NPK International Inc (NPKI) 2008 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.

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).

This conference is being recorded, today, Friday, October 31st, of 2008.

At this time, I would like to turn the conference over to Ms.

[Carol Cole] with DRG&E.

Thank you, Vince, and good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today to revie 2008 third quarter results.

We would also like to welcome our internet participant listening to the call simulcast live over the internet.

Before I turn the call over to management, I have a few housekeeping items to cover.

For those of you who did not receive an email of the release this morning and would like to be added to the distribution list, please call the DRG&E offices at 713-529-6600 to provide us your contact information, or you can email me at the address shown on the "Contact" section of the press release.

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

There will also be a recorded replay which will be available until November 7th, and that information is in yesterday's release.

Please note that the information reported on this call speaks only as of today, October 31st, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of the replay.

In addition, the comments made by management today 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 achievements 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.

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

Paul Howes.

Thank you, Carol.

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 Chief Financial Officer.

I would like to begin by first commenting on the pending sale of the environmental business, and then highlight some of the results of the quarter.

Following my remarks, Jim will cover the operational and financial details of the quarter.

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

Now let me briefly address the sale of the environmental business to CCS.

After signing the agreement with CCS in April 2008, we made our initial HSR filing in May.

In July, the FTC issued a request for additional information and documents as part of its standard review process.

On October 23rd, the FTC informed us that they intend file suit to block the sale due to their belief that the transaction would be anti-competitive, and they have filed a complaint in Federal District Court, seeking a temporary restraining order and preliminary injunction to preserve the competitive status quo, pending an administrative trial.

It is our believe that the FTC conclusions are erroneous.

We disagree with their position, at that this time we intend to oppose the FTC's request to obtain a preliminary injunction to prevent the closing of the sale.

Given the circumstances, it is unlikely the transaction will close during the fourth quarter.

Now turning our attention to the quarter, I would like to emphasize how pleased I am with our financial results in what has been become an increasingly challenging environment for oil field service companies.

We continue to make strong progress in growing the Company, both in domestic and international markets.

Revenues for the quarter were a record $212 million, up 9% sequentially and 38% over the third quarter of last year.

Our income from continuing operations for the quarter rose 53% year-over-year to $11.7 million or $0.13 per share.

Our Fluids and Engineering segment revenues were $189 million in the third quarter, up 45% from the same quarter a year ago.

Market share gains in North America contributed significantly, as did higher pricing and a 13% increase in the average rig count.

We saw market share gains in East Texas, West Texas, Oklahoma and the Rockies.

Canadian revenues nearly doubled for the third quarter of 2007, as the rig count was up 25% from a year ago, and market share gains were also achieved.

In the international markets, our Fluids business continued to show strong growth due to increased drilling activity and market share gains in North Africa and Eastern Europe.

Following the completion of our Brazilian Fluids plant in September of this year, we delivered our first product to the offshore deepwater market.

We have received word that Petrobras has approved our Lot B contract valued at approximately $350 million Brazilian Real, or $165 million at current exchange rates.

We expect to have a formal signing of the contract in mid-November, with revenue starting in early 2009.

As stated previously, this is a landmark event in the history of our drilling fluids business, demonstrating our capability and acceptance in the deepwater market.

In addition, we renewed our Fluids contract with Sonatrach in Algeria, and we are nearing completion in our offshore rig in the Black Sea with [Petron], a Romanian company.

These developments are strong signs that national oil companies new Newpark as a world-class fluids company.

Overall, our Fluids margins were 13.5% in the third quarter, up 160 basis points over last year, and up 280 basis points sequentially.

Fluids segment operating income was $26 million in the third quarter, up $10 million from the third quarter of 2007, and up $7 million sequentially.

Now turning to our Mats and Integrated Services business.

We saw a modest drop in revenue in the third quarter from a year ago.

However, on a positive note, we have entered the UK -- United Kingdom -- mat rental business during the quarter.

