NPK International Inc (NPKI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by.

Welcome to the Newpark Resources first quarter earnings conference call.

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

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

(Operator Instructions) This conference is being recorded today, Friday, April 27, 2012.

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

Please go ahead.

Thank you, Alicia, and good morning, everyone.

We appreciate you joining us for Newpark Resources' conference call to review 2012 first-quarter results.

We'd also like to welcome our internet participants listening to the call simulcast on the internet.

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

For those of you who didn't receive an email of the earnings release yesterday afternoon and would like to be added to the list, please call our offices at DRG&L, 713-529-6600, and we'll put you on that list.

Also, there will be a replay of today's call, which will be available via web cast on the Company's website, which is www.Newpark.com.

There's also a recorded replay available by phone, which will be available until May 4, and that information for access is in yesterday's news release.

Please note that the information reported on this call speaks only as of today, April 27, 2012.

Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening.

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

And now with 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 would like to thank you for joining us today for our first quarter 2012 conference call.

With me today are Bruce Smith, President of our Drilling Fluids business; and Gregg Piontek, Chief Financial Officer.

Following my remarks, Bruce will provide an update on our fluids business, and Gregg will discuss Mats and Environmental Services as well as the consolidated financial results for the first quarter.

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

Now, turning our attention to the first quarter, while we were pleased that our revenues remained strong in the first quarter, we were obviously disappointed by the profitability in our US Drilling Fluids business.

North American Drilling Fluids revenues increased 30% from the first quarter of 2011, but were down 2% sequentially due to deterioration in our mid-continent completion services and equipment rental business, reduced activities in dry gas regions of the US and an early spring breakup in Canada.

These revenue declines are partially offset by strengthening in several regions, including the Gulf Coast, the Bakken, and Eagle Ford Shales, along with West Texas and Oklahoma.

Our Evolution drilling fluid system continues its solid performance, with revenues at $23 million, flat to the previous quarter but up nicely from $9 million a year ago.

International drilling fluid revenues increased 22% from the first quarter of 2011, primarily reflecting our strategic entry into the Asia-Pacific market in April of 2011, as well as solid growth in the Europe, Middle East, and African region.

Our Mats & Integrated Service segment performed very well in the first quarter, with revenues up 32% from the first quarter of last year and 4% sequentially to $30.5 million, a new record for this business.

The gain was driven by strong, composite mats sales of over $14 million and seasonal strength in rental demand in areas like the Bakken shale.

After completing our rental fleet redeployment last quarter, we are seeing good utilization of our mats from the Gulf Coast, the Rockies, and the Northeast.

Our Environmental Service segment continues to post solid performance with revenues growing 46% from a year ago and 2% sequentially.

As I noted, our Drilling Fluids revenues remain strong.

However, we did experience operating margin declines in the US, resulting from several factors.

One, increased raw material costs, particularly barite; the reduction in third-party barite sales; weakness in our completion services and equipment rental business in the mid-continent region; further reduction in dry gas activity in certain regions of the United States; unfavorable product mix, and continued support costs associated with our ERP system implementation.

Bruce will provide more color on these factors during his remarks.

While our bottom-line results were disappointing, we are taking the necessary corrective actions, and we do expect our US fluid business to return to its historical operating margin level by the end of the year.

And now, I'd like to turn the call over to Bruce Smith, president of our Drilling Fluids business.

Bruce?

Thank you, Paul, and good morning, everyone.

In the first quarter, the Fluid Systems and Engineering segment generated revenues of $218 million, a 28% increase over last year's first quarter, and a 1% sequential decline compared to our fourth quarter of 2011.

North American revenues were $161 million, up 30% from last year's first quarter and a sequential 2% decline due to deterioration in our mid-continent completion services and equipment rental business, reduced activity in dry gas regions of the US, and an early spring breakup in Canada.

In the US, we saw solid gains in the Louisiana Gulf Coast, and we continued to see excellent results both year-over-year and sequentially from the oil and liquid-rich plays such as the Woodford, the Eagle Ford, Bakken Shales and the Permian Basin.

