NPK International Inc (NPKI) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Newpark Resources second quarter earnings conference call.

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

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

(Operator instructions) This conference is being recorded today, Friday, July 30, 2010.

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

Please go ahead sir.

Thank you, Brandy.

Good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today to review 2010 second quarter results.

We would also like to welcome our Internet participants listening to the call simulcast live, over the web.

Before I turn over the call to management, I have the normal housekeeping details to run through.

For those of you who did not receive an e-mail of yesterday's release yesterday afternoon, and would like to be added to the distribution list, call our offices at DRG&E.

Our number is 713-529-6600.

We'll get you on those appropriate lists.

There will also be a replay of today's call that will be made available by webcast on the Company's website at www.newpark.com.

There will also be a recorded replay available by phone, which is available till August 6, and that information is in the press release.

Please note that information reported on this call speaks only as of today, July 30, 2010, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

In addition, the comments made by the management 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 2009 annual report on Form 10-K, its quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies.

Now with all that said, 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 second quarter 2010 conference call.

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

Following my opening remarks, Bruce will provide an overview of our Fluids business, and Jim will then discuss the Mats and Environmental service business, as well as our consolidated financial results for the quarter.

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

Now turning our attention to the second quarter.

We are pleased to report that we've been able to build on our strong first quarter performance.

Once again, we achieved revenue and operating income gains in all three of our business segments.

Total revenues for the second quarter of 2010 increased 13% sequentially, to $181 million, and were up 65% year-over-year.

Operating income rose 45% sequentially, to $20 million, and this compares with a $10 million operating loss in the same period a year ago.

Our net income per diluted share for the quarter was $0.12, compared to $0.09 in the first quarter 2010, and a $0.10 loss a year ago.

Our Core Fluids business continues to perform well, benefiting from our focus on service quality, and new technology development.

Sequentially, Fluids revenues rose 10% from the first quarter 2010, driven largely by strong results in our US business, where revenues were up 18% as compared to a 13% increase in the US drilling rig count.

Last quarter, we mentioned that our Mediterranean revenues were negatively impacted by customer drilling delays, as well as extremely cold weather conditions.

This business rebounded strongly in the second quarter, showing a 35% sequential revenue gain.

As expected, we saw a 26% decline in revenues in Brazil from the first quarter 2010, as a result of our reduced IOC activity.

We continue bring to market our new high performance, water based system for the US shale plays.

We believe that the environmental, health, and safety benefits of these products, coupled with drilling performance equaling or exceeding traditional oil based systems, gives a competitive advantage, and represents an opportunity to further differentiate ourselves in the drilling fluid industry.

To that end our revenues from the high performance water based technology, grew 41% from the first quarter to the second.

Our efforts to continue the development of the product line are focused not only on improving its performance, but broadening its reach beyond the Haynesville Shale.

We currently have an initial formulation for trial in the Fayetteville, and we are also preparing a formulation for the Barnett.

We expect these wells to begin drilling in the third quarter.

Our Mats and Integrated Service business had an outstanding second quarter, as our composite mat system continues to address a niche in making well sites more environmentally friendly, minimizing the adverse impact of land drilling.

To address these ongoing needs and maximize the value of our assets, we continue to redeploy mats to higher demand areas that yield improved utilization and profitability.

Currently about 50% of our rental fleet is outside the Gulf Coast and we're seeing continuing acceptance of our composite mats in the Marcellus Shale, the Rockies, and United Kingdom.

During the second quarter, revenues in the Mat segment increased 25% sequentially, to $17 million.

This revenue growth reflects the growing acceptance of our composite mat system as a means to reduce environmental damage by minimizing erosion, containing spillage, and protecting plant life.

Improved utilization of the rental fleet, and our cost-cutting efforts of 2009 contributed to operating margins of 30% in the quarter.

Finally, the Environmental Service business continues to perform well, with revenues up more than 27% over the prior quarter to $13.8 million, and operating margins of 31%.

Exceeding the first quarter strong margins by almost six percentage points.

This business has played a key role in the ongoing cleanup activity associated with the Horizon Deepwater spill.

