NPK International Inc (NPKI) 2005 Q2 法說會逐字稿

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

Please go ahead Mr. Hardey.

Good morning.

Welcome to Newpark Resources' second quarter earnings conference call.

Much of what we discuss with you today is going to constitute forward-looking statements within the context of section 27-A of the Securities Act and 21-E of the Exchange Act.

Counsel has asked that I remind you to review the disclaimer language contained at the end of the text of the earnings release for important notifications with respect to risks and uncertainties associated with our comments today.

Yesterday evening -- by the way those that of you who don't have a hard copy of the press release can get a copy from our Web site, newpark.com, from the Investor Relations page.

Those of you who've read it and are here, I hope know that we reported yesterday our earnings of $4.8 million in the quarter, or $0.06 a share for the second quarter 2005 on revenue of $141.5 million in the period.

On that revenue growth in comparison sequentially to the first quarter of the year, you will note that the contribution from our Drilling Fluids unit increased significantly, the equivalent of about $0.02 a share.

The waste business was up the equivalent of about $0.01 a share and those two were offset in part by a seasonal decline in part of our matting segment of about $0.02 a share.

The net was even with the first quarter and during the period we had some increase in foreign currency charges and faced $400,000 of one-time expense associated with the acquisition of the outside interest in our mat manufacturing plant, that acquisition completed back in April.

So the pieces certainly seem like they are moving in the right direction for improved earnings, and that is what Jim will be here to talk about when I conclude my few comments.

It is not that often that revenue growth finds its way into the spotlight as it has in this release, but I think that there are a couple of comparisons that are worth pointing out, at least to put it in perspective.

Recent quarter revenue for the total company increased 10% compared to the first quarter this year.

Revenue was up 24% if you compare the second quarter to the fourth quarter of last year and 35% for the same quarter year-over-year.

Pretty significant growth numbers.

The comparison though is even more stark when you particularize it to the Drilling Fluids unit.

Within Drilling Fluids, second quarter revenue of $96.6 million was up 18% over the first quarter, 26% above the fourth quarter level, the December quarter, and a pretty astonishing 65% growth from the second quarter a year ago.

Traction in the industry really is the story and that is what Jim is going to focus on when he details the Drilling Fluids business for you.

The advent, though, of that kind of growth has caused us to accelerate some of our planned capital expenditures to accommodate the demand being placed upon us by our customers, and support the increased market penetration we've achieved.

Of course, we have made the working capital investment -- funded that from operating cash flow as needed.

The capital spending in the quarter was $9.6 million with the better part of $6 million used in our Drilling Fluids business, principally to expand things lake rail sidings, bulk storage capacity, mud tanks, liquid mud delivery systems, things that some of the older and more established companies have had in place for years and we are having to add as we grow.

Not just in the Gulf Coast, but in West Texas, Oklahoma, and the Rockies.

Here again, cash flow provided the bulk of the funding for the new investment.

With capital spending at this level in the quarter and similar levels in the first quarter as we invested in new technologies, we have not made significant reductions in long-term debt thus far this year, which remains about 37% of total capital.

We think that the opportunities that we've supported will justify the investment we have made and reward us with improved margins in cash flow later in the year.

Meanwhile, we do remain committed to a debt reduction strategy to move the ratio down to 30% on a long-term basis.

It is just not going to happen next quarter and probably not the rest of this year.

With that out of the way, Jim is going to bring you up-to-date on operations.

Thanks Matt.

I will basically talk today -- our focus will be on the changed company that has come out of a -- the restructuring over the last several years, and I think that a comparison with 2004 would not really be significant.

We could give you very impressive numbers, but I think that we were talking about a different company today than we were a year ago.

And so I think that comparison would be impressive, but not really the comparison we need to make.

And so I would really prefer and I will spend most of the time discussing sequential as I think we are in a point where sequential results are going to improve as we go through the next number of quarters, particularly in this year.

So I'm going to focus on revenue generation and margin improvement as we go forward.

As a point of reference -- and Matt mentioned some of these numbers -- but I'm going to compare the first quarter EBIT because revenues are wonderful, but profits are everything and cash flow is real cash earnings.

At any way, the first quarter, Newpark Drilling Fluids generated earnings before interest and tax on an operating level of $6.8 million and that increased to $9.7 in the second quarter, and we went from about an 8.3% margin to 10% in the quarter.

