NPK International Inc (NPKI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Newpark Resources third quarter earnings conference call.

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

Following the presentation, the conference will be open for your questions, and instructions will be given at that time.

Today's conference is being recorded October 26, 2012.

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

Please go ahead.

Thanks, good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today to review 2012 third quarter results.

We would also like to welcome our internet participants listening to the call being simulcast over the web.

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

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

That number is 713-529-6600 and provide us that contact information.

Or you can e-mail me on my e-mail address, which is on the press release.

There will be a replay of today's call.

It will be available by webcast on the Company's website at www.Newpark.com.

There will also be a recorded phone replay that will be available through November 9, and that information is in the press release.

Please note that information reported on this call speaks only as of today, October 26, 2012 and therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay listening.

In addition, the comments made by management today of Newpark during the 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 these statements made by management.

The listener is encouraged to read the Company's 2011 annual report on Form 10-K, its quarterly reports on form 10-Q and current reports on Form 8K to understand certain of those risks, uncertainties and contingencies.

And now with that behind me, let me turn the call over to Newpark's President and CEO, Mr. Paul Howes.

Paul?

Thank you, Ken, and good morning to everyone.

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

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

Following my opening remarks, Bruce will provide an update on our fluids business and Gregg will discuss the mats and environmental service segments, as well as the consolidated financial results of the 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 third quarter.

Despite a challenging North American drilling market, we are pleased to report sequential improvements in both our fluids and mats segments with total revenues for the third quarter of 2012 up 6% sequentially to $260 million and down less than 1% from the third quarter last year.

Operating income was up more than 16% sequentially to $29 million, but down 27% from the same period a year ago.

Our net income per diluted share for the quarter was $0.20 compared to $0.15 in the second quarter of 2012 and $0.23 a year ago.

Our worldwide fluids business posted revenues of $211 million for the third quarter of 2012, a 5% sequential increase.

This increase was driven by the strong performance of our international regions which contributed $61 million of revenues in the third quarter, up 15% from the prior quarter.

Specifically, we saw strong growth in Brazil and Asia-Pacific as revenues from both regions were up in excess of 20% from the second quarter.

Our work in Brazil is benefiting from our relationship with Petrobras, while our Asia-Pacific unit benefited from the start up of the two year offshore contract that began late in the second quarter.

Revenues from the Europe, Middle East and Africa region also improved sequentially as a ramp up continues on our new contract in Algeria.

In North America, revenues were up slightly on a sequential basis to $151 million as a seasonal recovery in Canada offset declines in the US business resulting from lower rig count.

Our mats and integrated services business posted another strong quarter, achieving a record level of both revenue and operating income.

As the gas drilling rig count continues to decline, we are seeing our competitors respond with more aggressive pricing, leading to an overall weakening in the US rental market.

For the quarter, however, this was offset by strong mats sales, including a large sale for the infrastructure project in the utility industry, along with an improvement in our international rental business in the United Kingdom, which benefited from the summer olympics.

In our environmental service business, revenues were $13 million in the quarter, down 2% from the second quarter.

Although the business was negatively impacted by Hurricane Isaac, we were able to reopen our locations more quickly than our competitors, thus minimizing the storm's impact on revenue.

While continuing to face a challenging market in the US, our third quarter results demonstrated the importance of our efforts to diversify and expand our business globally.

Our mats and integrated service segment, our Latin America fluids business and our Asia-Pacific fluids business all posted record levels of revenue and operating income in the third quarter, which helped offset the continued weakness in the North American fluids business.

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

Thanks, Paul, good morning.

For the third quarter, total revenues in the fluids systems and engineering segment were $211 million, representing a 2% year over year decrease and a 5% sequential increase.

North American revenues were $151 million, down 4% from the third quarter of last year but up slightly on a sequential basis.

In the US, revenues were down approximately 2% year over year and down 1% from the second quarter.

The sequential decline actually represents a favorable comparison to the 3% decline in the US rig count over this period.

While our US activity level was down with the lower drilling activity, our third quarter revenue included higher volumes of lower margin products, namely bare right traditional oil-based mat, along with a higher level of pass-through equipment rental revenues, which also carry a low margin.

So, while these specific areas helped to strengthen revenues in the quarter, they provided minimal benefit to operating income.