We are a primary disposal outlet for oil/water emulsion and other waste that is being collected from the Gulf of Mexico.

Before turning the call over to Bruce, let me take a moment to discuss the Horizon spill and the impact to Newpark.

If you remember in a June press release, we indicated that the original moratorium on drilling the Gulf of Mexico, and water depths greater than 500 feet, impacted about 5% of our consolidated revenues.

Since then, additional restrictions, limitations, and requirements, have been placed on drilling in all federal waters of the Gulf of Mexico, including the US Shelf.

Our customers are faced with meeting new requirements in order to receive permits to drill.

Compliance with the new requirements is impacting areas beyond Deepwater, which was the focus of the original moratorium.

For Newpark, approximately 7% of our consolidated revenues for the first half of 2010 were derived from the federal waters of the Gulf of Mexico, and thus may be impacted in some way.

The potential effect is greatest in our Environmental Service business, where about 55% of the segment's revenues in the first half of 2010 were attributable to operations in the federal waters of the Gulf.

For our drilling fluids business, approximately 4% of that segment's revenues were derived net portion of the Gulf for the same period.

In the second quarter, we benefited from a total of $2.7 million of revenue from spill and cleanup activities, which helped offset a decline in our traditional Gulf of Mexico business, which we began to see in the second quarter.

Going forward, we expect those declines in our traditional Gulf business to continue, particularly in the environmental service segment, while the uncertainty of drilling in federal waters continues.

At the same time, we also expect the revenues from cleanup activities to slow throughout the third quarter.

As a result, we would expect to see a revenue impact of between $7 million and $9 million, and operating impact of between $4 million and $5 million in the third quarter based on what we know today.

We continue to monitor the situation, and although we have eliminated some of the costs in the Gulf to offset the revenue decline, we have not made any significant infrastructure changes, pending some additional clarity on the situation.

With that, let me now turn the call over to Bruce Smith, who will review the operating and financial performance of our Fluids business.

Thanks, Paul and good morning.

The Fluids Systems and Engineering segment continues to post strong growth, and this is the fourth consecutive quarter of sequential revenue growth, since results bottomed out in the second quarter of 2009.

It's also the fifth consecutive quarter of operating income improvement, and operating margins have moved from negative territory a year ago, to over 10% in the second quarter.

Looking forward, we believe that our continuing efforts to gain the market share from the value proposition of our fluid systems, is expected to provide additional opportunities for margin expansion.

Now, turning to our financial results, total fluids revenues rose 10% on a sequential basis to $151 million, with North American revenues also up 10% to $109 million, due to stronger US drilling activity, partially offset by the seasonal slowdown in Canada.

In the US our fluids revenues rose 18% sequentially, driven in part by a 13% increase in the US rig count.

A strong presence in substantially all of the US land basins paid off during the quarter.

We saw improvements in most all US geographic regions, with the exception of the Louisiana Gulf Coast, where the restrictions on drilling in the Gulf of Mexico negatively impacted revenue in the quarter.

Our East Texas business unit, which includes the Haynesville shale, remains on a [real strength], growing revenues 25% on a sequential basis.

Fluid sales were brisk, and the fundamentals for the drilling fluid market remain very favorable in this area.

Besides East Texas, other areas of particular strength in the fluid segment include, South Texas, home to the Eagle Ford shale, and West Texas, which saw sequential revenue increases of 46% and 34% respectively.

Our mid-continent Completion Fluids business saw a 38% sequential revenue increase, and the Rockies and the Northeast both saw healthy gains of 17% and 43% respectively.

In Canada, we saw the expected seasonal revenue decline in the second quarter.

Internationally, Mediterranean revenues were up sequentially 35% to $30.2 million.

Algeria continues to be our largest base of operation, where we service approximately one-quarter of the drilling activity.

Besides Algeria, we also have operations in Libya, Tunisia, Italy, and Romania, all of which saw strong sequential growth in the second quarter.

Revenue in Romania recovered, after unusually cold weather in the first quarter had slowed activity in that country.

Additionally, we continue to look for opportunities to expand our highly successful Mediterranean business into new countries.

We also expect to begin new work in Egypt in the third quarter.

