NPK International Inc (NPKI) 2012 Q2 法說會逐字稿

Good morning, everyone.

Thank you for standing by.

Welcome to the Newpark Resources second-quarter earnings conference call.

During today's presentation, all participants 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, July 27, 2012.

At this time, I'd like to turn the conference to Ken Dennard with DRG&L.

Please go ahead.

Thank you.

Good morning, everyone.

Appreciate you joining us for Newpark Resources conference call today to review 2012 second-quarter results.

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

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

For those of you who did not receive an email of the release yesterday afternoon and would like to be added to my list, just call our offices at DRG&L 713-529-6600 and we'll get you on those lists.

There will be a replay of today's call.

It will be available via webcast on the Company's website, www.newpark.com.

There will also be a recorded replay available by phone, which will be available until August 10, 2012.

All of the contact information there is in the press release.

Please note that the information reported on the call today speaks only as of today, July 27, 2012, and therefore you are advised that time-sensitive information may be no longer accurate as of the time of any replay listening.

In addition, the comments made by management today of Newpark during this conference call may contain forward-looking statements within the meaning of the United States Federal Security Laws.

These forward-looking statements reflect the current views of management of Newpark, however, various risks, uncertainties, and contingencies could cause Newpark's actual results, performance, or achievements to differ materially from those expressed in the statements made by management.

Listeners are encouraged to read the Company's Annual Report on From 10-K, its quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of the risks and uncertainties and contingencies.

And now, with all that behind us, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes.

Thank you, Ken.

Good morning to everyone.

We'd like to thank you for joining us today for our second-quarter 2012 conference call.

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

Following my opening remarks, Bruce will provide an update on our Fluids business and Greg will discuss the Mats and Environmental Services businesses as well as the consolidated financial results of the quarter.

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

Now turning our attention to the second quarter.

We are pleased with improvement in profitability from our US Fluids business, which was up considerably from a very difficult first quarter.

While revenues were flat sequentially, our US operating income improved by more than $5 million from the first quarter.

As we stated in the first quarter call, the decline in profitability was attributable to several factors including-- increased bare rate cost and delays in passing these through to customers; reduction in third party bare-right sales; weakness our completion services and equipment rental business in the mid continent region; cost inefficiencies associated with the accelerated transition from dry gas to liquid; and support costs associated with our ERP system implementation.

In the second, quarter meaningful progress was made on all fronts contributing to the $5.6 million sequential improvement in operating income.

While performance strengthened in the US Fluids business, these gains were offset by declines in other regions, including Spring break-up in Canada, where we saw sequential revenue decline of $11 million.

Delays in North Africa, due to timing of customer projects and the transition to a new contract with Sonatrach in Algeria resulted in an additional $5 million sequential revenue decline.

In addition, operating expenses increased in North Africa in preparation for the ramp up in activity associated with new contracts.

The combined effect of these items decreased our second quarter revenues by about $16 million, and net income by about $0.04 per share.

Our Evolution system continues to see strong results in key US markets.

Evolution sales were $27 million in the second quarter, up from $23 million in the first quarter, and $18 million in the second quarter of last year.

We are seeing an increase level of interest in our technologies as inquiries about Evolution have broadened beyond the usual independent drillers to include the major international oil companies.

In addition, we expect to see Evolution used for the first time outside North America by the end of the year, which would represent a significant step as we look to introduce this technology in to the international markets.

The Mats business continues to perform very well as second quarter revenues of $30 million were up 8% year-over-year and down 2% from the all time record we set in the first quarter.

Mats sales activity has remained strong.

And the US Rental business continues to expand their customer base and deliver solid results.

Our Environmental Service business remains very stable, achieving revenues of over $13 million, which were up 12% from a year ago and flat sequentially.

We believe that with the recent ramp up in deepwater permitting in the Gulf and our strong competitive position in this region, we are well positioned to participate in the growth.

Now let me turn the call over to Bruce Smith who will review the performance of our Fluids business.

Thank you, Paul, and good morning.

In the second quarter, the Fluids, Systems, and Engineering segment totaled revenues of $202 million, a 6% increase over last year's second quarter, and a 7% sequential decrease.

