NPK International Inc (NPKI) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Newpark Resources third quarter earnings conference call.

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

(Operator Instructions) This conference is being recorded today.

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

Please go ahead sir.

Thank you and good morning everyone.

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

We'd also like to welcome the internet participants listening to the call that's being simulcast live over the web.

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

For those of you who did not receive an email that was released yesterday afternoon and would like to be added to the distribution list please call our offices at DRG&L at 713-529-6600 and provide us your contact information and we will get you on the -- on that list.

There will also be a replay of today's call.

It will be available via 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 5th and that information is in the press release.

Please note that information reported on this call speaks only as of today October 29th 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, comments made by management today of Newpark during this conference call may contain forward-looking statements within the meaning of the United States federal security's laws.

These forward looking statements reflect the current views of management at 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, it's quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies.

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

Paul Howes.

Thank you Ken and good morning to all.

We'd like to thank you for joining us today for our third quarter 2010 conference call.

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

Following my opening remarks, Jim will provide a review of our operating segments as well as our consolidated financial results for the quarter.

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

Now turning our attention to the third quarter.

After the strong perform in the second quarter, revenue and earnings, moderated sequentially yet were well above year ago levels.

Total revenue through the third quarter of 2010 were down 1% sequentially to $179 million and were up 52% year over year.

Operating income was down less than 2% sequentially to $20 million, but vastly outperformed the $2 million of operating income in the same period a year ago.

Our net income per diluted share for the quarter was $0.09 compared to $0.12 in the second quarter of 2010 and a break even a year ago.

Evolution, our high performance water-based system, continues to attract a high level of interest in the US shale plays as more operators inquire about the system and its benefits.

As we mentioned during our last quarter's call, we have now formulated new water-based systems containing key components of the Evolution system and have successfully introduced these formulations into the Barnett, Woodford and Bakken shales during the third quarter.

Evolution-based product revenues totaled $22 million through the first nine months of 2010

As another indication of Evolution's early success, I'm delighted to announce that just recently at the Ninth Annual World Oil Awards, Evolution won the award for best drilling, completion and production fluid beating out the other nominees - M-I Swaco, Halliburton, Baker Hughes and CNPC, the Chinese national oil company.

As stated in World Oil Magazine their awards are, quote, designed to applaud and showcase innovative thinking and next generation leadership, end quote.

We consider this award an affirmation of the benefits of Evolution as well as endorsement of our strategy to be recognized as the worldwide technology leader in drilling fluids.

But as we have cautioned in the past, bringing a game changing technology to the oil field service market is not without its challenges such as the industries comfort level with familiar products that have been used for decades and the inertia that must be overcome.

Word of our product has spread and attracted the attention of competitors looking to counter our gains.

Because of this we see an increased level of competitive pressure within the Haynesville shale and as a result we've experienced a softening in the Evolution revenues which is not unusual with the introduction of a new technology.

Notwithstanding the quarter's results, we're seeing a lot of momentum building around our Evolution system.

Right now we are in the early stages of introducing our Evolution system into other markets in the U.S.

and Canada.

We plan to aggressively continue our new product introduction and marketing efforts to help keep Evolution at the forefront of the drilling fluids industry.

Looking now at the results of our fluid segments, we saw a 2% sequential decrease in total revenues from the second quarter 2010 to $148 million.

North American revenues were flat sequentially and included a $3 million decline in our Louisiana Gulf Coast area due to the drilling delays and moratorium.

International fluids revenue saw a sequential decline as AVA was down 5% and Brazil was down 7%.

Our mats and integrated service business continues to show solid growth due to our composite mass ability to offer meaningful environmental benefits to land drilling in sensitive areas.

We have continued to redeploy mass to higher demand areas that yield improved utilization and profitability.

Currently about two thirds of our rental fleet is outside the U.S.

Gulf Coast.

During the third quarter revenues in the mass segment increased 7% sequentially to over $18 million.