Now turning to Brazil, revenues were down 26% sequentially to $11.2 million.

As you may remember from our first quarter call, this sequential decrease was expected.

In the second quarter, many of the Petrobras rigs assigned to Newpark, were allocated to workover operations, in an effort to boost production.

Workover operations do not require significant drilling fluid volumes, and therefore our revenues from those rigs were significantly impacted.

As a result, we incurred an operating loss of $2 million for the quarter as compared to a small profit in the first quarter of 2010.

We are taking further action to reduce our costs, including personnel and facilities, in an effort to reach profitability.

Looking forward in Brazil, we expect to be active on one offshore well for an IOC during the third quarter, and additional IOC in the fourth quarter.

Looking at the fluids segment operating profit, we reported operating income of $15.2 million in the second quarter, compared to $12.4 million in the first quarter.

This improvement was due to the strength in the US market, the recovery in Mediterranean activity, as well as our ongoing efforts to manage our cost structure.

We also experienced some US pricing improvement in the quarter, which contributed to the operating profit increase in Q2.

Overall, the operating margin for the segment in the second quarter was 10.1%, up from 9.1% in the first quarter of 2010.

Let me now add some additional insight into significant events going on in the Fluids business.

(Inaudible) the Haynesville shale, several of our customers are evaluating results of their initial wells that used our high performance water-based fluid.

These customers have a variety of drivers for using the system, both qualitative and quantitative, and therefore the value equation for each is slightly different.

So we are working with these operators to evaluate and optimize the system's performance for their usage.

While continuing this evaluation process, we are moving forward with the introduction of the system with new customers, and into new shale markets.

We currently have a formulation ready to test in the Fayetteville shale, and are in the process of working on a design for use in the Barnett.

These field trials should occur during the third quarter.

In August, we will be announcing the name of our new high performance water based system, and in conjunction with that announcement, we will also provide the industry with the results of our own assessment of the early performance and value proposition of this new fluid.

To date, revenue associated with this new technology has been limited to just one geographic region of the US, yet has totaled [$16] million in the first half of 2010.

As the new high-performance water based system gains acceptance, we will continue to report the associated revenues.

We believe that the efficiency, safety, health, and environmental benefits these fluids bring to our customers in comparison to conventional oil-based products, has great potential to drive revenue growth for Newpark as we introduce it to additional shale plays both in the US and internationally.

In closing, I'd like to say that I am pleased with the continuing advances in our Fluids business.

The North American market has improved dramatically since the first half of 2009, and the reduced cost structure we put in place is now paying off in the form of improved profitability.

Our international business continues to be in the area of investment, and remains a cornerstone of our growth strategy.

Domestically, the land rig count continues to rise.

Although uncertainty regarding the US offshore market in light of the government's restrictions, will have some negative effect on the second half results.

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

Thank you, Bruce.

Good morning.

Let me begin by first discussing our Mats and Integrated Services business.

The Mats business reported $17 million in revenue for the second quarter, a 25% sequential increase.

Much like the first quarter, this improvement was due to higher utilization of our composite mat systems in new rental markets, predominantly the Northeastern US where revenues rose by $3.5 million.

Here, our mats are being used by the NP operator to protect the environment around the drilling site from spillage and runoff.

We continue to redeploy our mats from the Gulf coast to areas such as the Marcellus, Rockies, and the UK.

And currently, about 50% of our rental fleet are in markets outside of the Gulf coast ,up from 40% just 90 days ago.

In total, mat rentals posted a 37% sequential revenue gain to $10.6 million.

Sales of our composite mats contributed $6.4 million of revenue for the quarter, up 8% from the first quarter.

The mats segment had operating income of $5 million in the second quarter, compared to operating income of $2.7 million in the first quarter, which if you remember included $900,000 of other income reflecting the proceeds from Hurricane Ike insurance claims.

Operating margins benefited from a higher mix of rental activity versus mats sales and service work.

Incremental margins on mat rentals were stronger than mats sales or service activities, due to the fixed nature of operating expenses, including depreciation on our rental fleet.

As a result of this higher utilization of our mats, operating margin in the second quarter was 30%, compared to 20% in the first quarter.

