a quarter or two, but it didn't affect years.

I want to go back to the decline in the Gulf Coast, though.

At one time, a few years ago, the Gulf Coast was approximately a third of the worldwide drilling fluids market.

I don't know whether it's good or bad, but it certainly isn't close to that today.

And, as Matt pointed out, this was the premier market and it still is a premier market.

There's nothing wrong with the activity in the Gulf Coast as long as you have shaped your business properly for it.

But in the decline, it takes a while to bring your capital assets and your inventories and your structure in line with the declines as they have dropped as far as they have in this market.

But I'm going to tell you, we're getting close, and 2005 will, I think, show that.

Now, as we look forward, I'm going to discuss two points.

One is where we have moved across - as we have moved toward in 2004, a progress was made in certain markets, and then I'm also going to discuss how the completion of that restructuring will affect 2005 also.

I think we're going to get, we've had a kind of a double-edged sword working against us.

I think we can have the sword working, coming back the other way very positively, as we move forward.

Now, I'm going to start with drilling fluids.

I'm going to give you some numbers, and I'm going to try to keep the numbers.

I always have a point that the percentage and statistics are probably for politicians and so basically I'm going to try to cut this down and give these are I hope, very factual, because they come right out of our statements.

The Gulf Coast, I'm going to start with the Gulf Coast.

Drilling fluids, in 2003, we averaged 39 rigs.

For those of who you like number write down 39 average rigs for the year and $82 million of revenues.

Very disappointing year.

There were some interesting things that happened during that year that caused that to be lower, but that's what it was, 2004 will end up around $107 million on 46 rigs.

Rigs will be up 18% on an average for the entire year, and revenues will be up about 30.

And the activity, the rig activity across the market hasn't progressed.

So, we have made pretty good inroads against the market.

So, I think that really hides the fourth quarter, I mean, it hides the progress.

Let me take the fourth quarter of 2003 in the Gulf Coast.

Average 34 rigs and $20.7 million of revenue.

So, in the fourth quarter a year ago, we did just under $21 million on 34 rigs.

The fourth quarter of this year, 60 rigs, $36 million.

We're up approximately 75% fourth quarter over fourth quarter.

That's the culmination of 27 new customers, of performance, of penetrating the market, and the growth story, which would actually have shown up in the third quarter was masked a bit by the weather, but it will show up strongly in the fourth quarter.

A year ago in the fourth quarter we have 11% of the rigs running in this market.

Today, we have 20%.

It is almost doubled our market penetration and we believe it's sustainable.

Because at end of the day, performance matters and we performed.

Let me give you the same set of statistics for the U.S. market.

In 2003, we averaged 111 rigs and $162 million.

That's U.S. market, that's mid-continent.

Everywhere we work in the U.S. 2004, 162 rigs, $226 million.

We're up over 40% in rigs and in revenue.

In the fourth quarter, our rig activity from the 2003 to 2004 comparison, 116 to over 180, up over 55% and our revenues have grow by about 66% from $40 million to $66 million.

The drilling fluids story is a story of gaining momentum, market penetration, and across the U.S., we work, we have 20% of the rigs working.

Now, for total year, we do about $276 million, 80 of that coming in the fourth quarter over 215 last year, but the real growth has occurred in the second half of this year.

In the year on the $276 million, we'll have an EBIT of 8%.

But we'll exit on that 80 for the fourth quarter at 10.

That's the base we have been working for.

And we look at the base going in the 2005 up $100 million from the base we entered this year from the fourth quarter up 100 million at an EBIT margin that's double.

Now, that's the progress we have made in the year.

Now, positive going forward in 2005 is the customer base and the base of revenues that we have built in this company.

Secondly, the volume that we have today now allow us to fine tune our capacities, our transportation, our infrastructure and we believe that there's $2 million to $3 million of identifiable cost savings by rerouting and by gathering by rail versus trucking, and vary because of the volumes that we have increased and capacity absorption at today's level, we're running right now in these markets.

Pricing is now moving off.

The good news is after a number of years, all these false starts that people have talked about in the drilling fluids business about increasing pricing a few years ago was all eyewash.

They didn't increase pricing.

Now, they are and we are also.

A 2% net price increase is worth $6 .4 million.

