NPK International Inc (NPKI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by.

Welcome to the Newpark Resources first quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode.

Following of presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded today, May 4, 2007.

I would now like to turn the conference over to Ken Dennard, DRG & E.

Thank you, [Mycia] and good morning, everyone.

We appreciate you joining us for Newpark Resources conference call today to review first quarter results.

Also like to welcome our Internet participants listening to the call live over the web.

Before I turn the call over to management, I have a few of the housekeeping details to run through.

We are still building that e-mail distribution list for Newpark and if you have not received an e-mail of the press release yesterday afternoon or if you'd like to be placed on that e-mail distribution list, call our offices at DRG & E, that number is 713-529-6600 and we'll take care of that.

Also, there will be a replay of today's call, it will be available by web cast by going to the company's web site at www.newpark.com.

And of course, there's a recorded telephonic replay which will be available for seven days until May 11.

And that information is in yesterday afternoon's press release.

Please note that information reported on this call, speaks only as of today May 4, 2007 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

In addition, the comments made today by management of Newpark during the call, could contain -- may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934 as amended.

These forward-looking statements reflect the current views of management of Newpark, however, various risks, uncertainties and contingencies could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by management.

Listeners are encouraged to read the companies annual report on the form 10k, for the year ended December 31, 2006, to understand certain of those risks, uncertainties and coach sis.

And now with all that behind us here, I'd like to turn the call over to Newpark's President and CEO, Mr.

Paul Howes.

Paul?

Thanks Ken.

Good morning to everyone.

We'd like to thank all of you for joining us for our first quarter conference call.

With me today is Jim Braun, our Vice President and Chief Financial Officer.

Jim and I will give a quick update on events since our last earnings call, which wasn't too long ago and review our operational and financial highlights for the first quarter of 2007.

Before I turn the call over to Jim to review the financial results, I'd like to give an update on our strategy in moving Newpark forward.

During our fourth quarter call in March, we outlined our new strategic plan for the company.

One of of the key components of that plan was to pursue strategic alternatives for our environmental services business, which we determined was no longer a fit for the company's long-term direction.

As I'm sure you can understand, we are limited in what we can say at this point for competitive reasons.

I can tell you that the selling process for this business has been initiated and the level of interest has been very positive.

So far, everything is proceeding according to plan.

Another important issue which was discussed in our previous call, was the ongoing distraction of shareholder litigation.

As announced in April, we have reached settlements with the Plaintiffs in the shareholder class action and derivative litigation.

Once those settlements become court approved, they will resolve all class and derivative litigation against the company, its former and current directors and former officers.

We are gratified that this cloud of uncertainty has been removed and we can now focus our full energy on moving the company forward and building shareholder value.

Additionally, I would like to announce several highlights in the quarter.

We're awarded a contract renewal with an international oil company to provide fluid systems and engineering support to the Deepwater Gulf of Mexico projects.

We are pleased with this contract renewal because it demonstrates our ability to perform successfully in this important market segment.

The penetration, of the Deepwater market, is a key element to our recently announced strategy.

We were also awarded a new contract by a major in the Rockies.

This work is expected to begin in early summer.

We'll utilize our flex-drill water-base system, which continues to gain market acceptance.

On the international front, we have been granted our first trials in Egypt.

This work is scheduled to start shortly and if successful, should provide us entry into another key international market.

Each of these three accomplishments, exemplifies our ability to compete effectively in the fluid systems and engineering market.

Another key element of our strategy is to grow through acquisitions.

These activities take longer to develop but actions are underway to facilitate the execution of this component of our strategy.

We have recently hired a corporate level director of M & A to serve as the focal point for this initiative.

Given the head winds that we have faced over the last year it is satisfying to see Newpark progressing in a new direction that we feel will be more productive and financially rewarding for our shareholders and will make Newpark a stronger and more competitive player in the energy services market.

With that, I will now like to turn the call over to Jim Braun, who will review first quarter results.

Jim?

Thank you, Paul and good morning.

I will discuss the highlights of the first quarter before we go to the Q & A.

For our first quarter 2007, we reported record revenues of $171.8 million dollars, up 3.2% from the first quarter of last year.

Sequentially, revenues were up 2.7% from the fourth quarter of 2006.

Income from continuing operations was $7.5 million or $0.08 per diluted share.