Now moving on to our Environmental Services business.

Revenues of $13.8 million were up 27% over the first quarter.

This gain was largely the result of increased E&P waste volumes in the Gulf coast, which included $2 million in revenues related to the Deepwater Horizon spill.

Operating income in our Environmental Services segment was $4.2 million, compared to a $2.7 million profit in the first quarter.

The operating margin in the second quarter was a strong 31%, compared to 25% in the first quarter, as we leveraged our fixed cost structure to our advantage.

We expect that our traditional drilling waste volumes from the federal waters of the Gulf of Mexico will decline in the third quarter, due to the moratorium and permitting delays imposed by the US government.

Additionally, we believed that the spill-related volumes will begin to decline as well.

Now moving to our consolidated results.

For the second quarter of 2010, we reported total revenues of $181.4 million, an increase of 13% from the first quarter of 2010, and up 65% from a year ago.

Operating income was $19.9 million in the second quarter, up $6.2 million or 45% sequentially.

Compared to the second quarter a year ago, there was an improvement in operating income of nearly $30 million, as the year ago period had an operating loss of $10 million.

Net income in the quarter was $10.8 million or $0.12 per diluted share, compared to net income of $7.8 million or $0.09 per diluted share in the first quarter of 2010.

In the year ago quarter, we reported a net loss of $8.8 million, or $0.10 per share.

Now I'd like to discuss our balance sheet and liquidity position.

Since the end of the first quarter, we reduced our total debt by $8 million.

We saw an increase in receivables that was related to higher revenue levels, as DSOs remain comparable to the last quarter.

Inventories were up from the first quarter, but roughly flat with year end.

Our total debt at the end of the second quarter was $120 million, with a resulting debt to total capitalization ratio of 24%, which compares to 25.5% at the end of the first quarter.

Our cash balance was $12 million at the end of June.

For the second quarter of 2010, our tax rate was 42.6%, reflective of an increase in our expected tax rate for the full year, from 36% to 40%.

This as a result of a change in our geographic mix of earnings and losses.

Going forward, we expect the rate to be 40% for the third and fourth quarter.

For the second quarter, our capital expenditures totaled $4 million, and our depreciation and amortization expense was $6.6 million.

Given the improvement in the drilling environment outside of the Gulf of Mexico, we expect to see an increase of our CapEx spending for the balance of the year.

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

Thank you, Jim.

The first half of 2010, and the most recent quarter, has proven that Newpark has turned the corner.

From the global meltdown of the markets in 2009, to a new level of performance, both financially and technically.

We remain optimistic that our business will grow domestically in the key US shale plays, and also internationally.

The tragedy in the Gulf of Mexico is very unfortunate, but with the increased focus and scrutiny on drilling processes, the importance of mud, or as we prefer to call it drilling fluid technology, has come to the forefront in almost every household in America.

As we move through an ever-changing regulatory environment, be it on land or at sea, products that enhance safety and protect the environment will become preferred.

We believe that Newpark is uniquely positioned to benefit from that changing regulatory environment.

From our new high performance water-based drilling fluids, to our Composite Mats Systems, and to our Environmental Service business.

We remain committed to our strategy of growing the Company domestically and internationally through service quality, and new technology deployment.

We continue our work to roll out our new high performance water-based technology, as we look to broaden our geographic reach in the US shale plays.

We are expecting to begin drilling our first wells outside of the Haynesville with that technology, sometime during the third quarter.

In our international markets, we continue to pursue opportunities with IOCs in Brazil, where we expect to begin work on two rigs, with different IOCs in the second half of the year.

I would add that we are committed to taking the necessary actions to bring the Brazilian business to profitability by end of the year.

In Europe and North Africa, our business rebounded as expected, and is well positioned to continue its growth.

Our Mats and Integrated Service segment has successfully navigated through the changes, and its historical markets, and position itself to contribute in a more meaningful way to the overall success of Newpark.

I would like to take a brief moment and congratulate the entire team on their strong performance over the past several quarters.

Likewise, our Environmental Service business has faced its own set of challenges over the past several months, and they have risen to those challenges.