North American revenues totaled $150 million, also up 6% over last year's second quarter, and a 7% sequential decline.

Due to the Spring break-up, Canada experienced an $11 million sequential decline in revenue, reflecting a 61% drop from the first quarter levels.

While the seasonal decline was significant on a sequential basis, the second quarter of 2012 revenue of $7 million, is nearly double the level achieved in the prior year's second quarter, reflecting our market share gains in this region.

In the US, revenues were up 4% from a year ago and flat sequentially.

We are continuing to see the shift from dry gas to liquid-rich plays with large year-over-year revenue declines in our East Texas and rocky regions, being offset by growth in our South Texas and Oklahoma business units.

As Paul mentioned earlier, our operating income in the US improved by $5.6 million sequentially in line with our expectations stated on last quarter's call.

We continue to be pleased with the North American market penetration of our Evolution system.

Evolution revenues increased to $27 million in the second quarter, with the largest sequential gains coming from the Mississippi and the Lime play.

Through the first half of 2012, our Evolution revenues are $50 million, reflecting nice balance of activity across regions.

One major milestone reached in the second quarter was the completion of our 1000th well, 100 of them with one large independent operator.

As Evolution continues to gain traction in the marketplace, we have seen greater levels of interest among the major IOCs.

Having launched the system and penetrated the market primarily through smaller independents in 2010, we have now been receiving more inquiries from the major IOCs, which we believe is yet another affirmation of the effectiveness of our technology and its benefits.

In addition, we are now looking to producing Evolution in to markets outside of North America, where we expect to have the first Evolution well by the end of the year.

Now turning to our international business, our Europe, Middle East, and Africa revenues were down about 3% year-over-year to $25 million, which represented a 16% sequential drop.

Decline was attributable to issues in North Africa, where activity was soft due to the timing of customer projects, and delays associated with a new two-year contract with Sonatrach in Algeria.

The lower revenues in the quarter, combined with increased spending and preparation for the new contract, contributed to an unusually lower operating margin in the second quarter.

The new Sonatrach contract is important for a couple of reasons, first our market share with this NOC should increase from our current levels of 20% plus up closer to 30%.

But second and more importantly, it demonstrates that Newpark can successfully compete with any of the large integrated service companies anywhere in the world.

In Libya, while we expect to see offshore activity resume by year end, we do not expect any meaningful land activity until 2013.

North Africa remains susceptible to political instability.

And we have seen some of the fallout from last year's Arab Spring in the form of demand for higher pay in certain markets.

In summary, for our Europe, Middle East and Africa business we expect profitability to rebound in the third quarter to a more historic level.

In Brazil, revenues were up 3%, year-over-year to $18 million, and down 2% sequentially.

Our business in Brazil has stabilized and remains profitable.

Recently, we signed a two-year contract addendum with Petrobras to supply completion additives.

This represents a new product line for us in Brazil and is a demonstration of our deep new relationship with Petrobras.

Additionally, we expect to begin work offshore with an IOC in the third quarter.

In the Asia Pacific region, revenues were $9 million for the second quarter, up 40% from the year ago period, as the prior year included a partial quarter following our April 2011 acquisition of this business.

Sequentially, revenues rose by 4%.

The two-year Santos contract to provide fluids and services on Australia's Northwest continental shelf, started near the end of second quarter and we expect to see a more significant impact of this contract going forward.

The Fluids segment reported operating income of $13.5 million in the second quarter compared to $20.8 million a year ago, and $14 million in the first quarter of 2012.

The operating margin for the segment in the second quarter was 6.7%, down from 10.9% in the second quarter of 2011.

But up from the 6.4% we achieved in the first quarter, despite the seasonal downturn in Canada.

Improving our margins, particularly given the numerous difficulties we experience in the first quarter, remains a primary area of focus.

Our US margins were negatively impacted in that quarter by several factors, as Paul mentioned previously.

Although these issues remain, we are very encouraged by the improvements we've made during the second quarter.

We've made good progress on increasing pricing on barite to offset cost increases experienced in recent quarters and our efforts in this regard continue.