So we are up $2.9 million sequentially.

Nesse, our environmental company, went from 1.3 to 2.2 and that's up $900,000, which is at least headed in he right direction.

The matting business had a very stellar first quarter at $5.8 million and it was down to $3 million, so we have dropped $2.8.

We were a net improvement at the operating level of $1 million.

Progress, nothing to wave a banner about because I think it is really a preview and a base to again build on and I think that's what we've done the first half of the year.

And Matt has mentioned that some of the $1 million improvement was deteriorated by some of the things he mentioned in currencies and the booking of the Loma plant below the line.

I''m going to just very quickly -- Matt had mentioned the comparisons of the prior year to show you how they can distort -- we are up 65% in revenues, we are up 400% in income, and we are up 31% in rig activity and fluids in the United States and total company.

So you basically looking at that and say wow.

Well, we are going to go back to sequential now, and let's take the first quarter of Drilling Fluids now, and I''m going to break it down now to another level, a little deeper.

Our revenues for Fluids in the first quarter were $81.7 million, and I'm sure I'll get some complaints that I am using too many numbers, but bear with me.

I think there's a story here.

The second quarter $96.6 million, so it was up just under $15 million or 18% sequentially in revenue.

Our foreign, which was Canada and the Mediterranean operations, were flat in that period.

We went through a break-up in Canada and so it usually drops a bit.

So we were -- it is about 16% to 18% of our revenues were in Canada and the non-U.S., and they were flat in the two periods at around $15.5 million.

So, if you back that out, our U.S. revenues went from $66.2 million in the first quarter to $81.3 million, $15 million, or 23%.

So, sequentially the U.S. revenue base went up 23% sequentially first to second quarter.

Now, that's again base building.

The number of rigs went from 186 in the first quarter, average number of rigs running in the U.S,. to 198 in the second quarter, up 6%.

The market was up 4%, so we were -- the rigs averaged up 4% and we were up 6%.

So we marginally outperformed the market.

The story is in the average revenue per rig.

We went from $356,000 per rig U.S. to $410,000, or an increase of 15%.

Our rigs are getting better.

And I think we will see that trend continue and with the 6% increase in rigs and a 15% increase in the revenue per rig, that's the sequential 23% of revenue increase for the company.

Now, let's consider the 198 of base from which we need to move forward.

And we think that we are moving forward.

The month of July, obviously the first month of the next quarter, we're at 218 rigs.

So our rig activity is up from the 198 by 20 rigs or 10%.

So a 6% increase in rigs -- if we hold the July level throughout the quarter -- we have already outperformed on rig activity, and we believe that the depth of the wells coming throughout the market and the wells we have on the books -- we are rolling on now, should allow some sequential increase in revenue per rig.

So, we think that you'll see a continuing substantial increase in the revenues of the Fluids company in the U.S., which is 82%, 85% of our business, as we go forward.

Now, let's talk, more importantly about margin -EBIT margin.

The U.S. margin with the company at 10%, the U.S.

EBIT margin was 11.3% and we believe that both the 10% overall and 11.3% U.S.

EBIT margin will increase.

We have an internal goal of a minimum of 13%.

Barite kind of slapped us upside the head in the first half of the year, but we are coming back on it now.

Our barite cost in the second half of the year will be down by between $3.50 and $4.00 from the second quarter level.

Those are contractual tonnages, which -- that we pass through our system, so we'll have an improvement in the cost side.

We are improving pricing in all markets and if we're not now, they ought to replace all of us.

Because we are pushing the envelope on people, we are pushing it on infrastructure, and the entire industry is doing this.

So, if anybody is not increasing pricing today, I think they ought to go maybe get in the shoe business or something.

The operating leverage on the added revenue ought to come in at very close to 30%.

Frankly, I think it should be higher, but let's just use that as a good margin.

Our goal is a minimum 13% margin.

I think we've got a good shot to achieve that on added revenue in the coming quarters.

In addition, both our -- Canadian operations are coming out of breakup, their revenues will be up, their margins will be up and our foreign operations, the revenue should be up, not as substantially but their costs are down because there's been a lot of work done to bring them in line, so you'll see better margins and profitability and increased revenue out of the foreign operations.

