NPK International Inc (NPKI) 2008 Q2 法說會逐字稿

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

Welcome to the Newpark Resources second quarter earnings conference call.

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

Following the presentation the conference will be opened for questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded today, Friday, August 1, 2008.

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

Please go ahead, sir.

Thank you, Mary, and good morning, everyone.

We appreciate you joining us for Newpark Resources conference call today to review 2008 second quarter results.

We'd also like to welcome our internet participants, as the call is being simulcast live over the web.

Before I turn the call to Management, I have a few housekeeping details to run through.

For those of you that didn't receive an email of the release yesterday afternoon and would like to be added to the distribution list, please call DRG&E and our office number is 713-529-6600, and just request to be added to the distribution list.

Also, you can email me.

Many of you have my email.

It's on most of the press releases.

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

There's also a telephonic replay that will be available for seven days, ending next Friday, August 8th.

The dial-in information is in the press release.

Please note that information recorded on this call speaks only as of today, August 1, 2008, 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 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 the 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 the statements made by management.

The listener is encouraged to read the Company's 2007 annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, to understand certain of those risks, uncertainties and contingencies.

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

Paul Howes.

Paul?

Thank you, Ken, and good morning to everyone.

We'd like to take this opportunity to thank all of you for joining us today for our second quarter conference call.

With me today are Jim Braun, our Chief Financial Officer, and Bruce Smith, President of our Drilling Fluids business.

Before we go through the details of our second quarter, I would like to highlight the quarter's results and give a quick update on the sale of our environmental service business.

Following my remarks, Bruce will provide an update on the Fluids business and Jim will then cover the Mats and Integrated Service business, as well as the balance sheet.

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

Now turning our attention to the quarter.

We continue to make strong progress in growing the company in both new and existing markets.

Revenues for the quarter were $194 million, up 9% sequentially, and 29% over last year.

Our income from continuing operations rose 41% year-over-year to $8.7 million or $0.10 a share.

We saw an improvement this quarter in the US drilling environment, as the upward trend we saw in the first quarter appears to be gaining momentum.

The US rig count rose 6% year-over-year in the second quarter of 2008, and during the same timeframe our US Fluids revenues were up 22%.

This revenue increase reflects continued market share gains in the US, as the number of rigs we service increased by about 18%.

The acceptance of our products and our services continues to grow as we gain new customers and additional work with our existing customer base.

We believe that our investment in personnel, equipment and products will fuel continued future growth within our target markets.

Turning to the international market, our Fluids business continued to show strong gains, benefiting from a robust and developing business in North Africa, Eastern Europe, and most recently, Brazil.

Revenues from our Mediterranean operations were $31 million in the quarter, a 53% increase from the same period last year and a 9% sequential gain.

We continue to invest in new and emerging markets such as Eastern Europe, Brazil and the Haynesville shale, as well as existing markets like the Rockies and East Texas.

While such investments create downward pressure on operating margins in the short-term, we expect that these actions will pay dividends in the future.

Turning to our Mats and Integrated Services business, we saw double-digit revenue gains both sequentially and year-over-year for the second quarter.

The gains were due to an increase in composite mat sales, which will more than offset the decline in mat rentals and related services.

Operating margins for mats have rebounded to 9.7% in the quarter, in line with our expectations.

Lastly, let me briefly address the issue of our sale of the Environmental Service business.

As you know from our press release last month, the FTC has issued a request for additional information and documents as part of its standard review process.

At this time we expect to provide the requested information to the FTC by late August.

Following that, it should be another 30 days for the FTC to complete its review of the proposed transaction.

Therefore, we are now expecting to close the sale sometime during the fourth quarter.

With that, let me hand the call over to Bruce Smith for a more in-depth look at our Fluids business.

Bruce?

Thank you, Paul.

This morning I will present a review of the Fluids Systems and Engineering segment.

Looking at our year-over-year results for the second quarter, Fluid revenues were $169 million, an increase of 29%.

US revenues were up 22% to $132 million.

We are achieving market penetration as the number of rigs we serviced increased 18% versus an average US rig count increase of 6%.

The revenue increases were achieved in most all of the geographic regions of the US in which we participate.

Specifically, we saw the largest gains in the Rockies, West and East Texas.

As has been the case over much of the recent past, our International operations continue to grow in importance.

Second quarter revenues from our Mediterranean business increased to $31 million or 53% year-over-year, mostly due to brisk overseas drilling activity, continued penetration into the North African and Eastern European markets and a strengthening euro.

