NPK International Inc (NPKI) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you so much for standing by, and welcome to the Newpark Resources second quarter 2007 earnings conference call.

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

Following the presentation the conference will be open for questions.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today Friday, the 3rd of August, 2007.

I would now turn the conference over to Mr.

Ken Dennard with the RG&E.

Please go ahead, Ken.

Thank you, Michael, and good morning everyone.

We appreciate you joining us for Newpark Resources' conference call to review second quarter results.

We'd also like to welcome our Internet participants listening to the call simulcast over the web.

Before I turn the call over to management, I have the normal housekeeping details to run through.

As you know, we're still building our e-mail distribution list for Newpark, so if you didn't receive an e-mail of the release from me, if you would call my office or at 713-529-6600 or pop me an e-mail -- my e-mail address is on the press release -- that way we can get you added to the e-mail list if you so choose.

As you know, there will be a replay of today's call available via webcast on the company's website at www.newpark.com.

There's also a telephonic replay you can access and that information is in the press release.

Please note the information reported on this call speaks only as of today, August 3rd, 2007.

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 this conference call may contain forward-looking statements within the meaning of the 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 achievement to differ materially from those expressed in any statements made by management.

The listener is encouraged to read the company's annual report on Form 10-K for the year ended December 31, 2006, to understand certain of those risks, uncertainties and contingencies.

Now with that behind us, let me turn the call over to Newpark's President and CEO, Mr.

Paul Howes.

Paul?

Thank you, Ken.

Good morning to everyone.

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

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

Jim and I would like to start out by giving a quick update on recent developments, the events of the quarter, followed by a review of our operational and financial highlights, and conclude with a Q-and-A session.

To start, I would like to highlight the strong fluid systems and engineering services revenue growth we saw in the second quarter of 2007.

Fluids revenue grew 8.6% sequentially from the first quarter, excluding the seasonal Canadian revenue decline.

Over the same period of time, our U.S.

revenues increased 4.8%.

This points out, I believe, that we are gaining traction in the markets we serve and establishing ourselves as a strong technology and service provider of fluids and engineering services.

As was the case last quarter, we have also continued to make cash management a priority, reducing our total debt by another $18 million during the second quarter.

In the quarter, operating activities provided $26 million, including $7 million from working capital reductions, which was used for funding $6 million of capital expenditures.

The remaining free cash flow was used to pay down debt.

We believe our continued focus on debt reduction and cash management should allow to us keep our powder dry in anticipation of making future acquisitions.

As part of our strategic plan to eliminate noncore operations, we have entered into an agreement to sell substantially all of the operating assets of our sawmill facility in Batson, Texas for $4 million.

This sawmill was previously used to source lumber for the mats and integrated services business.

However, we have determined it is no longer necessary or beneficial for us to operate this business, given the losses that it generates.

It has revenues of approximately $16 million a year and its divestiture represents a part of our larger shift from wooden mats to composite mats.

As a result, we have reclassified the sawmill as part of our discontinued operations.

Our historical financial results have been adjusted to remove the impact of Batson from continuing operations for all prior periods.

Finally, as you know, we are in the process of executing on a strategic plan that involves the sale of our Environmental Services business, which we determined was no longer fit for the company's long-term objectives.

At this point, we are in the process of receiving indications of value from various parties.

Throughout the second quarter, we have given several management presentations as well as conducted plant tours and brought on-line our electronic data room, which has been visited by numerous companies.

We have received a lot of interest in this business, and we'll keep you informed of any significant developments.

As we stated during our first quarter call, we anticipate closing this transaction by the end of the year.

With that, I'd like to now turn the call over to Jim Braun, who will review our second quarter results.

Jim?

Thank you, Paul.

I will now briefly discuss the highlights of the second quarter.

For the second quarter ended June 30th, 2007, we reported revenues of $167.1 million, up 3.9% from the second quarter of last year.

