NPK International Inc (NPKI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and 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 opened for questions.

(Operator Instructions).

This conference is being recorded today, October 30, 2009.

I would now like to turn the conference over to Carol Coale of DRG&E.

Please go ahead.

Thank you, Macayla.

Good morning, everyone.

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

We would also like to welcome our internet participants listening to the call finalcast 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 e-mail of the release this morning and would like to be added to the distribution list, please call us at DRG&E offices at 713-529-6600 to provide us with information, or you can e-mail Ken Dennard at the address 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 available by phone, which will be available until November 6, 2009, and that information is in yesterday's release.

Please note that the information reported on this call speaks only as of today, October 30, 2009, and therefore you're advised that time-sensitive information may not 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 in the expressed in the statements made management.

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

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

Paul Howes.

Paul?

Thank you, Carol.

Good morning to everyone.

We'd like to thank all of you for joining us today for our third-quarter 2009 conference call.

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

Following my remarks Jim will provide an update on our business segment, as well as the financial details of the quarter.

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

Now turning our attention to the third quarter.

We are starting see signs of improvement in drilling activity, even though the North American oil field service market continues to be a challenging and difficult environment.

Total consolidated revenues for the third quarter were $118 million, an 8% improvement from the second quarter.

Net income on a per share basis for the quarter was at a break-even level as a result of improved revenues, our cost-cutting initiatives and a gain from the settlement of business interruption insurance claims.

This break-even performance in the third quarter compares sequentially to a net loss of $8.8 million in the second quarter, or $0.10 per share.

Year-over-year revenue declined 48%, with net income dropping from $10.4 million, or $0.12 per share a year ago.

Sequentially, the US rig count increased 4% from the second quarter.

This is a first increase in the average quarterly US rig count since the third quarter of 2008.

As a result, our North American Fluids revenues were up 8% from the prior quarter and we also regained some of the market share lost during the first half of 2009.

Some of the better improvements came from the Rockies and East Texas, where working the Haynesville shale continues to expand.

However, Oklahoma and Louisiana Gulf Coast are still seeing low levels of activity.

We saw a seasonal rebound in our Canadian business, although Canada remains a difficult market.

Our international business continues to perform well, posting sequential revenue growth of 16% from the second quarter.

Although the pace of our Fluid sales to Petrobras is still below our expectations, we have solid -- seen solid improvement in revenue growth in Brazil.

Revenue in the quarter was $9 million.

a $5.4 million improvement over the second quarter, with most of the work coming from Petrobras and Maersk.

Consistent with our near term of improving profitability in Brazil, we reached a break-even level in the quarter as compared to second quarter operating loss of $2.5 million.

Our Mediterranean revenues were $29 million in the quarter, unchanged from the second quarter.

Most importantly, the drilling Fluid segment returned to profitability in the quarter with operating income of $2.5 million compared to an operating loss of $1.7 million in the second quarter of 2009.

Our Environmental Service business continues to perform well, with $11 million of revenue in the third quarter, which was roughly equivalent to the second quarter.

This segment, which has remained profitable during the downturn, has operating income of $4.1 million for the third quarter, which includes $2.3 million of business interruption insurance gain.

As we discussed on our last call, we implemented a plan last quarter to combine the management of our Mats and Environmental Services business in order to reduce cost and enhance operating efficiencies.

This action, along with other cost cutting steps, had a positive impact as Mats lowered operating loss to $879,000 in the quarter on revenues of $7.6 million as compared to a loss of $4.8 million on revenues of $8.6 million in the second quarter.

We continue to work on return this unit to profitability and expect it to be profitable in the fourth quarter of 2009.

Although we are seeing North American rig counts increasing and other signs that the industry may be improving, we continue to focus on managing cost, including the implementation of our newly reform chain organization.

In the meantime, we are continuing to expand our presence in some of the more favorable domestic markets, such as the horizontal shale plays in the Haynesville and Marcellus .

To that point, we recently opened up our second Marcellus location in Horseheads, New York.