Working with a local service company, we have 2,000 mats currently under lease in the UK for use in the utility industry.

This expansion into the new market is part of our ongoing effort to diversify the revenue stream of this segment and improve its profitability.

With that, now let me hand the call over to CFO, Jim Braun, for a more in-depth look at the quarter's results.

Jim?

Thank you, Paul, and good morning, everyone.

As Paul mentioned in his opening remarks, for the third quarter of 2008, we reported record revenues of $212 million, up 38% from the third quarter of last year.

Sequentially, revenues were up 9% from the second quarter of 2008, and operating income rose 29% over the third quarter of 2007 to $19.9 million, and rose 28% sequentially.

Income from continuing operations in the third quarter of 2008 was $11.7 million, or $0.13 per share.

This is an increase in the EPS from the $0.08 per share that we reported for the third quarter of 2007, and the $0.10 that we reported in the second quarter of 2008.

Now let me review our segment results.

Revenues for the Fluids system and Engineering business increased 45% to $189 million for the third quarter, as compared to $130 million for the same period last year.

We saw improvements in revenue across all of our regions being driven by higher activity levels, market-share gains and some pricing improvement.

Our U.S.

Fluids business revenues were up 40% to $103 million in the third quarter, as the U.S.

rig count increased 11% over the same time period.

As Paul mentioned, East Texas, West Texas, Oklahoma and the Rockies reported strong results, driven by market share gains.

The Gulf Coast business did well in spite of a loss in revenues due to the hurricanes, which we estimate to be $4 million.

Canada saw revenues almost double from a year ago to $7.7 million on a 25% increase in the Canadian rig count.

Our Completion Fluids and Services business based in Oklahoma also reported strong results compared to last year, reporting a 44% increase in revenues to $24.4 million.

And our barite wholesale business came in strong as well, up 64% to revenues of $16.4 million, driven by a 22% increase in sales volume, and improved pricing as a result of our success in passing through cost increases of barite and transportation.

Our international business reported strong results, growing revenues by 46% to $37 million in the third quarter of 2008 compared to a year ago.

The increase was mainly due to increased overseas drilling activity, continued penetration into the North African and Eastern European markets and our growing Brazilian business.

Third quarter revenues from our Mediterranean business increased to $32.5 million, or 27% year-over-year.

In Brazil, we saw $4.7 million of -- in revenues, compared with none last year.

Our new Brazilian fluids plant became operational in September and we delivered our first offshore deepwater shipment during the quarter.

We plan to leverage this asset in building our presence in the Brazilian deepwater market with other international oil companies.

On a sequential basis, total Fluids segment revenues were up 12%.

Our U.S.

business posted an 11% increase as compared to a sequential increase in the U.S.

rig count of 6%, as we saw improvements in all of our U.S.

regions, with the exception of the Louisiana Gulf Coast, which was impacted by hurricanes.

As mentioned earlier, we estimate the hurricanes cost us $4 million in revenue and about $0.01 per share on the EPS line.

Canadian revenues bounced back strongly from the seasonal Q2 trough, as our rig activity more than doubled, resulting in quarterly revenue of $7.7 million; and meanwhile, the Mediterranean and South American revenues were up 8% sequentially.

Operating margins in our Fluids segment increased to 13.5%, from 11.9% in the third quarter a year ago and 10.7% in the second quarter of 2008.

The improvement was due to several factors, including the strength in our North American markets, the cessation of some of last quarter's spend ahead costs and improvements in our international operations.

As we indicated in the last quarter's call, although the spend-ahead items are largely behind us, we expect to continue to incur startup costs for our Brazilian operations as we prepare to handle increasing levels of business there.

Now I would like to discuss our Mats and Integrated Services business.

Revenues were $22.6 million in the quarter, down 5% from the prior year.

A revenue increase of $3.1 million in the quarter from the August 2007 acquisition of what is now our Colorado-based business, was nearly offset by a decline in the Gulf Coast well -ide construction business, while composite mat sales were down modestly in the quarter over last year.