The reason I say net is some of the people who have worked for us are going to get price increases too.

This is a food chain and if the folks at the top end don't believe the service companies are entitled to it, hide and watch.

And the people that worked for us are, so, if a 2% is worth $6.4 and a net 3 is 9.6, that's in process as we speak.

It will vary by area and vary by product.

The good news is that we have actually held our margins, but it's because we have a better mix of our proprietary products of setting a sharp decline in commodity product pricing and it is the largest being barite which is now coming up for everyone.

The third area that's important, the next area, is Canada had a difficult weather year.

OK, but they have excellent products and an excellent customer base, and they'll have a much stronger 2005, unless of course we have a monsoon up there again and maybe it will become a tropical climate.

I think that we'll see that change, and the same thing in our foreign businesses, it's being strengthened materially and the contract situations that we had where we had some Euro dollar squeezes and the contracts are now behind us and a new contract should begin and I think that we'll see improvement both in Canada and foreign, but importantly, pricing in the U.S. and cost reductions as clocked by the volume coming off the base that we have spent in the last four years building and it's the culmination.

Now, our goal is we'll end this year about 8% EBIT, our goal is 12.

Part of that we're going to get because we have realized the volumes as late as we come into the second half of this year and the others will come off the things that I have just described.

We at one time in 2001 got up to 12.5% EBIT.

Right now for that next year it's 12.

And we can do better than that, but we'll hide and watch because it requires us do everything that I have laid out for you, but the most important thing is we have 20% of the U.S. market, and I think that we can perform to keep that, but we have no desire nor ability to go to 25%.

We couldn't, man it or staff it.

So with that, I'm leaving fluids with my view of the outlook of 2005 is very strong, and I think that we have earned every piece of it and we're going to earn the last of it.

No one gave us anything.

And I'm going now to matting.

Matting has historically been one of our very bread and butter profitable businesses and Matt has described the process by which the market has changed so dramatically.

In 1997, we made $25 million on this product line and we made $15 million in 2001 in the market.

And we have seen the decline of activity in the market, and it's not ours to question why it happens.

I have read so many accounts of what happens in the market that I basically think I'll just put it aside and say I'll accept a reality that it is, it's where it is.

We have been averaging over the last four years approximately 16 million square foot per year.

At the height of the market we were at 25 million square feet.

So, that's, and we don't have any delusions of grandeur about 25 million square feet laid again.Our delusion or illusion right now or our market projection is right where we are at 16.

I don't think that's a delusion and we'll run that this year.

The important thing is, is bringing the inventory and the cost structure in line with that market and I'm going to give you one set of statistics and this is the Gulf Coast market.

In 2002, as we began this last round of structuring, we averaged $0.74 a square foot.

Now, I'm just going to give you a point of reference.

At 16 million square feet, every $0.10 is worth 1.6 million, then put 50% more because that same pricing affects the extended rentals, so, it's approximately $2.5 million for every $0.10.

In 2003, we averaged $0.85.

In 2004, we're averaging through nine months $1.

In the fourth quarter, we're above $1.

But from that dollar, our goal is $1.25.

And if I'm right at 2.5 million per dime off of what we have done thus far, you can do the math on 25 times 2.5, or somebody will do that, that's over $6 million in pricing.

It's there to get and we will get it.

The important thing is we have reduced our inventory, and so has the entire industry has it's attrition, and we have done that by attrition of wood, mats and wood is still very important.

It's part of our product offering, but we have also been moving the Dura-Base composite mats to new markets.

This year alone we have out of 37,000, we have sold almost 9% percent of our inventory, to out of that market.

And we also are moving that into the rental markets.

So, we have been attritioning our Dura-Based mats away from the market, but we've also been attritioning the wood at sizing the mat to the market.

Now our first goal is the one I described to you, that's the price increase, of $0.25 a square foot and that's again assuming the $16 million and that's what we have averaged for four years and that's what we're running.

Our cost of completing the inventory depreciation, which will be complete by the middle of next year, so we're two-and-a-half quarters away from that occurring, will be $500,000 a month.

But we will only get half of that next year.

So, that's $3 million for the next year, but the second half of the year will be happier than the first half.