Environmental service revenues were $13 million in the quarter, down 6% from the prior quarter.

The quarter included $5.4 million of revenue from waste disposals associated with the Deepwater Horizon spill.

With the cleanup winding down and with the uncertainty over gulf drilling we anticipate seeing lower revenue in the fourth quarter in this segment.

Earlier this month we closed on $172 million convertible senior note offering the proceeds from the offering were used to payoff the outstanding debt under our existing credit facility and left us with about $65 million of cash.

We undertook this offering to extend the maturity of our indebtedness until 2017 at an attractive interest rate which serves to strengthen our balance sheet and provide increased flexibility going forward.

Finally I'd also like to take this opportunity to formally welcome Jeff Juergens as the new President of our mats and environmental service businesses.

Jeff has over 30 years of experience in the oil field service industry both in the US and abroad and is a valuable addition to our management team.

In conjunction with Jeff's hiring, I would like to thank Bill Moss for the excellent job he has done in handling those duties in the interim.

Bill will now return full-time to his role of Vice President, Corporate Strategy and Development.

With that, let me now turn the call over to Jim Braun who will review the performance of our business segments as well as our consolidated results.

Well thank you Paul and good morning to everyone.

The fluid systems and engineering segment saw small sequential decline -- revenue decline of 2% with total revenues of $148 million.

In North American revenues were flat sequentially.

In the U.S.

our fluid revenues decreased 3% sequentially to $104 million but were offset by seasonal improvement in Canada.

Non-North American revenues were down $2.5 million or 6% sequentially.

Relative to the high bar we set in the second quarter, there was pullback in east Texas in the Haynesville due to the heightened competitive pressures and ongoing customer evaluations of Evolution.

Sales from our Evolution water-based product were $6 million in the quarter bringing our total for the year to about $22 million.

Revenues in our Louisiana Gulf Coast area were down sequentially $3 million as anticipated due to the restrictions on drilling in the Gulf of Mexico.

Some of our customers in natural gas driven markets such as east Texas and Arkansas had reduced activity as a result of continuing low commodity pricing and the backlog of wells waiting on fracking and completion services.

And in this regard, we started to see situations where competitors are using high demand fracking services to push their drilling mud products.

We saw sequential revenue growth in Oklahoma, the Northeast and in the Rockies helping to offset some of the declines mentioned above.

Overall in the U.S.

market, we did see a small market share decline from about 16% in the second quarter to 15.5% in the third quarter.

Internationally, Mediterranean revenues were down 5% sequentially to $29 million.

Our business in the Mediterranean remains solid with Q3 revenue consistent with the historic levels we've attained in the past.

The completion of major projects with ILC's in Libya during the quarter was partially offset by increased activity in Italy with E&I and Total.

Algeria had another strong quarter and remains our largest business in the region.

Now turning to Brazil, revenues were down 7% from the previous quarter to $10.4 million.

A decrease in commodity product sales and activity with Petrobras from the second quarter was partially offset by new work with an ILC in the third quarter.

Looking at the fluid segment operating profit, we reported operating income of $11.8 million in the third quarter compared to $15.2 million in the second quarter.

Brazil generated a $2.7 million operating loss in the third quarter compared with a $2 million operating loss in the prior quarter.

Overall, operating margins for the segment in the third quarter was 8% down from 10.1% in the second quarter of 2010.

And now let me turn to the mats and integrated services business.

The mats business reported $18.2 million in revenues for the third quarter, a 7% sequential increase.

Like the previous quarter, we saw continued growth and healthy demand for our composite mat rentals in the northeastern United States and rental revenue remains a strong performer with 17% sequential increase.

During the quarter, we continue to redeploy our mats from the U.S.

Gulf Coast to the Marcellus and about two thirds of our rental fleet is now in markets outside of the U.S.

Gulf Coast.

Additionally the sales of our composite mats to third parties contributed $5.8 million of revenue for the third quarter down about 9% from the prior quarter.