This compares with the first quarter of 2006 income from continuing operations of $6.5 million or $0.07 per diluted share.

The first quarter 2007 results, include the shareholder and derivative litigation settlement as well as the associated legal fees.

These total $2.4 million or $0.02 per share, on an after-tax basis, producing an adjusted earnings per share of $0.10 on a non-GAAP basis.

On a year-over-year basis, revenues for the fluid systems and engineering business in the first quarter were up 9% to $125.3 million dollars.

Driven by a higher U.S.

rid count and the servicing of more complex wells which yield higher revenue per well.

All regions except Canada experienced revenue growth.

The better performing regions were our central region drilling fluids business and the Mediterranean.

Operating margins improved to 13.3% compared to 11% from a year ago due to improvements in pricing and cost leverage on higher volumes.

On a sequential basis, fluid revenues in the first quarter were down 3%.

Operating margins were down 270 basis points.

The decrease in revenues was primarily due to a difficult fourth quarter comparison due to the strong results in Tunisia and Libya, a part of our Mediterranean region.

Contributing to the lower sequential margins with a slowdown in certain key U.S.

markets and product mix changes, as well as higher bay right transportation costs, which were not fully recovered through pricing.

For the mats and integrated service business, year-over-year revenues were down 16% to $28.6 million, due to a large $7 million Canadian sale in the first quarter of 2006.

There were no sales mat into Canada in the first quarter of 2007.

This decline was partially offset by sales growth in the gulf coast region.

Operating margins were up to 15.8% compared with 11% a year ago due to higher activity levels, stronger pricing, favorable product mix and improved cost management.

On a sequential basis, mat revenues increased 32% and operating margins were up 700 basis points from the fourth quarter.

As we've discussed in our fourth quarter call, the fourth quarter of 2006 was a soft quarter for the mat's business and we believe that the first quarter 2007 is more indicative of normal business operating levels.

Higher pricing in our core south Louisiana market, resulting from a tight supply of mat's, was a key driver to the sequential improvement.

Our average rental price per square foot was up 15% in the first quarter over the fourth quarter and 29% over the first quarter of 2006.

We expect the supply of mat's to increase in the second quarter putting pressure on our recent price gains.

In the environmental service business, year-over-year revenues were up 3% to $17.9 million.

Operating margins were up to 18% compared with 11.7% a year ago driven by improved pricing and a larger mix of higher margin off shore and norm wastes.

On a sequential basis, revenues were up 9% and operating margins improved from 10.3% in the fourth quarter of 2006.

Increases in both volumes and pricing led to this improvement.

Our G & A expense of $8.2 million, was higher than prior year levels, as we incurred additional costs related to shareholder and derivative litigation mentioned earlier and the completion of our strategic planning work.

Specifically, our first quarter G & A figure includes $2.4 million related to the shareholder class action and derivative litigation, of which $1.55 million is for the settlement that is pending court approval and the remainder being legal fees.

There was also $1 million in consulting fees related to the strategic planning.

This work is now complete and we would expect our G & A expense to be approximately $4.5 million per quarter going forward.

Turning to our balance sheet, we continue to make progress on lowering debt and improving leverage ratios.

During the quarter, we reduced debt by $18 million and net debt or debtless cash by $6 million.

Our recently implemented cash management system, has allowed us to better manage cash on hand.

We ended the first quarter with a long-term debt to capitalization ratio of 35%.

As of March 31, 2007, total debts stood at $195 million and working capital was $214 million.

Effective management of our working capital remains a goal at Newpark.

Sales collection remains a particular focus going forward, although our DSO's increased slightly during the quarter.

We were able to reduce inventory levels by $6.5 million in the quarter.

In terms of our liquidity position, as you may recall last December, we secured a $100 million revolving line of credit with a maturity date of June 2011.

At March 31, 2007, we had $52 million available under our revolver.

Our capital additions for the quarter totaled $8.5 million.

This includes the movement of $1.3 million of composite mat's into the rental fleet from salable inventory.

Our cash capital expenditures were $5.4 million for the quarter.

As stated in our previous call, we projected for 2007 or total CapEx will be between $26 and $28 million.

Depreciation and amortization was $6.1 million for the quarter.

And with that, I'd like to turn the call back to Paul.

Thanks, Jim.

And now let me provide a brief summary of our view of general market conditions.