In addition, we saw $3.4 million in revenues from Brazil, where there were none last year.

On a sequential basis, Fluid revenues of $169 million in the second quarter were up 8%.

Our US business overcame the seasonal Canadian decline by posting a strong revenue gain of 12% as compared to a US rig count increase of 5%.

Again, market share gains drove a large part of the revenue growth in the US.

Meanwhile, our Mediterranean business was up 9% sequentially.

Operating margins in our Fluids segment decreased to 10.7% from 12.4% a year ago.

The drop was due to several factors including an unfavorable product mix, but most notably we experienced an acceleration in the inflationary increases in various operating costs such as fuel, transportation and product costs.

Although not as significant, we saw increases in our personnel costs that were required to remain competitive in the marketplace.

Not all of these cost increases could be passed on through higher prices due to contractual obligations and market conditions.

There were also startup costs associated with new contracts, where we had to incur expenses prior to the full benefit of the revenue being realized.

In some cases drilling plans were delayed, although we were fully staffed and ready to go.

And finally, there were certain nonrecurring items in the current quarter, including asset write-offs, legal settlements and higher than usual repair and maintenance costs.

Due to the nature of these cost items, as well as our anticipated ability to adjust some pricing in the third quarter, I expect our Fluids margins to improve in the second half of the year, although we will continue to incur expenses in advance of future revenue in Brazil as we develop our base of operations there.

In addition, we continue to work on ways to improve our efficiencies and reduce cost where possible.

In closing, I want to say how pleased I am with the growth and progress achieved in our Fluids business, both domestically and internationally, and I look forward to continued success in building and growing our company.

With that, I'll now turn the call over to our CFO, Jim Braun.

Thank you, Bruce, and good morning, everyone.

First, let me review our Mats and Integrated Services business and follow-up with a summary of Newpark's consolidated results and a discussion of the balance sheet.

For Mats and Integrated Services, the revenues were $24.9 million in the quarter, up 32% from the second quarter of last year.

This improvement was driven by composite mat sales, which increased $8.3 million to $10.6 million.

As composite mat orders are sporadic, sales tend to be variable from quarter to quarter.

Mat rental and services revenues were down 13% to $14.3 million.

Southern Louisiana land activity remains an area of weakness as the land rig count averaged 23 in the second quarter compared with 33 a year ago.

As a result, competitive pressure is having a negative impact on pricing.

On a sequential basis, the Mat segment was up 17%, again mainly due to the increase in composite mat sales.

The rental and services business was down 16% sequentially, due primarily to decreased activity and increased competition in Southern Louisiana, and the loss of some work in Colorado.

Operating income in this segment rose to $2.4 million during the quarter compared to $2.3 million in the same period in 2007 and a breakeven result in the first quarter of 2008.

Operating margins were 9.7% in the second quarter of 2008 compared to 12.1% in the same quarter a year ago.

And now looking at some of our other expenses, our total G&A expense of $5 million for the second quarter of 2008 was comparable to both the year-ago quarter and the previous quarter.

Interest expense was lower by $1.2 million as compared to the second quarter of 2007, and the tax rate for the second quarter was about 34% versus our full-year estimate of between 34 and 35%.

And to summarize total Newpark results, revenues were $194 million in the quarter, up 29% from the second quarter of 2007 and up 9% from the first quarter of 2008.

Income from continuing operations was $0.10 per share, which is $0.03 better than the $0.07 we reported a year ago in the second quarter.

On a sequential basis, we reported $0.10 from continuing operations in the first quarter of 2008.

And as Bruce mentioned earlier, there were some nonrecurring expenses and spend-ahead items in our second quarter results.

The nonrecurring items impacted the quarter by about a penny a share, while the spend-ahead items and the project delays cost us almost another full penny.

With the exception of Brazil, the majority of the spend-ahead items we believe are behind us.

Now turning to the balance sheet.

We applied our available cash flow toward debt reduction and share repurchases.

We paid down long-term debt by over $27 million during the quarter, before the funding of $7 million for share repurchases.

We ended the quarter with total debt of $179 million and a total debt to capital ratio of 32%.

Since the approval by our Board of a share repurchase program in February of this year, we have purchased about 1.9 million shares for a total cost of $10 million, an average cost of $5.32 per share.

Finally, our capital expenditures for the quarter were $5.7 million, including $3.4 million related to the new fluids plant in Brazil, while depreciation and amortization was $6.4 million.