The mats segment had operating income of $8.6 million in the third quarter compared to operating income of $5 million in the second quarter.

Keep in mind that the third quarter's income includes $2.2 million of income reflecting net proceeds from the settlement of a lawsuit against a former raw material vender.

The balance of the income improvement was due to higher mat rental revenue, incremental margins on mat rentals are higher than mat sales or service activities due to the fixed nature of the operating expenses including the depreciation on our rental fleet.

Operating margin in the quarter was 47% including the $2.2 million legal settlement.

This compares with a 30% operating margin in the second quarter.

And now moving to our environmental services business.

Revenues of $13 million were down 6% from the previous quarter.

As expected we saw a decline in our traditional Gulf of Mexico business due to the drilling restrictions in the Gulf.

Sequentially revenues from the areas impacted by the restrictions were down $3.3 million from the second quarter.

This decrease was offset by a sequential increase in revenues related to spill cleanup activities of $3.4 million.

During the quarter, we had a total of $5.4 million in revenues related to spill and cleanup.

Operating income in our environmental service segment was $3.9 million compared to $4.2 million in the second quarter.

Our third quarter operating margin of 31% is comparable to that of the second quarter.

We do expect revenues from spill clean up to be lower in the fourth quarter as compared to the third quarter.

As you probably know the formal drilling moratorium in the deep water Gulf of Mexico has been lifted, however we expect activity levels in both the deep water and on the shelf to remain uncertain for the next several quarters.

And now moving to our consolidated results.

For the third quarter of 2010, we reported total revenues of $179 million a decrease of 1% from the second quarter and up 52% from a year ago.

Our operating income was $19.5 million in the third quarter down 2% sequentially.

As I mentioned during my discussion of the mats business, there was $2.2 million pre-tax or $1.2 million after tax of other income in the third quarter reflecting lawsuit settlement proceeds.

Offsetting this income was a $1.2 million pretax charge for interest expense or $0.7 million after tax related to the termination of our interest rate swap agreements relating to the issuance of convertible senior notes and the subsequent repayment of outstanding balances under out credit facility.

Compared with the third quarter a year ago, there was an improvement in operating income over $17 million.

Net income in the quarter was $8.2 million or $0.09 per diluted share as compared to net income of $10.8 million or $0.12 per diluted share in the second quarter of 2010.

A foreign currency exchange loss of $1.2 million in Q3 had a one penny impact on the quarter.

We reported an FX gain in the second quarter.

Thus the third quarter comparison is negatively impacted by about a penny and a half.

And for the third quarter, our tax rate was 45.3% as compared to 42.6% in the second quarter.

The increase was largely as a result of change in our geographic mix of earnings and losses and this sequential increase in the rate equates to about half a penny of EPS impact on the third quarter as compared to Q2.

And now let me discuss our balance sheet and liquidity position.

During the third quarter we reduced our total debt by $20 million.

Our total debt at the end of September was $100 million with a resulting debt to total capitalization ratio of 20% which compares to 24% at the end of the second quarter.

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

Operations provided $18 million of cash during the quarter, it's receivable and inventory levels remained comparable to those at the end of the second quarter.

In addition, employee stock plans provide an additional $2.7 million of cash.

Our third quarter capital expenditures totaled $1.4 million and our depreciation expense was $7.1 million.

We expect to see an increase in our CapEx spending as we move into 2011.

And now let me take a moment to talk about our recent convertible offering and the use of proceeds.

Subsequent to the close of the quarter on October fourth we completed a $172.5 million senior convertible note offering that yielded $167 million in net proceeds.

After repaying the outstanding balances under our term loan and revolving credit facility, we had cash of about $65 million which will be used for various investment and expansion projects we are currently evaluating.

I would like to turn the call back over to Paul for his concluding remarks.

Thanks, Jim.

After experiencing strong growth in our second quarter, we've seen a moderating revenue growth as a result of increased competitive pressure in the U.S.

shale markets with traditional oil-base mud and we also saw a softening in our Evolution revenues.