In addition, while corrective actions in our mid continent completion services and equipment rental business have continued, this market remains highly competitive, leading to a sequential decline in both revenues and operating income for this business unit.

In Canada, we experienced the usual seasonal improvement, though as we indicated on our previous call, this year's recovery has not been as robust as past years and remains hampered by the weak natural gas pricing.

Canadian revenues were down 24% from last year's third quarter and were up 41% sequentially.

Although the year over year revenue decline is significant, I would note that it is well in line with a 26% decline in Canadian rig count over the same period.

As a result of all these factors, our North American operating income declined sequentially by $1.7 million while North American revenues remained essentially flat.

Despite the headwinds in the North American market, sales of Evolution in the third quarter totaled $29 million, a $2 million sequential increase.

We experienced a pick up in sales in Eagle Ford and have introduced Evolution into an east Texas play called the Woodbine.

All wells in both plays meeting with excellent operating results to date.

Importantly, the success of the technology has resulted in raising our profile with other operators, including Iowa Seeds.

As mentioned in the last earnings call, we expect Evolution to be used in the first wildlife centers in North America before the end of the year for an IOC in the Europe, Middle East and Africa region.

Looking ahead, we remain focused on continually expanding and enhancing a family of high performance water-based systems as we build upon our platform as a recognized technology leader in the industry.

Turning now to our international fluids business, we were very pleased with our results from all regions as total international revenues grew 3% year over year to $61 million, which is a 15% sequential increase.

While revenues from our Europe, Middle East and Africa region were down 9% from a year ago to $28 million, this represented a 9% sequential improvement.

The sequential gain was primarily driven by Algeria, where activity under the new Sonatrach contract continues to ramp up.

While increasing, we have not yet seen the full impact of a new contract as the ramp up has been slowed somewhat by the contract renewal process with all of the service vendors.

Therefore, we anticipate a gradual ramp up in the near-term as we work through this process and expect to see the full impact sometime in early 2013.

In Brazil, we achieved a record quarter for both revenues and operating income.

Revenues were up 10% year over year to $22 million and up 20% sequentially.

The gains were primarily driven by Petrobras' strong deep water activity and increased demand for products and services, along with continued IOC business.

In the Asia-Pacific region, revenues were $11 million for the third quarter, up 32% from a year ago and up 23% sequentially.

Like Brazil, record revenues and operating income were achieved following the start of our Santos contract where we provide fluids, products and services for other activity Australia's northwest continental shelf.

Since acquiring this business midway through the second quarter of 2011, we have been in the Asia-Pacific market for a full year and are extremely pleased with the performance thus far.

Going forward, we are encouraged about our growth prospects for our drilling fluids operations in this region.

The consolidated fluid segment reported operating income of $14.8 million in the third quarter compared with $25.6 million a year ago and $13.5 million in the second quarter of 2012.

The operating margin for the segment in the third quarter was 7% compared to 11.9% a year ago and 6.7% for the second quarter.

In last quarter's update, we noted that we expected the operating margin for the fluids segment to return to the historical 11% range by the end of the year.

While our international business is on track with our expectations, the challenges in North America are creating headwinds to a rate of improvement.

Therefore, while profit improvement initiatives continue, we expect to see further improvement in the fourth quarter.

We now expect the recovery to a double-digit margin to progress more slowly than previously indicated.

Finally, I would like to mention that construction work on our technology center is progressing and remains on schedule for completion in mid 2013.

As we stated before, this center represents a major initiative in furthering the development and growth of our drilling fluids business.

The technological differentiation of our fluid systems is critical to our customers' success, and it is our intent to stay on the forefront of innovation by continually building on a family of high performance water based systems.

With that, I'll now turn the call over to our CFO, Gregg Piontek.

Thank you, Bruce, and good morning, everyone.

I'll begin by discussing the results of our mats and integrated services business before moving on to the environmental services business and finishing with our consolidated results.

The mats and integrated services segment had a very strong third quarter, recording $35 million in revenues.

A 16% increase over the same quarter of last year and a 17% sequential increase.

Our composite mats sales saw healthy demand and sales were strong enough to compensate for a decline in the rental revenues that resulted in reduced natural gas drilling and increased pricing pressure.