So, I'm looking forward to the third quarter.

The only thing that always scares me is our named storms.

But there's nothing we can do about that.

It won't change the development and momentum in this company that we have made -- I don't -- if you have an insight on how the hurricanes are going to run you can factor that, and maybe we have had our share for the year.

So, I think that if we look forward, we are looking at continued sequential improvements in revenues and margins both in what is our largest company, and basically we are very excited about that.

It's been a lot of hard work, I can tell you that it happened the last year or two, but it has happened over the last five years as we've developed a product line and developed technical staff, we developed our engineering, and our infrastructure.

And as Matt pointed out, we had to accelerate some of that because the wells we are getting now are much larger and require more liquid mud and more storage.

So we have had to really accelerate to stay with the market.

I think that that will be down substantially in the latter part of the year because we just can't outrun our people.

So anyway, we are very pleased at the progress in the fluids business.

I am going to talk about matting on a sequential basis next.

First quarter, second quarter, I am going to break to its parts and discuss each of them because, we have put a guidance out -- by the way, let me step back to Fluids a moment.

We have a guidance of about $41 million.

We are at -

It is the EBIT number, right Jim?

Yes, the EBIT number of $41 million.

That's in our presentation.

We did it earlier in the year.

We have a $342 million guidance on revenue.

We are annualized right now at 357.

I would think it is a pretty safe bet we will get the revenues.

We had a 12% EBIT margin on revenue.

We are running behind that now.

But I think that we will be catching up as we go forward.

I think that I would feel fairly comfortable, unless something really surprises us, that we will be able to meet that guidance that we have out there, to exceed it in revenues and meet or exceed it in the profitability.

Excuse me, I'm back to matting, now.

First quarter, I'm going to break this in parts to head toward a guidance of approximately $20 million, and to sum it up, we've earned $8.8 million in the first half of the year.

I don't think you can do it times two, but if you did you'd have $17.6 million.

And we have $2 million less cost in the second half of the year.

So on paper, the guidance is very close.

Let me break it in its parts.

The Gulf Coast oil field rental business did $7.5 in the first quarter, $6.2 in the second.

Our pricing has stayed stable at about $1.12.

Our guidance was $1.20 on 8 million square feet, we have done $8.5.

Our only problem with the Gulf Coast market and it is just what it is, the first half of last year there were 30 rigs operating in the average and it is 30 rigs this year.

While the rest of the world is growing, the Gulf Coast is still in what we call Groundhog Day.

It's just kind of staying in the same position.

But that's life.

We sized the company to participate in that market

Our non-oil field had an excellent first quarter of $3.4 million, $700,000 in the second.

We're at 4.1, our guidance for the year was between $7 million and $8 million.

We should do that The decline is really for the largest industry is the utility.

When it warms up they stop working because they need every line they can get to move AC load and power.

So, in about September or October, we will pick up projects and we have the biggest backlog of projects we have ever had.

So, it will always be a bit seasonal.

We are learning that market and we will be able to give good guidance I think going forward on the seasonality factors involved in that.

DuraBase sales, we had given guidance of 15,000 units, we have sold 3,900 in the first quarter and 4,100 in the second.

That is 8,000 units.

I would like to tell you we have projects out that would cause that to happen to meet our guidance.

This is a bit spotty.

So I would say the chances are reasonable that we ought to get close.

And I think overall, we'll be pretty close to our guidance.

And I think that, remember this is a company that made $4.5 million last year that we gave guidance for $20 and most people laughed when we gave it.

Well, as we go through this year, and maybe they will smile a little bit, not laugh.

But it has been a lot of work by a lot of people to bring the cost structure and get that sized into a business that's set for this smaller market that we're in today.

The environmental company.

If you -- the entire corporation, including Canada, the Rockies, which are really run under Canada, and the Gulf Coast businesses, we did $3.5 million for the six months, $1.3 in the first quarter EBIT, and $2.2 in the second.

It's a $900,000 improvement.

The improvement in the company has really has been almost $0.50 a barrel in pricing.

We averaged $13.34, up from $12.88 in the first quarter.

So pricing has remained strong.

Our volume was up 41,000 barrels and the combination of that is your game, set, match, that's your story right there.