As I mentioned previously we are in the early stages of commercialization with our Evolution technology.

This is not 100-yard sprint but rather a long distance run that will take time to realize the full value.

We are enthusiastic concerning the market potential of our new technology.

As I mentioned earlier, we have started to transfer the technology outside of the Haynesville to other shale plays.

I would add that the initial results in the Barnett in terms of improved rate of penetration over oil-based mud continues with our first well significantly reducing the time from spudding to reaching T.D.

And we are also in the early stages of evaluating formulations for the Eagle Ford and the Marcellus Shales.

Customer interest is high, in one case, a customer authorized $100,000 expenditure to cut core samples for us to evaluate in our drilling simulator.

Over time we believe that the benefits of using Evolution will become more and more apparent to E&P operators as the value of the technology overcomes the historical bias to oil-based muds.

In the meantime we are committed to accelerating the revenue growth of Evolution including product line extensions for new formations and basins both domestically and internationally.

In our international markets we have taken and will continue to take actions that are necessary to bring the Brazilian business to profitability by the end of the year.

With recent personnel changes as well as ongoing discussions with Petrobras to better align our operations with activity levels, we believe there's a great deal of room for improvement.

Now, if I may, I would like to take a moment and thank the entire Newpark technology team for achieving a major milestone, a first in the history of the Company, a fluids technology award.

This award speaks volumes to the commitment of Newpark drilling fluids to become recognized as the worldwide technology leader in drilling fluids.

Our mats business continues to show solid signs of growth in areas outside of our traditional Gulf Coast market.

The product line continues to gain market acceptance as an environmental solution for E&P operators by preventing site erosion and controlling spillage.

However, we would expect to see increased competitive pressure as operators look for alternative products.

Finally, we expect our environmental service business will experience some slowdown in waste volumes given the completion of the Horizon spill cleanup along with lingering uncertainty surrounding drilling activity in the gulf.

Let me emphasize that all of our business segments remain ideally positioned to serve long-term fundamental needs in the E&P industry.

The need for a cleaner, smarter and faster drilling fluid, the need to make less of an environmental impact at a drilling site and the need to dispose of drilling waste in an effective and environmentally responsible manner.

These are issues that will not go away and will, if anything, become more important going forward.

Our outlook for the natural gas market is consistent with many of the analysts that follow the oil and gas industry.

Gas below $4 will not support the current rig count.

Therefore we would expect to see continued pressure on the number of rigs operating in the various gas plays in the U.S.

market.

We would also expect to see some increase in rigs, in oil and liquid gas plays like the Bakken and the Eagle Ford shale.

In closing, I would like to thank the employees of Newpark for their continued efforts over the past year in driving Newpark to a higher level of performance.

With that, we will now take your questions.

Operator?

(Operator Instructions).

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

Please go ahead.

Good morning Paul.

Let's zero in on Evolution, obviously the market today is a little afraid of what's going on there.

Fill us in on pricing there, give us some sense of in the Haynesville, how many rigs you have running now and maybe -- may expect going forward and then I will follow that with give us sense of timing on migration into Eagle Ford, Marcellus, that kind of stuff.

In terms of the Haynesville, as you know Marshall in our last quarter we stopped giving counts on the number of rigs and we're giving the revenue growth of Evolution.

With respect to pricing, we have not seen any pricing pressure necessarily on Evolution, what we've seen in the Haynesville is operators going back to some oil-based mud on the rigs.

They're evaluating the performance and the value of the Evolution technology and as I mentioned as well, the competitive pressure from other vendors in pushing their traditional oil-based and in some cases even managed pressure drilling is out there.

A lot of competitive pressure in the Haynesville right now.

But it sounds like that competitive pressure is more guys like Halliburton saying, all right if you want a frack crew, use our mud, so they're getting pull through revenues.

It's certainly not them coming up with a similar type product.

Is that fair?

That is fair.

In fact, the competition has tried running some new water-based technology unsuccessfully.