As we stated during last quarter's call, we have been actively migrating to the liquid plays for nearly a year now, and expect that drilling in these areas will remain robust as activity and dry gas drilling continues to contract.

Because of this, our activity in the Barnett and Haynesville shales continues to decline, and consequently, our revenues in those areas were down 30% sequentially and now make up less than 11% of our North American revenues, a decrease from the 15% we had in the fourth quarter.

In the first quarter, sales from Evolution were up $14 million from the first quarter of 2011 to $23 million, and flat sequentially.

The technology continues to gain acceptance across a broad spectrum of customers and regions.

At the end of the first quarter of 2012, Evolution has now been used in over 800 wells.

Now, moving to our international business, Europe, the Middle East and Africa revenues held steady at $30 million, as activity remains stable in Tunisia, Algeria and Romania.

There was still no activity in Libya in the first quarter, but we expect our customers to start drilling again later in 2012.

In Brazil, revenues were down year-over-year, but operating income improved modestly.

Our deep drill water-based system, another example of our technology and leadership, continues to perform well in both the Brazilian off shore and land markets.

Asia Pacific continues to contribute nicely with $9 million in revenues in the quarter.

Our announcement in March of a new two-year contract to provide fluids and services on Australia's northwest continental shelf represents an important step towards introducing our technology into the region.

The Fluids segment reported operating income of $14 million in the first quarter, compared to $19.2 million a year ago and $25 million in the fourth quarter of 2011.

The operating margin for the segment in the first quarter was 6.4%, down from the 11.3% that was achieved in both the first quarter and fourth quarter of 2011.

The margin decline was cause by a combination of factors.

First, the ongoing barite shortage has caused a significant increase in our raw material cost.

Although we have been diligent in passing these costs on to our customers, they rose at a rate above which we could feasibly offset in the quarter.

As a result, our operating income was negatively impacted by approximately $2 million in the first quarter.

In addition, due to the tightness experienced in the barite supply during the first quarter, we temporarily reduced our third-party barite sales, causing an additional $2 million decline in income during the quarter.

While we have recently seen some stabilization in barite pricing, we continue to work on passing these cost increases onto our customers while concurrently working on developing additional long-term sources of barite supply.

However, it may take several quarters to accomplish these initiatives.

In our mid-continent completion services and equipment rental business, we have seen competitors move underutilized assets out of the Haynesville and Barnett and redeploy them into the mid-continent region, resulting in increased competitive pressure on pricing.

This increased competition contributed to a $3.5 million reduction in our service and equipment rental revenue, and due to the relatively fixed cost structure in this business unit, negatively impacted operating income by nearly $3 million compared with the prior quarter.

In response to these changes, we are taking necessary actions to improve profitability in this evolving market.

Also, our first quarter was impacted by a weak revenue mix and operating cost inefficiencies associated with the transition from dry gas areas into liquid plays.

While we continue to shift our resources as the rigs move, not all of our customers are active in the liquid plays.

Particularly, one of our key customers that operates exclusively in the dry gas region reduced the drilling program by 80%.

So while we were offsetting the lost revenue stream from our dry gas areas, our margin levels do vary from customer to customer.

Additionally, due to the rate of transition that we experienced in the first quarter, there were operating cost inefficiencies within the business.

In other words, cost reductions in areas of decline tend to lag the cost increases in areas of growth, resulting in some short-term cost inefficiencies to the business.

And last, some of the lost revenue from the declining dry gas areas was offset by increases in lower-margin product sales, which serve to reduce operating margin in the quarter.

Most significantly, the first quarter included a $5 million increase in oil-based mud sale.

Oil-based mud is a much lower margin product compared to our specialty offerings.

Further, diesel fuel is the primary raw material in oil-based mud for which costs have been continually increasing over the past several months.

Together, these factors were the major contributors to our operating income decline in the quarter.

Although we were disappointed with the earnings performance in the US region, I would like to point out that the fundamentals of our business remain positive.

Our customer base remains strong and diverse, our rig count remains stable, we are maintaining our market share.

Our rollout of the Evolution system continues to attract new customers and gain acceptance.