Total revenues from mats sales were $20.5 million and benefited from a large sale for an infrastructure project in the utility industry.

On the rental side, we are continuing see modest declines in the US rental business, driven by lower activity in our key markets.

However, the declines in the US were somewhat offset by a strong third quarter from our rental business in the UK, which benefited from the summer olympics.

The mats segment generated operating income of $16 million in the third quarter, up 10% from the third quarter of 2011 and up 22% sequentially.

Operating margin in the quarter was 46% as compared to 48% in the same quarter a year ago and 44% in the second quarter of 2012.

Looking ahead, we expect our mats sales revenues to return to a more normal historical level in the fourth quarter.

In addition, we expect to see rental revenues continue to trend modestly downward, which will naturally bring operating margins back down toward the 40% range.

Now moving on to our environmental services business.

Revenues in this segment were $13 million, down 12% year over year and down 2% sequentially.

While Hurricane Isaac did force a shutdown of our Gulf Coast locations during the quarter, our team was able to quickly recover and restore our operating activities, serving to minimize the storm's impact on our third quarter results.

Operating income in our environmental services segment was $3.1 million compared to $5 million in the same quarter a year ago and $3.5 million in the second quarter of 2012.

Operating margin for this segment was 24% compared to 33% a year ago and 26% in the second quarter.

Looking ahead, with the continued signs of recovery in offshore drilling in the gulf, we remain hopeful that we will see a meaningful pick up in activity which would have a favorable impacted on our revenue and operating margin.

Now moving on to our consolidated results.

For the third quarter of 2012, we reported total revenues of $260 million, a 1% year over year decrease and a 6% sequential increase.

Operating income was $29 million in the third quarter, down 27% from the third quarter of 2011, but up 16% sequentially.

Net income in the third quarter was $18.7 million, or $0.20 per diluted share as compared to $23 million, or $0.23 per diluted share a year ago and $14.5 million, or $0.15 per diluted share in the second quarter.

The third quarter 2012 tax rate was 28.3%.

Tax expense in the quarter included a $1 million benefit associated with an increase in US tax deductions identified for prior years as we finalize our 2011 US tax filings during the period.

The benefit impacted our diluted EPS favorably by about $0.01, and we expect our full year 2012 tax rate to be between 32% and 33%.

Now let me discuss our cash and liquidity position.

Over the last several quarters, we have worked to improve the rate of customer invoicing as our unbilled receivables grew significantly following our fourth quarter 2011 ERP system conversion within the US fluids business.

As we highlighted last quarter, as of the end of the second quarter, our receivable balance for the US fluids business remained approximately $70 million higher than the level at system conversion.

During the third quarter, we made meaningful progress reducing our receivables in this business unit by $34 million, or about half of the $70 million target.

Total consolidated receivables ended the third quarter at $312 million, about $22 million down from the previous quarter.

While significant progress has been made, our US fluids receivables are still more than $35 million higher than our system conversion level and we expect to see further receivable reductions in the near term.

Looking to the consolidated third quarter cash flows, operating activities generated cash of $65 million.

We used $9 million to fund capital expenditures, along with $11 million to fund share repurchases.

As a result, the amount outstanding under our revolving credit facility decreased by $38 million.

We ended the third quarter with cash of $35 million and a revolving credit facility balance of $28 million.

Our total debt at the end of the third quarter was $202 million, with the resulting debt to total capitalization ratio of 28.2%.

Through the first nine months of 2012, capital expenditures totaled $35 million, and we now we expect our total 2012 capital spending to be in the range of $40 million to $45 million and includes the expenditures towards our new technology center in the fluids business.

The reduction from our previous full year estimate of $50 million to $60 million is primarily due to the deferral of projects into 2013.

During the third quarter, we continued repurchasing shares under our $50 million share repurchase program announced earlier this year.

From the inception of the program through October 25, we have used $44 million to purchase 6.4 million shares, which is about 7% of shares outstanding at the beginning of the year.

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

Thank you, Gregg.

We are very pleased with the overall performance of our business.

With record revenue and profitability in our Latin America and Asia-Pacific drilling fluids business to a solid rebound in our Europe, Middle East and African region.

