NPK International Inc (NPKI) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Newpark Resources first quarter earnings conference call.

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

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

(Operator Instructions).

This conference is being recorded today, Friday, May 1, 2009.

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

Please go ahead, sir.

Thank you, Britney, and good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today to review 2009 first quarter results.

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

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

For those of you who did not receive an email of the release yesterday afternoon and would like to be added to the distribution list, please call the DRG&E at 713-529-6600 and provide us your contact information, or you can email me as well to be put on that list.

There also will be a replay of today's call and it will be made available on the webcast/website part of www.newpark.com.

And there's also a recorded replay available by phone, which will be available till May 8.

And all that information is in yesterday's release.

Please note that information reported on this call speaks only as of today, May 1, 2009, and therefore, you are devised that time-sensitive information may no longer be accurate as of the time of any replay listening.

In addition, the comments made by management today of Newpark during this call may contain forward-looking statements within the meaning of the United States federal security laws.

These forward-looking statements reflect the current views of management of Newpark.

However, various risks, uncertainties and contingencies could cause Newpark's actual results, performance, or achievements to differ materially from those expressed in the statements made by management.

The listener is encouraged to read the Company's 2008 annual report on Form 10-K, its quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of these risks, uncertainties and contingencies.

And now with that behind me, let's -- I'd like to 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 all of you for joining us today for our 2009 first quarter conference call.

With me today is Jim Brown, our Chief Financial Officer.

I'd like to start by giving a brief overview of the market and Newpark's performance during the quarter.

Following my remarks, Jim will discuss our operating segments as well as the combined Company results.

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

Now turning our attention to the quarter.

The first three months of 2009 have proven to be an extremely challenging and difficult time for the North American oilfield service market.

The US rig count averaged 1,344 during the quarter.

This was down 24% from the first quarter a year ago.

But more importantly, through last week, it has fallen dramatically by 53% from its peak last fall.

Canadian rig count declined 36% from the first quarter of 2008, yielding a combined 27% year-over-year decline for North America.

Due to these reduced activity levels, we saw revenue decline in all of our businesses.

More aggressive bidding for new and existing projects had the additional negative impact of compressing margins.

Because of these factors, our total revenue was $127 million for the first quarter, which is within the range we announced last month, representing a decline of 35% from a year ago.

Although we aggressively took actions to reduce our costs during the quarter, we were unable to keep pace with the rapid decline in revenue.

We have now reduced our North American headcount, including contract labor by 428 since the beginning of the year, representing a workforce reduction of 28% in a period of 90 days.

In addition, we froze all salaries and wages, and eliminated non-billable overtime and extra pay.

We have obtained pricing concessions from a host of vendors and suppliers, and discretionary spending in all areas has been reduced significantly.

In spite of these efforts and in light of the dramatic decline in drilling activity, together with pricing pressures, we are reporting consolidated net loss of $12 million or $0.14 a share for the first quarter, versus net income of $11.4 million or $0.13 a share a year ago.

The first quarter includes $2.6 million of pretax severance costs, which works out to be $0.02 per share.

Our first quarter results were also negatively impacted by a tax rate of 17% related to certain foreign operations.

This lowered our expected tax benefit and represents about $0.03 of the quarter's net loss.

Since the end of the first quarter, we have taken additional steps to return to profitability.

Effective today, May 1, the Company's Board of Directors, my executive staff and myself, have taken a 10% reduction in pay.

In addition, substantially all of our North American salaried employees will have their pay reduced by up to 5%, depending on their salary level, effective June 1.

During this period of severe downturn, our financial objective is simple -- to return to profitability and generate positive cash flow.

If the North American market continues to deteriorate, we will evaluate and undertake, where appropriate, actions necessary to achieve this financial objective.

While the North American situation is certainly discouraging, our international business is a welcome bright spot.

International markets in which we participate have fared much better.

Our Mediterranean business continues to perform well, producing another solid quarter with new opportunities in Turkey and Libya.

In Brazil, our operations in this important market are ramping up rapidly.