Barite costs appear to have stabilized over the last three months in part due to the slow down in North American drilling activity.

Nonetheless, we will continue to work with existing and new suppliers to improve our cost position.

Another challenge experienced in the first quarter was the influx of competitors, moving from dry gas plays into the mid continent region negatively impacting our mid continent completion services and equipment rental business.

This area of our business is showing noticeable signs of improvement.

Although revenues were still down $9 million year-over-year, they increased nearly $2 million sequentially, resulting in a $1.4 million improvement in operating income.

While making notable progress, this continues to be a work in process.

Looking forward, assuming a gas price remains at $3 levels and oil remains above $80, we are optimistic about the near term outlook for the Fluids business.

We expect the gradual recovery of our US operating margins to continue.

While the impact of new contracts in Asia Pacific and North Africa are expected to drive top line and operating margin improvements in each of those regions.

Canada should also improve as drilling activity recovers from the Spring break-up.

However to date, activities in Canada appear to be rebounding at a slower pace than we've seen in recent years.

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

Thank you, Bruce, and good morning, everyone.

Let me begin by discussing our Mat and Integrated Services, and Environmental Services segments, then conclude with a discussion of our consolidated results.

The Mat segment posted very solid results again, reporting second quarter revenues of $30 million, an 8% increase over the same quarter of last year, and a 2% sequential decrease.

There continues to be strong demand for our composite Mats overseas and we're seeing solid utilization of rental fleet despite rising competitive pressures.

We see regional shifts in customer demand driven by changes in regional activity and weather conditions.

While activity continues to decline in dry gas areas in the northeast, to date, we have successfully offset the impact of declining activity by expanding our customer base within this region.

The Mat segment generated operating income of $13.1 million in the second quarter, down 11% from the second quarter of 2011 and down 9% sequentially.

Operating margin in the second quarter was 43%.

This compares with the record 53% operating margin in the second quarter of 2011, and a 47% operating margin in the first quarter of 2012.

As we've emphasized in previous quarters, we remain very pleased with the strong results in this segment driven by the superior performance of our differentiated product offering.

However, we do expect to see competitive pressures continue to push margins downward, particularly in the US rental business.

Meanwhile, the near term demand for Mat sales remain strong, which we expect to help maintain revenues near current levels in the upcoming quarter.

Now turning to the Environmental Services business, revenues in this segment were $13.3 million, up 13% from the second quarter of 2011, and flat sequentially.

Steady volumes in the Gulf continue and with the ramp up of deepwater permits, we remain hopeful that we will see increasing activities in the offshore market within the next few quarters.

The Environmental Services business achieved operating income of $3.5 million, compared to $3 million in the same quarter a year ago, and $3.6 million in the first quarter.

Operating margins for the segment have been relatively stable, coming in at 26% in the second quarter, up from the 25% margin we achieved a year ago and down from 27% in the first quarter.

Now moving on to our consolidated results.

For the second quarter of 2012, we reported total revenues of $246 million, up 7% from a year ago, and down 6% sequentially.

Operating income was $24.8 million, down 22% from a year ago and down 5% sequentially.

Net income in the second quarter was $14.5 million, or $0.15 per diluted share, compared to net income of $19.3 million, or $0.19 per share a year ago, and $15.6 million or $0.16 per share in the first quarter.

The second quarter 2012 tax rate was 34%, which is in line with our expectations for this year.

Now let me discuss our cash and liquidity position.

As we discussed last quarter, one particular area of focus has been the rate of customer invoicing, as our unbilled receivables grew significantly following our fourth quarter 2011 ERP system conversion within our US Fluids business.

The level of unbilled customer receivables in this business unit increased by $63 million in the fourth quarter of 2011, and has since come down by $38 million in the first half of 2012, including a $15 million decrease in the second quarter.

Total receivables ended the second quarter at $334 million, down $21 million from the previous quarter.

While significant progress has been made, this remains an area of focus in order to get our receivables down to historical levels, which we expect to accomplish over the next few quarters.

Looking to the consolidated second quarter cash flows, operating activities generated cash of $22 million.