The performance of our North American fluids business has improved since the first quarter, but as Bruce said, we still are work ahead of us in order to return the operating margins to historical levels.

Our mats business saw record revenue and profitability, it is clear that we have come a long way in diversifying our customer base and expanding the geographical markets we serve.

Going forward, we do see some headwinds in the fourth quarter, but over the longer term, we are convinced that this business will remain a consistent and valuable contributor to our performance.

Our environmental service business performed well in the quarter, given the impact from Hurricane Isaac.

But as Gregg mentioned, we were able to restart operations faster than our competition, a testament to the operational expertise of this group.

I would like now to talk about a few key elements for our corporate strategy, starting first with our focus on technology.

Historically, Newpark was not viewed as a technology driven company and quite honestly, we weren't.

But over the last two years, I can tell you that Newpark is being recognized as a technology leader in the drilling fluids market, and it is just beginning.

With the opening of the new technology center in June of 2013, our capabilities to bring new and innovative fluids solutions to the market will be accelerating.

A similar story can be told about our mats business.

The mats business started outside as a nondifferentiated supplier of wood mats and a experimental composite mat called DuraBase.

Today we are no longer involved in wood mats, and our DuraBase product line is being recognized as the market leader for environmental solutions on the drilling site.

And just like our drilling fluids business, we continue to bring new and innovative technology to the market, most notably our spill management system that will be ready for field deployment by the end of the fourth quarter.

More to come on this topic on our next call.

So, whether we are talking about our drilling fluids business or our mats business, an evolution is taking place at Newpark.

An evolution that will act as a catalyst for growth next year and for the years to come, both here in North America and around the world.

At Newpark, we are constantly working to provide solutions to our customers that are cleaner, faster and smarter.

Another key element of our strategy has been our focus on international expansion.

As you have seen from this quarter, we are now approaching $250 million in analyzed revenues outside North America, a key element of our goal to balance the geographic sources of our revenues.

This quarter and for the last several years, we have seen progress on that front as our international businesses continue to grow and strengthen.

While we have bases of operations in place in many parts of the world, there remain many opportunities for additional growth in the international market, and we will continue executing this part of our strategy.

One final comment on market conditions before we open the call to questions.

Given the recent decline in rig activity, we are hesitant to say that the North American market has stabilized.

However, we remain optimistic longer term about the North American market as well as our international opportunities as we continue to expand our global footprint.

With that, we will now take your questions.

Operator?

(Operator Instructions)

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

Please go ahead.

Morning, guys.

Morning, Marshall.

So, mat business on fire.

Obviously, it sounds like some of that was one time stuff, and you gave some good guidance on margins.

From a revenue perspective, should we look at that as returning to the run rate of the first and second quarter, with the 40% margins?

Or do you think we'll fall below that?

Marshall, this is Gregg.

I'll take that.

Breaking it up into its two pieces, first of all with the mat sales side -- yes, that is what we would expect.

That was a very large sale that benefited the quarter that we wouldn't expect to recur.

I would expect that piece to return more to that historic low- to mid-teen level that we had been running for several quarters previously.

On the US rental side of things, it has been sliding.

And as we have talked about on previous calls, it has been modestly deteriorating over the past four quarters.

And we do see that continuing, given the current headwinds in the market.

Now, there's always weather, and other factors can always play a quick role and change the direction, especially up in the Northeast and the Bakken and those areas.

That one is a little more difficult to predict, but we would expect to see that continue to slide a little bit.

Modestly lower than where you were in the first half?

Yes.

Okay.

Environmental looked awesome, and it sounds like, since it is mainly Gulf of Mexico-driven, that business is really one of the bright spots.

Can you just give us a little more color on where we should think about that going, both from revenue and a margin perspective?

Sure, Marshall -- this is Paul.

If you look at the Gulf of Mexico, obviously, the rig count has been increasing in deepwater, and that is where we have our strongest market share.

We have over 60% of the deepwater market.

And with the increasing level of permits, we expect to see more activity as we move into, hopefully, the fourth quarter as well into the first part of next year.

As Gregg mentioned, we would expect to see some operating margins improve some over that time frame.

So, we are very pleased with that business.

It's always been a strong generator of cash, even through 2009; and certainly very pleased with how they came [out of Hurricane Isaac and] positioning the business for growth going forward.