Our team has responded in a professional manner from providing expert opinions to BP, to handling the waste disposal demands coming from the Horizon spill.

This all occurred while they continued to focus on their core business.

In closing, I would to thank the employees of Newpark for their dedication and hard work over the past year.

More importantly, I want to congratulate them for another outstanding financial performance in the second quarter.

With that, we will 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 Bo MacKenzie with Global Hunter.

Please go ahead.

Hello, guys.

Congratulations on what appears to be a really strong Quarter.

On the new water based fluid, you talked about going into the Fayetteville and the Bakken.

Fayetteville, excuse me, and the Barnett.

Can you talk about other markets that you see as potentials?

Are there places, such as the Bakken, where the uncertainty in the recount is perhaps an awful lot less than it might be in some of the (inaudible) markets.

And whether or not there's market penetration potential that might help you build your market share up to comparable of what you got in the Haynesville, Barnett, Eagle Ford, market shares?

Each shale play really has a different value proposition.

So, we have to look at each one individually, and design the system accordingly, that plays to the value in that particular shale play.

Some of the costs of doing business and disposal costs are different, for example, in the Haynesville then they might be in the Barnett.

So, you have a little different equation you have to play with, but we fully expect to be able to formulate a system surrounding this new technology that will play in each area, and that's the way we're heading at the present time.

Yes, just aside, certainly in the US market, we believe that the various shale plays that we can deploy the technology.

If we look a little further out, though, as you look out maybe 18 months, 24 months, we're also looking at what the international market may provide to us in terms of the shale plays in Poland, maybe Germany, and some other developing areas.

And then a separate -- not really a follow-up question.

I know that the disposal work related to Macondo is going to be a one-time thing.

Obviously the quarter had a little bit of a benefit.

Would it be fair to say that, looking partially into Q3, that there's still a bit of work that's coming in, but is winding down during the course of the Quarter, that maybe offset some of the decline that you see from the more traditional?

Is the Gulf of Mexico really the business out there?

That's certainly accurate.

I mean, as we see in the volumes that we received in the last several weeks, it started to slow down.

That's also very consistent with what you hear publicly about finding fewer and fewer spills, or oil in the Gulf.

So we are certainly seeing that start to taper off.

Thank you.

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

Please go ahead.

Good morning, gentlemen.

I'm going to stay on that same fluid steam.

Obviously this high performance water based fluid is a pretty big deal.

Help us to understand the issues around this.

I got a lot of things I'm trying to get my arms around.

Why do you need different formulations and different formations?

What's pricing look like in this group?

Is this really contributing to share growth, or are there certain regions that works better than others?

I guess finally, are you seeing any competition come in on this specific fluid?

Let me take that and see if I can address some of your questions.

In terms of formulations, for example, in the Haynesville shale, where we originally formulated this fluid for, you have extremely high temperatures.

You have pretty significant lateral distances that you're drilling, and you also have very significant mud weights -- high mud weights -- high pressures.

If you compare that to the Barnett, it's quite a different scenario, with lower mud weights, lower temperatures.

So, they are quite different areas, therefore they demand quite different formulations for success and for the value proposition.

So, really, you have to look at each of these shale plays almost individually, and design a fluid that makes sense for that particular area, and the way the operations run in that particular area.

I think one of the things, too, certainly the formulation that we mentioned before has a sensitivity to chlorides.

So, if you move to certain basins, the Marcellus typically has higher chlorides than the Haynesville.

So you have to adapt the technology a little to deal with that.

So formation, temperature, pressure, all plays into the system engineering.

Each one's just a little bit different than the other?

Yes, exactly.

And what we're really trying to do there is obviously maintain all of the benefits from an environmental perspective in terms of disposal to cuttings.

As you move into more sensitive areas, that adds more value.

There's certain areas, say in the Eagle Ford shale, where oil-based cuttings, you don't have the same disposal issues that you do in the Haynesville, or will have probably up in the Marcellus.

So, that's one factor.

And again, driving performance, continuing to work on rate of penetration and outperforming the traditional systems, is another factor that we work on as we engineer the system.

How about pricing, margins, share, that type stuff?

How's that compare?