We used $9 million to fund capital expenditures, along with $17 million to fund share repurchases.

We also made the final payment of $12 million, on our April 2011 acquisition of Rheochem.

As a result of these expenditures, the amount outstanding under our revolving credit facility increased by $13 million.

We ended the second quarter with cash of $29 million, and a revolving credit facility balance of $66 million.

We expect the revolving credit facility balance to decline in the near term, driven in part by our efforts on the reduction in receivables.

Progress has continued early in the third quarter, as a revolving credit balance as of July 26 was $51 million, down $15 million from the June ending balance, and also below our March ending balance.

We continue to expect our 2012 capital spending to be between $50 million and $60 million, which includes the new $30 million technology center in the Fluids business.

In early July we completed $15 million of share repurchases, purchasing 2.6 million shares at an average cost of $5.74.

Combined with $15 million of share repurchases made earlier in the year, we have purchased a total of $30 million of outstanding shares at an average cost of $6.71, reducing our outstanding share count by 4.5 million, or about 5% from the beginning of the year.

Our total debt at the end of the second quarter was $240 million, with a resulting debt to total capitalization ratio of 32.3%.

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

Thank you, Gregg.

The first half of 2012 has not been without its challenges.

But we are beginning to see the turnaround in our US Drilling Fluids business.

Although we are not back to our historical margins, we are encouraged by the progress made over the past quarter.

We'd expect to see continued strengthening of the US Fluid margins over the next two quarters.

Meanwhile, as we look to other regions and segments of our business, we see many positive developments including-- increasing activity levels in the Gulf of Mexico that will likely drive additional revenue growth; a return to drilling activity in Canada where our team has done a great job of capturing market share over 12 months to 18 months; the ramp up of our new offshore contract in Australia; the new two-year fluids contract with Sonatrach in North Africa; and the increasing interest from international oil companies in our Evolution technology.

I would also mention we remain very pleased with the exceptional performance of our Mats business.

While we recognize that competition will continue to put pressure on our margins, we remain focused on further enhancements to our existing product offering along with the creation of new products.

Specifically, we anticipate that we will have a spill containment system ready for deployment in the field by the end of the year.

Our goal is to provide a spilled control solution to EMP operators during the drilling and completion process.

In conclusion, we remain optimistic concerning our business, both domestically and internationally.

With that, we will now take your questions.

Operator?

(Operator Instructions)

Jim Rollyson; Raymond James.

Paul, just to circle back to one of things you were talking about on the Mat side of things.

You've been talking about competitive pressures and margin potential pressure for a while, and outside of one customer specific situation you had in the northeast, margins held up extremely well for quite a long period of time.

Kind of curious if the commentary towards competitive pressures is more something you say in the -- given that the margins there have been so strong and it's inevitable that eventually guys will come in to that market?

Or is there something you have been seeing?

Or a little added color on that?

I think it's really a combination of both, Jim.

We certainly believe that those high level margins that attracts new competition trying to come in.

We have seen some local pressure, certainly in given areas where it's been very dry, where the mats have been used to stabilize some soil conditions.

There has been pricing pressures.

The team has done a great job of bringing on new accounts and that's helped offset some of that pricing pressure.

And the other thing I would say in terms of the overall segment margins is that the sale of our mats, the margins there, continue to hold pretty steady.

Great job there.

For my second question, on the fluids side of things, when you think about going through the rest of the year, you continue -- should continue I suspect to recover the barite cost increases from your customers.

You've got some of the contract changes going on in the Europe, Africa, Middle East regions that will get in to place over the next two or three quarters.

And I assume Canada will eventually recover back to the winter drilling season.

How do you think about, sounds like up, but in terms of margin direction and magnitude when you think about going in to the fourth quarter?

All else being equal, where do you think margins can end up towards the end of the year relative to the just under 7% this quarter?

I think in all of those things, we expect to get our margins by the end of the year back to the historical levels we were at, which is around that 11% range.

Neal Dingmann; SunTrust Robinson Humphrey,.

Guys, just wondering, you addressed on this last question the confidence, Bruce, that you have that after seeing margins stall out this last quarter, second to first sequentially.