Sequentially, revenues were unchanged from the first quarter of 2007.

Income from continuing operations was $8.2 million or $0.09 per diluted share.

This compares with second quarter 2006 income from continuing operations of $6.9 million or $0.08 per diluted share.

Revenues for the fluid systems and engineering business in the second quarter were up 17% to $131.2 million as compared to the second quarter of 2006.

Revenues were driven by a 44% increase in sales within the Mediterranean region, which saw an increase in North African rig count activity and continued penetration into this market.

The North America region had an 18% revenue increase, largely due to market penetration in the areas where new rigs are being deployed, the servicing of more complicated wells and improved pricing.

The largest growth was seen in the Gulf Coast and the Central region, where revenues were up 17% and 32% respectively.

Operating margins were up to 12.4% compared to 11.7% from a year ago due to increased sales volume and improved pricing.

On a sequential basis, fluid revenues in the second quarter were up 4.7% with the largest growth coming from the Gulf Coast, Central region, and Mediterranean, which offset the seasonal decline in Canada and a decrease in Excalibur's third party barite and industrial mineral sales.

As Paul indicated, excluding the impact of Canada, revenues in the fluid segment grew 8.6% sequentially.

Fluid revenues in the U.S.

grew 4.8% from the first quarter to the second quarter of 2007.

Sequentially, margins were down 90 basis points to 12.4%, reflecting the impact of the Canadian revenue decline.

Excluding the seasonal impact of Canada, the margins were comparable on a sequential basis.

In both the Gulf Coast and Mediterranean, the revenue growth was characterized by lower margin products, a function of the customer's drilling programs and needs.

Additionally, pricing increases were not sufficient to fully offset the higher transportation costs associated with barite ore imported from China.

To address this situation, Excalibur raced their wholesale barite prices in July by an average of 12%.

For Mats and Integrated Services, revenues were $18.8 million in the quarter.

A $12.3 million sales decline from last year was largely attributable to $9 million of wooden mat sales in Canada during the year-ago quarter.

Similar to the first quarter, we had no sales of wooden mats in Canada during the second quarter.

The large sales we made in the first and second quarter of last year combined with a significant Canadian rig count decline this year has significantly reduced customer demand at this time.

In addition, export sales of composite mats were also down from year-ago levels to the tune of $4.5 million due to timing issues with certain sales.

Operating margins were down to 12.1% compared with 13.5% a year ago due to decreased sales volume.

On a sequential basis, mats revenues decreased $5.1 million due mainly to lower export sales and in our key south Louisiana market, a 25% decline in the rig count from the first quarter of 2007.

The lower activity drove pricing down as our average rental price dropped 16%.

Our sales of composite mats fell $3.8 million from the first quarter, due to the timing of orders.

Operating margins were down significantly to 12.1% from a very strong first quarter.

The lower export sales, lower activity, and lower pricing all worked against us this quarter, offsetting the benefits realized from the staffing reductions effected at the beginning of the quarter.

In the Environmental Services business, year-over-year revenues were down about $700,000 to $17.1 million.

Operating margins rose to 16.8% compared with 13.3% a year ago due to improved pricing as well as gains in operational efficiency.

In the U.S.

Gulf Coast market, waste volumes decreased by 13%, which was offset by the average revenue per barrel increase 11% due to a higher mix of offshore waste and more service revenue.

On a sequential basis, environmental revenues were down about $900,000.

Higher volumes in the Gulf Coast and Permian region were not enough to overcome a $1.3 million revenue drop in Canada.

Operating margins were down 120 basis points, as this segment had an unusually good mix of higher margin NORM waste in the previous quarter.

Our G&A expense of $5.1 million was $400,000 lower than the year-ago quarter, which included $1.4 million of costs associated with the internal investigation.

G&A costs decreased $3 million from the first quarter of 2007, as that quarter included one-time charges for the litigation settlement and consulting fees related to our strategic planning projects.