And as a result of these fundamental strengths, our revenues remain strong and stable in the US.

We understand the issues that have led to the earnings decline and are taking the necessary corrective actions now.

We anticipate that we will see gradual improvements in margins over the next several quarters, and by the end of the year, operating margins from the US Fluid Systems and Engineering business will return to the recent historical levels.

With that, I will turn the call over to our CFO Gregg Piontek.

Thank you, Bruce, and good morning, everyone.

I would like to begin by first discussing our Mats & Integrated Service and Environmental Services segments, then wrap up with a discussion of our consolidated results.

The Mats business reported first quarter revenues of $30.5 million, a 32% increase over the same quarter of last year and a 4% sequential increase.

Sales of our composite mats contributed $14.4 million of revenue in the quarter, nearly double our sales from a year ago, and a 24% increase from the fourth quarter.

Rental and services revenues were $16.1 million, reflecting a 3% increase from the first quarter of last year, but now down 9% sequentially.

As we noted last quarter, the fourth quarter benefited from a large site preparation project in the Gulf Coast, driving the 9% sequential decline.

Rental activities were very strong in the quarter, and we are seeing a good balance of demand across the Northeast, the Gulf Coast, and the Rockies, with strong utilization in all those areas.

Although we continue to see strong demand in rental utilization overall, we are seeing softening in certain areas driven by seasonality and dry gas pricing.

Therefore, we are not expecting near-term revenues or operating margins to remain at the level we achieved in Q1.

The Mats segment had operating income of $14.3 million in the first quarter, up 22% from the first quarter of 2011 and up 23% sequentially.

Operating margin if the first quarter was 47%.

This compares with 51.1% operating margin in the first quarter of last year and 39.7% operating margin in the fourth quarter.

Now turning to the Environmental Services business, revenues in this segment were $13.3 million, up 46% from a year ago and up 2% sequentially.

Once again, we saw solid performance and steady volumes in the Gulf Coast.

Operating income in the environmental services segment was $3.6 million compared to $1.6 million in the same quarter a year ago and $2.4 million in the fourth quarter.

Our first quarter operating margin was 26.9%, up from 17.8% obtained year ago and up from 18.1% operating margin that we achieved in the fourth quarter.

Now, moving onto our consolidated results.

For the first quarter of 2012, we reported total revenues of $262 million, up 29% from a year ago and roughly flat sequentially.

Operating income was $26 million, down 7% from the first quarter of last year and down 23% sequentially.

Net income in the first quarter was $16 million or $0.16 per diluted share, both of which are flat to the first quarter a year ago but down from the $22 million of net income and $0.22 per diluted shared in the fourth quarter of 2011.

The first quarter 2012 tax rate was 35%, which is in line with our expectations for this year.

Now, let me discuss our balance sheet and liquidity position.

During the first quarter, operating activities used cash of $6 million, and we used $17 million to fund capital expenditures along with $8 million to fund share repurchases.

While borrowing is under a revolving credit facility, it increased by $36 million.

We ended the first quarter with cash of $30 million and a revolving credit facility balance of $53 million.

We continue to expect total 2012 capital expenditures to be in the $50 million to $60 million range, inclusive of the new $30 million technology complex that we announced last quarter.

Earlier this month, we completed share repurchases under a $15 million 10b5-1 plan put in place in March under which we purchased $1.9 million at an average cost of $8.06.

Total debt as of March 31 was $227 million, resulting in a debt-to-total capitalization ratio of 30.8%.

Now I would like to provide you with an update on our ERP system conversion.

As we communicated last quarter, our US operations within the Fluid Systems and Engineering segments implemented a new ERP system during the fourth quarter of 2011.

As is typically the case, we encountered a significant level of inefficiency in the early months as we worked through process reengineering and retraining of our workforce in all aspects of the business.

During the first quarter, we incurred nearly $2 million of supplemental cost to support the implementation effort, which is relatively consistent with spending level incurred in the fourth quarter.

One area that we highlighted as being particularly challenging in last quarter's call was the rate of customer invoicing, as our unbilled receivables grew significantly during the fourth quarter.