So, look for continued improvement going forward in that business, presumably.

I would say so -- modest improvements going forward.

A lot of it is obviously is dictated by the bps turning to the right and the permits being issued.

Last one for me, and I'll turn it over.

You teased us with this whole spill management thing.

You can't be Donald Trumping us -- you've got to give us a little more detail on what you have got going.

(Laughter) We have talked about it on prior calls.

Obviously, what we have been trying to do is take the Dura-Base product line, which provides a platform that you can put heavy equipment on and protect the environment, but provide more to a different level of system solutions.

Taking it to a concept where we can be able to drive the frac fleet onto the mats, have polymer berms that would run the perimeter of it, so that if you did have a rupture of one of the lines during the fracking process, that you would be able to contain that volume of fluid for a period of time until you get your pumps on there and contain the spill.

That is the concept -- is really trying to move Dura-Base to a system solution where we think there is a demand within the marketplace.

Perfect.

Thank you all.

Our next question comes from the line of Jeff Spittel with Global Hunter Securities.

Thanks.

Good morning, fellows.

Morning.

Maybe if we could talk a little bit about the fluids margin progression, understanding that there is a lot of uncertainty in North America near-term.

But given what we know today in a flat to maybe slightly down rig count environment -- over the course of, say, the next three or four quarters, would it be totally unreasonable to think that maybe margins could start to trend back up to, say, to low to double digits by the time we get into the second half of 2013?

This is Bruce.

I think that is a fair comment.

Directionally, we feel the margins will continue to increase, just not at the rate we had hoped.

But directionally upwards, that's correct.

As the rig count declines, there is more pricing pressure that comes, so obtaining margins with pricing becomes a little more difficult on our conventional systems.

But with Evolution's performance ability to impact overall well costs, and the fact that there is not anything out there competing with us, makes that part of our business less susceptible to pricing pressure.

Appreciate that.

I guess that doesn't necessarily contemplate that you are going to see a big step change in terms of one of the major IOCs stepping in and starting to move forward on Evolution more aggressively.

That is kind of a normalized run rate of business, is that fair to say?

That's correct.

It is a normalized run rate.

Okay, and then one more question on fluids.

Canada, obviously, was pretty challenging in the third quarter.

Would we continue to expect a little bit of a muted rebound, down year over year, but probably up sequentially in the fourth quarter, in accordance with normal seasonality in Canada?

That's absolutely correct.

It will be a little better than the third quarter, but not to the level of the fourth quarter of last year.

Very helpful.

Thanks guys.

Nice quarter.

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

Go ahead.

Good morning, guys.

Good morning.

Just a quick follow-up on that -- as far as the fluid margin question.

I thought a little bit earlier, when you had got the hit, maybe question to Bruce, that it was largely because of the barite, and then because the business there in Oklahoma.

I'm just wondering -- you are kind of now referencing more just pricing pressure in general.

So, I'm wondering where we sit with the barite, and I forget the name of the company in Oklahoma, the nonfluid business there.

Wonder if that is still an issue, or if those are rebounding, and if that's going to be part of -- if those are taking longer to actually come back.

Or maybe a little more color on those margins?

Barite, at the moment, certainly continues to be a challenge.

We are working very hard to try and pass on the cost we are getting on to our customers, but that is a process that has a lag time.

Within the MCCF business, which is the business in Oklahoma that you are referencing -- that continues to be a challenge.

But we are very focused on two parts of that business.

We are very focused on driving the revenue side of the business, and we are concurrent with that.

We are very focused on getting some significant cost reductions in place, and we are doing that.

The cost reductions are in place, the costs are coming down, and we are working on both of those elements concurrently.

And Neal, with our previous reference or earlier reference to the barite, it is really a sales mix issue that we had in the period, because your base oil muds, your traditional oil muds and your barite is at a lower margin.

And we had a higher component of that during the quarter, so that was just a reference.

That was just more one timer Gregg, you are saying?

Your mix shift tends to go back and forth period to period, and in this particular quarter we had a higher mix of those low margin items, which as Bruce pointed out, those serve to make that revenue line look a little stronger versus the activity levels; but it does little to your bottom line.