The second quarter G&A included roughly $400,000 of legal fees related to the conclusion of the class action and shareholder derivative suits.

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

During the quarter, we reduced debt by $18 million.

We ended the second quarter with a long-term debt to capitalization ratio of 33%, and total debt at $177 million.

At June 30th, 2007, we had $73 million available under our $100 million revolving line of credit.

For the quarter, our capital expenditures totaled $6.1 million, and our depreciation and amortization was $6.3 million.

We now project our 2007 capital expenditures will be between $24 million and $26 million.

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

Thanks, Jim.

As you have heard, we had a mixed quarter.

Our fluids business saw strong sequential revenue growth offset to some degree by a weak Canadian market.

We were able to hold our margins sequentially even though the segment was under pricing pressure.

As we have discussed previously, a key element of our fluid strategy is to penetrate the deepwater market.

We are pleased to report that we had $9 million in deepwater revenue in the quarter, driven in part by our E&I contract.

Our mats business struggled under significant pricing pressure driven largely by a 25% reduction in rig activity in south Louisiana.

However, we have started to see indications that activity is picking up and pricing is improving.

In addition, export sales of composite mats are expected to improve.

Our international operations continue to be a strong performer with year-over-year sales from our Italian based business Ava growing by 44%, and we expect continued growth going forward.

We are nearing the completion of our first trial well in Egypt.

Once finished, we will move to the second well.

We remain confident that we can demonstrate our capabilities in this new and important market.

Our activities are picking up in Brazil.

We expect to see some revenue before the end of the year.

And finally, over the past nine months, we have made progress in positioning Newpark for a bright future, and we remain confident in our businesses and our ability to execute our strategic plan.

In closing, I would like to acknowledge some of the recent changes to our board.

First,let me take this opportunity to thank our outgoing board members.

David Hunt, Roger Stull, and Alan Kaufman have served on the board for a combined 39 years and have played a pivotal role in helping guide Newpark through its challenges.

We are deeply appreciative of their many contributions over the years and wish them well in their future endeavors.

Second, we are delighted to welcome our newest addition to the board, Mr.

Steve Finley.

Steve is the former CFO of Baker Hughes and he brings a wealth of experience in the oil and gas industry.

All of us here at Newpark are thrilled to have him on the board and look forward to his contributions.

Third, I would like to congratulate Mr.

Jerry Box on being elected Chairman of the Board.

Since joining the board in 2003, we have had the benefit of his extensive experience and insight, and we are excited to have him continue on the board in his new capacity as chairman.

With that, we will now take your questions.

Operator?

All right, thank you, sir.

Ladies and gentlemen, we will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Karen Green with Oppenheimer.

Please go ahead.

Thanks.

I wanted to talk a little bit about matting for just a second.

I know at one point you had mentioned 15% targets in terms of operating income margins.

That something you still feel that's achievable, and if so, what kind of timeline do you anticipate that being under?

Hi, Karen this is Paul.

Absolutely we feel that target is achievable.

Timeline we're still working on.

As you remember from our prior discussion, our strategic plan around the mats business is trying to reduce its vulnerability along the Gulf Coast and to expand in other basins and offer additional products to provide that total site preparation model.

So as we begin to execute along our strategic plan, we would expect those margins to move up.

Okay.

And then fluids business, you mentioned a 12% price increase.

When do you think we'll see that impact, and if so, once we do see that impact, how much of that is going to be offset by the increased transportation barite costs or will some of that fall to the bottom line?

Karen, specifically, the price increase that we referenced was for barite, not for the majority of the drilling fluids area.

Our hope is that 12% price increase would offset the increased cost of moving the barite ore from China to the Gulf of Mexico.

Lastly, Petrobras -- you mentioned in your comments that you could see some revenue contribution before the year end.

Should we make the assumption that you are on Petrobras's bid list?