Most recently in the Fayetteville and your other point is spot-on.

We are seeing pressure from some of the fracking companies that are trying to pull through their fluids by committing to frack dates.

Okay.

But then going -- your other point was in terms of the technology and leveraging it outside of the Haynesville as I mentioned in the read was that we have drilled a successful well in the Barnett with one of the key components of evolution.

And the first well we seen a significant improvement in the time from spudding to T.D., almost a 30% improvement.

So and then we are moving out as I said, we've drilled one well up in the Bakken and one, maybe two in the Woodford.

So we're starting to get traction outside the Haynesville.

Our marketing efforts at this time continue to focus on quantifying the value and then being able to convey that to the marketplace but all the additional data points that we've collected continue to reinforce the value of the technology and that it is a game changer in industry.

But as you know Marshall the change in the industry when they have had 40 years of experience running oil-based mud takes time.

So basically from a modeling perspective, it sounds like you're going to be slugging it out, getting -- trying to get more traction in the hotter areas such as Eagle Ford and what not, still not sure if it's going to work in Marcellus because of the salt conditions there.

But more second half of 2011 before you get meaningful traction?

Is that a fair assessment?

I would say meaningful traction certainly late first half, early second half that would be -- I think that's a reasonable assessment.

But also I would say that in the Eagle Ford you're correct that that's where we are targeting.

We have new formulations that we are working on.

We have been collecting shale samples there to run in our simulator.

I was going to add that I think one of the big drivers, not only for Evolution, is what happens with gas prices and what's the appetite for operators if gas prices continue to stay low.

That will also be a key variable.

Right, last question for me.

I'll turn it over to someone else.

The environmental side, you got about $5.5 million from the Macondo work.

Should we assume all of that goes away next quarter in terms of our modeling?

Yes.

I think we would expect to see that over the course of the quarter, start to fall off.

You may see some by the end of the year.

But as you go into next year, that should -- that revenue source should go away.

So that should give us a close representation of how we model it down.

Then maybe your other environmental business picking back up with the rig sometime in 2011?

No, that's exactly right.

We would expect that as the drilling comes back, and if and when it comes back, it will replace that.

It will return to those normal rates we saw prior to the spill.

Perfect.

Great guys.

Thank you.

Thank you Marshall.

Next question comes from the line of Neal Dingmann with Wunderlich Securities.

Please go ahead.

Neil?

Pardon me, Mr.

Dingmann, your line is open at this time.

Please check to see if you have your mute button on.

Okay our next question comes from the line of Michael Marino with Stevens Incorporated.

Go ahead.

Good morning, guys.

Good morning.

A follow-up on Evolution, you mentioned, I guess for the first time I've heard it the Bakken.

I was wondering if you could shed a little bit more light on what you're doing there?

I guess because it's the first time I have heard you guys talk about an oil play in kind of the Evolution potential.

Right.

You bet.

The -- what we did in the Bakken is we took one of our the key components of the Evolution system and ran it in one of the traditional water systems up there and saw some very interesting results.

So preliminary but very successful in terms of running it.

So we're encouraged by that and are going to continue to push the Evolution product and its components into the Bakken in the oily shale.

Okay and then on the Barnett, I was wondering if you could maybe help us understand maybe the magnitude of that market for you guys, I guess more specifically, who the customer is.

We'd prefer not to identify the customer cause that certainly paints a target for the competition.

But I can say it's probably one of the larger operators in that -- in the Barnett.

And so and we did see very significant over 30% reduction in the time to reach from spudding to reach T.D.

But it was with a large independent.

Is that customer the one pulling you into the Eagle Ford or Marcellus or is it coming from somewhere else?

That is not the account that's pulling us into the Woodford or the Bakken.

Okay.

What about the Eagle Ford and Marcellus?

I guess you mentioned you guys are --.

There's a number of accounts that are interested in running the technology and evaluating it in the Eagle Ford and the Marcellus.