We did make notable progress in this area during the first quarter, reducing our unbilled receivables by approximately $25 million by March 31.

However, making progress on the invoicing does not immediately result in improved cash flows as the customer invoices then go through the standard customer payment terms.

As a result of this delay, our total receivable balance increased in the quarter.

While progress has been made, we still have a lot of work ahead of us.

We are continuing to take steps to streamline our operational processes throughout the business in order to reduce our costs and reduce our working capital in the US business, and plan to continue these efforts throughout the next several quarters.

Another aspect of our ERP system that has been particularly challenging has been the development of operational reporting that provides line unit managers with timely information regarding their operation.

Due in part to the shortcomings in the reporting generated out of the new ERP system, there were delays in the timeliness of key operational trends becoming visible to management, therefore delaying the timing of corrective actions.

Similar to the retraining efforts, we are continuing to take steps to improve the timeliness of information to the operational managers.

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

In closing, we had a difficult quarter in our US Fluids and Systems Engineering segment, but as Bruce explained, it's our belief that the US business will recover over the next couple of quarters as we move to push through barite price increases and restructure our completion services and rental business in the mid-continent region.

Our international Fluids and Engineering Service segment delivered a solid first quarter, and with the recent contract award like the one in off shore Australia, we believe we will continue to see solid growth from our international businesses.

In the area of technology, we continue to make inroads in the commercialization of our high-performance water-based Evolution system.

We believe Newpark has become the recognized technology leader in the North American drilling fluids market.

Our mats business posted a solid quarter both in terms of revenue and profitability.

As we have stated previously, we do expect to see some margin compression in the business as we move in the later part of 2012 and early 2013.

Due to seasonality in the business, we expect to see a softening in the rental business in the second quarter.

Competitors searching for new customers and a low price of natural gas are creating pricing pressures in the segment.

However, we are continuing to work on product enhancements to help us maintain our competitive advantage.

The Environmental Service business continues to perform and is expected to strengthen in its core deep water market as operators obtain permits to drill in the second half of 2012.

Now, turning our attention to the North American market, so long as the price of oil stays high, we would expect to see continued movement of rigs out of dry gas regions into the oil and liquid-rich basins, which we are well positioned to handle.

However, there may be additional pressure from operators to reduce their cost of services and products that they purchase.

We are optimistic concerning the US rig count and do not see any current signs of significant reductions.

However, that could change if natural gas fundamental deteriorates further.

We will now take questions.

Thank you.

(Operator Instructions) We ask you please limit yourself to one question and one follow-up question and then requeue.

Neal Dingmann, SunTrust.

Good morning, gentlemen.

Maybe Paul, either for you or Bruce, just wondering if you could give me a little more color -- you mentioned for the raw materials, particularly barite, about trying to improve those margins or pass through the costs.

Just wondering what sort of processes and procedures you'll do to -- is that, make agreements in China yourself?

Or if you could give us some color on how you plan to do that and if you see this or the pricing going through, is this a one-quarter, four-quarter type of event to regain this?

Neal, what's happening that would suggest that we may be at the top of the market in terms of the high pricing, and that high pricing is also attracting new suppliers into the market.

So going forward, not next quarter or the following quarter, probably -- but later in the year, we expect some other suppliers coming onto the market will help that situation.

During the quarter, as we mentioned, due to a shortage, we did have to halt some of our third-party sales.

We have recently reinstated those as our inventories have gotten somewhat better.

The real problem, as you pointed out, is the significance and the frequency of the price increases we've had.

They're becoming so thick and fast, we just have not been able to catch up with the first increase when the next one comes along.

But we were diligently passing it through our customer base and we still are.

Obviously we're trying to speed up how we do that as best we can.

We're looking at all areas, all customers by area, and we're trying to find the ones that are using the most barite, as it were, and we're trying to hit those first.

And there's also time lags in terms of when we do a bid for a customer and we bid a barite price, the program gets submitted, the drilling campaign gets planned, the campaign gets underway, we drill the well.

By the time we do that, that adds several months onto the lag time also before we can start recouping some of these costs.

But I guess diligently, we're looking at every account, every area, and trying to move the price increase through as quickly as we can.