I did not reference Petrobras, I referenced that we were starting to get some traction in the Brazilian market.

We certainly are targeting Petrobras, but we have not announced who we are doing business with currently in Brazil.

Is the work that you plan to be getting in the near term -- is that land or offshore based?

That's land.

That's all I have.

Thank you, gentlemen.

Thank you, Karen.

Our next question comes from Jim Rollyson with Raymond James.

Please go ahead.

Good morning, guys.

Good morning.

You guys talked about some of the seasonality issues as far as sequential margins, really across all business lines as it relates to like Canada.

Can you kind of shed some light on what you think the third and fourth quarters might look like directionally in terms of margins?

Presumably Canada gets a little better, I recognize it's not great up there -- but are you kind of expecting the downward trend from this quarter to reverse course next quarter to some extent?

I think certainly we'll see the natural seasonal rebound that we see in the third quarter.

Looking out beyond that, we're probably more optimistic and bullish on 2008 than we would be in the fourth quarter, so I think that's when we'll start to see some better activity levels.

Understood.

And could you characterize, I guess for my follow-up, could you characterize the margins you're focus -- getting a lot of traction in fluids, and it sounds like internationally you've got a lot of irons in the fire.

Can you characterize margins or margin opportunities in some of those areas and maybe even deepwater relative to just your core fluids business?

I think it is a relates to our international markets, yes, we've seen some really strong growth there.

Margins have been improving.

But going forward, I think where we're really going to start to see more traction as we start to again play out our strategic plan as we've discussed previously -- we would like to make some acquisitions in that part of the world.

So again our focus will be continued growth organically but also look at strategic acquisitions.

Jim, in this quarter, we commented on the strong growth in the Mediterranean.

And the international margins, generally and typically are somewhat higher, although again this quarter was characterized based on what the customer was doing in their programs and their needs with products that had had lower margins.

So again, we think international will, over time, bring us higher margins than some of our basic land fluid business.

Great.

Thank you.

We'll take our next question from Vijay Singh with Janco Partners.

Please go ahead.

Good morning, gentlemen.

Morning, Vijay.

Couple of questions.

One is on the deepwater update -- if you can give us an update on the deepwater projects you are pursuing?

You mentioned in the first quarter conference call.

That would be my first question, and I have a follow-up.

Yes, as I mentioned, we've had $9 million in revenue in the second quarter related to deepwater, and we signed a new contract with E&I, three-year contract for the deepwater work in the Gulf of Mexico.

We continue to work with other deepwater drillers, and again that's a target area of not just here in the Gulf of Mexico, obviously, but also in the Brazilian market -- but that's going to take a longer time to penetrate.

We need to get some traction there first on land.

Okay, great.

And then on the mat business, you talked about that first quarter revenues in mat business were supposedly the normal operating level revenues, and this quarter was a drop.

As you progress towards your -- as you go into diversified markets or diversify away from the Gulf Coast, what do you think is the timeline before you can hit that normal operating level revenues?

Well, Vijay, we've already started to make some progress.

We made a concerted effort and plan to move into northern Louisiana, and we have.

In 2007 we'll have close to $3 million there.

Again, part of the activity or the exercise to reduce the dependency on south Louisiana where we saw the big rig count decrease.

Again, over the next year we look to expand to other basins through acquisitions.

We have a list and a portfolio of things we're looking at, and they are in the pipeline in the process, and we're working that agenda.

Okay, great.

And last question is just what was the cash flow number in the quarter, operating cash flow?

The cash flow operating was $26 million.

$26 million.

Great.

Thank you, gentlemen.

Thank you, Vijay.

Stephen Mead with Anchor Capital Advisors, please go ahead.

On the Canadian situation, what's your feel for the business there in terms of -- how much was seasonal in terms of the diminution, and how much would you say is a more secular kind of phenomenon?

Well, I think a large part of it was just the decline in activity.