It's -- certainly this account that we ran in the Barnett has interest in other formations as well.

Switching gears, if I could, to Brazil.

I guess -- is -- just bluntly, is Q3 the bottom?

Have you guys gotten your operations under control there and now it's getting some throughput under the cost structure?

No, Mike as you know, as you mention, we've taken some actions down there.

We do expect us to be at the bottom and see it come up from here.

We hoped it'd be break-even by the end of the year, the fourth quarter but certainly no guarantees.

There's still a lot of work to be done down there.

To get to break-even for Q4, is it more -- is it a function of getting the throughput or is there more work to be done on the cost side I guess?

There's a couple of key elements.

Certainly on the cost side we continue to take action to right size the business as we've said on prior calls to break-even on the Petrobras business.

And we're working very closely with Petrobras on that.

The other thing is that in the fourth quarter we expect to see more activity with ILCs and contracts that we have in hand where wells are currently being drilled with one ILC and we expect another well to be spudded maybe sometime late in the quarter.

So it's both a cost which we are moving on as well as a volume which we've also had been working to.

(Operator Instructions) Our next question comes from the line of Mike Harrison with First Analysis.

Please go ahead.

Hi, Good Morning.

As you look at the business development and the marketing spending that you're doing right now with respect to Evolution in the shale areas.

How does that spending level compare to the $6 million in sales that you saw in the quarter?

Well we don't really draw a comparison to the marketing spend versus the revenue.

But I can tell you that we've continued to increase the resources that we have in the lab working on new formulations and testing new shales.

And certainly are doing more on the marketing side and press release side.

Certainly the -- we're very excited about the World Oil Technology of the Year Award in drilling fluids.

I think that's a significant milestone for the company.

And so you would continue to see more marketing, advertising efforts, as well as, we're doing a lot more quantification of the value proposition, presentations to key accounts.

And that will continue as obviously we roll out the technology.

Hey Mike, I think one of the things we are doing is really trying to arm our sales and our technical people with the data that demonstrates the value proposition so that we can get it in front of more and more customers.

So there's certainly an increase in spending in terms of the marketing side of it.

But it's also in terms of the investment and the people and the knowledge that they have about the product.

Yes, I'm just trying to get a better sense of -- with the formal launch of the Evolution product if we really should have been expecting to see a little bit of a dip in fluids margin this quarter just related to some additional spending and then as the revenues come up, you're going to be able to leverage that spending a little bit better and we'll see the margin improve.

Is that a reasonable way to think about it?

Well certainly there was an increase in spending because there was a lot being done before.

But there are other factors that are-- were driving the margin situation in terms of mix of where the revenues were coming from.

I think specifically the shale rig counts in two of our really important markets.

Haynesville and Fayetteville were down Q2 to Q3 so that had -- probably had a bigger impact on our margins than the spending on the roll out of the branding of the Evolution.

Wanted to ask for a little bit more detail on that front.

You mentioned that some of your customers were slowing their activity in response to lower natural gas prices.

Where was that trend most pronounced and can you quantify how much that hurt your revenues in the quarter?

Yes, that was really coming out of the Haynesville as well as the Fayetteville.

You combine that with the $3 million sequential decline in the Gulf of Mexico.

And between those three combination, there was a total of over $10 million revenue falloff.

And again that $10 million was made up in other areas such as Oklahoma, the Rockies as well as in the Marcellus.

Thank you and our next question comes from the line of Joe Gibney with Capital One.

Paul, quick question.

I just want to follow-up on the bundling issue.

Particularly as you guys I know it's customer directed, pull through and interest in moving into Bakken, moving into the Eagle Ford.

Just curious though you're also moving into areas where a lot of the pumping and fracking demand is even more acute.

It seems like you'd be encountering the bundling issue maybe even more so than you have in your historic markets, in the Haynesville and Fayetteville.

Just curious is that something that you're just going to have to contend with and fight through to try and get a little more traction on with Evolution?

