NPK International Inc (NPKI) 2013 Q1 法說會逐字稿

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

Welcome to the Newpark Resources 2013 first quarter earnings results conference call.

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

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

(Operator Instructions)

This conference is being recorded today, April 26, 2013.

I'd now like to introduce Ken Dennard.

Please go ahead, sir.

Thank you, George.

And good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today to review 2013 first quarter results.

We would also like to welcome our Internet participants listening to the call as it is being simulcast over the web.

As usual, I have the normal housekeeping details to run through before I hand the call to Management.

For those of you who did not receive an email with the earnings release yesterday afternoon and would like to be added to that list, just contact our office at 713-529-6600, and provide your information, and you can e-mail me.

My e-mail address is in the Contacts section of the press release.

There's also a replay of today's call to be available by webcast and you can go to the Company's website in a couple of hours and it will be live, www.newpark.com.

There's also a recorded replay by phone, which will be available for the next two weeks, and that information is in the release we put out yesterday.

Please note that information reported on this call speaks only as of today, April 26, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by Management today during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities laws.

These forward-looking statements reflect the current views of the management of Newpark.

However, various risks, uncertainties, and contingencies could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by Management.

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

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

Thank you, Ken.

Good morning to everyone.

We would like to thank you for joining us today for our first quarter 2013 conference call.

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

Following my remarks, Bruce will provide an update on our Fluids business, and Gregg will discuss the Mats and Environmental Service businesses 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 and A.

Now turning our attention to the first quarter.

We started 2013 with strong performance from our Fluids business, which enabled us to achieve $283 million in consolidated revenues, a record revenue quarter representing an 8% growth from the first quarter of 2012.

Our worldwide Fluid segment, which represented 88% of our consolidated revenues in the first quarter, also set a new quarterly sales record of $247 million.

As you may remember from our fourth quarter call, we surpassed the $1 billion mark in full-year revenue for the first time ever.

And with our strong performance in the first quarter, we're on pace to have another excellent year.

In the US, our first quarter Fluids revenues were up 12% over the prior year, despite a 12% decline in rig count.

Year-over-year gains were achieved throughout the oil and liquid-rich regions, with dry gas regions down year-over-year.

Two of the key oil markets, the Permian Basin and South Texas, also benefited from our recent acquisition of Alliance Drilling Fluids.

I would like to also note that during the first quarter, we've made significant progress in integrating the Alliance operations into our regional structure.

And they now represent an important part of Newpark's Permian Basin and South Texas business units.

Revenues in Canada were roughly flat with a year ago, a major accomplishment if you consider the rig count declined 9% during the year.

Our international drilling fluids revenues were $70 million in the first quarter, an increase of 21% from prior year, reflecting solid gains across all regions, including increased off-shore work in both Brazil and Australia.

I would also like to highlight our excellent progress, as we've made inroads into the international market, particularly in deepwater.

We recently announced two new deepwater offshore contracts, a two-year contract with Total, for a series of wells planned in Brazil's Campos Basin; and another with a super major for a series of wells in the Black Sea.

Under both contracts, Newpark will be providing drilling fluids and related engineering services beginning in the fourth quarter of 2013.

These contracts are certainly important from a revenue perspective, but just as important as a validation of our capabilities as we compete head to head against the largest integrated service companies in the deepwater market.

This is a testament to our technology and our people, but the job is just beginning, as we set our sights on the goals being the preferred partner for operators in the deepwater market worldwide.

On the technology front, our Evolution family of products again posted solid performance, with revenues of $29 million.

I'm pleased to report that we are nearing completion on our second international well using our Evolution system in the EMEA region.

Additionally, we expect to see the first use of Evolution in the Asia-Pacific region within the next few quarters.

Moving to our Mats and Integrated Services segment, while revenues have declined 33% year-over-year on lower mat sales, our rental revenues rebounded in the quarter, and we are encouraged by the continued deployment of our spill containment system.

Development of this system remains on track and consistent with last quarter's call.

We are currently on the third site, with a fourth site expected in the next few weeks.

I would add that customer interest remains strong for our new spill containment technology.

As we highlighted on last quarter's call, in anticipation of the formal launch of the spill containment system, we dedicated the majority if our first quarter production capacity to manufacture additional mats for our rental fleet.

Turning to our Environmental Services segment, the business reported another solid quarter with revenues increasing 10% over last year, as activity continues to increase in the Gulf of Mexico.

And now I would like to turn the call over to Bruce Smith, President of our Drilling Fluids business.

Bruce?

Thank you, Paul.

Good morning.

In the first quarter, the Fluid Systems and Engineering segment generated total revenues of $247 million, an 8% sequential increase and a 30% increase year-over-year.

