NPK International Inc (NPKI) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Newpark Resources third quarter earnings conference call.

(OPERATOR INSTRUCTIONS).

This conference is being recorded today, November 5, 2007.

I would now like to turn the conference over to our host, Mr.

Ken Dennard of DRG&E.

Please go ahead, sir.

Good morning everyone.

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

We would also like to welcome our Internet participants as they are listening to the call live over the Web.

There will be a replay of today's call and it will be available via webcast on the Company's website at www.newpark.com.

There is also a telephonic recorded replay that will be available for the next seven days until November 12, and that information is in the press release.

Please note that information reported on this call speaks only as of today, November 5, 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 by the management of Newpark during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws.

These forward-looking statements reflect the current views of management of Newpark; however, various risks, uncertainties and contingencies which are described in the Company's annual report on Form 10-K for the year ended December 31, 2006 could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by management.

Now with that said, I would like to turn the call over to Newpark's President and CEO, Mr.

Paul Howes.

Good morning to everyone.

We would like to take this opportunity to thank all of you for joining us today for our third quarter conference call.

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

Before we go through the quarterly results I would like to start out by briefly revisiting the strategy approved by our Board earlier this year and discussing where Newpark stands on certain key strategic initiatives.

By doing this I hope to highlight some of our accomplishments thus far, and while there are still more to be done, give you a sense of the progress that has been made as we execute on our strategy and move towards our vision of becoming a leading drilling fluids and well site service company.

After outlining these events I will turn the call over to Jim who will review our quarterly results.

I will conclude with a discussion of our market outlook, before opening the call up to Q&A.

With that said, let's take a step back and review where the Company stands relative to our previously announced strategy.

Earlier this year we completed a detailed review of Newpark's operations and established a viable strategy to move this Company forward.

This plan has three main components.

One, refocus on and grow our Fluids business; two, improve the efficiency and expand the scope of services of our Mats and Integrated Services operation; and three, exit the Environmental Services business, which will allow us to focus our attention and resources on our Fluids and Mats businesses.

Where do we stand on these initiatives?

On growing our Fluids segment we have won several milestone awards to provide our Fluids Systems to major operators, including a three-year Deepwater contract for E&I's Gulf of Mexico operations, and a significant Fluids contract with Chevron for a large portion of their U.S.

land-based operations.

In addition, we signed a master service agreement with Marathon in the Rockies, and we have completed our first well for them in Oklahoma.

Internationally, we continue to experience exceptional growth.

We have established a solid base of operations in North Africa and the Mediterranean region.

I'm happy to report that the first trial well in Egypt has been successfully completed and we have now started on the second trial well.

We have expanded our business into Eastern Europe.

We have also established a beachhead in Brazil, where we expect to book our first revenues during the fourth quarter of this year.

Although we will start off in the land-based market in Brazil, we expect to leverage our position into the country's deepwater market.

With regard to improving our Mats and Integrated Services segment we consolidated operations last summer from five separate units into one and reduced headcount by 15%, thereby improving the cost structure and allowing us to better leverage our market position.

More recently we sold off our unprofitable Batson Sawmill facility, which did not fit with our long-term strategy.

Our recent acquisition of SEM Construction not only diversified the geographical reach of this segment, thus reducing our dependency in the south of Louisiana rig count, but more importantly is the initial step in expanding the scope of products and services, pushing us towards our vision of becoming a total well site service provider to the oil and gas industry.

Finally, on exiting Environmental Services, we placed it on the selling block earlier this year, and we were pleased last month to announce that a definitive agreement was reached to sell the business.

Closing is expected by the end of this year.

The sale will provide us with $81.5 million in cash and potentially an additional $8 million from an earnout provision over the next five years.

This transaction will serve to free up resources and capital which can be employed in our core Fluids and Mats businesses.

Looking ahead, a critical success factor in executing this strategy will be our ability to identify, negotiate, close and integrate acquisitions.

We continue to develop and work with a network of banking and other M&A professionals that will help keep the opportunity pipeline full.

The key filter in an acquisition process is to be sure that the opportunity aligns with our strategy.

We will remain disciplined and steadfast in our approach.

In addition to these three key strategic initiatives, we have also sought to reduce our leverage by improving cash management practices, as well as bring closure to our shareholder litigation issues.

We have been successful on both fronts.