And we are building the non-oil field market, which uses the Gulf Coast infrastructure to rent to the utilities and other companies around the United States.

We had, that was not a market in 2003 with a gleam in our eye.

This year it will be approximately $5 million, and without the problems in Florida, in the Southeast, it would have been higher, but that's life.

But we make about an 80% increment because they pay for the costs.

It's a very high incremental market, and we believe that they will be a fairly substantial up-tick again as that market developed in 2005.

We think that we'll gain another $3 million off of this year next year.

And our fourth quarter base will be above anything in the year.

So, our fourth quarter base we're leaving the year will be the best quarter of the year profitable, for the Gulf Coast, and we'll add for next year approximately a total of about $15 million, but about 12 of it should show up.

So I think that we're going to be back rivaling in the Gulf Coast what we did in 2001.

The base is pricing, cost and the non-oil field market, which is serviced out of our Gulf Coast area with the same inventory, but it's all composite mats that are used in those markets.

I think that looking forward in the matting business, in the Gulf Coast, it's the beginning of the restoration of a market that really started in 2002, in earnest, and I think it will be completed in 2005.

Additionally, our Dura-Based sales; we're continuing to move them throughout the market.

We sold 6700 mats in 2003 for $9.3 million.

We have sold 14,000 mats this year, 33,000 are used in mats that we sold out of inventory and the good news is that at five years old, people are very anxious to buy them.

And the reason we will sell them is that we have got something better coming, in time, so, this is a great mat, and we think we can reduce the costs on the future mat and we're working on that.

However, we have sold new 10.7, and we'll sell some more in the fourth quarter.

We never know for sure, because we have got so many potentials out there, but I'm not going to even conjecture that.

I feel better about what I told you about pricing, cost structuring and the non-oil field that I can ever tell you about the numbers of mats that our customer base and the markets are growing monthly.

So, we're going to do fine in that business.

The problem is that in an initial years rolling out, and we opened in this last quarter, a rental business in Mexico, with 6,000 mats.

We're working on contracts as we speak.

We believe Mexico has the opportunity to be a substantial market, and additionally, we remain optimistic about the Canadian market, there are approximately $85,000 mats in Canada, while rolling it back five years ago when we introduced mats in Canada, six years ago, there were zip, zip to 85.

Canada is learning how to use mats.

Some people learn faster than others, but they're learning.

The majority of those mats have been put in there by Newpark.

Approximately 18,000 of those are Dura-Base and the remainder, are wood.

We now supply our former competitors.

There's a big sales market in Canada, which is continuing to grow.

We're going to sell a lot of mats in Canada.

So, we look at Canada as being a good future market continuing, Mexico being a good rental market.

The Dura-Base sales, but our biggest push coming forward next year is the final restructuring and pricing in this Gulf Coast market and it's underway, we're close.

Environmental services.

Tied to rig count.

At one time that was absolutely wonderful.

In 2001, we had 260 rigs running and in that prime market today, we have 168.

And I we get 15, 60-plus in the offshore market.

It's gone from 144 in 2001 to 90 rigs today.

I can go through in the water at $10 a barrel and it's dropped.

And the land market has dropped and it's about an $8.50 market.

We dominate the premium market.

I think that we see business as being similar over the next several years.

We are working on improvements on our infrastructure to reduce costs.

We have also gotten the fun of Homeland Security, which is really great.

We have always wondered what a waste dock's going to do to concern the country about that, but that doesn't matter.

The law is a law.

And - we did that.

Diesel is up, transportation is up we are doing things like being sure changing some of our transportation patterns to try to reduce costs, but I think that we can make this a very nice profitable business, but it will not be the business that it was in 2001 or in -- and prior.

Our growth in this business will come from several markets.

Canada has some exciting new products they just introduced, which assists in their composting, and that's through an integrated set of services.

I think that we will see some impact in 2005 in that, and I think hats off to the technical team in Canada, which really has had a breakthrough.

And if they happen to be listening today or they hear later, we appreciate your good work.

And the other is that when Matt invited you to go to the website and I don't want to be like Dick Cheney in his debate and give you the wrong website, give you George Soros' website, so I won't even try, but you see the picture.

You are looking at the future.