Just wanted to get your thoughts there.

Absolutely.

You're spot-on.

That's exactly what we're going to have to do.

And It's not so much the bundling of a wide variety of product.

It's really frack as you suggested where some of the venders are promising frack dates if they'll give them their fluids contract.

So you're right that's something we're going to have to continue to fight going forward.

Understood.

And just to follow up on the mats side, you referenced some competitive pressures there.

Just some of your customers looking at some other alternatives.

What specifically is cropping up there?

Just want to get a little more color on the mat side.

Nothing specifically though there are some large wood mats that are used say in the Canadian market, in the oil field.

It's possible that those could be brought down into the Marcellus though it's our belief that they wouldn't provide the same level of environmental protection from spillage and erosion.

Because you can't interlock them together and underneath the mats, there's a vinyl barrier.

And so you run the risk of tearing that with wood mats so -- but again you may see operators head in that direction.

Appreciate it.

Joe.

Joe.

What's that?

I'm sorry?

I was going to say Joe, one of the things, as you know, with related to frack equipment, there's a lot of new frack equipment trying to come online and add capacity which makes that situation, one, that certainly isn't permanent, but it's the normal cyclical thing that we see in this type of service line.

Yes, Indeed.

Hyper Cyclical.

I appreciate it, I'll turn it back.

Thank you.

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

Please go ahead.

Morning guys, couple questions.

Just on capacity, where do you sit with the traditional and then with Evolution?

You do get orders or if the traditional business does continue to ramp, where you sit on a capacity standpoint?

Cause is that something you could ramp up very quickly?

Yes, As it relates to the Evolution product line, we are comfortable with our current capacity in terms of where we are in utilization.

And feel good as those orders -- and we believe those orders will continue to come.

We remain very excited about the potential for the Evolution.

So we think we're okay for an operation or manufacturing perspective.

Okay and then just on, so the traditional business look like overall (inaudible) have slipped just slightly, is this going to be more of a pricing issue as we look for the next few quarters going forward or are you going to be trying to get in additional regions maybe that you're not in-- how do you see a traditional business come along in the next couple of quarters?

Well, one of the things that we saw this quarter, Neal, is there was some strong growth in some of the other shale plays, the Eagle Ford and the Bakken in particular.

A lot of the increase in drilling activity in those areas was done by operators that weren't our current customers.

So now there's an opportunity for us there now that their operating in those regions to go in there and try to regain some of those rigs, not that we lost them.

It's new activity that we just didn't-- weren't participating with that particular operator.

So we believe there are opportunities in those two areas in particular to increase the revenues over the next several quarters.

And my last question, around Evolution, is that going to be the case with Evolution to basically go after some of your newer customers or will it be to work over some of the existing customers and continue to try to drive that.

Just wondered in areas like the Fayetteville or Barnett will you continue to try to expand that or will you go after new customers in the Marcellus or, Bakken or some of these areas?

Our approach with Evolution is to target both existing and new customers.

And we've seen a high level of interest both from the existing customer base we have and new customers as well.

So that product line continues to build momentum.

So it is fair to say I guess, I don't know if you want to call it bidding activity or whatever you want to call it but at least the acknowledgment from customers continues to increase on that-- on the Evolution side?

That is correct.

Thank you all.

Our next question comes from the line of Matt Beeby with Global Hunter Securities.

Please go ahead.

Good morning.

Guys.

Good morning, Matt.

When you look at 2011 spending, can you maybe just talk about how your CapEx is going to be directed, obviously a lot is going to be dedicated to the fluid side.

But can you talk about what you might be doing in the mats business as you look out to next year?

As we look at the mat business into 2011, we'll be evaluating and making some decisions on adding to the mat fleet for continued support of the Marcellus.

We'll also be looking at what expansion opportunities are there into other parts of the U.S.

and even in the international front are there opportunities internationally to deploy our mats?

We're -- we'll be looking to continue to grow that business but we'll be looking at the capital of the market very carefully.