Got it, and then just one follow-up, maybe again for Bruce, just on Evolution.

Again, I know last quarter you talked about the first job internationally and I think the prior quarter to that.

So, maybe going back to either the first or fourth quarter, there was talk about a high pressure job, I think it was out in the Rockies.

So, I'm wondering now, when you are looking at these jobs, were all those -- if you could talk a little bit about how successful those jobs were and if those same customers are now recurring customers.

And in general, maybe for Paul, just if the customer base is still growing, or is it just the existing base has just seen more usage?

Okay, several points there.

I'll see if I can remember them all.

The total Evolution wells that we've drilled to date now are approaching 1,400 wells, which was up from about 1,100 wells, I believe, in the last quarter.

In terms of the amount of operators that have used the system, that's gone up 18 since last quarter.

We are now running about 172 different operators have used the system over a period since its inception.

So, in terms of that growth, that still continues.

The well that's occurring now in the Europe, Middle East and Africa part of our business, the well has spudded.

We don't have results back yet from the performance, but the well has spudded, and it is currently ongoing.

Got it.

That's great.

Then just wondering lastly, maybe a comment from Paul, if I could.

Obviously, it sounds like you definitely have the confidence it will continue to grow.

You see as it is more sporadic, or Paul, do you see a ramp continuing as we have seen the last year or so?

No, I don't see it as being sporadic at all.

We are very confident around the growth of Evolution both here domestically and as it is going overseas.

The other thing I would also say, though, that we continue to look at new polymer systems, water based technology, to continue to expand on the base of our technology.

And so as we look to the years coming, we are also obviously going to be adding on to Evolution, and there is a traction being developed there as well.

Thank you, Our next question come from the line of Michael Marino at Stephens Inc.

Please go ahead.

Good morning.

Question on -- one more on the margin side and the fluids business.

Bruce, you mentioned the possibility of some pricing headwinds, if things continue to drift lower.

Have you seen any pricing deterioration as of yet, in fluids?

Or has it to date been more about mix and maybe the other businesses that have been impacting margin?

Certainly in the quarter it has been more about mix.

There is always a pricing pressure; any time rig count begins to decline, there is always a pricing pressure.

But to some degree we can offset that with the Evolution side of our business.

Because when you have something that can enhance an overall well cost, it's not susceptible to the same pricing pressures as the general conventional systems like oil-based mats and those other conventional systems we use.

And the other thing to point out there is, just naturally in this area, just like we saw when things deteriorated significantly a few years back, this is a variable cost type of business, so you don't have that degree of pricing pressure one way or another, like you do in the fixed cost, the high investment areas in the industry.

Sure, sure.

And just shifting gears a little bit to Brazil -- I guess some nice improvements there.

What's the outlook in terms of activity levels over the next couple of quarters down in Brazil?

If I recall, profitability comes and goes there.

Are you where you want to be?

And what does the outlook look like?

I think we are never where we want to be, but we are certainly well on the road now.

And the profitability has been pretty good this year.

The revenue increase has been pretty good this year, and we see that continuing as we go forward.

The Petrobras Lot B contract will be renegotiated at some point during 2013; we are not sure exactly when.

But we have been invited to continue on with that part of the contract, so we are very hopeful that things will continue improving in Brazil as they have done all of those years.

Yes, and the stability of the business, as you pointed out, in the past, it had been kind of choppy quarter to quarter.

That is an area where they have really improved because they have stabilized the revenue stream and the profitability over the past four quarters have been very consistent.

And again, looking to the future, though there wasn't a lot of IOC activity in this quarter beyond Petrobras, as we look out into 2013, we see a lot of opportunities with the IOCs that are in Brazil.

Okay, great, thanks for the color.

Our next question comes from the line of Joe Gibney with Capital One.

Thanks; good morning.

Most of my questions asked and answered.

But just curious on the mats side, Gregg, if you could provide a little bit of color on the boost that you got from the UK Olympic benefit?

How material was that to operating income boost in the quarter for mats?

That business, we saw -- on a sequential basis, the revenues improved about $700,000 from Q2 to Q3.

All right, helpful.

And I'm sorry, just one last one.

Falling back on the Brazil commentary -- the boost in revenues, did it include any of the new addendum for completion attitudes that you guys had referenced last quarter?