Over the past 12 months we have reduced total debt by $63 million, before funding of the $21 million acquisition of SEM.

In terms of our litigation issues, in October we received final approval from the Federal District Court of a settlement to our derivative and class-action lawsuits, which brings this litigation to a close.

Given the changes I have outlined, I believe Newpark has emerged a stronger, more focused and more disciplined Company.

There is still a great deal left to do, but I think our accomplishments to date give us a great deal of confidence and resolve which will serve us well as we continue executing on our strategic plan.

Now turning our attention to the third quarter results.

Allow me to make a few broad observations before I turn the call over to Jim to review the financial and operational results.

As you are aware by now, the third quarter of 2007 was a challenging environment for many oilfield service firms with North American operations.

Unfavorable weather conditions and precautionary storm measures in the Gulf of Mexico had a negative impact on our revenue for the quarter.

Our Deepwater revenue fell from $9.3 million in the second quarter to $4.8 million due to these conditions and the operators' drilling schedules.

In our U.S.

Gulf Coast business the rig count experienced a year-over-year decline of around 7% and sequentially 4%.

Canada also remained weak during the third quarter, as it has been throughout much of 2007.

In stark contrast to North America, international and drilling activity remains robust, lead by oil prices that are at historical highs.

Under this backdrop, well service firms with exposure to overseas markets have shown the greatest growth.

Newpark's most recent results mirror these market dynamics, with weak performance coming out of our North American operations, while our international operations continue to post strong gains.

With that, let me hand it over to Jim for the third quarter results.

Good morning.

Before I go through the details of the quarter I want to note that the Environmental Service business is now being recorded as discontinued operations.

As a result, I will not be talking about its result in any detail, nor its revenues and operating income included in the comments below.

For the third quarter we reported revenues of $153.8 million, up 4% from the third quarter of last year.

Sequentially revenues were up 2.5% from the second quarter of 2007.

Income from continuing operations was $7.6 million or $0.08 per diluted share.

This compares with third quarter 2006 income from continuing operations of $9.7 million or $0.11 per diluted share.

2006 results include $2.5 million in after-tax insurance recoveries from Hurricanes Katrina and Rita.

Excluding these recoveries, income from continuing operations was $7.2 million or $0.08 per diluted share.

Revenues for Fluids Systems and Engineering business in the third quarter were up 4% to about $130 million as compared to the third quarter of 2006.

As was the case in the last quarter, revenues were largely driven by international growth.

We experienced solid sales growth in our Ava business, where revenues grew 63% to $25.5 million.

Our North American Fluids business saw revenues fall 4.5% from a year ago.

As mentioned earlier, Gulf Coast revenue was negatively impacted by the slowdown in activity.

Canada was also down year-over-year with 30% fewer rigs working in Canada than a year ago.

An unprofitable quarter in Canada has been addressed by redeploying resources, reducing headcount, and limiting discretionary spending.

Fluids operating margins were 11.9% compared to 13.3% from a year ago, as adjusted for the insurance recoveries of 2006.

Lower operating margins were the result of lower revenues in the Gulf Coast, which has relatively high fixed costs and higher [daylight] transportation and other operating costs.

On a sequential basis, Fluid revenues in the third quarter were down less than 1%, as a 6% decrease in North American revenue was mostly offset by an increase in our Mediterranean business.

Within North America are Central region was a bright spot as revenue grew 18% on higher activity and share gains, but it was not enough to offset the Gulf Coast decline.

Revenues from Eastern Europe of $5.5 million in the quarter were particularly noteworthy as we gained new business in this market.

Fluids margins were down about 50 basis points to 11.9%, in part reflecting the impact of higher barite transportation costs and pricing pressure in North American.

For Mats and Integrated Services the revenues were $23.8 million in the quarter, up 6% from the prior year.

Sales of mats increased by $1.9 million, or 33%, as the quarter saw a nice pickup in export sales of our composite mats.

Mats rentals and integrated services were down 4% as volume and a weak South Louisiana land rig count worked against gains in pricing and incremental sales from SEM Construction, the Colorado well site construction company that we acquired in August.

We had one month worth of revenues from SEM, which contributed approximately $1.2 million to the third quarter.

Matt's operating margins were 19.1% compared with 20.4% a year ago, the slight decline mostly due to sales mix and fixed costs in South Louisiana.

On a sequential basis, the Mat segment increased 26% due mainly to strength in mat sales, which were up $4.2 million, driven by an increase in composite mat sales.