Okay, and then maybe just one follow-up as far as on Evolution.

I think last quarter you talked about having a major [usage] -- you talked about maybe out in the Rockies, pretty significant well.

Bruce, or Paul, I mean, any significant sort of things you can point to sort of -- I don't want to call them catalysts, if you will, but sort of things to look for down the road?

We obviously know it's kind of a lumpy business, and it was nice to see the revenue remaining solid there.

But just what we should be looking for, for Evolution as you continue to develop that.

In most regions, it's gaining momentum.

We're particularly pleased with some of the work we're currently doing in the Eagle Ford, which could stand us in good stead for the future in that part of the business.

We're looking at some of the Tuscaloosa Marine Shale play, which is over in Mississippi, where we might be able to introduce Evolution in the not-too-distant future.

So it really, most regions are going very well.

The complexity of the wells, we're using Evolution on are becoming more complex.

So very pleased to this point with how it's rolling out.

Yes.

One of the things I might comment on as well that in the quarter, we were starting to do some fairly long laterals, some up to 10,000 to 12,000 feet in length.

That's linear we're starting to see is the extended reach of the laterals where the high-lubricity, low-torque and drag on the drill string is starting to benefit the operators.

Interesting.

One last I could sneak in, just wanted from Gregg, -- any thoughts on forecast for mats margins going forward?

Thank you.

As I had mentioned in my comments, the 47% that we achieved in the first quarter was pretty much everything hitting on all cylinders.

You had the record level of the mats sales, as well as the utilization being very strong in all the regions.

So we do expect that to be downward some, somewhere in that 40% range that we were at last quarter is not an unrealistic area in the near term.

Thank you.

Rob Norfleet, BB&T Capital Markets.

Looking at the completion and equipment rental business, you obviously [netted] the competitive pressures there.

Can you talk a little bit about what type of restructuring initiatives you're going to undertake to try to obviously improve margins in that business?

And are you also looking to take any capacity out of the market?

Where we're focusing currently is on the cost structure in that business as the competitors have moved from the Haynesville and the Barnett into the mid-continent region.

That competitive pressure obviously has forced down our revenue, and we're trying to now put through the cost structure and shape that for the size of the current business.

We're looking at our bidding strategies, and we're also looking at other opportunities for under utilized assets and moving those to other regions.

Okay.

And I guess another question I just wanted to bring up, we have known about the barite cost obviously being elevated and certainly impacting margins to some degree, but it seems like since you reported fourth quarter, obviously we had a large number of issues that impacted margins this quarter.

When did these issues really start becoming prevalent?

Was this really in the last couple of months?

I'm just trying to understand -- in terms of visibility, when you look out into the market, how much of this you kind of saw coming versus just -- it happening right in front of you.

Sure, this is Gregg.

I'll take that.

Yes, as you mentioned, the barite, the increasing barite cost, we had been talking about for a few quarters now.

But what you have is a very long supply chain there in which, from first seeing the cost increase to actually moving it through your supply chain, through your grinding facilities, and actually making its way into your sales activity.

So what we saw was those cost increases that we were seeing several months in advance really work their way through the system in the latter part of the quarter, and that's when it, as Bruce mentioned, came at such a rate where these higher cost shipments were then working their way through and causing the shortcoming there.

Yes.

Specifically, that was in February and March where we saw those cost escalations hitting us.

Okay.

That's fair.

And last -- and I'll get back in the queue -- in terms of capital allocation, you obviously talked about your CapEx, the research center -- with the stock down being below $7, based on where your average purchase price was in Q1, how do you view buyback at this point from a capital allocation standpoint?

There's really no change in our overall long-term view.

I mean, we put the $50 million program in place, and as we had talked about in previous quarter, that's more about maintenance of our capital structure, and we plan to continue executing as planned.

Okay, thanks for your response.

Thank you.

Jim Rollyson, Raymond James.

Good morning, guys.

So you were just trying to bring your average cost down a little bit today, huh?

Kidding.

Just kidding.