I am just going to get back to basic and tell you that in my layman's way, everybody else treats the surface; we treat the molecules.

It is so remarkable a difference in technology that it took us a while to believe it was true.

It is true.

And it can take produced water or it can take coalbed methane or mineralized water and make good water out of it.

If you want drinking water, you can get it.

If you want irrigation water, you have got it.

We can spec it to it.

And I am sitting here looking at our Dr. Frank Lyon, who is our Head of Technical, and he is not nodding now.

And I think that when you look at the first unit going to Jonah Pinedale we are looking with the needs are great and I think that we have the opportunity going forward for a nice, new product line that is unique in the world.

And I am not overstating that.

So, I look forward, as I look as we are exiting 2004.

And sometimes you look at the lousy earnings of the company, and you say wow and then you look at what we have progressed in the year, and I am really tired of saying wait until next year.

Maybe I am - maybe this is the year for Boston and they get the curse off them and this maybe 2005 is the year for Newpark to break the curse, but I'm confident that fluids is going to have a breakout year.

And I am confident that SOLOCO will be a very major surprise in their businesses.

And I think that 2005 isn't the ultimate, but it's going to be nice step up for this company.

And I am really, I usually at my age not anxious to have a few months peal off the calendar fast, but I'd sure like to get the next couple of months out of here and get into 2005.

With that, I will basically turn it over for questions.

Tasha, it's up to you.

[Operator Instructions].

We'll take the first question from John Tasdemir.

Hello, thanks, guys.

How are you doing?

Good morning, John.

That was pretty quick.

Let me first of all in the drilling fluid business, your business is obviously ramping up.

I mean is that coming from a function of new customers and/or just more active current customers or a mix of both.

I would say that it's a mix of both.

We have added about 35 new customers across the U.S, 27 of those in the Gulf Coast.

And so, I would say that it's probably a combination of more new customer, but also our existing customers are actually doing more work also.

So, it's a combination.

I couldn't put a percentage on it, but if would you -- I could ask them and they could guess for you, but I --

That's all right.

But I would say it's both.

And as far as the improvements you are seeing in your EBIT margins, is that a function of different mix of product, or higher prices or just better pull-through?

I think if I put it in order, the first order is I think that if we get the 10%, it's primarily operating leverage.

We have held our margins, so secondly our product margin by a better mix.

We have seen our commodity pricing over the last two years, going from about 20%.

Just slightly under 20% to about 5.

So the commodity margins at the product level have really collapsed over the last several years.

Now those are the ones that are coming up strongly now in pricing and they need to.

In fact, in the quarter, just ended, we had a dead lost in barite, which is about 25% of your business in the Gulf coast.

We had a dead loss.

We're increasing that pricing substantially.

That's because China ramped up their cost in the ocean freights and all that stuff.

So, I would say that A) it's operating leverage and B) it's been a mix that's held us up, and I think we haven't had the pricing yet.

The pricing is coming, we'll start to see it some of it in the fourth quarter, but you will see it in 2005, but we're customer by customer, we're increasing prices on contracts, and well by well now as we go forward.

OK.

And then you also mentioned, you know, you're doing some infrastructure expansion in the fluids business.

Is that -- can you tell me a little bit about that?

Sure.

What we have is we have had to support, because of the ramp-up in -- let's say weighted products like barite, because of deeper drilling in Oklahoma, West Texas and the Rockies, we have been trucking.

But we've built our volumes now where we now have in the system about -- if I say 75 to 80 rail cars.

By railing some of those markets, we gain $30 to $40 a ton, but you have to build the storage infrastructure to be able to offload it properly.

So we have built in this year, that flow of ability to load out rail cars, and get them there, and the rails have not been cooperative, because they have been pretty busy, too.

But with that flow of saving about $30 or $40 a ton.

Also, in things like mixing liquid mud and things of that nature, we've historically used black tanks in certain areas because it's variable.

But our volumes have come up where we can replace it with primitive storage and save money.

We have built some improvements in our plant capacity in barite.

So it's various thing.

Volume has allowed us to relook at what an infrastructure that was really developed at maybe at half the volumes at $160 million - $180 million and not $320 million company, and start fine tuning those and that's the 2 to 3 million that I described.

Did I give you enough?