On a sequential basis, Mats and Integrated Services segment revenues decreased 9%, due primarily to falling composite mat sales from $10.6 million in the second quarter of 2008 to $5.5 million in the current quarter.

There was improvement in the Southern Louisiana market, as the average rig count rose from 23 to 28.

This helped drive a 7% sequential gain in our base rental business.

Our Colorado business was up significantly over last quarter, due largely to the ramping up of a new site preparation contract.

Operating margins for the segment were adversely affected by a revenue mix change and $900,000 of expense associated with the movement of mats to the United Kingdom.

As a result, margins came in at 5% versus the 10% in the second quarter of 2008, and 19% in the same quarter last year.

We redeployed 2,000 composite mats from Mexico to the UK in order to enter that market and improve our returns on assets.

These mats are currently under lease in the utility industry, where we believe further market share gains are possible.

Moving on to our corporate costs, our G&A expense of $6.8 million was about $2.2 million higher than the year-ago quarter, and up about $1.8 million sequentially.

There -- this was due to an increase in performance-based employee incentive programs, which are a result of the strengthening performance of the Company, as well as higher legal expenses related to the arbitration with our former CEO, and professional fees associated with a Middle East market strategy and M&A projects.

The effective tax rate for the third quarter was 33%, in line with our full-year estimate.

Now turning to the balance sheet, we finished the quarter with cash balances of $11 million, and total debt of $173 million.

Our total debt to capital ratio was 31%, consistent with the end of the second quarter.

As part of our stock repurchase plan, we repurchased 732,000 shares or $5.1 million during the quarter.

Thus far, we have repurchased shares for a total of $15 million as part of our $25 million authorization.

Our capital expenditures for the quarter were $5.2 million, while depreciation and amortization was $6 million.

For the full year 2008, we continue to project capital spending to be about $22 million.

In closing, let me talk a minute about our liquidity position.

Our ability to access cash for operations in growth is through our credit facility.

Importantly, this facility has over four years left to run, expiring in December 2012.

The $225 million facility has a $175 million revolver, and a $50 million term loan.

The term loan has annual installments of $10 million, the first of which is due in December, 2008.

At the end of the third quarter, we had $45 million available on our revolver.

Between cash generated from operations and access to our credit facility, we believe that our liquidity position remains strong.

And now, would like to turn the call back over to Paul for his concluding remarks.

Thanks, Jim.

I'm extremely pleased with the progress we've made in the quarter.

We have increased penetration into key markets, particularly overseas, and have been able to reap the benefits of operational efficiencies we've developed in our Fluids business.

Within our Mats and Integrated Services business, I am encouraged by our results in Colorado and the sequential improvement in Southern Louisiana.

However, there is still room for improvement.

Looking forward, in the U.S., we expect the fourth quarter to be down slightly, as we've started to see the rig count fall as a result of lower natural gas prices and the tight credit market.

Our Mediterranean operation should see continued growth, although not at the same rate we saw last year.

We are encouraged by the market share gains in Canada, as well as the higher rig activity.

In Brazil, we expect to sign the Petrobras deepwater contract in November, with revenues after the first of the year.

In closing, I am pleased with the quarter's results and believe the future of Newpark is bright.

The successes we have enjoyed give us the confidence to pursue new opportunities on a global basis.

With that, we'll now take your questions.

Operator?

Thank you, sir.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

And our first question comes from the line of Jim [Rollison] with Raymond James.

Please go ahead.

Hey, good morning, guys.

Nice quarter.

Thank you.

Paul, could you spend just a minute on -- obviously, you're -- you have been working on selling your environmental business for a while with some delays.

Assuming that the Department of Justice kind of stays against you, maybe what your options are from there, and how that may affect your -- I think you guys wanted to redeploy that capital into your other businesses, or even look at possibly other opportunities.