Going forward, we see the barge market up about six rigs.

That is the most waste intensive or volume intensive for us.

We see the second half being up very to get us very close to our guidance of 35 or 36, 3.6 million barrels.

And pricing is ahead of our plan.

So we will be in the ballpark.

The penalty box this year has been the Canadian and Wyoming and that's probably, I think if have said it, the most important thing there is that we had a break-up in Canada, which was pretty severe and they lost $800,000 in the two and the rest is start-up of the new operations which we refocused and reallocated resources and start-up costs into the coal bed methane and to Pinedale markets.

So I think if I look back at this company with about a $9 million to $10 million guidance, I think we will turn around the Canadian and Wyoming as the year progresses.

The $4.3 million, which is the $3.5 plus the 8 lost -- 4.3 in the Gulf Coast, it will improve.

I think we will be in the ballpark.

I still think we'll come very close to our guidance in that company and that will be volume in the Gulf Coast, Canadian improvements, and the start-up becoming a productive unit in some of the new areas contributing a bit in the second half.

So, that is kind of the sequential businesses, and because I ended up with start ups, I will talk briefly about NEWS, which is our new entry and we are very excited about this new technology.

Like all new things it gets -- it's running a little later than we would like because of the start-up and the instrumentation and getting everybody trained.

But we should be flowing good water out of there within the next few days.

We are running water through the unit now and you do it on a sequential basis through each stage of the technology.

For those of you who're new, it is Sonochemistry and if you want to know more about it, call Frank Lyon.

I'm laughing because he is sitting here and smiling at me, but -- or you can go to newparkwater.com and it is a very interesting technology.

Our Boulder plant is, if I said it started up, I could be off by 24 hours but it is in process.

The Gillette plant, which is coal bed methane would be started up in late September.

That's late by about 60 days, and we in 60 to 75 days, I will put a little factor on that, we should be testing the water at Fort McMurray in heavy oils and that is the largest market.

As we set out this year, we took what we initially thought were about a dozen markets for the application of this technology, took it down to three.

The Pinedale play, the coal bed methane and heavy oil and we -- those were our focus to introduce that this year and we are in that mode.

We are getting paid for everything we do when we perform.

And we will be in all three markets this year demonstrating or operating, in two cases operating and one testing and demonstrating.

And I think if we are able to that this year, I would count the year a success rolling out a new technology.

And with that, we'll open it up for questions.

(Operator Instructions).

Our first question comes from Gary Goldstein with Guilford Securities.

Go ahead please.

Yes, first of all, congratulations on the quarter and there are those of us out here not laughing, we thought it was quite a good quarter, so congratulations guys.

I had a few questions.

In the last quarter there were some additional costs associated with the rollout of the new 100 fluid system in Canada.

Can you give us a little bit of flavor on how that is going and if there are going to be additional costs this quarter?

Can you talk to that for one quick second?

Sure, Gary, I don't think there was a cost.

There always is when you put in liquid mud plants and have to put your infrastructure in.

That wasn't material.

I think that the -- I think what we had is a -- the cost was really, as you rollout an oil mud system like that --

So, it was just associated with the rollout of the system?

Right.

And what you do is you get an improved margin because you put technical products and you put oil and it is an animal oil product and we put part of our FlexDrill system in it, but still you don't get your margin.

You get about a 15% to 20% improved margin by the time you rollout the third time, so your margin is depressed until you get into a pattern with the fluid system.

And until you get a better mix between selling your specialty product and selling the oil, which you do on the initial system.

So it is just a margin improvement that you ought to see as we mature the systems in the marketplace.

Okay, great.

In the first quarter there were some changes you guys made to the recycling process.

I guess it temporarily reduced the capacity a little bit.

It would appear that that's all behind you.

But if you could just address the status of that and if you could talk to us on the capacity utilization in Fluids, we'd really like to hear where that is because we know, as you had discussed before on pricing, if you could talk to us about capacity utilization of Fluids that would also help us.

In the first quarter, I will answer the first question first.

In the first quarter what we had is a changeover in the method we process and during the period of time, we actually filled our barges and we had to actually for the first time I can ever remember refused work, and that carried over a bit into the second quarter as you get into wells and they stay out there for a while.

So, I think that we thought it cost us around 80,000 to 100,000 barrels in the first quarter.