In these developing shale areas we have started to favorable results and increasing interest in our service and technology offering.

Overall, based on our recent count we estimate that we have approximately 20% of the rigs operating in the US shale plays.

Another positive development on the technology front has been our introduction of our water-based Fluid Systems into the Brazilian market.

Specifically, we successfully introduced our deep drill system on two wells for Petrobras during the quarter.

Based on this success, they've decided to drill two additional wells using deep drill.

To our knowledge these first two wells are some of the most successful water-based wells drilled by Petrobras.

In addition, we have been employing our flex drill water-based system for Maersk in Brazil.

As we have stated before, these water-based fluids represent an important value-added proposition for our customers when compared to synthetic fluid systems, which have been the main stay of offshore drilling.

Now what I'd like to update you on our liquidity situation, specifically the amendment to our agreement that was executed in July of this year.

The amendment waived financial covenant violations as of the end of the second quarter and modified our covenant requirements to the second quarter of 2010.

We've continued to focus on cash management and this has resulted in a total debt reduction of $10 million in the quarter, bringing our year-to-date debt reduction to $53 million.

As expected, we are in compliance with our covenant requirements for the third quarter of 2009.

With that, now let me turn the call over to

Thank you Paul and good morning.

I'd like to start out by reviewing the performance of our business segments before concluding with a look at our consolidated results.

Our Fluids System and Engineering segment revenue was $99.4 million in the third quarter, a decrease of 47% from last year.

The bulk of this decrease was attributable to a 60% decrease in North America revenues to $61.1 million.

Lower natural gas prices, record storage levels and reduced demand depressed drilling activity, which drove aggressive price competition.

All of our North American regions suffered a significant fall off in revenues and profitability.

Our Mediterranean operations performed notably better than North America, but were hampered by a stronger dollar during the quarter compared to a year ago, as we saw a year-over-year revenue decline of 9% to $29.4 million including a 5% decline from currency effect.

Our revenues from Brazil were $9 million in the quarter, up 90% over last year's third quarter due to the startup of the revenue-generating activities in the latter half of 2008.

On sequential basis, total Fluid segment revenues were up 11%, with North America revenues up nearly 8% thanks to a 4% improvement in the US rig count, market share gains in the US, and a seasonal rebound in Canada, which provided incremental revenues of $1.8 million.

Paul mentioned the strong showing in the Rockies and East Texas, I would also add West Texas, which reported increase in revenues.

At the Gulf Coast and Oklahoma areas, including our Midcon completion fluids business in western Oklahoma, have yet to see an upturn in activity levels.

Mediterranean revenues were flat at $29.4 million compared to the second quarter, while Brazilian revenues were up $5.4 million to $9 million, reflecting a ramp-up in activity with Petrobras, Maersk and Eldorado.

In terms of operating profit our Fluid segment reported $2.5 million of operating profit in the third quarter compared to $25.6 million in the third quarter of last year.

The third quarter operating profit showed a $4.3 million improvement over the $1.7 million operating loss in the second quarter, reflecting the benefit of the increased revenues and the cost cutting steps taken in the first and second quarters of this year.

Environmental Services reported $11.2 million in revenue for the quarter, down 23% year over year.

On a sequential basis revenues were comparable, down only 1%.

This market has remained relatively stable throughout the downturn, although recently it has seen some softness.

Operating income for the Environmental Services segment was $4.1 million in the quarter, up $2.2 million from last year.

On a sequential basis, operating income was up $2.7 million.

These gains were a result of the $2.3 million in income associated with the final settlement of business interruption insurance claims from the 2008 hurricanes and storms.

Now let me discuss our Mats and Integrated Services business.

In our Mats segment revenues were $7.6 million in the quarter, down 66% from the prior year.

On a sequential basis, revenues were down $1.1 million, which includes a $3 million decrease in Mat sales that was offset by an increase in Mat rental and Integrated Service work where we had a large construction project in the quarter.