Just kind of spend a minute on how that all might play out.

Well, you know, this matter involves, obviously, pending litigation with the Federal Trade Commission.

And I hope you can appreciate that it's a very sensitive area at this time, and we're really not going to comment or speculate on what might transpire as we go forward.

Okay.

Switching, I guess, gears to the International Fluids business.

Obviously, you guys have been making pretty good strides there.

You are starting up with Petrobras in the deepwater you mentioned in the first quarter.

Remind us again of how the margins might look initially on that business, versus what you have been posting so far and maybe where that trends over time?

Well, certainly, initially, in the margins, we expect those to be somewhat lo lower, because we have got start-up expenses in bringing on new people and equipment.

This contract also involves solid controls in addition to the fluids technology.

So we would initially expect lower margins, but hopefully strength ending through the end of next year.

Great.

Thank you.

Thank you.

Our next question comes from the line of Karen David Green with Oppenheimer.

Please go ahead.

Thanks, and a good morning.

Good morning, Karen.

Good morning, Karen.

Just wanted to, I guess, follow-up a little bit more on the previous question, going back to the Environmental Services unit.

Can you just walk us through, kind of your -- you said you intend to oppose the FTC request -- a timeline on how this could unfold over the next -- over the coming quarters?

Yes, again, Karen, because it's -- you know, we're in pending litigation.

We are working on the FTC on time lines right now, but that's still in negotiation with the FTC.

You know, one thing about -- you know, the business is performing very well, and -- but as new information becomes available, we'll certainly make that available to the market.

Okay.

Great, and then you also mentioned pricing increases during the quarter.

Can you kind of talk through the magnitude of those increases, and if you think -- given the outlook for 2009, whether or not you think some of those are going to hold?

Well, Karen, we've -- as you know, we have worked hard over the last several quarters trying to move prices up to help offset some of the price increases that we saw.

We have been successful.

You see it in the margin line.

Certainly as we move forward into next year and as activity slows down and customer spends slows down, there will be pressure on pricing.

The tradeoff, of course, is that we obviously see a decrease in some of the prices of the products we buy because they are hydrocarbon based.

So we will do the same thing in '09 as we have in '08, and that is work to maintain and improve our margins in spite of where pricing or cost of products, commodities, are to us.

Great.

And then lastly, I noticed in the press release, the comment was made you have plans in place to react quickly based on market changes.

Can you just take a few minutes and elaborate on what those are?

Well, certainly depending -- and again, we expect different regions in North America are going to be impacted differently.

But, again, we have got contingency plans that if rig activities fall dramatically in a particular region, then we'll respond accordingly to eliminate some of our fixed costs.

But --

And Karen, we also have some ability to redeploy resources or redeploy people to those markets.

Again, whatever activity level decline you might think is going to happen next year, it is not going to be universal across all the markets in the North America, and consequently we'll have some opportunity to move people to the right places.

But that will be part of the plan.

Great, thanks a lot.

And once again, congratulations on a very good quarter.

Thanks, Karen.

Thank you.

Our next question comes from the line of Mike Harrison with First Analysis.

Please go ahead.

Hi, good morning.

Hi, Mike.

On the -- not to beat a dead horse on the Environmental Services -- I know you can't speak too much about it, but have you come up with any estimates for what the costs could be to contest that decision?

We have.

It's -- it's not a small amount.

It's certainly -- you know, cost us a couple of million dollars to fight that in the end.

And then -- just in terms of business trends overall,7 maybe in both the Fluids side and the Mats side of the business, can you talk about how business looked in October relative to September, and whether you have seen any signs of pronounced slowing in any areas, or any areas that may have stabilized?

You know, Mike, it's difficult looking month-to-month.

But just looking at the month of October versus September, you know, we didn't see a significant change in the amount of work we were doing just on that month-to-month comparison.

A lot of the talk and a lot of the conversations that we have had with customers over the last 30 to 45 days, certainly have indicated that they see themselves cutting back some.