Is that more of a '13 benefit and lift to potential revenue flow through there?

Just kind of curious on the boost.

It did not include any of the addendum; that will come more -- it is more of a 2013 play.

We still have that to come.

Helpful, I appreciate it.

I'll turn it back.

Our next question comes from the line of Mike Harrison with First Analysis, please go ahead.

Good morning.

Good morning, Mike.

Just going back to fluids margins, you mentioned that the return to double digits is probably slower than you previously thought.

What could make that happen faster or slower?

And can you also maybe address -- on the cost side, you talked about some of the progress you made, but said the weak market environment is probably masking some of that progress.

Can you maybe give some details on areas where you have seen cost improvements, compared to the first and second quarter?

This is Bruce.

I'll take that first part, anyway.

The rig activity really is the deciding factor in how the business in North America develops and the pace at which it develops.

But because we are in an ever softening cycle right now -- nothing dramatic falling, but just softening -- we are, in addition to the product margin side and the product mix side, we are looking very carefully at all the costs within the Company, trying to manage our business more efficiently until we see how this market develops in North America.

All right.

And in terms of the international side for Evolution -- first of all, congratulations on spudding the first well there.

But can you discuss the opportunity for Evolution internationally?

More broadly and talk about the timing?

Is that a business that eventually could be larger than North American Evolution?

And if so, how long would it take to ramp to that level?

There really are opportunities everywhere for Evolution in the international marketplace.

Recently, on a trip to Australia, for example, we saw some wonderful potentials for Evolution there as the operators were beginning to get some success in the shale gas plays in Australia versus the old faulting gas plays.

If they start drilling campaigns to test up these shale gas plays, Evolution would be a natural fit, for example, in that Australian market.

So, there's one market that's got a huge potential.

The European market, African, Middle East -- we've talked about huge potential.

Asia-Pacific, other places other than Australia -- great potential.

It is hard to quantify exactly right now what the timing will be, what the value will be, but there is potential everywhere to roll the system through the international business.

You asked about the size of the North American market.

I think the US market is going to continue to be the largest market opportunity for Evolution.

That is where you have got the significant amount of shale drilling going on.

Our hope would be, obviously, once we start penetrating the international market, that we could maybe ramp up faster than what we did in the US, because we have got a lot of proven track record behind us.

And so I would expect the ramp up international to be a little bit faster, but definitely the US market is going to be the largest market going forward.

All right, thanks very much.

Our next question comes from the line of Stephen Gengaro with Sterne Agee, please go ahead.

Thank you, good morning, gentlemen.

I'm back on the margin question, but when I think about fluids, and I think about 7% versus the 11%-plus range at the back half of 2011.

Can you help me understand how much of that is international, how much of that is the mixture of international and US margins, how much is cost inflation?

How much is -- I'm trying to get a clearer view on how to understand the margin progression going forward.

Sure, this is Gregg.

I'll try to take a cut at that.

If you compare the business overall -- I guess first of all, you compare it geographically to where it was last year.

And you look at it piece by piece, the international business units -- first of all, Canada, as we have noted, it is running significantly below last year.

The activity there is 25% below last year.

That piece is weaker than it was a year ago.

The EMEA region -- we talked about this transition to the new contract, and we are still going through that and we're seeing the ramp up, but we are still not back to where we were historically.

So, that one is still not back to where it was, but we would expect it to get there and actually move beyond on the revenue side here in early 2013.

The Asia-Pacific and the Brazil side, now -- both of those are actually performing favorably as compared to where they were a year ago, so those help us But those are smaller pieces of it.

Now in terms of the US, you have a variety of issues that come to play.

But it is still -- a lot of it is this kind of hangover from this transition of the gas to oil; and your resources and your requirements have shifted dramatically from region to region.

You go through the process of evaluating your structure in the new activity levels and adjusting your costs, and as you take costs out, they don't come out day one.

There is transition cost, there's severance, there is those types of things.

So it takes a little time for it to bleed off.

And then the last thing that you add to that is, we have continual changes as we are seeing right now, in the rig count.

As it continues to change, that just complicates things a little bit further, causes you to re-look.

So, it takes some time to get through those.