Our Petrobras contract has now started in earnest, where we have engineers on four deepwater rigs and 16 land rigs.

We will be on our first Maersk well in June, and on our second well with Exxon in the second quarter.

It is on the strength of these additional opportunities that we've decided to expand the capacity of our plant in Rio.

We remain optimistic about the future of the international markets and expect to be bidding on more work.

Even in the weak North American market, we have looked for expansion opportunities.

We recently opened a combined drilling fluids and well site construction warehouse and yard in Somerset, Pennsylvania to service the Marcella Shale play.

We have completed our first well in Marcellus for Chesapeake and have targeted other operators for additional work.

With that, let me now hand the call over to Jim Braun, our Chief Financial Officer, for a more in-depth discussion of the quarter's results.

Jim?

Well, thank you, Paul, and good morning, everyone.

I'd like to review our individual business segment performance before concluding with a look at our consolidated results.

But before doing, however, let me note that we've modified slightly the presentation of our income statement with this quarter's release.

You may have noticed that we're presenting a new caption entitled Selling, General and Administrative Expenses.

This caption includes the Newpark corporate expenses previously reported as General and Administrative, and the SG&A expenses of the operating segments.

The SG&A expenses of the operating segments were previously included in Cost of Revenues.

This change was made in part to better facilitate comparisons with other oilfield service companies.

And we will continue to disclose in the footnotes to the financial statements and in MDNA the operating profit of our segments, as well as our corporate expenses.

And now let me begin with the fluids business.

Looking at our first quarter results on a year-over-year basis, our Fluids and Engineering segment revenues were $107 million, a decrease of 32% from last year.

The bulk of this decrease was the result of weakness in North America, where there was a 39% decrease in revenues to $79 million, driven by a 27% decline in North American drilling activity.

Not only were there fewer rigs to service, but there was also heightened price competition for servicing those rigs.

Because of this adverse environment, our North American business declined across the board, with the hardest hit areas of the drilling fluids business being Oklahoma, the Rockies, and West Texas.

Our Completion Fluids and Services business based in Oklahoma was also particularly hard hit, with revenues being down 59% for the quarter as compared to the same period in 2008.

Revenues for Excalibur, our wholesale barite and industrial minerals group, was down 46% year-over-year.

And relative to North American market, our operations in the Mediterranean and Brazil performed much better, although the Mediterranean segment did experience a year-over-year revenue decline of 11% due to foreign currency effects.

In local currency terms, our Mediterranean revenues were flat.

Our Brazil revenue of $2.8 million for the first quarter was an increase over the $400,000 achieved a year ago, and is expected to continue to show good gains through 2009 as we move past our initial startup phase.

On a sequential basis, total Fluids segment revenues were down 44%, with our North American business accounting for the bulk of the decline.

The North American rig count was down 28% from the fourth quarter of 2008.

Mediterranean revenues were down about 21%, the decline split equally between a strengthening dollar and the timing of customers' drilling plans.

Brazil revenues were down about 58%.

This was due to the completion of our first well for Exxon in the fourth quarter, and we expect to service a second well for them in Q2.

The operating loss in our Fluids segment was $5.6 million in the first quarter, which is a decline of $27 million year-over-year and $28 million sequentially.

In both comparisons, the drop in North American rig activity and more aggressive pricing contributed to the significant decremental margins.

This segment incurred $2 million in pretax severance costs in the quarter.

Including contract engineers, the Fluids business has reduced its North American work force by 39% or 375 people since last December.

In our Mats and Integrated Services segment, revenues were $8.9 million in the quarter, down 58% from both the prior-year and sequentially.

There was a $9.5 million year-over-year decrease in the well site construction services business that was largely attributable to the Gulf Coast market weakness.

This is being driven by both decreased drilling activity in the Gulf Coast region, as well as a continuing shift in focus from coastal drilling toward more inland locations.

In addition, intensifying price competition and the timing of non-E&P related projects also had a negative influence on the results.

Composite mat sales were down 66% year-over-year and 78% sequentially to $1.4 million, as these sales tend to be sporadic and can fluctuate a good deal depending on the timing of orders.