A lot of that -- I don't know that it has actually occurred yet, because they had contractual obligations to -- for those rigs during that period of time, which is why we haven't seen that fall off.

Certainly as we get towards the end of the year, we will see some of that, and of course I think we'll see some of that also in the first quarter of next year.

All right.

And then in terms of the Lot B contract with Petrobras, can you remind me what the duration is going to be?

Or in other words, how much you would expect to see of those $350 million Reals in 2009 (inaudible)?

Yes, the contract itself can run up to five years, and the more -- the timing is also determined about the value of the contract, and they have got the amount of money to spend, and it's how fast they spend it.

So it would tend to be ratable, but I could be faster or slower depending on rig availability and access to the equipment.

All right.

Thanks very much.

Thank you.

Our next question comes from the line of [Therese Fabian] with Sidoti.

Please go ahead.

Hi.

I have to get my question in there about the Environmental Services segment sale also, I guess.

ho is the law firm representing you with the FTC?

Is this somebody who has had success in these cases?

It's (Inaudible) out of Washington, D.C..

Is very experienced in this area.

Okay.

Is one -- do you have any, like, proportions or any ratios of success in these cases as they are realized with the FTC?

Well, we certainly have some internal discussions, but that's nothing that we can share with the market at this time.

Okay.

A question on the G&A cost, $6.8 million.

How much of that is that going to be on a -- continually running forward?

You have the employee-based incentive costs, you have legal fees, professional fees.

Is this going to be sort of a run rate going on?

Therese, I think it would come down to the more traditional, roughly $5 million a quarter now.

Certainly in the fourth quarter is where -- in litigation I expect those expenses to be higher because of legal fees.

But the normal run rate about $5 million is what I would expect.

Okay.

And then on the -- on the uses of cash.

You have brought back shares under the current circumstances.

Are you going to be continuing to buyback, or would you be using those to pay down debt or just to accumulate cash, do you think?

Well, certainly 60 days ago our view on that issue and the conservation of cash is significantly different.

So we are certainly much more aware and cognizant of what is going on in the credit market, and I would expect us to be holding on to more cash than buying back shares.

Okay, okay.

I'll queue back up.

I have a couple of other questions.

Thank you.

Our next question comes from the line of Marshall Adkins with Raymond James.

Please go ahead.

All right, guys.

I'm not going to ask you about the Environmental business.

Actually, it seems like the real bright spot in the story and the change you guys have made has been in the Fluids business and obviously the market share gains.

Help me understand how you are getting these market share gains.

In other words, are you coming in at lower prices than the competitors?

Is it going in to areas that you didn't participate in before?

Is it that your products are just better than everyone?

Help us to understand what is driving the market share gains.

Yes, sure, Marshall, this is Paul.

Certainly a part of that is that we have been successful at drawing our business internationally.

Historically, the Company had been very strong with the independent -- you know, small, medium, and large independents.

Starting about, you know, 12 to 18 months ago, starting making a big push for the majors -- supermajors, the IOCs, the NOCs, and we're starting to get a lot of traction there with some of the recent contracts in Brazil, both with a supermajor as well as Petrobras, the resigning of the contract with Sonatrach in Algeria.

And domestically, certainly, I think it's combination of technology as well as our people.

Because we believe this value equation -- certainly our product technology -- brings value; but it's also our people and the knowledge of the formations and the customers, and we have been very successful at leveraging those relationships in very specific regions from East Texas, West Texas, Rockies, Oklahoma.

And, you know, at the end of the day, one of the things that we really try to do is bring value beyond what our competitors are currently doing, and we seem to be very successful at doing that.

Is any of it due to pricing lower, or -- I guess, how would you prices compare to your competition?

We normally don't try to feed on pricing.

Again, our objective here is to continue to improve margins and try to move our pricing up, and so we think we're differentiating more on the technology and the people side.