Have you quantified, I guess in terms of percentages, how much you might dedicate 2011 CapEx to the mats versus the fluids?

I mean I think you're talking relatively low percentages, 10% to 15% of the overall spend but it doesn't need a lot of capital.

And the capital you do spend can be put to work right away so it's usually money that has a pretty good return on it.

The vast majority of our capital spend will be on focused on drilling fluids business.

Sure.

Thanks guys.

Our next question comes from the line of David Foster with Allianz Global Investors.

Go ahead.

Good morning, guys.

Good morning, David.

Just one question for you.

Just wondering you did this convert deal post quarter end so I'm assuming you had numbers pretty much in hand.

Just wondering why you guys decided not to preannounce at the time of the deal?

Now, David, I mean, there was some of the things that we talked about in the call that brought the earnings down were some of those things at the end of the year, like taxes and F.X.

that by their nature, things that are done at the last minute.

Okay.

Those things that you're saying weren't available at the time you did the offerings?

That's correct.

Those are the things that are done at the very last part of the process as you're closing the books, just to hear as briefly as a week ago.

Thank you.

Our next question comes from the line of [Tom Nowak] with Advent Capital.

Please go ahead.

Yes.

Just a follow up to that, you brought this deal -- you brought the convert deal at quarter end.

You knew the numbers it seems like it was a material disclosure that you're required to make and I'm just curious again about how you justified not disclosing this?

Could you please explain that?

No, I think I would just repeat what I answered with the previous call.

And that is there's some things and part of processes, closing the books and preparing the number that are done at the very end, taxes and foreign exchange.

And those are just the normal month end adjustments.

Thank you and our next question is a follow-up question from the line of Marshall Adkins with Raymond James.

Please go ahead.

Back here to bug you again.

Let's -- I want to focus in on the international side.

We saw a modest decline there.

What's the road map there to improve Brazil and the other areas, number one.

And number two, what percent should we look for longer term?

What's your goal in terms of domestic versus international or do you even-- or is there one?

Yes, Marshall.

We've talked about Brazil and the things we are trying to do there.

I think in the other international markets, we want to continue to grow the AVA business.

We've got some new opportunities in Egypt that are just going to gain some traction, we think, over the next several quarters and there's some continued growth in Eastern Europe operations.

So those are the markets or the areas we'd like to continue the growth pattern that AVA experienced over some of those earlier years.

And in terms of the balance, Marshall, in terms of domestic versus international.

Roughly get more weighted to a 50/50 if possible over three to five years.

International being more weighted to oil versus the US market on natural gas.

Okay.

Mat business, even if you pull out that gains, still very strong margins, can you hold those up?

I mean -- you guys -- that's been a real bright spot for you.

What's your perception there?

No, you're right.

Those have continued to grow quarter over quarter and it continues to be a direct result of keeping the mats on the ground under rental.

We mentioned earlier some of the interest from competitors in that market trying to get in the Marcellus in particular and the ability to continue that will be a function of how successful they are or how successful we are in keeping them at bay.

Okay.

Last one here and, again, I'll turn it back.

I know you guys don't normally give us guidance but looking out the next quarter, any insights you can share with us?

I mean should we be looking for things to be up or with the confluence of Macondo going away and maybe losing some share recently in the Haynesville, should-- are we looking for a down quarter next quarter?

Well, I think specifically as it relates to environmental business, we have been fairly clear there transparent.

We expect it to be down.

I think you look at the shale plays and the rig count it's just going to be a function of what they do over the balance of the quarter and what happens to commodity prices.

Okay, so all things equal with what you see right now, you are not expecting more market share deterioration.

It's really more how does the market evolve?

I think that's accurate.

Thanks, guys.

Thank you.

Ladies and gentlemen, that concludes our question and answer session for today's conference.

I would like to turn the call back to management for any closing remarks at this time.

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 taking your calls again at the conclusion of the fourth quarter.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the Newpark Resources third quarter earnings conference call.

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