It had some effect in the second, but we ought to be through that by now.

So I think that was kind of a one-time event that may have cost us 100,000 to 120,000 barrels to 130,000 in a year, which is $1.5 million which is $0.01 a share for the company -

It is $0.01 a share, but that seems to be behind you guys now?

Well, it is behind us.

Okay and the capacity utilization of Fluids that seems to be an issue all around and you had talked about pricing, but can you talk about Newpark specific and what capacity utilization you guys are at in the fluids?

I think the capacity utilization in fluids is -- you almost have to break it in sub markets because that if I really gave it, I think I would put it in about maybe five categories because this is a totally integrated service so you can't leave any part out.

It is kind of like the body.

If one part shuts down, the others suffer, and so you have to basically work each part of that.

And I would go back, probably the most critical are people because when you have to solve - or your engineering staff and technical staff have to program and engineer and they are out there with the rig.

And the point is if everything went as you planned it, life is simple.

However, geologic structures out there don't cooperate all the time.

So, you have to - that's when you -- it is a little bit like flying an airplane and it's smooth weather and you get into a thunderstorm.

That's daily events out there on the rig.

So, people are very important, and we are pushing our people, particularly our engineering very hard.

And they have been troopers, but we have to be careful we don't overstep the people.

Now, we are adding engineers and we have run over 120 in our mud school the last few years.

We dreamed and imagined the company we have, that we are having -- we've been building today.

So we actually trained over 100 engineers in our own mud schools.

We have two schools back-to-back coming.

So we're continuing to train engineers when other people are letting engineers go.

Understood, but you guys are still growing.

I mean, we saw 32% growth there with 11% for the industry.

So are you guys, you must still be bringing on individuals.

Is that the case?

We just finished a mud school of 12 and they are in the field backing, they'll have a up short apprenticeship, and we will careful replace them.

We've picked up four engineers from other places in the last five days.

So we are also attracting people in the industry.

Canada has been wonderful about shipping engineers down.

They are very well trained.

So we are allocating carefully our engineering staff and I think that we can still grow, but we have to selectively be careful.

That's why you can pick your pricing a little better because you are allocating resource.

That's one.

Two, the second resource is your infrastructure.

And that's your liquid mud plants.

That is why we spent more capital the first half of the year, and that's rig storage tanks, that's liquid storage, bulk storage for barite and other products.

It's rail sidings so we can move it more efficiently.

So that's what we've been about and I think we're there.

I think we've stayed one step ahead of the hound on that one.

And it has been a lot of effort to do that.

I know we are looking at giant utilization numbers.

We have to be if this is...

We are pushing it, but also there's one thing about pushing, we are learning how to do it.

We are an industry that was over-capacity for years.

So we've got people that are actually getting more -- I think that we still can do more because we are learning how to do it more efficiently.

This is a wonderful test now of our management skills because when you are sitting with surplus capacity, even an idiot can do it.

Now you've got to figure out how to plan better and utilize your resources better.

But also you have to think about your pricing and all the other issues that go into it.

So, if we can't make more money out of it, why do it?

No, it is a great time.

It's the best of times and we love the situation we are in.

All right.

We're going to let some other people ask some questions with absolute congratulations on all the improvements which you appear to have made across all of your business lines.

So keep up the great work.

Thank you.

Okay, thank you.

The next question is from Cory Greendale from First Analysis.

Go ahead please.

Hi, good morning.

Jim Cole/Matt Hardey: Good morning, Cory.

A couple of questions, first of all on the Fluids business, can you just give me a sense, the contractual cost improvements in barite, are those going to go in effect at the beginning of Q3 or in effect now?

What is the timing?

The timing already in effect - it's in effect in July and what we did is we were able to at the right time the fellow that runs our minerals business, Tom Eismann (ph) who has been doing this many years, almost his entire life, and with good contacts, saw the window of opportunity to lockup ore into next year and he went ahead and moved forward contractually.

So, I think it has really been his expertise in the marketplace that has gained us that $4 a ton.

And we consume about 50,000 tons a month, so it isn't everything, but if you do that for a few months, it starts to add up.

Okay, on the pricing side, also could you give me a sense -- is that the contracts you are seeing now or business are seeing now is that a ready -- beginning to see improved he pricing or that you are started implementing the processes in your people to get the improved pricing, but haven't yet seen it?