Also we are starting to see a slight pick up in activity in the Gulf Coast area.

The operating loss for the segment was $879,000 compared to operating income of $1.1 million a year ago and an operating loss of $4.8 million in the second quarter of 2009.

However, the Mats business was cash flow positive, defined as operating loss plus depreciation and amortization, in the quarter and we expect to reach break-even operating income next quarter.

Moving on to our consolidated results, for the third quarter of 2009 we reported total revenues of $118.2 million, up 8% from the second quarter of 2009 and down 48% from a year ago.

Net income in the quarter was $202,000, a break-even on a per share basis, compared to a $0.10 loss in the second quarter of this year.

A year ago we reported second quarter earnings of $0.12 per share.

As mentioned earlier, our third quarter operating results include $2.3 million in pre-tax income from insurance claims.

This insurance gain added approximately $0.02 to our earnings per share.

Our second quarter 2009 results included $4.8 million of pre-tax charges related to employee termination cost, the nonrenewable barge leases and asset write downs.

These items contributed about $0.03 for the second quarter loss.

Now let me discuss our balance sheet and liquidity.

During the quarter we paid down $10 million in debt, leaving total debt of $135 million at the end of the third quarter.

Since the beginning of the year we've reduced debt by $53 million.

Now the reduction in debt has lowered our debt-to-capital ratio to 27% at September 30th from 29% at the end of June and from 33% at the end of 2008.

Our cash balances at September 30th was $6.3 million.

As part of the amended credit agreement reached last July we agreed to reduce the revolving credit facility from $175 million to $150 million.

At the end of September, we had $61 million of availability under this facility.

Our capital expenditures were $3.1 million in the third quarter, more than half of which was spent in Brazil.

Our depreciation and amortization expense was $6.8 million in the quarter and we expect capital expenditures to be roughly $3 million for the fourth quarter, resulting in a total 2009 CapEx of about $20 million.

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

Thank you, Jim.

In summary, we are pleased with our third-quarter results.

On the international front the growth and greater relative stability of overseas market has been a great benefit to us during these difficult economic times.

But as I said earlier there's still a great deal for growth and improvement, not only in Brazil but also in the Mediterranean.

The opportunity to expand the presence of our high-performance water-based fluids, in both the overseas markets, as well as the domestic shale plays, is an exciting opportunity as it gives further credence to the technological advantages of our core products and services.

We have a lot of work ahead of us bit we are committed to improve earnings as we move forward into 2010 and beyond.

Before turning the call over for questions, I wanted to take a moment to thank our employees for the dedication and commitment to our customers during these difficult times.

With that, we'll now take your questions.

Operator?

Thank you, sir.

(Operator instructions).

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

Please go ahead.

Hi, good morning.

Morning, Mike.

You've shown some pretty nice improvement in gross margin this quarter, at least on a sequential basis.

Can you comment on how sustainable that improvement is and given the changes that you might be expecting over the longer term in your mix, do you have any long-term target for gross margin?

Mike, good morning.

We certainly have a goal and objective of returning back to our historical operating margins in our businesses.

The timing of which will be a little bit subject to what happens with rig activity, but with the cuts we've made in the cost structure and the position that we're now in, we believe that we'll be able to achieve that as the market comes back and our business grows, particularly in the international arena.

Was wondering, also, just in terms of the debt covenants, what was the lever ratio at the end of the quarter and how do you feel about your ability to remain in compliance going forward?

Well, let me address the latter part of your question first.

Certainly we remain with an expectation that we'll maintain compliance with those covenants as we go through these amended covenants and then returning ultimately to the other one.

In terms of the leverage ratio we'll be filing our Q either later today or tomorrow and you'll see, but it came in just under three turns on the leverage.

All right.

And I was also hoping you could talk about the competitive environment.

You mentioned in Fluids aggressive price competition but also mentioned regaining some of the share that you lost during the sharp downturn earlier this year.

What are your expectations on pricing and market share going forward?