But we lose business right now as well.

I mean, we win some and we're losing some.

We lose some on pricing, so.

Hey, Marshall, I think that the other thing I would add -- I mean, again, you look at the margin.

Historically, the 13.5% this quarter tends to be at the high end of the margin range, and the contrary is, you know, you're buying a lot of business, and therefore you see the margins suffering.

We don't.

We're making a very disciplined approach to get new business without cutting prices and perform and improve our ability to deliver effective costs, and hence increasing margins, and I think that's what you're seeing.

Yes, that's really what I was getting at.

It seems like you are kind of getting both there, so that's good.

All right, a couple of other quick ones just in terms of, you went through your different regions, but just give me a quick snapshot of how much of your -- and I'm talking mainly on the Fluids side here -- how much of your business is international versus US -- well, let me rephrase that.

International versus North America?

Because I think that's kind of all linked to U.S.

natural gas prices.

And secondly -- and maybe it's really the same question, you know, how much would you view as oil driven versus gas driven?

The -- the Fluids business is roughly 20%.

International -- which we use the same definition, that of being non-North American, since the U.S.

and Canada are natural gas-driven markets.

So 80% North America, 20% international.

Roughly, we view the international market as the oil-driven piece, and the North American piece is driven as the (inaudible) that we certainly have seen a little bit of an uptick in oil drilling in the U.S.

in the last year.

But that's how we segmented the market and see it.

And let's say looking forward to '10 -- I mean, just to throw out a rough guess on where that might be given the Petrobras situation you're having on the international side?

Is that going to be 70/30, 50/50?

Where would you see that, say in two years?

Well, you know, year and a half, two years ago it was 85/15.

It's now 80/20.

I mean, we expect it to continue to move that way as we grow faster internationally, particularly if we see gas prices have an impact on drilling, at least in '09 and '10.

50/50 is a big number a long way out there, but certainly the 75/25 is the next mark for us, and our strategy has always been to grow and develop both businesses; but particularly international to give us a little bit of stability to help weather the storms on a volatile natural gas market in North America.

Okay, great.

Thanks, guys.

All right, Marshall.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Vijay Singh from Janco Partners.

Please go ahead.

Hi, good morning.

Good morning, Vijay.

Jim, the question for -- question on Mat business.

The margins sequentially slipped quite a bit, and we were a little bit under the impression that the -- on the cost cutting that you guys have done, that we are approaching a more steady state margin.

And then the revenue mix, if you can elaborate that -- what that revenue mix is doing, because my understanding is that the Colorado business is higher margin business, and yet composite sales were down sequentially.

So that shouldn't have affected that much.

I'm trying to get a sense of what's the steady state margin that we can model, and what needs to happen to achieve that?

Well, Vijay, in the last call we talked about we hadn't taken any actions, and we had gotten to a steady state -- to use your terms -- of around 10%.

And then of course, this quarter was 5.

If you were to adjust that for the expense that we incurred in shipping the mats to the UK and the duties that were incurred to do that, al that expense hit -- it hit in the third quarter, which impacted us by about five points.

So we were at that 10% rate absent that.

Now that money that we spent is really an investment for us in the future, because we now have the mats there and they're going to be able to ramp and generate cash flow over the succeeding quarters.

So if you adjust for that, you're back to the 10% steady state, and again, I think that is a level -- at least the activity that we've seen -- that should be a floor for that business moving forward.

Okay, so then it wasn't as much revenue mix than as much as it was one-time expense -- shipment expense, right?

On a sequential basis, certainly a little more revenue mix in the -- on the year over year comparison.

But you're right on sequential.

Okay.

In terms of the rigs, the contracts that your customers have on rigs and -- in your conversation with them, do you get a sense for there's a certain commodity price that they would be sensitive to beyond which they -- or below rates, that they would actually reduce their activities quite a bit?

Well, it's certainly -- Vijay, this is Paul -- that there are certain tipping points for our customers.