But most of the issues there are on the cost side, recognizing that the business has shifted.

That's very helpful color.

My follow-up would be -- are you willing to rank the margins from best to worst among those areas?

We have not, we don't get into the disclosing of our margins at all the different regions.

What we have said in the past is, internationals -- it has historically been stronger than the US market.

You have a different, a much more competitive market in the US business.

So.

Typically, international revenues are going to be stronger in drilling fluids.

There is less competition.

Domestically, there is a significant number of smaller drilling fluids companies.

And so that's been a trend that we have had for a number of years.

And then the other thing that complicates that geographic profile is, also within the US, we have the full divisional headquarters infrastructure, so it complicates that comparison a little bit.

Okay.

That's very helpful color.

I appreciate it.

Thank you.

Our next question comes from the line of Rob Norfleet with BB&T Capital Markets.

Please go ahead.

Good morning, and congratulations with a great quarter.

Thank you.

Most of my questions have been answered, but just one quickly on capital allocation.

Can you just talk about your thoughts on capital allocation going forward?

You have almost completed your repurchase program; clearly, the investment in the tech center is being made.

I just wanted your thoughts on that.

And additionally, what do you see in terms of other opportunities to grow the business from an acquisition standpoint?

Sure -- this is Gregg.

As we evaluate our options, with acquisition, continual organic investment to expand our locations and offerings, as well as, the third being shareholder distribution.

[Given everything we had going] this year, and with -- especially with our system conversion and the challenges in the North American environment, we had an opportunity this year to exercise a pretty significant distribution in terms of the repurchase program.

As we look ahead to next year, obviously right now, we are in the midst of our planning process for 2013.

And as you go through that and evaluate the opportunities, that is when you begin to clarify.

But similar to the Rheochem acquisition that we did last year, we are always evaluating opportunities and ways to expand this in a synergistic way.

Yes, I think we are always looking for opportunities to acquire, but as we have said on previous calls, there is not a lot of opportunities in the international market.

There is more domestically, but we will be opportunistic if something does develop.

We have been very pleased with the Rheochem acquisition, very pleased with the share repurchase, and we're looking for opportunities to grow this Company organically as well.

The whole Brazilian business was done organically, and very pleased where that business is going.

Our next question comes from the line of Bill Dezellem with Titan Capital Management.

Please go ahead.

Relative to the mats business and the spill management product that you have discussed, how much of the potential of that product would you say is incremental to the current market versus cannibalizing the current market where an existing customer just simply upgrades?

And maybe you do receive a little more value, but it is certainly not a one for one increase?

Well, it certainly -- it is a new market, quite honestly.

Because most of our mats today that are used in the US and the rental side are during the drilling process.

As the rig's being moved off, the mats are being moved off, and then you have got the frac crews that are coming on later.

We look at this is as a new market expansion opportunity, so we would hopefully see some significant revenue increase over the years to come.

And to help us understand this product just a little bit better, when the rig moves off the site, would the current Dura-mats also move off the site and then the spill management mats would be brought on?

I don't know that we've got that completely figured out at this time.

In some cases, certainly the mats might move off and in other cases, we may change out the sealing system, put the polymer berms on.

A lot of work to be done in this area.

And what I was referencing in the dialogue was that we'll have a beta site, we'll have our first opportunity to deploy the concept in the field, and that will give us more insight on how we would adjust it on a go forward basis.

That is helpful, thank you.

And then relative to the Algerian contract -- what is the revenue potential relative to the third quarter revenue that was achieved?

Well, if you look at the revenue of the region, historically that region, which Algeria is one of the larger markets, it's been running about $30 million a quarter; here in the third quarter, it came in short of that.

It ran about $20 million, $29 million.

What we had said is, with the benefit of the new contract we would expect that our run rate in the region would go up beyond that $30 million into the low $30 millions, but--

Another piece to remember, too, in the north African business is that historically we have done about $10 million in Libya.

Obviously, Libya has not come back.

We keep expecting to be able to start some offshore activity there.

That could happen early next year, so.

Thank you.

I'm showing no further questions in the queue at this time, I'll like to turn the conference back to management for final remarks.

Like to thank you once again for joining us on this call and for your interest in Newpark Resources.

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

Thank you.

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

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