Certainly pricing has been difficult.

We saw it stabilizing some in the third quarter.

Certainly we've been taking back some market share in areas that we've lost some, specifically in East Texas, Louisiana, the Rockies, West Texas, and so our expectation going forward is that we see some -- continue to see some modest increase in market share gains, but we expect pricing to continue to be difficult as we move forward.

All right.

Thanks very much.

Thank you.

Our firs -- our next question comes from the line of Stephen Gengaro with Jefferies & Company.

Please go ahead.

Thank you.

Good morning, gentlemen.

Hi Stephen.

I guess back to a similar question on the pricing side, but you talked about market share changes, do you have a sense for why you lost it and how you're getting it back?

I think to some degree as we were losing it --, we lost market share faster than the rig count decline and I think to some degree that was our dependency on some of the independent operators.

We're starting to see some of those independent operators that we have a strong relationship with starting to drill more, and so we're starting to pick up more work in that segment.

Stephen, I think the other thing I would add specifically relates to the shale plays.

We've always had a nice position there and as you know, the activity and the increase in the shale plays have been better than some of the other regions, so that's certainly benefiting us at this time.

Thank you.

And then on the international front, any new big opportunities that you're seeing?

Certainly we're excited about the use of our water-based technology in Brazil.

As we continue to gain traction there our hope is that we would pick up additional rigs that would be dedicated to our water-based technology with Petrobras as we move into the fourth and the first quarter of next year.

Great.

And just as a final follow up, when you -- I'm not sure it is a big issue yet but as you grow internationally, does the -- does the single product service line focus, do you think that hurts you internationally, or do you think that the Fluid division is largely independent of the other services?

It's largely independent, though I think you'll see some -- the integrated projects taking some of that share.

But as you know, currently the Fluids contracts when they're bid internationally, drilling fluids as well as solids control and occasionally we'll get some completion additives.

We don't see any significant change in that approach in the market over the next couple of years.

Thank you.

Thank you.

Our next question comes from the line of Jim Rollyson with Raymond James.

Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Paul, you guys were talking about Brazil this quarter contributing about $9 million and it started ramping finally and so you got to close to break-even levels on margins.

As that continues to ramp-up any thoughts as to how -- number one, maybe, what the incremental revenue might look like for next quarter but longer term, more importantly, how that's going to start impacting your margins, assuming that margins elsewhere are flat.

How much incremental Fluids margins are you looking at when that ramps up to a full run rate:

Let me answer the latter part of that question first.

Longer term we would expect for the Brazilian margins to be more in line with the margins that we've seen in the [Abba] shorter term we're going to continue -- we need to continue to drive the revenue, hopefully with our water-based technology where we see stronger margins.

We've been very pleased with the initial success there.

So it's a little premature to look at the shorter term but certainly longer term we would expect margins to be more consistent with our Abba business.

And on the revenue side, do you think that will be up sequentially given what Petrobras is doing today and what you see so far for the quarter?

That's our expectation.

And last one for me, I think I heard you say that Mats was going to be break-even in 4Q.

is that a function of cost cuts or -- in addition to what you've been doing, or is it because activity's starting to pick up a little bit in the Gulf Coast, or a little bit of both?

Well, it's a little bit of both, Jim, and we've also got some Mats shipments and some sales of Mats on the order book that would help contribute to that, as well.

So as you know, that has been a piece of our business that has really disappeared almost, but we are starting to see more activity and interest in people in making those purchases again.

So the purchase part might be still a little spotty from quarter to quarter, but 4Q it sounds like you've got some stuff on the books so that'll help keep that break-even?

That's correct.

So maybe not sustainable short term but hopefully as that picks up overtime that gets back to where it used to be?

Right.

Perfect.

Thanks, guys.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from the line of Terese Fabian with Sidoti & Company.

Please go ahead.

Thank you, good morning.

I have a question on Brazil.

How many rigs are you working on now and what proportion of the business there is with Petrobras in the third quarter?