If you look at all the different factors that you mentioned that led to the margin compression on the fluid side, can you kind of give us a sense, if you have this handy, of maybe how those rank out or just magnitude of the various factors so we can find of think about as those unwind going forward or, you know, the factors that should, like barite, eventually catch up on.

How do you rank those out in terms of what was the biggest cause of the compression?

Yes.

This is Bruce.

I'll take that.

I think to categorize it, barite was probably 40% of the piece of the issue.

The mid-continent completion fluid and services business was 25% of the issue, and the remaining 35% was the mix and some of the operational cost inefficiencies that we are now looking to resolve.

So those would be the big buckets.

Okay, that's helpful.

And on the mats side, I think you gave pretty good color on how you're expecting that to play out going forward.

Maybe just a little bit of color on kind of the breakdown of where your rental fleet stands today because you have been doing some relocating just -- Marcellus, I would imagine, is seeing some softness just because we have seen the rig count falling off with the gas price, but maybe a breakdown of where your fleet stands between the different geographic regions?

As we stand today, it's pretty well balanced between the three regions.

Northeast, Gulf Coast, and the Rockies area all having about a third of the overall fleet in the US.

And you're right, the area in the Northeast is one that we're definitely seeing a softening driven by the low gas pricing, and the other one of note is the seasonal demands in the Bakken area where we see a softness.

That's occurring right now.

Yep, which is normal and picks back up later.

Historically, you've given a break down of fluids revenues kind of by region, like in your press release.

Any chance you can give us that breakdown?

I know we got the Evolution number, but we hadn't really got everything else.

I can give you the quick breakdown.

The Europe, Middle East, and Africa revenues were $30 million.

Brazil was at $18.6 million.

Asia Pacific was in just under $9 million.

Perfect.

Thank you.

Appreciate it.

Thank you.

Mike Harrison, First Analysis.

Hi, good morning.

Just wanted to talk a little bit about the ERP system, and you mentioned some of the issues you have.

What's the timing or what do you think the timing going to be on some of the resolution or fixes that you put in place?

And have you delayed the rollout of other aspects of the ERP system or other projects associated with that while you're working through these issues that you come across?

Yes.

I will say that there are no other rollouts that are underway until all of the issues get satisfactorily resolved within the US business, that's for certain.

But in terms of the timing of it, there's a lot of pieces to it.

We talk about the retraining and the reengineering of a lot of different areas of the business, and they need varying degrees of work.

And so we're attacking it on all fronts, but different pieces take differing levels of effort and amounts of time in order to complete.

In terms of the overall process, I would expect to see steady improvement over the next few quarters before we're really to the point where we want to be.

And didn't -- wanted to understand on the barite front -- if you could just talk a little bit about how you guys are seeing the pricing environment right now.

Obviously, you're not the only ones who are dealing with higher raw material costs and I would think with the rig count where it is that demand is relatively good.

So are you able to sort of get the pricing that you're trying to get, or are you seeing significant amounts of pushback or competitive pressures that are hurting you?

There are certainly competitive pressures, but that's normal in our business.

I think we face that all the time.

I don't think we're getting any pushback so much from our customers.

It's more just the time that it takes from the time we get the orders, as Gregg mentioned, by time we push it through the system, by the time we fully realize that cost and then we pass that through to the customer.

So it's been more one of a lag time issue, and because the cost increases have been so high and so frequent, it's probably going to take us through to the fourth quarter before we successfully manage to push these things through.

And that's sort of the -- what I really wanted to get at.

You mentioned the rate of increase kind of accelerated in February, March, and you mentioned that supply chain is several months long.

So it is going to be an October, November, December when we really see the higher costs hit you?

Or is that when we really see that the pricing is in place?

Just maybe help us understand a little bit more that the timing of this price from a [inaudible] dynamic and the head wind on margin.

The timing in terms of passing through those additional costs to our customers, I think we will see a gradual increase in that as we go through the year.

So it's not going to be a swift leap back, I think.

It's going to be more a gradual climb back throughout the rest of the year.

The one thing Bruce did mention, Mike, was that the cost, the ore cost coming out of China, we think that's plateaued.