No, we are seeing it.

They assured me that they are basically on every contract and they are moving pricing -- you don't go in though like -- I don't want to say this in the wrong way -- like a bureaucrat, and basically say I'm going up 10%.

You know which products you can move so you get -- as you program a well, each well is individual, so you basically move your products so your overall pricing goes up and so each one -- we give them the latitude to get the results and do it on an individual basis.

Now, we have some contracts that -- we have one substantial contract that is renewed every two years and we went up, our pricing was too low on that.

It had have gone up on an average of 10% to 12% on that, but that is not across the board.

That just happened to be because that contract came up for renewal and they appear that they're going to sign the contract.

And another major oil company which would do a substantial amount of business with, we went up 8.5% on an annual contract.

But that's not -- those are just kicking in as we go forward.

So we should see pricing improve, but generally we do it company by company and sometimes even well by well in pricing and specifically by areas or types of products moving well.

Okay, great.

And as you have improved penetration, has the mix changed at all going either toward or way from a commodity or higher margin fluid?

I think we are continuing to move toward our water-based system.

I think as I look at it from time to time.

You will see more of the FlexDrill and the performance water base in our mix continuously.

But that doesn't mean -- we do perform what is best for the customer.

But I think as we move forward in deeper wells, you're seeing a better mix of our specialty products, which also helps.

Okay, and a similar question on the E&P waste business, the pricing there.

Is mix playing a factor there?

I think it is.

I think with the down-tick we had a little more in the offshore market, which is more service oriented.

And -- but actually we have added some services in the inland barge business which also has helped the pricing there by about $1.50 a barrel.

So I think it has been the ingenuity of our people to offer a more complete package of service to the customer, which allows us to get a little better pricing.

Okay.

And then I had a question about NEWS, whether I believe you had a bid out or you were suggesting that the customer could cover the up-front capital cost.

I was just wondering if you have any sort of update on the feedback you have gotten on that and what the economic model looks like, and how much of your comments about the opportunities in front of you are not reducing debt this year relates to CapEx for the water business?

I think that the very first two units, the one in Pinedale and the one in coal bed methane, we put out the capital and that was about $7 million.

About that, we put that up.

You think it's about $7, $7.5 million?

We put that up.

What we are now looking forward now is once you prove this technology is to begin discuss the capital with the customer, particularly if we are successful with our testing in the heavy oil at Fort McMurray.

And so I think that that is a forward statement that that's the way we want to approach the market, but first of all we want to prove that we can solve their problem before we start talking capital with them.

Okay, so that comment about not being 00 the goal being not to reduce the debt immediately that relates more to the Fluids business than the NEWS right now?

I think it relates to the fact that, Cory, we spent a good part of the CapEx budget in the first part of the year.

I think with increased earnings, the real question is going to be how much more revenue growth do we see in the second half of the year, what working capital does this demand and how rapidly are we able then to start paying debt down.

We'll take care of the growth first and we'll worry about the balance sheet as time permits.

Okay.

Do you happen to have updated CapEx guidance for the full year?

We'd like to work on that.

Because, in fact this afternoon we are going back in to see how much we've actually moved up and what we will defer.

So I think that if you come back to Matt later on that and give us about two weeks because we're going back through it again to see just -- refreshing that as we go forward.

So that's a project for pretty soon after the conference call today.

Okay.

And just one last one.

The tax rate came down a bit, Matt.

Do you happen to have any go forward tax rate guidance?

Well, Cory, our accrual rate should remain around 37%.

New guidance though is going to cause some volatility in the tax rate because true-ups of issues that are closing out from the tax review standpoint now have been to be taken into the current period.

We'll probably see a small benefit in Q3 and perhaps a bigger one later in the year, depending on how those tax situation work out, so use 3%7 for now, and we'll work with you on that through the rest of the year.

All right, great.

Thanks very much.

Thank you.

Our next question is from Daniel Dean from Glacier Asset Management.

Go ahead please

This is Pete Castolonas (ph) for Daniel Dean.

Good morning, Pete.

How are you?

Good.

How are you doing?

A couple questions here.

Just one on Drilling Fluids and then a couple on ARMEL In the Fluids business could you talk about the overseas level of drilling activity and what prospects you might have there?