The operating loss for the segment was $3.4 million, down $3.5 million year-over-year, and $1.7 million sequentially.

Once again, operating margins suffered as a result of reduced activity and pricing pressures.

As was the case with the Fluids business, we've implemented cost reduction initiatives, such as paring headcount by 78 employees in this segment, with an associated severance cost of $400,000.

As a reminder, we brought the Environmental Services business back into our continuing operations in the fourth quarter of last year.

The Environmental Services segment was the only segment that generated operating income in the quarter.

They reported $11.5 million in revenue for the quarter, down 29% year-over-year, and 24% sequentially.

The bulk of the decline in both comparisons was the result of a reduction in the volume of waste processed in the Gulf Coast.

In addition, in the first quarter of 2008, there were unusually large volumes of waste from a well blowout, which did not recur.

However, some of the volume decline was offset by favorable sales mix and pricing increases.

Operating income for the Environmental Services segment was $1.2 million in the quarter, down $3.1 million from last year.

On a sequential basis, operating income improved $730,000, due primarily to asset write-offs in the fourth quarter of 2008 of $2.6 million.

And now turning to the consolidated results.

For the first quarter of 2009, we reported total revenues of $127 million, down 35% from the first quarter of last year.

The net loss in the first quarter of 2009 was $12 million or $0.14 per share.

As Paul mentioned earlier, our first quarter operating results include $2.6 million of pretax severance costs, representing about $0.02 of our net loss.

The quarter's results were also affected by a low 17% effective income tax rate, which was mainly the result of a couple of events.

First, based on recent projected losses in our Canadian operations, we wrote down our tax asset related to a Canadian net operating loss carryforward.

The write-off of the tax asset of approximately $1 million was netted against the quarter's benefit.

Second, in certain foreign countries, mainly Canada and Brazil, we are not recognizing a tax benefit on the losses currently being generated because of the generation of income in the future is uncertain, at least as set forth (technical difficulty) accounting requirements.

In total, these two items account for most of the difference between the statutory tax rate of 35% and the reported tax rate of 17% for the first quarter.

This difference represents about $0.03 of our loss per share for the quarter.

And now turning to our balance sheet.

At March 31, working capital stood at $207 million with a cash balance of $9.3 million.

We paid down $25 million in debt during the quarter, bringing our total debt balance to $163 million for a debt to capital ratio of 31%, down from 33.2% at the end of 2008.

Our capital expenditures were $7.5 million in the first quarter, the majority of which was spent outside of North America in growth markets.

Looking out for the balance of the year, we expect to spend capital only as needed, and we expect capital spending for 2009 to be approximately $20 million, down from an estimate of $28 million announced during our March conference call.

Our depreciation and amortization expense was $6.9 million in the quarter.

Regarding our liquidity position, at the end of March, we had $51 million of availability under our $175 million revolving credit facility.

The credit facility, which also has a $40 million outstanding under a term loan, expires in December 2012.

The next $10 million installment on the term loan will be due in December 2009.

With the decline in activity levels, we saw an 18% reduction in our working capital since the end of 2008, driven mostly by a 36% decrease or $74 million in receivables, which allowed us to pay down debt during the quarter.

Despite this cash generation and debt reduction, an area of concern for us is our ability to generate sufficient levels of EBITDA as defined in our credit agreement to remain in compliance with our financial covenants.

Although we are in compliance with all three of our financial covenants at the end of March, if drilling activity levels remain at depressed levels through the balance of the year, it is likely we will not remain in compliance with those covenants, even if we return to modest profitability.

In order to address this situation, we have begun discussions with our lead bank in an effort to explore options, with the objective being to modify the covenants before we reach noncompliance.

And now I'd like to turn the call back over to Paul for his concluding remarks.

Thanks, Jim.

Clearly, this was a difficult quarter, one that so quickly erased the gains and the great strides reached in 2008.

We hope that we've seen the worst of the North American rig count decline.