We're starting to see some dipping, the cost coming down out of China, and we expect that to stabilize and hopefully maybe even decline as we get throughout the end of the year.

We'll have to wait and see, but again, another thing that the drilling fluids organization is doing is looking at securing alternative sources at lower costs.

But that's going to be in smaller quantities because China still probably controls about 60% to 70% of the worldwide barite market.

Understood, thanks very much.

Doug Garber, Dahlman Rose.

Good morning, guys.

I wanted to ask a little bit about the international business.

It seems most of the concerns on the margins this quarter were from the domestic business.

Can you give us an update on the different geo-markets, Brazil, Asia-Pac, the Middle East, maybe Canada?

Are you seeing margin improvement and pricing improvements there like some of your larger competitors are talking about on the international markets?

The pressure is all there.

However, the contracts tend to be longer-term there, and moneys are committed significantly up front of drilling campaigns.

So we tend not to see the short-term swings so much in those areas as we do in the US.

Overall, each of those areas were relatively stable to the prior quarter.

Up slightly.

Yes.

Modestly up in the international markets.

Okay.

And when did those legacy contracts roll over in the international markets where we could potentially see margins on the aggregate level be impacted by the international strength?

I think it's all situational.

Those contracts are at different points in time, different lengths and different countries.

Bruce, I don't think we have any contracts that are coming up.

We're signing new contracts in Algeria, which is our largest country in that part of the world.

Don't see anything on the near-term horizon, Bruce.

But you may want to comment further on that.

I think you categorized it correctly, Paul, I think.

Yes.

The one that obviously we're probably most pleased about was the new contract we won down in Australia off shore there.

That was a nice contract win for us.

It was a multiple year contract.

And just one more quick question for Gregg.

On the ERP costs, or I guess the corporate and other, the line item, it was a little elevated this quarter.

Do you have a road map on when you kind of -- on that for the next -- for the rest of the year?

That kind of goes hand-in-hand with these efforts that we're talking about.

A lot of these incremental resources that we have are to support the reengineering and retraining of the folks in -- within the operation.

So as we make progress in that area, we will see the support costs also go down over time and so those costs are -- I mentioned nearly the $2 million of costs and those costs are really split between the Drilling Fluids unit, and as you know, the corporate line is the other area where that shows up.

Thanks, guys.

I'll turn it back.

Thank you.

Michael Marino with Stephens, Inc.

Good morning.

Just wanted to get some more clarification on the barite cost.

What I'm struggling to understand is, does the impact on margins of the barite cost issue get worse before it gets better?

Or have we seen the worst of kind of the impact?

We think we've seen the worst.

There is evidence that suggests we are on top of the market on the high price side, so we're hopeful that we've seen the worst at this point.

But in terms of the lag and the flow-through into the P&L, you think you have seen the worst?

Yes.

I mean, in terms of the cost increases that we have seen coming through, we are now basically working through the highest cost shipments that we have purchased.

Okay.

So on the cost side, we have seen the top.

Okay, okay, that's helpful.

And then as a follow-up, the third-party sales issue, is that kind of the first component of the margin issue that bounces back?

Yes.

As Bruce had mentioned, that was a situation in which we had to temporarily restrict our third-party sales in order to protect our own internal consumption needs, and that's based on the supply levels that you have site by site.

And so that was a situation that we faced late in the first quarter that we've worked through.

Yes.

And we turned those sales back on now.

Okay.

Okay.

And then finally, on the completion services business, could you give us some color on how big that is?

And maybe how the margins in that business compare to the rest of the business?

And where -- I guess I'm just trying to figure out -- obviously it's apparently higher margin stuff and moves around a lot quicker, but I'm trying to understand kind of the potential impact going forward, if it gets worse or if it stabilizes.

Just kind of put some color around the relative size of that business, maybe.

It's a relatively small piece of the business.

The revenues are only in the 5% as we stand today after the declines, 5% of the total segment revenues.

In terms of the margin profile, what's different about this business is it is, with it being a service and rental business, you have that fixed cost structure.