Our rental and service business had a sequential gain of 20% due to the incremental SEM sales, about one-third of this gain, partially offset by a 3% decrease in sequential mat rental pricing.

We have made solid progress in diversifying the mats business away from South Louisiana, as revenues from our Northern Louisiana site construction business nearly doubled to $4.1 million for the second quarter.

Reducing our dependency on the South Louisiana rig count is a key element of our strategy.

Operating margins improved significantly to 19.1% from 12.1%, based primarily on the strength of the composite mat sales.

Our G&A expense of $4.6 million was $0.5 million lower than both a year ago quarter and Q2 2007.

This quarterly runrate is consistent with our previous guidance of around $4.5 million per quarter in corporate G&A.

Turning to our balance sheet, debt levels remained unchanged from the second quarter in spite of the funding of $21 million for SEM.

The net result is we ended the third quarter with total debt of $178 million, $7 million in cash, and a long-term debt to capitalization ratio of 32.4%.

Our leverage situation will improve substantially with the receipt of proceeds from the Environmental Services sale.

Assuming net proceeds of about $81.5 million, our pro forma, long-term debt to cap ratio will be closer to 20%.

This strength in our balance sheet should allow us to finance future acquisitions.

For the quarter capital expenditures totaled $3.9 million, and depreciation and amortization was $4.9 million.

We now project 2007 capital expenditures will be between $19 million and $20 million.

With that, I would like to turn the call back to Paul for his concluding remarks.

To restate some of our my earlier comments, conditions in North American markets have been soft, and this is has weighed on our third quarter results.

I feel that the Gulf Coast rig count will continue to be soft through the winter.

Next year and longer-term the Gulf of Mexico, particularly the Deepwater, is expected to be a major source of hydrocarbons for the U.S.

market.

We do believe that there will be solid growth in the Rockies, as the Rockies Express Natural Gas Pipeline becomes operational.

And we have had indications from our customers that they will increase drilling activity levels.

We expect this could drive growth not only in our Fluids business, but also at our new Colorado-based well site construction business.

Internationally we expect to continue to gain traction in Fluids.

Our Ava business should continue to see solid gains from North African markets, such as Egypt, Libya, Tunisian and Algerian.

Our entry into and growth in Eastern Europe gives us confidence in our competitiveness in this emerging market.

And we expect to see revenues start to flow from our Brazilian land-based business this year.

In closing, we expect the fourth quarter to be improved from the third quarter, and 2008 to be slightly stronger than 2007.

With that, we will now take your questions.

Operator?

(OPERATOR INSTRUCTIONS).

Karen David-Green, Oppenheimer.

I just wanted to touch a little bit more upon the redeployment of capital.

Any ideas in terms of timelines once you do actually close on the Environmental sale in getting those proceeds redeployed?

Maybe a low bit more color in terms of what some of the acquisitions you guys are looking at.

This is Jim.

With the proceeds coming here at the end of the year, we have a number of opportunities that we are currently looking at and working in both businesses, both domestically as well as international.

It is always difficult to predict the exact timing on these, but we would certainly expect to see some things come to fruition in the first half of next year.

Looking at the Matting side of the business, could you give us an idea how much revenue contribution you have from wooden mats versus composite?

I know you sold your sawmill, and inventory levels I believe at the end of last quarter were probably close to 50-50 wood versus composite, but in terms of a revenue mixture?

It was a lot smaller this quarter, some sales into the Canadian market, but probably less --.

From a sales prospective most of the mat sales are the composite sales to date.

We're doing -- the mats was only roughly about -- excuse me, the woods was only about $0.5 million, so it is all coming from composites now, and that is what we're really focusing on.

And inventory levels right now in terms of the overall wooden versus composite mats?

It continues to move very strong to the composite side.

We are phasing out and keeping a small amount of wooden mats, but we continue with our push to have a fleet of composite mats as opposed to wooden mats.

John Fitzgerald, Raymond James.

We noticed that this quarter your margin in the mats and services business were up to 19% as opposed to 12% last quarter.

Were you guys done with most of your cost-cutting that helped improvement there?

And where do you see the margins going forward in the business?

We certainly believe that we've got most of our cost-cutting completed.

And going forward it is our belief, as we start to expand into full portfolio of products around that total site preparation model, our target is to start driving this business towards a mid-20s in terms of margins.