Despite our headcount and cost reduction, timing issues mitigated their effects on the quarter's results, but we expect that we will start to see the full benefit of these steps as we enter the second quarter.

Although it appears that the rate of decline in North American rigs might be slowing, we will continue to look for opportunities to reduce costs and drive operational efficiencies in order to better position ourselves in what we expect will be a challenging year.

But even in difficult times like this, we are excited about the programs we've implemented overseas, particularly in Brazil.

We feel fortunate that our efforts to diversify the business outside of North America have put us in a position to deliver more attractive growth rates with less dependence on domestic drilling activity.

We will continue to execute on international growth strategies, while also paring costs in North America to manage through the downturn.

Looking forward, in the US, we do not expect the US rig counts to rebound before the end of 2009.

Low natural gas prices driven by high supply and low demand, along with ongoing tightness in the credit markets, are the headwinds that we have to overcome.

When times are bad in a cyclical industry such as ours, we all strive to find ways to operate more efficiently and conserve capital.

In short, we want to be well-positioned as we can be to emerge a stronger company when the recovery comes.

With that, we'll now take questions.

Operator?

(Operator Instructions).

Marshall Adkins, Raymond James.

Let's start with the Fluids business.

Obviously, much lower margins than most of us thought.

I'm assuming a lot of that is because of the high severance costs in this quarter.

So first of all, I mean, is that the case?

And second of all, when do you think those margins are going to bottom and improve, given the cost-cutting measures that you've put in place?

The severance in the Fluids business was about $2 million.

So certainly that was a component of it.

But the margin decline was really driven by the dramatic drop-off in the revenues in that business segment.

And based on the actions taken to date and the structuring of the costs, it's in a position where it should return to profitability, and margins over the balance of the year can improve, as we see some improvement in the rig activity.

So do you think this was the worst quarter?

I mean, do you think you absorbed most of the costs this quarter?

Or are we going to flop around here for another few quarters, at least on the margin side?

I think it's been the worst -- if the rig count goes down to lower levels as some are projecting, we'll take additional costs out.

But at these levels that we see today, this should be the bottom.

And Marshall, just to follow up on that as well, in the first quarter -- I mean, the rig count was dropping so quickly, as [it] was taking out headcount, we just couldn't keep up with that decline.

The other factor, too, in the first quarter is that our Brazilian business ran a net loss because we were mobilizing, bringing on resources to gear up for the Petrobras contract.

And we expect Brazil to go net income positive in the second quarter.

Yes, that's where I was going to go.

It seems as that comes online, even if North America continues to stay in the toilet, I would think the Brazilian side would start to boost your margins a little bit.

Absolutely.

The work with Petrobras, as we mentioned the number -- roughly 20 rigs we're now -- been given in Brazil with Petrobras, the Exxon Mobil gearing back up, the new contract with Maersk.

We have a contract with Alvarado as well that we signed.

So we do expect some strong revenue growth in the second, but really growing more in the third and the fourth quarter.

All right.

My last question on the Fluids side and I'll re-queue.

The rig count was down 28%, but you fell 44% in terms of revenues.

Was that regional mix where you happened to be regionally, that fell more?

Was it marketshare loss?

Or was it price?

Or was it all of the above?

Well, I think it was all of the above.

Certainly, the bread and butter of our client base has been the independent operators for many years.

And they're the ones that laid the rigs down the fastest and the hardest.

We also saw severe pricing pressure during the quarter and it was really in all regions.

So, it was all three of the things that you mentioned.

Are prices stabilizing at all yet?

They appear to have stabilized, but there's still some very aggressive bidding on wells as they're put out.

And a lot of our operators today are bidding on a well-by-well basis as opposed to a package, which they did six, nine months ago.

Thank you all very much.

Mike Harrison, First Analysis.

In terms of the SG&A, I know that you shifted some cost around there from cost of goods sold down into the new SG&A line.

But can you give us a sense of where those SG&A costs stood on an ex-specials basis in this quarter as compared to what the fourth quarter looked like on a restated basis?

I don't know that I have the exact number here.

They've certainly come down.