You have the equipment and the personnel in place, so much like we see in the mats rental business, in which you've got some pretty dramatic swings in your operating margins based on your utilization of your assets, you have the similar dynamic here in which the decline in margin really flows through.

Okay.

I mean, has that business maybe seen the worst too?

Were you caught a little bit flat-footed the last couple quarters there and now you can kind of stabilize and hopefully improve?

Or has it kind of flattened out here?

We think it's flattened out now.

I don't think we were caught unaware.

We certainly were aware that other assets were moving in from the Haynesville and the Barnett as they went down.

So we certainly were aware of it.

It just happened very quickly and we didn't have enough time to react to it, but we are reacting to it now, and we're going to start building that business back up.

Okay, great.

Thank you for the color, guys.

Thank you.

Mike Harrison, First Analysis.

Any update on kind of what you're seeing in terms of deep water activity, drilling activity in the Gulf of Mexico?

Are you seeing an increase in bidding or actual work that you're doing out there?

Really, we're not seeing a dramatic change.

There's a lot of activity going on that was almost a pre-Macondo in a way.

That's still going on, but in terms of permits and new drilling, we're not any seeing significant increase at this time, but we expect that to gain momentum as the year goes on.

And then what were the revenues in Canada in Q1, and can you maybe walk through sort of how the normal seasonality works in that business?

I know that's been a very strong market for you, so are you still expecting to see year-over-year higher activity during the summer months, or is that sort of gone until we get to the colder weather again?

Mike, I'll take the first part of the question and then hand off to Bruce.

In terms of their first quarter, I just want to remind that the fourth quarter -- the third and fourth quarter of last year were very strong for that business historically.

In the fourth quarter, they had nearly $24 million in revenues due in part to the early spring breakup that really caused things to drop off in March.

Their first quarter revenues declined to under $19 million so they were down $5 million in revenues quarter-over-quarter.

Yes.

The first quarter can be lengthy or short, just purely depending upon the time of the breakup.

The breakup began a little bit early this year, hence the revenues tailed off towards the end of the quarter.

The second quarter, of course, in Canada is always the time when things really slow down simply because the [road bans] are on and rigs and materials can't move.

But coming back out of the breakup, whenever that occurs, we expect to get back to a very strong position in Canada and grow the business during the third and fourth quarters back to the high levels we saw at the end of last year.

All right.

And last question I had is maybe more of after strategic one for Paul.

Just on the mats business, we've talk in the past about expanding the rental model into some international markets.

Is that something you're still investigating and what maybe is the timing of that?

Yes, Mike, we do continue to investigate the international markets.

As you know, we've talked previously about Eastern European shale plays as a possibility.

We've been spending some time there to try to understand the operators and what their rate of growth might be in that region.

And then the other place that we think there's a natural benefit for our product line is down in eastern Australia and Queensland with a Gladstone LNG project.

So we're still looking at those, but we're off end of this year, early next year before we would do anything meaningful there.

All right, thanks very much.

Thank you.

Chris Enright, Weeden & Company.

Good morning, guys.

Just a couple quick follow-up questions.

Going back to the completion services business, given the competitive pressure and obviously your small-scale, has there been any discussion around potentially exiting the business?

Does it make sense for Newpark at this point?

We're always looking strategically at our portfolio, but certainly at this time, there's been no decision made in that area.

Okay.

And last question -- most things have been answered at this point.

But now that you have given the Canadian breakdown, had a decline there, had a decline in completion services, decline in barite sales, it seemed like a pretty nice increase in the core US drilling fluid business -- from a revenue perspective, not talking about margin.

Overall, do you think you gained any share there?

Is that a fair assessment, first of all?

I think we remained flat in terms of market share.

Yes.

There's been -- there was some rig growth.

We work with a [baker] who used rig count, so there was some growth in rig count.

But relatively flat in market share, maybe a slight improvement basin by basin.

Thank you.

Thank you.

This does conclude the question-and-answer session.

I will turn it back over to Mr. Howes for any closing remarks.

Thank you for joining us today on the call and for your interest in Newpark Resources.

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

Thank you very much.

Ladies and gentlemen, this does conclude the conference call.

You may now disconnect, and thank you for your participation.