The rig sluggish activities seen in some of our drilling fluids markets during the first quarter, has continued into April.

We would expect to see improving activity levels in the latter half of the year.

Canada's activity levels are about half of what they were last year at this time.

Our international markets remain strong driven by the high price of oil and longer term perspective of the international operators.

In closing, it has been a little over a year now since I've been at Newpark and I am very encouraged by the progress that has been made over such a brief period.

The pace at which we are improving our businesses, exemplified this quarter by our second contract with an international oil company in the Deepwater market, the improvements in mass, the settlements of the shareholder litigation and strong indications of interest and our environmental service business are just some of the reasons that give me great optimism for Newpark's future.

Throughout this whole process, the obstacles that have been overcome and the progress made so far towards our strategic vision, has served as a motivating force in driving us to achieve higher levels of performance.

With that, we will now take your questions.

Operator?

Thank you, sir.

We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Please ask one question and one follow-up and requeue for additional questions.

If you are using speaker equipment, you will need to lift the hand set before making your selection.

Our first question is from Colin Gary from Raymond James.

Good morning guys, nice quarter and again congratulations.

It looks like the progress on a lot of your initiatives is coming through.

Thank you.

I wanted to drill down on -- on some of your international revenues, in particular on the fluids division.

Can you give us kind of a flavor of what percentage came outside of North America and -- and really what the -- what the market strengths were this quarter and what you all are looking for going forward?

Yes, the -- Colin, the -- the Ava business -- our Mediterranean business, makes up about 12% of our revenue, and as you know, they had some substantial growth last year, it was over 50% quarter over quarter, they are another 20% over the first quarter.

We look for them to continue to grow in some of the markets surrounding the areas in which they are -- currently participate.

We made reference to the trial in Egypt which is first -- a first for us.

And that's the kind of expansion that we're looking to -- continue to achieve as -- as we move forward in the international markets.

Okay.

And -- and where does Brazil fall in that?

You all -- I know you all recently moved capacity down there.

What's -- what's on -- what's going on there?

Brazil is an important market for us in the long term -- the Deepwater play.

It's a market that we're growing organically.

We do have some people in inventory down there.

It's a little slower because we're starting from scratch.

We did not have and do not have a beachhead from which to -- to launch our efforts, but that's moving along.

It's -- but it will be slower than what we've seen in the Mediterranean.

Okay, okay, so that's still -- that's still a growing market.

And we expect results kind of more maybe back half of the '07, kind of an '08 story.

I think so.

That's a fourth quarter story.

Okay.

And then just a follow-up question.

Looking at your margins.

Pretty big sequential jump for a division and -- and you did a good job of going through that.

I guess I want to get a feel for going forward.

What's the more applicable run rate that we should be looking at as it relates to the different divisions?

Well, I think, you know, that at a high level, we anticipate and expect that the fluid guys will improve from their 13% they reported.

Okay.

And we also anticipate as I described it in the mat's business, I think we'll come under a little pressure there.

So I would think that those two would move in the -- in the directions that I have indicated.

And the Environment?

Yes, and on the environmental side.

In the environmental business, again I think they'll continue to show strong improvement, they may see a little softness in their margins.

But they've done a -- they've done a very nice job and a difficult time running their business and being successful at it.

Okay.

And then last question just housekeeping.

I don't know if you said this on the call, but do you have the depreciation level figure for the quarter?

Yes, we -- it was $6.1 million.

All right, guys.

Thanks a lot.

Thank you.

Thank you.

Our next question is from Karen Green with Oppenheimer.

Please go ahead.

Thanks.

Good morning, gentlemen.

Good morning, Karen.

Just wanted to get your thoughts on a potential growth.

Certainly you guys have been paying down debt.

Free cash flow looks good, maybe $35 million or so this year after CapEx.

Plus the proceeds from the environmental sale whenever that does occur.

Could you kind of give us your thoughts on deployment of some of that cash and which areas you think are going to be more of a focus?

Yes, in terms of the utilization of the free cash flow, what -- what our plans are is to immediately use it to pay down debt, but then as we look to grow the business, it would be with acquisitions that we're trying to identify and target in both the mat's and the drilling fluids business.

That could include both domestically and on an international front from the drilling fluid side.

We'll continue to invest in technology and R & D and try to improve upon our --our solid position with drilling fluids.