Well, certainly on the pricing side, we believe that the price point is a balance between the value of the technology, and what the customer pays, and what we're receiving.

So we feel that we're getting the right kind of pricing.

Margins certainly are, we believe, a little better historically than some of the oil-based, and closer to our water-based technologies.

And we think there's upside there as we begin to move it out to other basins, other shale plays.

I think the key point here to remember is that, really, we've only been into the deployment of this new technology for about six months.

So, our expectation with the official product launch in August, that we'll continue to gain traction going forward.

See any competition?

There are some things out there, that are water based methods, that are being tried.

But, based upon the feedback we're getting from our customers in the area, we believe we are still the leader in this technology, and of the roll out of this technology.

Of course that's where we plan to stay.

Thank you.

And our next question comes from the line of Neal Dingmann with Wunderlich Securities.

Please go ahead.

Good morning, guys.

Good morning.

Couple quick questions.

On the water base, was wondering, when you look at that on the initial -- the two studies you're going to do.

Is that just initially with one client each, and then are you already actively discussing with additional clients in those two regions?

Initially it's with one client each.

But we are talking with many clients in all the regions, with the view to promoting this and moving it forward, but you have to start somewhere, so you start with one, and you build some credibility, and you build from that point going forward.

So yes, one in each area at the beginning, but we're talking to many customers currently.

And -- Go ahead, I'm sorry.

I was going to add to that, again, on our August product launch, one of the things that we've been doing is collecting all of the performance data in all of the wells, from all the customers that we've been running with, for the last six months.

And so, we're going to aggregate that together, do some statistical analysis, and we'll be presenting that data to the market.

That will look at the things related to performance, and operating temperatures, lubricity.

Factors that are critical to the customer.

As far as, on that water base, are there near-term plans, internationally, to start expanding that?

Have any talks begun in that aspect?

Certainly, our group over in Ava are keeping very close to what's going on in Poland and what's going on in Germany, in terms of who's buying which leases in which areas, and when drilling might start in some of these shale plays.

So the answer is yes.

We are certainly actively looking at what is coming up in the international market.

And we will use the data that we've generated here, obviously, as a basis for our expertise and our knowledge.

One other area that, if you can it call internationally, it's outside the US, is the Canadian market, if you look up at the Horn River.

We certainly have been collecting core samples there.

And have been running them in our drilling simulator.

So, again, as I was addressing it with Marshall, talking about engineering the system to be able to perform in that shale.

And then, just one on the traditional fluids business, could you discuss a little bit what you're seeing in market share in some of the key regions like the Bakken, or Eagle Ford, or Marcellus?

Over the Quarter, our share in the shale basins has stayed roughly the same.

Within any Quarter, you have little ups and downs that make a difference.

In the Haynesville, we've had a slight decrease, in the Bakken we've had an increase.

In the Eagle Ford, we've had a significant increase.

So, all of those ups and downs make us roughly the same percentages that we've held for the past few Quarters.

Thank you.

Our next question comes from the line of Tracy Marshbanks with First Analysis Securities Corp.

Please go ahead.

Thanks for taking the call.

I'm sitting in for Mike who's sequestered away on a Naval base today.

I have a couple questions.

On the core fluids business in the Mediterranean, you had sort of an unusual First Quarter, and a strong rebound.

What's your outlook in that region as you move forward in the rest of the year?

The Third and Fourth Quarter we expect more to resemble the Second Quarter, rather than the First Quarter.

The First Quarter was really somewhat of an anomaly, particularly with the cold weather.

But also they did have a decline in business, the effects of the 2009 global recession did affect them to a degree, although not so seriously as we felt it here.

So, we expect the rest of the year to be more similar to the Second Quarter performance.

So the Second Quarter performance was back to a baseline expectation?

That's correct.

Okay.

And, while your revenue improvement in some of the segments is impressive, the incremental margin is what caught my attention.

Maybe you could help me out.

Let's say in Mats, you talked about utilization, and redeployment outside of the region, and rental mix.

As you look forward in that segment, what's your outlook for the rest of the year as far as some of those metrics and impact on margins in the Mats business?