For the full-year 2008, we now project capital spending to be about $22 million, down slightly from our previous estimate.

And with that, I'd like to now turn the call back over to Paul for his concluding comments.

Thanks, Jim.

I am very happy with the quarter's revenue growth and market penetration in our Fluids business.

In addition, I am pleased with the improvement in the Mats and Integrated Service business and our new division President, Bill Moss.

However, we need to stay focused on improving our operating margins.

The investments we've made in the second quarter should start to pay dividends in the second half of 2008.

We expect to be able to pass on price increases as contract turns and market conditions permit, which should result in improved margins in the third quarter.

In the US, we expect the rig count to continue to grow, provided natural gas prices remain at attractive levels.

We're optimistic that our Mediterranean operations will see continued gains, although perhaps not at the same growth rates we saw last year.

And we are encouraged by the strong return in the Canadian rig count.

And lastly, I would like to comment on our activities in Brazil.

First, our work has continued on building our Fluids plant and we expect it to become operational in September.

Secondly, we have accelerated the hiring of key personnel to support our new offshore contract with a super-major that we announced last quarter.

And thirdly, we are awaiting the result of the Petrobras tender.

With that, we will now take your questions.

Operator?

(OPERATOR INSTRUCTIONS) John Fitzgerald with Raymond James.

Quick question on the Fluids side, given the pick up in domestic activity, do you guys see the international growth still outpacing your growth domestically from a revenue perspective?

Certainly the pick up in the US has been dramatic in this period.

We still fully expect the international growth to continue at the rate is has been, and of course we're waiting and expecting some fairly significant things to happen in our Brazilian market going forward, which would certainly add to the pick up on the international side.

Well, I guess what I'm getting at is, is your percentage of revenues growing internationally as a total in the Fluids?

John, it continues to grow.

I'm not sure I follow the question.

Would you mind repeating it, make sure we understand it?

I'm trying to get at, you know, your international revenues on the Fluid side as a percentage of the total compared to domestically, is that increasing?

The rate of growth in the international market, which is about 15% of our business, we expect to continue to grow strongly, although perhaps not the same as some of the same rates that we saw this quarter over last quarter, 53%.

They'll start to slow down, but we should see those rates continue--the growth continue to grow and it should be at rates at least comparable to the US.

One additional comment, this is Paul.

As you know, we have the Petrobras tender that's out currently, that's due to be awarded here shortly.

It's been delayed some, obviously.

If we are successful in winning that, that's a fairly significant contract.

It could begin to shift the ratio above 15% in terms of our international business.

Okay.

And then on the margin side, is the international side generally better than domestically?

Yes, that's correct.

It tends to be generally a little better.

Terese Fabian with Sidoti & Company.

We're seeing that you're getting market share gains in the drilling fluids.

Can you talk about whether you're seeing changes in the competitive landscape and what would allow you to exercise the raising of prices?

The competitive landscape remains pretty much the same as it has been.

We tend to be a technically led organization and when we bid on projects we try to differentiate through the technologies that we have, and we've never been overly aggressive on the pricing side of things.

So, competitively, still a very competitive market, but we are picking up work.

We're picking up work in areas that are technically demanding and we've been very successful using our technologies in those areas.

Subsequently, we continue to pick up market share in that regard.

Okay.

And in the Mediterranean region, are you getting any new contracts in North Africa or Egypt?

Yes.

Egypt is still the status quo currently.

We're waiting for the bids to come out in Egypt.

There's a timing period there where the bids will come out in due course.

In other parts of North Africa, we're about to be re-bidding our Algerian portion of business, which we expect to obtain a slightly higher increase in the percentages of work we've had in that area, going forward.

The other thing I might add--this is Paul.

We recently completed our first successful well in the Black Sea, off the coast of Romania, and as a result of that work, we've been awarded a new contract for additional work in the Black Sea.

So, we're also very optimistic about that part.

Karen David Green with Oppenheimer.

I wanted to touch a little bit on the matting side of the business.

Certainly the numbers showed sequential improvement, but you mentioned with the rig count still being lackluster in the Gulf Coast, you know, that pricing is still under pressure.

Can you kind of give us maybe an indication of where pricing is versus a couple of months ago and kind of how you see that going forward, on the rental side?

Karen, the pricing has been under pressure.

It's come down.

It's certainly lower than it was 90 days ago, certainly as well as it was versus a year ago.