We had some -- we did have, as you know, mentioned some costs in the fourth quarter.

They've come down both in our corporate office as well as in our operating businesses.

And how much on an annual basis are the cost-cutting actions that you've taken expected to save?

Across the Company, we've targeted $40 million of annualized savings through the actions that we've taken and the opportunities that we've identified.

And how much of those were realized in the quarter?

What kind of run rate were you at, at the end of the quarter?

In the first quarter, there was a relatively small amount that was realized because the actions, particularly the headcount reductions, occurred throughout the quarter.

We also had the severance.

That run rate really picks up and we ought to see a full quarter's benefit starting in the second quarter.

All right.

And specific to the Mats business, I think given where the revenues were in that business, some of us would have expected an even wider loss.

I was wondering if you could talk specifically about actions you've taken to control costs there, and maybe if you can comment on how much you brought your breakeven point down in that business?

Certainly, in terms of how we've been managing that business, we've been taking down headcount.

We've been sizing down a couple of our smaller operations and moving the labor force to more of a hub and spoke concept, because the rig activity continues to decline in South Louisiana; taking very aggressive cost reductions on expense spending, the division, SG&A.

So that's what we're trying to do is rightsize it again for the current rig activity in that marketplace.

All right.

And the last question I have is on Brazil.

You commented that you're ramped up to four offshore and it sounded like 16 onshore rigs.

Can you give us a sense of how many platforms, once that contract is fully ramped, how many platforms you'll be on?

Yes, I don't think they've committed to an actual number at this time.

As other rigs become available to us, we'll go on more of those; but it's a little premature at this point to speculate the total that we'll have.

All right.

Thanks very much.

(Operator Instructions).

Terese Fabian, Sidoti and Company.

I have a question -- on your debt covenants, you said that depending on what the market outlook is, you might be tripping some of them.

Can you give the specifics of where you stand now and what you think the issues would be?

Sure, Terese.

Good morning.

As you know, we have three financial covenants.

The information that I'll give you we're going to -- we'll also lay out for you in our 10-Q that we expect to be filed either this afternoon or on Monday morning.

But on our consolidated fixed charge coverage ratio, we have a minimum of 1.2.

And at the end of March, that was 1.72.

We have a consolidated leverage ratio, which is our debt to EBITDA, has a maximum of 3.0.

And we were at 2.46 at the end of March.

And then finally, the third covenant is one that we are well within, is our debt to cap ratio.

We have a max of 45% and as we mentioned, we were just at 30% for the quarter.

And in terms of talking with your banks through this, is this common now in the industry?

Do you expect to have issues arising there?

Well, this -- our bank facility or credit facility is fairly common in the oilfield service space.

So we're not the only company that the banks have begun talking to and this is what they've told us.

So it's going to be something that a lot of companies, a lot of banks deal with here through the balance of 2009.

And we all have an expectation to work through that and reach something that's mutually beneficial and satisfactory to both parties.

Okay.

And then a question on your Mediterranean operations.

I think, Paul, you mentioned some work in Turkey and Libya.

Is this new work?

Or are these continuing projects?

It's new work that we've been bidding on offshore Turkey in terms of some natural gas storage wells that they're looking at putting in.

And in the case of Libya, it's continued tenders that we're bidding on for offshore deepwater work there.

Are you looking at any other areas off of Africa or -- primarily off of Africa?

We certainly have been asked at times to bid on business in West Africa.

Typically, we've stayed away from countries like Nigeria, but we may look at a few countries.

But I wouldn't expect a lot of activity there in '09 at all.

Marshall Adkins, Raymond James.

Well, good to have a little extra time here.

So you mentioned that you wanted to be -- one of your goals to be free cash flow positive going forward, and part of that CapEx is going to come down.

Any sense of what quarter you can turn that corner to where you're going to be free cash flow positive?

What's your sense there?

No, I mean, Marshall, again, we've taken some pretty drastic actions, as you've seen, to get to that position.

We think that in the second quarter, it is certainly our plan, our expectation, based on where we see the rigs doing today, to be able to do that.