Specifically to the Mats business, Tracy, the moves we've made outside of the Gulf in the new regions.

We expect to continue to be there, and to try to expand, for example, in the Marcellus, we currently operate in the Northern part.

We're targeting and trying to move, gain more business in the southern part of the Marcellus shale.

So, we certainly have plans to continue the revenue growth, maintain our margin profitability there.

The key in that business is to keep the Mats on the ground, being utilized.

And that has a significant driver to the overall profitability of that business.

Thank you.

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

Please go ahead.

Thank you, good morning gentleman.

I guess two things.

One, just to follow up on the last question.

The sequential incrementals in fluids, they were light of our expectations.

Obviously revenue growth was good.

Could you speak to how we think about them going forward?

That's a good question.

The incrementals there were around 19%, but if you take Brazil out of the equation, you see those incrementals are 27%, which are a little more consistent with what we've seen the past several Quarters.

So, once we solve the Brazil situation, we should see those incrementals back in that high 20% area.

Are we solving it in the Third Quarter?

Is that more of a Fourth Quarter --

It's a process that'll take Third and Fourth Quarter.

We expect it'll be profitable by the end of the year in that business.

Okay.

The other question I had, I think you had mentioned, maybe it was back on the last conference call.

I think you had nine rigs working in Haynesville.

Can you give us a sense for where you are?

Yes.

What we've elected to do is to go with the revenue growth.

I think that's a more meaningful figure.

And, quite honestly, provides less targeting of our competitors on the number of rigs that we're on.

Okay, that's fair.

Just as a final question, do you -- when you think about your business, I know this is a bigger picture question.

You've obviously had good success penetrating some of these areas with the fluids on the shale side.

How did you feel like, when you're looking at some of the bigger players, and the engineering they have in conjunction with the bits and downhole assembly, how does that impact your engineering process?

Is it something you continually can overcome, or you think that acts as a headwind to success as we go forward here?

When we're engineering something, we tend to look at what we're doing, and what value we can bring, and the expertise we have within our system.

Some of our major competitors that integrate many product lines can sometimes become a little deflected from the core business that they're trying to deal with.

So our core business is drilling fluids.

Our research, our development, our thoughts, our skill sets are in drilling fluids, therefore, we focus on that and we bring that to our customers.

We bring that expertise.

We bring that focus to our customers.

Steven, it's been our experience that having that focus on fluids is more important than having two or three different product lines that you then have to work together.

We think we've been very successful at that, as Bruce said, just by being focused on our fluids business.

And I'll just add a little point too.

If you look -- it's a little different internationally than domestically.

Certainly you're seeing some integrative projects in the international front, where the bundling of products is occurring.

That creates maybe a little bit of a headwind, but we really don't see that necessarily.

We still see large super-majors very interested in having best-in-class services along all of the different product lines.

And I really think that we're starting to emerge as one of those best-in-class technology leaders for drilling fluids.

I think there's going to be some wind at our back, quite honestly.

Thank you.

Our next question comes from the line of Terese Fabian with Sidoti and company.

Please go ahead.

Hello, thank you.

I have a question on the drillings fluids also, the water based.

Going into the Fayetteville and Barnett.

Can you talk a little bit about your customer base there, and whether you expect you'll be converting clients to this, or actually getting new clients into the mix?

In the Fayetteville and Barnett, it can be a bit of both.

In the first two trials wells, it will be with customers that we do business with in other areas, so we'll be levering those relationships and trying to bring those technologies to those customers, in the different area.

The Barnett is probably more -- looking at developing the system in the Barnett for use in some other areas, like the Haynesville, where it's more demanding.

Where everyone can get to see the system, get used to the system, understand how it works, prior to taking it into a more demanding environment.

So that's more the Barnett play.

The Fayetteville is quite demanding in its own right, so that's a little different case.

That technology will be deployed to, hopefully better what's being currently done in that area.

And in terms of your customer base there, is it the same, is it different clients?

Same.

Okay.

When you introduced the product, is the result immediately visible to the operator to see what the advantages of it are, or is it something that has to be run through a process?

Certainly a process of introducing it.