And it will continue to remain under pressure at these current levels, which is why we took the action we did early in the quarter to start rightsizing the business to these activity levels.

Nevertheless, there still remains capacity in the marketplace.

There are a number of mats and a number of operators that continue to keep a lid on our ability to improve pricing.

Karen, this is Paul.

One of the things we're looking at doing is obviously trying to push out of the Gulf and to go into the Northern Louisiana market more, which we've been successful at, as well as trying to expand our footprint in Western Colorado on the Piceance Basin, where we bought a business last year.

So, hopefully over the next couple of quarters we'll start to see more revenue from outside the Gulf of Mexico.

And in terms of inventory levels, can you just talk a little bit about that?

The inventory is mats.

We have a combination of our composite mats in our rental fleet as well as wood mats.

We are not adding any inventory.

In fact, we're shrinking the inventory of mats.

As the wood mats are depleted and taken off the books, we're not replacing those.

So we continue to contract the amount of assets in inventory in that market.

John Flanagin with First Analysis Securities.

First question (inaudible) Fluids, perhaps for Bruce.

I saw in the release, reference to an unfavorable product mix and I'm curious to know whether you can comment on the extent that's a function of sort of geography or mix of oil and gas wells?

That surprised me and I'm wondering what has changed this quarter?

Nothing's changed, actually.

It tends to be more directly related to the rig activity and where you are specifically on a well.

And different parts of wells, of course, are more lucrative than others.

So, there's a timing as to where the wells happen to be at certain points.

So it was more an issue of just the rigs activity at the time and we don't expect that to be a significant problem going forward.

It just happens from time to time.

We also had some deepwater activity, which requires ahead of the more lucrative sales what we call pump and dump, which tends to be a large volume of lower margin fluid, prior to getting to the more lucrative parts of the deepwater wells.

So, that was really the mix issue in the quarter and we don't expect that to be significant going forward.

It was a moment in time.

Thank you, Bruce.

Next on Mat and Integrated Services, and again, it's sort of the geography outside of South Louisiana, can you comment on where, Paul, you're seeing some success, if any, on building out the full array of services, well site construction services in other basins?

Certainly in North Louisiana in the Haynesville Shale area, in Arkansas the Fayetteville Shale, so we're starting to see activity there.

We're also starting to see some increased activity in Colorado with one of our large accounts there on some additional work as well.

(OPERATOR INSTRUCTIONS) Vijay Singh with Janco Partners.

Just a question on Jim.

You mentioned that the spend-ahead that is behind you is nonrecurring in nature and going forward it's not going to affect your margins.

What is that spend-ahead as a percentage of total spend-ahead that you expect, like in Brazil, you continue to invest?

What would that percentage be?

I'm just trying to get a sense for where the margins are going to rebound to.

In rough terms, the spend-ahead and some of the project delays were about a penny and I think in basis points it works out to about 80 or 90 basis points in the quarter.

So, it had a noticeable impact.

And again, we're taking actions to getting people in place, equipment in place.

Many times we're all ready to go and the rigs don't arrive, but we still incur some of those costs.

And as you mentioned, we believe most of that is behind us with the exception of Brazil, and that will be an area that we continue to develop our infrastructure and our capabilities to serve the market.

Okay, so the 80 to 90 basis points is total, is it?

The impact for the quarter.

Impact for the quarter.

But, margins declined a little bit more than that and you may have mentioned it and I apologize if I missed it, but--.

Certainly a piece of it was Canada.

We talked about the seasonal break-up in Canada.

We had about an $8 million drop in revenues in Canada on a sequential basis, which had about a $2.3 million profit impact.

The other big items would include a couple of the nonrecurring things that we had mentioned, as well as the inability I should say we had to capture back all the cost increases that we saw accelerate during the quarter.

Fuel, transportation and the like, we weren't able to keep our head above that.

Fortunately, we'll have an opportunity to do that here in the third quarter.

Sure.

And then lastly, not to beat this too much, but I mean, 80-90 basis points of total, Brazilian side is how much do you think that's recurring in nature, in terms of spend-ahead or the ones that are behind you, how much of that would be--?

I would say that about half of them are behind us.

Follow-up from Terese Fabian with Sidoti & Company.

I have a question on the environmental segment sale.

Do you still plan to use the proceeds to pay down debt at this point or are you narrowing on any acquisitions?

We would use the proceeds to pay down debt, Terese.