Okay I'll try, but I will do it very carefully.

We are primarily -- and I don't put Canada even though I separated that today for discussion purposes, in overseas.

But, if you took just -- our Mediterranean operations were about 10% or 12%.

That's North Africa.

And I'd see that business carefully growing because we stopped at the current level because we wanted our systems in place and -- to build a management base.

And I think we're pretty close to going back into a growth mode there but we want to do it on a much more profitable basis, and I think that that's going to happen.

I think our biggest possibilities in the near term really has - it's very fortunate because the success we've experienced in certain projects and with certain customers with our water based drilling fluid has attracted the attention of a good number of people that have been coming into our labs and seeing what we have been doing.

And I really would think that places like potentially Brazil, Mexico and some other markets like that have actually come in and been talking to us about expanding into those markets.

And we're diubg -- I think we can do some of those with a very low amount of, a very small amount of CapEx and we can do it -- but we want to be very careful going in the right way.

But I think that you'll see, as we go forward over the next few quarters we hope to make some announcements that we are expanding in some of those markets.

Are the margins comparable there to -- how do the margins compare to what you do domestically?

It depends on how you structure.

We would prefer to do -- and thus far people, this is what that's being discussed and they really want our specialty product line.

They've got the commodity in market business.

The commodity business is really low margin.

And particularly, when you have to transport it and pay taxes and so forth in a foreign country.

So our primary thrust is that we have about 30% or 33% of the product line that causes the good stuff to happen and we can sell that at a reasonable margin out of the US into that market and then oversee its application or manage its application and train the engineers.

That's more the approach we are going to start with because they already have the investment in place and have the commodity product, which we couldn't make any money handling anyway.

And on Atmel, I had one question about CapEx which you answered earlier, but the other question I had on that is, is there a testing protocol, do we have some expectation as to the duration of the testing and you know, at what point this is a go?

Let me try this and then -- we have the specifications.

It is really taking about a process that has maybe eight or nine parts around it is really - it really isn't a protocol we have to meet.

It is a standard we have to meet.

And we can do that.

It's really making the equipment efficient and training the people.

And it's a very automated system and each part fits with the other.

And it is a little bit like maybe an orchestra and you play the parts and you work together.

Or if you were a football coach how you put your offense and your defense together and make a team.

But it's a process and we're in the final throes of completing that.

And we have already run water through it, but then you find out that this thing isn't quite right, that's not quite like to they have adjusted.

So we have technical teams that are now with training people and also tweaking the equipment so, it will flow at its capacity rates.

Could it flow today?

Yes.

Will it flow at its capacity, not quite yet.

But Dr. Lyon, we should be flowing later this week, shouldn't we?

You couldn't see his nod or hear his nod but he'd nodding yes and smiling.

At capacity this week or just flowing?

Whatever.

It is a day-by-day event.

We found out that somebody wired a blower motor backwards.

So we had to replace that at midnight last night.

So, it's just testing the equipment.

The other question just on that -- there are some companies that are involved in the Sonochemistry that are using it for heavy oil to -- actually for break up, the high sulfur or oil for example, we get in the Central Valley, California.

Is the technology applicable to a lot of different areas or it's strictly related to water or --?

Actually, it was designed for emission and one of our market objectives long term is heavy oils because it can remove the sulfur and lighten - improve the grade.

But that has yet to be proven.

The answer is it has so many applications you have to be careful you don't overload your systems?

The answer is, yes.

And the difference between people who are trying it today they maybe wonderful.

These people have been doing it for 18 years that are our partners so, we feel very fortunate because they have a lot of experience.

: And last question, just on the management transition I think a couple of months ago, Jim, you mentioned there was going to be -- you were going to, I believe, go and to run Atmel if I recall the announcement, you were going to step over to just focus on the water activities.

Is that in process or what is the status of that?

The status really is that the board has a committee and they're -- and maybe I'm a little pleased it's taking up some time because it means that they're having to replace it -- something good.

But they are in the process of doing that and they keep us posted and they are doing a very thoughtful and thorough job on finding a good candidate and we're all anxious to meet the new person when that -- they make that selection.

Great.

Okay, thanks very much.

Okay thank you. [Operator Instructions].

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