Prior to people using it, you have to show them some sort of a benefit that might accrue from using the system.

As the well is being drilled, there are indicators as you are drilling, that tell you whether things are working well, or not so well, or effectively, or efficiently.

Certainly at the end of the well, you have all of the data to go back to the customer with, and sit with the customer, and review, and decide how the performance was versus what they've done historically.

So there are benchmarks as you drill, but the real proof comes at the end, when you can sit and reflect and look at all of the data, and look at the data, based upon historical performance.

Okay.

And I also have a question maybe for you, Bruce, about Brazil.

The issues that are occurring there, is that something you did not foresee?

Is it new?

Is it something that you thought you would overcome sooner?

What exactly is the trajectory of what happened?

Can you repeat the question, please?

I didn't catch the first part.

Sure.

The developments in Brazil, is that something you did not perceive prior to this?

The development in Brazil, it's a little strange.

The bid is put in three parts, really.

The contract we have is in three parts.

A personnel part, there's an equipment part, and there's a product part.

The product part, is the part that hasn't come so quickly.

The rig count has increased.

We have potentially, I think, our share of the rigs per contract.

But we haven't yet perceived the value of the products on that contract.

So, we're working very hard with Petrobras to try and increase that product volume to go with the rigs that we have, and try and get more to the contract value.

At the same time, as Paul and others have mentioned, we're looking at reducing our costs at the same time, until such times as we get that product value up to the value of the contract.

Yes.

That's really what we're going through at the present time.

Yes.

I think the bottom line is that our expectations, we continue to set them higher in terms of what we thought Petrobras could do.

We held on to the people a little longer than we needed to.

I think certainly as you look in advance, what we're seeing across the Brazilian market with Petrobras.

A lot of work over activity trying to keep the production up in advance of their presidential election.

So, we don't see any, in the short term, any real improvement there from increased revenue.

So, we're going to have to hit it from the cost side.

Take out additional some overhead in terms of people, and a couple of warehouses and facilities.

Just to add a little to what Paul was saying, part of the structure that we have, both infrastructure wise and personnel wise, in Brazil, is based upon requirements from the contract.

So as we try and change this, and bring those infrastructural things down, and bring the personnel down, we have to do it in conjunction with Petrobras to make sure that we're adhering as best we can to what's required within the contract.

Thank you.

(Operator instructions) Our next question comes from the line of Michael Marino with Stephens.

Please go ahead.

Good morning.

Good morning.

Quick question on the new water based fluid.

Have you had anyone use the fluid and then say, thanks but no thanks?

Or has anyone that's used it moved forward with additional plans for further use?

Both.

We've had people that have used it that are now reviewing the results and trying to decide if it fits with their plans going forward.

We've had people using it who are still growing the use of it, adding rigs to our current rig count.

So I guess we've had a little bit of both.

Okay.

Just a point of clarification in the Barnett.

A new customer, is that a customer that was not using the water-based solution prior to this first well that they'll drill in Q3?

It's a customer that we deal with in different areas but not currently in the Haynesville.

So we're going to deal with them in the Barnett but we deal with them everywhere.

So it is a customer that's well known to us.

Yes.

Both the Barnett and the Fayetteville are existing accounts for us, but have never used the new technology.

Both are new to the technology, but well established existing accounts.

Okay.

If I could, one more?

Please.

You mentioned that the rates of penetration are on par or better.

I guess that's the first time I've heard you say better.

How many days are you saving your customer?

Again, we've seen rates of penetration, 100 feet in an hour.

What we're doing, as I mentioned earlier on the August 19 product launch, is we're collecting all of this data.

And it's really difficult to take a one off, what we really like to do is use some 6 Sigma and do some statistical analysis, and look across many different wells, different customers.

And then come with the data that would speak to rate of penetration, or lower operating temperatures, et cetera.

Okay.

Fair enough.

I'll wait for that then.

Thank you.

At this time, there are no further questions.

I'd like to turn the call back over to management for any closing comments.

Thank you.

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

We look forward to talking to you again after the conclusion of our Third Quarter.

Thank you.

Ladies and gentlemen, this concludes the Newpark Resources Second Quarter earnings conference call.

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