Probably -- the majority of the work in the quarter was with Petrobras.

We have seven rigs that were assigned to there in the offshore market.

Doesn't mean they're necessarily all working and drilling at the same time, but that's the number of rigs that we're currently term assigned to.

And two of those rigs have been dedicated now to water-based technology.

Okay.

And what is the competitive outlook there for you?

You have the contract with Petrobras, but then you're also working with oil majors.

Who else -- what would be your main competition down there?

Well, certainly the main competition in Brazil is similar to what we see around the world with M-I SWACO, Halliburton and Baker Hughes.

Okay.

And then with the water-based fluids there you said you're getting a good reception in Brazil, are you also marketing that aggressively in the US?

We've started to market some new water-based technology specifically for shale plays, but we're in the early stages of that.

We've had one successful well so far, but that's one data point.

We need to continue to improve and track along that success, and we'll provide another update on that in the fourth quarter.

Okay.

And you mentioned a large construction project in the Mats and Integrated Services segment in the third quarter, can you talk about where that was and what the outlook is for more construction work going forward?

Yes, It was in South Louisiana, it was a construction of some infrastructure there and again overall the activity we're starting to see a slight pickup there in South Louisiana with the operators and we're optimistic that that'll continue to grow.

Okay.

And just a last question on the new supply chain organization that you say that -- I think you said you're putting it into effect, is that going to have cost savings for you, any discreet numbers you have on that?

Yes.

No discreet numbers at this time, but certainly we do expect to have margin improvement as a result of that group's activity, but where we'll really seeing benefiting the Company is that we start to ramp-up and start purchasing more raw materials hopefully we'll start to obtain a lower cost position, which will flow through the income statement.

Thank you.

Thank you.

Our next question comes from the line of Rod McKenzie with FBR capital markets.

Please go ahead.

Good morning, guys.

Good morning.

Thanks.

A couple of questions for you.

First, on Brazil, how do you think about the potential growth opportunities as Petrobras adds deepwater rigs to their fleet?

How many of those do you think will go towards their insource fluids management versus how many do you think are potential pickups for you guys going forward?

Well, Rob, we think as Petrobras continues to add deepwater rigs and their business continues to expand that we'll participate in that work certainly.

We've been very successful in our work down there so far.

We've had good results.

They seem to be pleased, and we would expect to continue to participate with them as their market grows.

We certainly would expect Petrobras, though, through their supply arm to continue to purchase base oils for some of the synthetics, but the additives and the service on those rigs certainly we would expect to participate in.

Okay.

Following up on that, in terms of their purchase of the base oils and chemicals, how would you characterize your market share in that portion of Petrobras business?

Typically we bid -- those bids are put out in sometimes a monthly basis with BR.

Sometimes we'll win some of those bids, sometimes we won't.

Quite honestly, a lot of those bids on base oil and some of the other commodity chemicals have very low margins, and so we're selective in where we think we can get margin.

Okay.

That goes to my next question.

It seems like if the water-based fluid is really effective on Petrobras' wells that could be a competitive advantage for you all being able to drill the wells with a higher margin, compete better against some synthetics.

How long do you think it'll be before we know for sure how much productivity gain the water-based fluid you're using there could yield for Petrobras?

That's a good question.

Certainly we've had two successful wells with Petrobras.

We expect to drill a couple more wells here in the fourth quarter and hopefully accelerate that as we move into the first half of next year.

Ultimately we'll have to work close with Petrobras in terms of quantifying the value.

Certainly from an environmental perspective there's a reduced cost to disposal of the cutting.

We've seen faster rate of penetration initially and we've seen very solid well bore stability.

So I think we're probably another six months away before we can start to quantify that on a go-forward basis.

Okay.

Would that also be the time, perhaps, that you could -- obviously depending on the success use this performance and this work to really help expand elsewhere with these fluids?

No, that's our plan.

We've been working on a technical marketing strategy that as we gain successful wells and data, that we'll start to leverage that success around the world into the international markets, as well as back into the shale plays in North America.