Okay.

So you can cut costs that quickly.

All right.

That's helpful.

A couple of income statement items.

Your depreciation was down meaningfully.

I assume that was from some of the right-downs you took last quarter.

SG&A, you mentioned re-categorize some things; that's down.

Interest was down huge, a lot greater in proportion than really the debt that you paid down.

Can you walk through some of those balance sheet items just to give us a feel for where we should model those going forward?

Well, certainly, the interest expense has come down because of the debt reductions that you describe.

But also we benefited, versus a year ago, in some of the lower interest rates.

So we've taken advantage of that as LIBOR in particular has come down.

In terms of some of the -- you mentioned balance sheet issues (multiple speakers) --

So, going forward on the interest -- 1.6 a quarter is kind of a good run rate?

Yes, it is, Marshall.

I would caution you, though, that one of the outcomes of most bank negotiations when you have covenant violations is an increase in the interest rates to market rates.

We put our facility in place in December of '07 when rates were still very low.

So we certainly have an expectation that interest expense is going to go up as a result of any renegotiation of our facility and/or the covenants.

So that is a potential increase.

Right, that makes sense.

Okay.

Keep going -- depreciation, SG&A?

Yes, the depreciation is really flat quarter-over-quarter.

It was up some sequentially, as we put on some new assets in place, particularly in Brazil.

We have seen a slowdown in the collection efforts, as you might expect, from customers, so we are working diligently to ensure we get paid.

Our DSO's were up over the end of the year.

And we've got inventory that, as we went into the end of last year, had been in the pipeline.

And as the market decreased, we haven't been able to liquidate that inventory as quickly.

That represents an opportunity for us over the next several quarters to convert that into cash as well.

Okay.

All right, last question for me here.

When you talk about negotiating with the banks, I assume -- the covenants, are they with your line of credit or the other facility?

Is that where the -- where are the most onerous covenants located?

Yes, Marshall, it's actually one facility that just has the two components -- that being the term loan and the revolver.

So, there's only one set of covenants that cover both of them.

Okay.

All right, good.

Thank you all.

Terese Fabian, Sidoti and Company.

I have a question on the competitive landscape, sort of a broad brush question.

What are you seeing in terms of the smaller and the larger competitors as far as bidding on contracts goes?

And what do you think will be sort of the end run of this towards the end of the year?

Will there be some falling out of businesses or a dropping by the wayside?

Well, certainly, we see the continued pressure on the competitive landscape, as Jim mentioned.

Our customers are bidding out every well versus bidding them on a package basis.

It might change by the end of the year, though I wouldn't expect it to.

Some people may fall out of the mix.

But the way we're running the business at this point is that we expect to see continued pressure in the North American market.

We're not seeing competitive pressures to that same degree, obviously, in the international market.

So, we're being more optimistic about our margin and being able to hold margins internationally.

Okay.

And you mentioned certain areas in North America that were more difficult than others.

And you also mentioned that you are in the Marcellus with one well.

Do you think you will -- I mean, what is your view on this?

What do you expect going forward?

Well, certainly, the areas that have been hardest hit, again, as Jim mentioned, Oklahoma was hit pretty hard in terms of drilling activity as well as margin; the Rockies and West Texas.

Certainly, Marcellus -- we're excited about the opportunities there, a new play.

Working with Chesapeake, who's one of our largest customers, in other parts of the country.

And so we remain optimistic around the opportunities up in the Marcellus Shale.

And do you have a regional office up there?

Yes we do, in Somerset.

And the other thing I might mention as well -- the other play that we've been very successful on recently is in the Haynesville Shale, is another area that we expect to see some increased demand and hopefully, some margin improvement going forward.

Okay, thank you.

Thank you.

(Operator Instructions).

And there are no further questions in the queue at this time.

I'd like to turn it back to management for any closing comments.

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 second quarter.

Thank you.

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

If you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter access code 11129131 followed by the pound sign.

And once again, the number is 303-590-3000 with an access code of 11129131 followed by the pound sign.

We thank you for your participation.

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