Putting capital you know into inventory and equipment as the Brazilian markets grow, would be a use of -- a use of that capital.

As well as putting capital in place in some of those growing areas around the Mediterranean, Egypt as an example.

Great.

And in terms of the first trials in Egypt, can you kind of walk us through the logical progression.

I mean right now, you're in trials.

If that goes successful, what's the time line that -- that you're under between trials and maybe revenue generation?

Karen, the --the general time line is that you go in and do a couple of trials over a period of a month or two and they'll evaluate the results and then make a decision going forward on whether or not to award or grant us additional work.

So, you know, it's something that'll transpire over the -- over the next two to three months and then we'll know what the results are.

Right, and this is your first work that you've done or potentially will be doing in Egypt?

That's correct.

Great thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is from Corey Greendale with First Analysis.

Please go ahead.

Hi, good morning.

Good morning, Corey.

I wanted to follow up on Karen's question about the use of cash.

Just, can you talk a little bit about how you're thinking about the balance sheet and the capital structure with -- and I assume, you're thinking about proceeds from the environmental business and then redeploying that cash potentially into acquisitions.

Are -- does the leverage level kind of an aggregate, go down from here or what --what's -- what's the optimum target?

Well, while the optimum capital structure is one that we -- we continue to study and try to identify, it'll be -- it'll be a function of what acquisitions and investment opportunities that we have in order to deploy that cash.

Certainly we'll -- we'll pay down the debt and that'll come down.

We will then have the opportunity to leverage back up.

We're at 35% and we've said in previous calls that we're not opposed to increasing that leverage for the right opportunity or the right cash flow profile going forward.

Okay.

And then on the --the contracts that you mentioned in the press release, the one that you -- that you said was a renewal, can you give some sense, is the renewal under the similar terms as the last contract or up-sizing or what does that look like?

It's generally better than the previous one.

Okay.

Then the one that's a new contract that you mentioned, I think in the -- in the Rockies region.

Can you give any sense of what the magnitude of that is?

We're probably not in a position to talk about specific customers' specific revenues but it's a nice win for us.

Okay, and I realize you're not giving guidance but can you talk -- can you give any indication of the sequential trends in the fluids businesses, do you think that goes up sequentially in Q2?

I mean, as I mentioned earlier, we're going to see a little down -- downfall from Canada, but we certainly have expectations to have improved margins in the -- in the fluids business going forward.

Any in terms of the revenue level?

Yes, revenues, I think we will see them comparable or up slightly.

Okay, I'll get back in the queue.

Thanks.

Thank you.

And management, there are no further questions at this time.

Please continue with any --

Okay.

We'd like to thank you all once again for joining us --

I'm sorry.

We do have a follow-up from Corey Greendale.

Please go ahead Corey.

Okay, sorry about that.

If there's no other then I've got a couple others if that's okay.

On the -- can you say on the -- on the E & P, on the environmental business, at some point, does that qualify for discontinued [ops] treatment?

I assume it doesn't yet or it would be there already.

No, you're correct, Corey.

The E & P, the --the potential sale of the waste disposal business, did not qualify for discontinued operations at the end of March.

It'll be included in continuing operations and we'll re-evaluate those facts and circumstances at the end of June, but it's certainly at some future point in time it would make discontinued operations classification.

Okay and my other follow-up question was on the mat business, I think you said there's more inventory entering the markets.

Can you just talk about the -- the competitive environment in that business and where the capacity's coming from?

Well, the capacity, it's -- its not generally difficult to procure and obtain wooden mats which are used predominantly in southern Louisiana on a fairly short basis.

, The first quarter experienced a period of time where there was some increase in the rate count and some of the smaller competitors found themselves short of wooden mats.

And you'll notice we utilized some of our composite mats our of our inventory to put into the rental fleet to try -- to take advantage of

Great.

Thank you.

Thank you.

I would now like to turn the call back over to management for any closing remarks.

Alright, we'd like to thank you all once again for joining us on this call and for your interest in Newpark Resources.

We look forward to talking to you again after the conclusion of our second quarter.

Thank you very much.

Thank you.

Ladies and gentlemen this concludes the Newpark Resources first quarter earnings conference call.

If you would like to list ton a replay of todays conference call, please dial 303-590-3000 with access code 11087627 followed by the pound sign.

We thank you for your participation and you may now disconnect.