Okay.

Great.

Thanks for your time.

Thank you for the questions.

Thank you.

Our next question comes from the line of [Ash Gupta] with VVC.

please go ahead.

Good morning, guys.

Good morning.

It's Ashesh.

One question -- or actually a couple of questions.

Regarding your covenant how much EBITDA improvement would you need to see in 4Q to stay within your covenant guidelines?

We would pro -- we would need EBITDA comparable to the third quarter, a slight improvement excluding the business interruption gain.

As you know, the compliance is a function not only of EBITDA but also of debt levels, but based on projected debt levels we could use a couple of million dollars more of EBITDA.

Sure.

Understood.

Along those lines, are there any seasonal issues to worry about and areas of potential strength, i.e.

Canada, areas of weakness, the Rockies or just winter, holiday season.

Net-net what do you think the seasonal impact could be in 4Q?

Traditionally in the fourth quarter we've been operators slow some things down.

We saw that 2007 and 2008.

Of course the operators haven't been very active so I don't think we'll see the same type of falloff.

Our expectation is, barring some unusual event, we ought to McKenzie see activity levels improving modestly, even in the fourth quarter.

Okay, that's very helpful, and it seems like you still have some momentum in your international markets.

The last question I have, just a very macro question on market share, it seems like a lot of the fluids companies, whether you talk to SWACO -- M-I SWACO or Halliburton seem to be gaining market share and you guys slowly gained market share in 3Q, I'm just trying to understand.

Who's losing market share and how does one decipher between the different players and the different markets from a market share perspective?

Well, it's certainly difficult for us to comment on the specifics of their business, but in terms of our shares, what we try to do is we keep track of the rigs that we're working on and we look at that in relation to what the overall rig count is and certainly we have a very large -- a large presence in the North American market and that's where we've seen some of the gains recently, particularly in these shale plays.

So a lot of the information that you get from some of the other companies you mentioned may be including a lot of their international business, as well, that we don't participate currently at the same scale they do so that perhaps might account for some of the disconnect there.

Okay.

I appreciate it guys.

Thank you.

Thank you.

Our next question comes from the line of Stephen Gengaro with Jefferies & Company.

Please go ahead.

Thanks.

One follow up.

You may have addressed this at the beginning of your call, I missed the very beginning, but have you -- how are you thinking about the nonfluids businesses going forward?

Any change in the strategic view there?

As it relates to the Mats business our challenge there has been get the business at break-even cash flow positive and that's our focus and we're going to continue down that path.

On the environmental side with [Nessie] again we've been very pleased with the performance of that business year over year.

It's remained strong and it's been a strong contributor of EBITDA to the Company going forward -- today and going forward.

Great.

Thank you.

Thank you.

We have a follow-up question from the line of Terese Fabian with Sidoti & Company.

Please go ahead.

Yes, thank you.

I have a question on your European operations -- Mediterranean operations.

Can you talk about the outlook there, whether there's going to be a seasonal downturn in that business, or it was relatively flat I guess quarter over quarter?

Yes, we wouldn't expect a slowdown in the fourth quarter, possibly a modest uptick in the fourth quarter.

Certainly in the third quarter you had the traditional holiday season in Europe, as well as some religious holidays in the Middle East.

So we would expect the fourth quarter to be slightly stronger than the third for the Mediterranean business.

And are you doing anything in Europe at this time?

Yes, absolutely.

We're doing business in Italy, Hungary, Romania.

Thank you.

Thank you.

Thank you.

At this time I would like to turn the conference back over to management for closing remarks.

We'd like to thank you once again for joining us on the call and for your interest in Newpark Resources.

We look forward talking to you again after the conclusion of our fourth quarter.

Have a great day.

Ladies and gentlemen, that that concludes the conference for today.

If you would like to listen to a replay of today's conference please dial 303-590-3030 with the access code of 4110135#.

We thank you for your participation and at this time, you may now disconnect.