Yes, That's great.

Also on the mat side in your comments, you talked about reducing costs by 700,000 a month, getting into next year.

I'm not sure if you commented on that more specifically, but what are you doing there?

I think that -- I think the first has been to recheck all of our suppliers.

I think that we have -- we have had a new program or we basically have shared the funds a little bit.

We had some pricing on our suppliers that was out of line.

And I think that that has already in the fourth quarter will gain us probably $300,000 a month.

And that was a more active role by our president, Tom Ballantine to go down and work on that.

And then -- the remainder are really tied to a tail-off in the mats that were put in the 2001 peak period.

I think they'll tail out probably in the next two quarters.

That will be about $500,000.

OK.

So it' really s-- That's going to happen.

It's just a matter of timing.

And then every time we sell or move mats out of the market, we basically reduce the cost, and frankly, if we could take another 10,000 or 15,000 composite mats out of the 30,000-plus inventory we would be happy to do so and put it in other markets.

Right, that makes sense.

OK, and just one real clean-up question on the matting business.

Can you tell me what your composite mat sales and revenue accounted for in the third quarter?

Yes.

Hold on a second.

Matt's getting that.

It was down from the second quarter.

Composite mat sales revenue in the quarter was 5.6 million versus 9.4 in the second quarter.

OK.

Alright guys, I appreciate it.

OK.

We will take our next question is from Corey Greendale.

Hi, good morning guys.

Good morning, Corey.

I guess, let's start with the LENT Business.

Sorry about that.

The ENP Business - is there any startup investment that's going to be required for the water treatment business beyond what you have spent.

Can you break it out between CapEx and operating cost if there is anything?

The answer is we have been expensing it -- we have been expensing that as we have gone and if I put out something, it would have been $400,000 or $500,000.

We have been working on it for a while.

Maybe $50,000 a month is because of various expenses.

It hasn't been huge, because we're not the developer of the technology.

We are the marketeer and the co-developer on the applications.

So, this is not a -- this is not unproven technology.

It's just never been applied the way it's being applied.

And then the CapEx is -- that will depend on the -- on how we structure it; because we're looking at projects, the first one in Pinedale has been a CapEx.

We spent about $1.2 million for the initial plant at Pinedale, which will improve the efficiency of the existing operation and serve as a marketing tool to help place this same technology in new markets.

We have people -- we have a new unit that's being -- that we're also building now that's a small unit, about the size of a small U-haul truck.

We have a list of people all through North America that are waiting for us to test their water with it, and that we have -- we just really -- that's just showed, because what we have to do is test water to build a plant that conforms to their needs.

And so we have a testing unit that I would say that is -- I'm asking Frank Lyon and Tom Ballantine are in the room with me.

They would be probably two or three months away, a couple of months away before the unit would -

Yes.

So, we probably won't hit Canada this winter.

We have a number of places.

Then we design the plants specifically to meet the need, whether it's drinking water or it's coal bed methane applications.

And we have reviewed and working on projects that would be up to over 100,000 barrels a day.

For those that don't know what a barrel is, that's 4.2 million gallons of water a day.

That might serve a city, a small town.

And down to this unit that we're sending to Pinedale is 4,000 barrels a day, which fits that market need.

So you can make, you can scale them to larger or smaller to fit the application of the water based on the mineralization and things that you need in that market.

Did I run off too much on that?

Detail is always a good thing.

I appreciate it.

On the mat business just a couple of clarifying questions.

The $1.25 goal that you talked about is that only for the oil field market or is that blended with the utility market as well?

With the utility market, we jump out of the window.

The utility is substantially higher.

It's on oil field only.

OK, and no jumping of the window.

The 14,000 mat sales that you talked about, is that through the end of Q3 or does that include October as well?

Say that again.

Sorry.

You mentioned 14,000 mat sales so far.

That's through the end of nine months.

We sold some this month, but we never sell enough, but we've sold some in the month of October.

OK, and then just a couple of clarifying questions.

The cost reduction measures that you are talking about in all three segments, are any of those the sort of things that could involve a restructuring charge at some point?

No.

OK, and last one looks like DSO's were up a bit sequentially.

Is that a transitory thing? is that a ongoing issue?