I think there was more associated with the downturn and the pull-back in the Canadian activity as opposed to the seasonal impact.

So your view of sort of Canada looking out into the second half and next year -- what would it be?

In terms of activity levels from where they are now?

Yes.

We think they'll be up in second quarter over what they will be this year, but we're not indicating kind of what percent that would be at this time.

There's some rebound of rig activity as we speak, but we really expect to see that market strengthen the end of this year and early next year.

Thanks.

(OPERATOR INSTRUCTIONS) John Flanagin with First Analysis Corporation.

I'm sorry, he seems to have left the queue.

We have a follow-up from Stephen Mead.

Please go ahead.

On the fluids business from an operating standpoint, overhead structure, sales force, et cetera, where are you as far as -- it relates to a margin question in terms of what the margin potential might be in the fluids business and whether you're at sort of a normalized sort of margin level at this point.

Or are there some things going on internally that we would see the benefit from in the future?

I think the opportunities to improve margin are not necessarily dependent on having a lot more sales and a lot more infrastructure.

We've got a good base and a good infrastructure along those two fronts to deliver improved margins.

We'll see that as we continue to see activity in the Gulf Coast, the shelf, and then ultimately in the deepwater.

We've got a lot of fixed assets in the Gulf that are not fully utilized right now, and as we begin to penetrate the deepwater more, we'll see a better utilization of those assets.

Okay.

I mean, and I was just wondering at what point does the sales increase start to have a levered impact on margin?

Well, certainly we would expect better incrementals as we increase that revenue in those areas from where we experienced this quarter.

And this was a unique quarter in the product mix, both in the Mediterranean and Gulf Coast based on what our customers are doing at specific times.

But we do believe there's leverage opportunities over our cost base in those important markets.

So in general, was international below what would be a normalized margin level?

That's a fair statement.

Okay.

Thanks.

thank you.

Thank you.

Corey Greendale with First Analysis.

Please go ahead.

John Flanagin here with Corey.

Good morning, guys.

Good morning.

I want to follow up on comment on deepdrill.

$9 million in the quarter, did I understand?

That is correct.

How does that compare to the past few quarters?

Is there sort of a baseline that you guys started focusing on this?

We are.

It's improved nicely from the first quarter.

Can you remind me what it was in the first quarter?

We've -- we didn't disclose but it's up significantly from the first quarter.

Thank you.

Turning over to the mats side, did I understand, Jim, you to say that you thought the move into other basins would start to happen and take shape in '08?

No what we -- we said that we started to move into other basins, particularly we moved up into the north Louisiana area this year, and what I had indicated is we'd have something a little less than $3 million of business in 2007 and we'd expect that to grow in 2008.

And we would expect to move into other basins in our mats and integrated service business here yet in 2007.

So that's already in the works, and we can start to expect to see some announcements presumably second half of this year and '08?

Well, when something develops, we'll make an announcement, certainly.

I understand.

Thank you.

And on the acquisition front, this is the last follow-up, generally both in the fluid side and on the mats buildout, how do you expect to be funding those?

We've got capacity in our revolving credit facility which would allow to us fund those.

As we've indicated, we have the sale of the Environmental Services business that we anticipate closing before the end of the year that would also be a source of funding for acquisitions.

Thanks, Jim.

That's it for me.

All right, thank you.

Our next question is from Larry Callahan with Huntleigh Securities.

Please go ahead.

Hi, I'm sorry, I got disconnected.

I wasn't sure if you discussed the sale of the environmental business at all.

We did, Larry.

It's progressing on our schedule and our timeline.

We have people that we have been visiting the data room, conducting management presentations, doing site visits, and we remain on schedule for completion of a transaction before the end of the year.

Thanks a lot.

Management, there are no further questions.

Please continue with any closing comments.

Well, 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 third quarter.

Have a great day.

Ladies and gentlemen, this does conclude the Newpark Resources second quarter 2007 earnings conference call.

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