What confidence you already have, is it just the raw materials that you have seen improvement?

Or again, is it more international that you are going to see more higher margins there, what gives you that confidence?

I think both things.

Within the US business, we are certainly managing now to begin to pass on the cost increases we've already have.

That's flowing through the system as we speak and we will continue to do that.

Internationally, we have some good things going on with the contracts that we have mentioned that will increase our business there, quite significantly.

And we expect, of course, that margin to follow the revenue increase coming from those new contracts.

Okay.

Follow up, if I could, maybe Paul for you or Bruce.

Just wondering, when you look at Evolution, Paul, maybe a broader question for Paul and maybe a detailed for Bruce.

As far as Paul, Is it about right now where you thought Evolution would be as far as tracking?

And when you see the growth, you mention going international we talked about that in the past and it's coming to fruition.

Is this Evolution now growing about as you would expect?

And Bruce, if you could talk a little bit about margins and demand out there?

Are you starting to see higher demands on that are going to boost the margins in the Evolution?

Sure.

I will take that first and pass it off to Bruce.

We are pleased with the revenue growth in Evolution.

As you know historically we've tried to be very diligent about how fast we ramp it up.

We've hit a major milestone this quarter, where we've now drilled over a 1,000 wells.

I think we're over 3 million feet.

So we are starting to get a little more aggressive in taking Evolution to new regions, specifically, taking it to the international market.

The other thing that we are obviously excited to see is with the a lot of the majors, the large IOCs now are starting to be interested in the technology.

And our hope is that will be a market that we'll penetrate over the next 6 months to 12 months.

International is interesting.

We are pursuing various options and are not sure which one of them will come first.

That's why we are saying there will be one before the end of year and really not saying which exact area it is.

We are pursuing several.

In terms of the margin, the margin with Evolution remains consistent at the moment because we are still focused on a penetration of the system into marketplaces in different geographical regions.

So that's the focus currently.

Mike Harrison; First Analysis.

I was hoping that you could give us maybe a little bit more color or detail on how you guys are seeing the progress in repositioning your business and resources out of the dry gas shales and in to some of the more liquid rich areas where you are seeing greater activity?

Were you still encountering some costs during Q2?

Or are we largely seem those costs run their course?

We were encountering some cost still in Q2 but they are nearing running their course is the correct answer.

The majority of the change from dry gas to liquids we've already accomplished so we expect to be fairly flat going forward on the cost side of things.

As Bruce mentioned earlier, the biggest area of focus on a year-over-year basis continues to be in the completion services business where that's down quite a bit year-over-year.

They continue to focus on that piece of it.

I was hoping to get detail on the new Petrobras contract extension.

You suggested that was a product line extension.

Tell us what is new there.

What does the contract require of you?

I know your past contract with Petrobras required you to put resources in place and you sat there for quite a while and were stuck before business started to ramp up.

Is this contract a little bit more attractive from that standpoint?

This is an addendum to the original contract and it's with completion additives, which is a different line of chemicals than we have been providing before.

We understand a lot better how Petrobras functions and we built a good relationship with them now.

And we have people actually internally within the Petrobras office.

We expect this addendum to not have the same delays as the initial contract and we feel that this will being as part of the existing process now.

Doug Garber; Dahlman Rose.

I wanted to ask about the spill containment system.

I'm curious how big of a percentage of the AFE it's going to be for the customers.

I understand pricing to be sensitive but maybe on that perspective, I'm trying to get a sense of how much incremental cost it will be for them.

Also if you could tell us more about the value proposition for them versus regular regulatory cost for spills and fines, the value proposition there?

Yes.

We haven't worked up necessarily how much the percentage is on AFE basis.

As you know, in the North American market, we deploy a rental model so the spill management would be a rental program.

Certainly in the case where you have an environmental exposure and if you do have a spill during the drilling process or completion process, we want to create a new market segment focusing on the completion side of it to help control any possible spills that could occur during fracking.

Okay.

Also on the Mat margins, coming back to the near term, is there anything that is happening immediately that would cause the margins to come under very near term pressure?