I know that you have been working on get those down.

Corey, I think for the most part transitory.

We had a lot of work that we didn't get to a billing point at the end of the quarter because of the water but we ought to pull that back down at fourth.

Thanks and congratulations on the activity.

Thank you.

[Operator Instructions] We'll take our next question from David Snow.

Yes.

You are heading into the third quarter and had a loss in the mud business.

What is your net short position in buying mud versus having your own supply?

Well, first of all, we have our own supply.

Secondly, we made $5 million in the product line.

So, I don't understand the loss.

Well, you said that you made a loss in the third quarter in the mud end of the business.

No, in barite it just happened to be caught between a ramp-up of ocean freights, in ocean freights and we're recovering that now in the fourth quarter and then in the first quarter.

The contracts on which it was being consumed, David, were already in place.

We couldn't change the contract, but the new supply coming in was at a higher cost.

That's why there's a loss.

That's absorbed in the profit that we've already reported for the unit.

So, narite is not a net buying; that you produce and balance enough for your needs.

We buy that and then we grind that in our plant.

And you bring the raw material in because of the -- all of these things that you hear about ramp-up in China and all of this the ramp-up in ocean freights and cost, caught the supply, and because of contracts and job in process, we could not pass that through in the quarter, but it's being passed as we speak now.

You mentioned that you had in your commodity drilling fluids gone from almost a 20% EBIT to 5%.

With that loss being part of it, what do you think you will go to as you come out in 2005 in the commodity end of that margin?

OK, first of all, it's not EBIT.

It's gross product margin.

OK.

So, that we were right --just a freckle under 20%.

We have gone down to 6.

We have an internal objective.

It's doubling the ---that's about a third of our business.

As our commodity shows barites, gels and product family that everybody has, you can buy them about anyplace.

But you have to have those products to in your mix.

We hope to increase that by from about 5 or 6 to double to 10 or 12.

And the reason I'm hedging, I'm not exactly up to the speed whether it's five or six, but it's in that range right now.

Positive.

Even though the barite was a loss in the quarter, we made money out of the other commodities and now we have moved that back up.

And if it's actually 30 to 33% of the mix, and I'm not 100% sure this mix because I could be out of date, that you could see where we could gain a point-and-a-half or two points of overall margin, if in fact we have already absorbed the cost increase of the product.

OK.

Going back to the drilling fluids comments earlier, you referenced 2003 at $215 million and 2004 at 276.

Is that for the U.S. or total including Canada and Europe?

That's everything.

Everything.

OK.

Thank you.

And it will exit the year at 320.

On the same basis.

And your expecting to be up 100% in '05 and I'm trying to figure out what that means.

100 million.

100 million.

OK.

All right.

So if we do 276 this year, what we're telling you is.

No, we were up 100 million from the fourth quarter of last year annualized to the fourth quarter of this year, annualized.

We do not expect, what we expect now is we have paid a big price to technically and performance wise penetrate the market.

The market will not, we do not believe that it's time now to continue to try to penetrate the market because of the shortage of people we would like to see at20% market.

We have gotten our volumes.

Now it's time to increase the profitability.

And we will be about an 8% EBIT for the year on 276.

That's $22 million.

That's what we end -- I'm laying it out there for you.

I'm trying to fish for a revenue estimate for '05.

Just use 320.

Just 320, no improvement from the fourth quarter.

It could go up, it's better up than down.

The point is to go out with running training schools for engineers.

It's now a time we have to maximize our returns.

And to get our returns, our, we have cost improvements, and we have pricing.

The first time in four years, we're going to get pricing.

That's how we want to get to 12 on the 320.

Terrific.

We might do a little better in revenues and we might do a little better in margin, but that's our model we're working under today.

David, the 276 embodies an $80 million fourth quarter.

Right.

Which on an annualized basis is up $100 million the year before.

OK.

Thank you.

Looks like we have no further questions.

Well, we thank all of you for joining us.

We thank many of you for your patience.

I believe we're getting close.

And in particularly if the Red Sox can end the curse, we're going to do it here.

So, thank you very much, and we'll basically keep you posted.

Thank you.

Thank you.

The conference has concluded.

You may disconnect your lines at any time.

Thank you and have a great day.