While at the same time we do have some things in the acquisition pipeline that we continue to look at and evaluate and would have those funds available for acquisitions if needed.

And then another question on Brazil.

The production capacity of the Brazilian plant, how is that looking to you?

I think the capacity currently for the contracts that we have in place is more than sufficient.

I guess as we hopefully pick up more contracts in Brazil, we'll re-look at that position and establish whether it's sufficient or whether we might need some more going forward.

Follow-up from Karen David Green with Oppenheimer.

I just had another question with regards to the Petrobras tender.

Is that work that you're bidding on onshore or offshore related, and most likely would that be, assuming you are successful, that would be more of an '09 impact, is that correct?

The work we're bidding on for Petrobras is offshore deepwater predominantly.

Lot B and C, Lot A has already been awarded, so we're awaiting Lots B and C, the outcome of those.

What was the second part again?

In terms of start date, would that be something that you would look, if you are successful, to be more of an impact in 2009 or would some of that be work beginning in '08?

No, I'd expect it to be more of an '09 event.

Okay, great.

And just one more follow-up.

On the Haynesville you mentioned that you have some Fluid activity there.

Can you maybe give us a little bit more color on the number of rigs you're working on, your outlook for that region?

The Haynesville Shale, the play that everyone's excited about is really the more technically demanding lateral step-out wells and currently we are operating 6 rigs, which is about 30% of that particular market.

Follow-up from John Flanagin with First Analysis Securities.

On the mat side, just clarifying, Paul, activity, does that mean actual work being performed or is that more at the bidding stage?

We're actually performing more work there, but certainly as you move into the North Louisiana and the Arkansas areas it's not--some bidding in Arkansas.

North Louisiana is actually work we're performing, but we're not using mats up there.

It's more construction type equipment, pad preparation, that type of thing.

And the follow-up is, do you still anticipate trying to grow that business perhaps with some small tuck-ins of operating--?

We remain optimistic about this business and believe that there are places that we can grow it.

We desire to grow it outside of the Gulf of Mexico and we continue to see operations, be it organic growth opportunities or maybe some small bolt-on.

(OPERATOR INSTRUCTIONS) Joe [Marvar] with [Illuma] Sales.

I'm relatively new to the Newpark story, and just comparing your results against some sell-side models, in the Fluids business Q2 revenues were quite a bit above expectations, yet the margins sequentially were down a fair amount.

Now you went over four buckets of what hurt margins, including the startup cost at 80-90 Bps.

Can you give us some more granularity on some of the other areas, such as the inflationary cost pressures, to give us kind of a ballpark number on what that hurt in terms of margins?

The Canadian was about, I mentioned 30.

The startup was a nonrecurring and was about the 90.

And then the other big piece, large part of it was the inflationary costs that we talked about.

If you look at the one-times, those were about 90 Bps and the startups and project delays were about 1 basis point.

Again, the inflationary pressure that we were seeing is all tied to the price of oil.

Obviously it relates to transportation, fuel cost.

A lot of the product technology, even our water based technology uses hydrocarbon technology that's been polymerized.

So a lot of it's tied to the price of oil and it came at us so quickly that we didn't have a chance to push it through the marketplace.

But certainly in the third quarter we're very focused on getting those increases pushed through.

Okay.

And just a follow-up item.

If you wanted to break your operations down between existing, which is I guess largely US operations and a lot of these startup areas where you're incurring cost ahead of revenue, is it possible that the existing areas had margins maybe in the range of what you've done in Q1 and the startup areas were perhaps low or possibly even zero?

I think that's a fair characterization.

Follow-up from Terese Fabian with Sidoti & Company.

Just a quick question on the mat division, the segment.

What is driving mat sales and is it something that you anticipate continuing higher in coming periods?

Terese, we have made a concerted effort over the past year to spend more time understanding the opportunities internationally for composite mat sales.

We've seen some benefit there.

We do expect it to continue at a level above the $1 to $2 to $3 million that we historically experience.

But a $10 million quarter was extremely high and we would think it would moderate off of that.

But we do think it will continue to be an important part of this business.

Thank you.

Mr.

Howes, at this time I'll turn it back to you for closing comments.

Please go ahead.

Thank you.

We'd like to thank you 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.

Take care.

Thank you.

Ladies and gentlemen, that will conclude today's teleconference.

If you would like to listen to a replay of today's conference, please dial into 303-590-3000 and enter the access code of 11115505 followed by the pound sign.