Anything with the customer in the northeast or seasonality or anything like that, or do you think for now they are stable despite the longer term lower bias you have?

In the near term, we don't see anything in particular that would cause a significant change to what we have been experiencing.

But the downward pressure on the rental margins, that continues over the longer term.

Thank you.

Michael Perino; Stephens.

Good morning, Greg, quick question on the accounts receivables.

How much cash do you figure, excess cash, is kind of tied up there now versus kind of where you see it over the next couple of quarters as you kind of work through that?

Yes.

Going back to where we were at the time of conversion, basically, we are still a good approximately $7 million higher in this business than that point in time.

There is still a significant amount of cash to come off the receivables.

Okay.

Just to follow up on the mats.

Could you remind us again if there is much of a difference between the sales margins and the rental margins?

And how mix might affect consolidated margins in mats?

Yes.

Just real quick, this is Paul.

On the prior question, Greg, you were answering how much extra cash I think you said $7 million, it's $70 million.

Cash on the balance sheet, just to be clear how much excess cash is on the balance.

Okay.

I'm sorry could you repeat the second question.

On the mix within the mats business, sales versus rental.

How does that impact margin?

How does it impact margin and how do you see it unfolding?

Generally your incremental impact of your rental business is a higher incremental margin than the sales business.

That's a function of the fact that your cost structure is more fixed on the rental business between your Mat fleet, your operations, et cetera.

As you do see things shift from rental to sales, you will generally see a downward trend.

(Operator Instructions)

Bill Dezellem; Titan Capital Management.

Thank you.

Two additional questions.

One relative to that accounts receivable decline that you did experience in the quarter, how did that compare to what you were hoping for at the beginning of the quarter?

Well, as we discussed on the previous quarter, the progress is to make our way back to our historical levels has got several facets to it between the process and efficiencies and retraining et cetera.

Compared to our expectations, I would say from my perspective it's been a little slower than what I would have initially hoped.

Nonetheless, it is heading in the right direction and we continue to make progress.

Are you seeing that the progress is accelerating the further down the timeline you get?

We continue to make progress on it.

I go back to my point of what we are seeing here early in the third quarter, where in the first 3 plus weeks of the quarter we have seen very nice collections and our revolver balance is down $15 million from the beginning of the month.

Mike Harrison; First Analysis.

I was hoping to get a little bit more detail on the ERP related costs.

How much did they change from last quarter to this quarter?

Can you maybe walk us through the next I don't know maybe three or four quarters and give us a sense for what you are going to be -- what we should expect to see in cost?

And maybe what kind of benefits when those start to creep in?

Yes.

As far as the costs go, last quarter we had mentioned that it was running about $2 million in the quarter.

We are seeing that continuing to ramp down.

It's probably down roughly $0.5 million quarter-over-quarter.

So in the $1.5 million range here in the second quarter.

I would expect it to continue on that slope over the next few quarters as we continue to make progress and reduce our reliance on third party contract resources, et cetera.

When do we start to see the benefits?

I think the benefits are really a little longer term, a few quarter out before we would see benefits.

We had pointed to a number of different areas where we would expect the system to provide long-term benefits, including on the receivable side.

Obviously you have to go through a little bit of pain up front before you see the long-term benefits.

Doug Garber; Dahlman Rose.

It seems to be a theme in North America for certain service lines that there is more competitive environment in price pressures.

I wanted to see what you guys are seeing in the core Fluids business in terms of lead edge pricing competition there.

This is Bruce.

Within the Drilling Fluids business, it's always been quite competitive and that continues.

There is competitive pricing out there.

That's where we need to try and differentiate with Evolution and other technologies we have in our armory.

The competitive pressure is there and usually is there.

Has there been any recent trends in terms of pricing in the last I guess few months where it's started to impact other select North American business lines?

Not really at this point.

Gentlemen, I'm showing no further questions at this time.

I'd like to turn the conference back over to you 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 to you again after the conclusion of the third quarter.

Thank you, very much.

Thank you, sir.

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

We'd like to thank you for your participation.

You may disconnect.