On the fluid side, I know last year -- or usually you have a seasonal ramp up in Canada.

Are you expecting to have the same effects normally percentagewise as you did -- as you have in the past?

One of the things that impacted this quarter is we did not see the traditional recovery in the third quarter from the second quarter spring break up in Canada.

We certainly think things will improve eventually in Canada.

But it is perhaps a much longer recovery period than what we are used to in light of the conditions there, the recent passage in the increase in royalties as operators try to make sense of what that means to them moving forward.

Would you still see your operating margins going up maybe a couple hundred basis points or staying flat as opposed to this quarter [import to you]?

One of the things we have commented -- and we made the comments in the conference call was the fact that Canada actually lost money in the quarter.

We have taken steps to improve that.

If we're able to recover in Canada we should improve overall operating margins anywhere in the range of 50 basis points to the total Drilling Fluids business.

Our objective longer-term with that business is to get it consistently running at 15%.

Vijay Singh, Janco Partners.

I think the margin questions have been answered.

I just wanted to reconcile your free cash flow with your debt levels, including the SEM transaction of $21 million.

The cash went up sequentially $4 million and $21 million spent in SEM, yet the debt is the same.

If you can, Jim, help me reconcile the $34 million in free cash flow with the numbers in the balance sheet.

The free cash flow -- excuse me, the cash from operations for the quarter was about $26 million.

We had the $21 million for the SEM acquisition, as well as roughly the $3 million or $4 million in capital expenditures, getting the two fairly close with very little debt change.

The tax rates were little bit lower, any -- what should we build in terms of tax rates going forward?

It was about -- it was lower by about 1%, so I assumed --.

I think going forward for the year and for next year a 35 to 36% tax rate is good for modeling.

John Flanagan, First Analysis Securities.

On the composite mat sales are you producing them with the intent of growing sales?

Yes, we are.

When we came into the year we had a significant amount of inventory of composite mats, and we had been idling production.

We have now started running production again.

And we are running production for two things.

One, to continue to sale our rental fleet as we move away from wood in North America, but then also to build some moderate level inventories for sales overseas.

Is that mainly in Europe?

Now, it is mostly in countries in Africa, India and then the Far East.

I see.

In the North Africa market are these also customers for some fluids?

All of our current revenue in the North African market is for fluids.

We do not have any mat sales in North Africa.

Oh, I see, so they may be going to West Africa or some other place?

That is correct.

(OPERATOR INSTRUCTIONS).

Rob Young, William Smith and Company.

What type of market share does SEM Construction have in the Piceance Basin region?

That is a good question.

I don't know that we've have calculated market share there in the Piceance specifically.

All I can add in terms of color though is that we feel that they are one of the larger providers of services in Piceance.

Who do you guys primarily compete with in the Piceance Basin region, or who would they primarily compete with?

In the Mats and Integrated Services business?

No, I apologize.

On the -- in the SEM Construction business?

Okay.

It is going to the other smaller businesses, kind of mom-and-pop activities.

Karen David-Green.

I wanted to talk a little bit more on the contribution from a revenue perspective that you had in Eastern Europe, the $5.5 million.

Is that the first revenue that you have seen from Eastern Europe?

And could just you tell us what areas you are working in in that market, maybe what you're looking for in terms of future contribution?

We have had some sales into the Eastern European market in the past, not as meaningful obviously as we have had here.

And we're talking some of the countries around the Hungary, Romania area.

Is that more land-based work then?

Yes, it is.

Then in terms of Brazil you mentioned revenue contribution in the fourth quarter.

Can you give us any idea of what kind of numbers we could be expecting?

In terms of the fourth quarter we are looking around $0.5 million.

But I think more importantly, and what we have been working towards in Brazil is we will be submitting our bid for some work in the offshore market for Petrobras.

So as we have described before, our goal is to demonstrate our sales on land, get invited to the party, and put our bid forth to Petrobras.

And that is what will happen -- that process in the first quarter of next year.

I will now turn the conference back over to management for any closing remarks.

Please go ahead.

We would 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 inclusion of our fourth quarter.

Good-bye and have a great day.

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

If you'd like to listen to a replay of today's conference, please dial 800-405-2236, or 303-590-3000.

The pass code is 11098107 pound.

ATC would like to thank you for your participation.

Have a pleasant day.

You may now disconnect.