And that varies depending on what region of the country here in the U.S.

that they're drilling in.

So that varies by account, I think, and how efficient they are and what formation they're drilling in.

So -- I think it varies across the map.

Okay, very well.

Thank you very much.

Thank you.

Our next question comes from the line of Peter Conner with Capital One South Coast.

Please go ahead.

Good morning, Paul and Tim.

Hey, Peter.

Hey, wanted to maybe go a little further on Marshall's question of the mix of business -- and I apologize, I jumped off for a second -- you may have answered some of this.

But so, if 80% of -- and again, strictly Fluids Systems and Engineering, as that's North America -- Remind us that split on your onshore versus offshore of that among?

Yes, the North American piece, it's -- the vast majority of it is onshore -- it's land.

Okay, right.

And you had some opportunity for expansion, I guess, from the offshore?

Yes, exactly.

That's -- you know, we're very encouraged by our recent contracts in Brazil, the supermajor in Petrobras in deepwater.

Historically, we have done work in deepwater in the Gulf of Mexico, but we do see that as a market that we're going to reenter, and we have been working on.

Now, so I can understand a little bit on the cost structure side of that, can you break that down, at least generally, on -- you've got some -- is there a large percentage of that that's just some barite costs?

Of course, you mentioned that you potentially have even some cost relief on some of your product lines that are hydrocarbon based.

And then, what's the labor component of that?

Is it nominal?

It's certainly not nominal.

The labor part of it is an important piece of it, because we are a service piece business, and we have a lot of employees out there.

But the product cost is significant.

Then you've got the facility of the infrastructures -- the storage tanks, the blending facilities, the mixing of the product -- or inventory.

So it's largely a product in the facility infrastructure piece.

That's the biggest piece.

Is there anything -- you mentioned -- again, to go back to it -- about the -- some of you supplies' cost potentially.

But what about the (inaudible) of barite.

Is there movement downward there with additional availability?

Well, you know, we've -- certainly on the ore side, the raw materials side, we're not seeing any significant movements in pricing in China right now; though we are seeing a pretty significant decrease in some of the stock markets on the ocean going freight to move the products here in North America.

In (inaudible).

Okay, good.

Gentlemen, thanks very much.

All right, Peter.

Thank you.

(OPERATOR INSTRUCTIONS).

And our next question is a follow-up question from the line of Therese Fabian with Sidoti.

Please go ahead.

I have a question on the Brazilian market.

You probably see pretty expansive opportunities there, and I know that you've already constructed your facility for your production.

What are you plans -- like who do you see working there, and would be working outside of Brazil also?

Would you have an (inaudible) model, there?

Well, certainly there are other IOCs that work offshore in Brazil, and so we do work and communicate with them on a weekly basis about future opportunities and tenders that may be coming up, but more broadly within Latin America.

Right now, we're focusing on bringing home the Petrobras contract and the other one with the supermajor.

But maybe near the end of '09 we'd look to expand more into other parts of Latin America.

But probably more in the latter half of '09, or early '10.

Okay, and with your work in the Mediterranean -- you also have some in Eastern Europe now - is that becoming a significant portion of your revenue from there, or is it still pretty minor?

Well, it's certainly growing.

We have been real excited about the growth in Romania.

We have recently been awarded some new work in Hungary.

And we're also very excited about the work in the Black Sea in our third well that we have there.

So a significant piece, no; but a growing piece that we like.

And any new work in Egypt?

Well, we have had two test wells.

We are drilling another new well in Egypt right now, and -- but, again, just starting to gear that country up.

Okay.

Thank you.

Thank you.

And at this time, there are no additional questions.

I would like to turn it back to management for any closing remarks.

We would like to thank you once again for joining us on this call and for your interest in Newpark Resources.

And we look forward to talking to you again after the conclusion of the fiscal year.

Good-bye.

Take care, have a great day.

Thank you, sir.

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