As Paul stated, this is a new record quarter for fluids revenues, exceeding the prior record of $229 million achieved during the fourth quarter.

North American revenues were up 16% sequentially, to $178 million, which represented a 10% year-over-year gain.

In the US we were able to achieve revenue gains, despite the decline associated with the fourth quarter completion of our large Gulf of Mexico deepwater project, which we highlighted in February.

This performance was due to the higher revenues in all of our other US regions, with particular strength coming from the Permian Basin and South Texas, as those areas contributed an additional $13 million over the fourth quarter, including $3 million from proppant sales.

The US was up 13% sequentially to $159 million with a 12% year-over-year gain despite the 12% decline in the US rig counts over the same period, with increases generally in all oil and liquids-rich basins and decreases in the dry gas areas.

In Canada, revenues were up 50% sequentially to $90 million due to the seasonal uptick, modestly outpacing the 44% sequential rig count increase.

This was roughly flat with revenues a year ago, but an improvement over the rig count, which was down more than 9% year-over-year.

Now moving to our international business.

Europe, the Middle East, and Africa revenues were up slightly on a sequential basis to $35 million, reflecting a 15% increase from the first quarter of last year.

We continue to see strong revenues from Italy and Romania and gains from expanding markets.

Meanwhile, Algeria saw modest sequential improvement as [sono] tracks activity continues to increase.

I would like to also highlight that work in Libya has restarted in the quarter, although the revenue contribution was not significant.

Looking ahead, we are very pleased with the recent award for deep-water work in the Black Sea, which will be serviced out of our Romanian operation.

In Brazil, revenues were down 30% sequentially, however up 34% year-over-year to $25 million.

The sequential decline was driven by an IOC deepwater well that had been completed in the fourth quarter, as we made mention of in our previous call.

As Paul stated earlier, we have finalized the two-year deepwater contract with Total, with work expected to begin in the fourth quarter of this year.

I would also like to mention that we're currently in negotiations with Petrobras for the renewal of our Lot B contract, and we'll keep you posted on developments there.

Asia-Pacific was down 20% sequentially to $10 million, which was up 14% year over year.

The sequential decline was primarily due to the timing of work on the Santos offshore contract.

Specifically, we have completed the first part of the Santos contract, and following the transition by the customer to a larger rig, we expect their activity to resume in the second quarter.

The consolidated segment reported operating income of roughly $23 million in the first quarter, up 28% sequentially, and up 62% year over year.

The operating margin for the segment in the first quarter was 9.1%, up from 7.7% in the fourth quarter and up from 6.4% a year ago.

We continue to work towards our goal of double-digit margins, although progress remains subject to market conditions.

First quarter revenues from Evolution were $29 million, which was down slightly from the $31 million achieved in the fourth quarter, but up from $23 million in sales a year ago.

As Paul mentioned, we are nearing completion on a second well in the EMEA region, and are in the initial stages of introducing Evolution into several trial wells in the Asia-Pacific region.

As we stated on last quarter's call, we have recently won a fluids contract with one of our most important Evolution customers, which expands our coverage into the (inaudible).

This new contract ideally positions us for continued expansion of Evolution in this domestic growth market going forward.

I would also like to note that at the recent offshore Mediterranean conference held in Italy, we presented a paper that we co-authored with Occidental Petroleum.

This paper demonstrates how the use of Evolution for horizontal drilling resulted in performance on our oil-based and synthetic-based drilling fluids while generating considerable cost savings.

It documented a study using over 50 casing runs that were analyzed and evaluated, concluding that Evolution provides successful drilling of horizontal wells that historically required oil-based fluids.

Though this is something we have stated for a long time, this study provides additional credibility from a highly respected major E&P player.

And last, we are excited to highlight the Newpark Technology Center is nearing completion, and we expect to start moving in within the next three months.

As we've discussed in the past, this new facility will be the cornerstone for our continued development of new technologies going forward.

And we expect to have a grand opening in the third quarter.

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

Thank you, Bruce, and good morning everyone.

I will begin by discussing the results of our Mats business before moving on to the Environmental Services business and finishing with our consolidated results.

The Mats business reported first quarter revenues of $21 million, a 23% decline sequentially, and a 33% decline year over year.

As we cautioned on last quarter's call, mat sales were expected to be down sequentially, as we dedicated the majority of our first quarter Mat production toward rental fleet additions.

Mat sales declined by $7 million sequentially, impacted in part by the timing of one large mat shipment which was delayed from March into April.

Mat rental revenues were up $1.4 million from the fourth quarter driven by improvements in the Rockies and the Northeast.

The mat segment generated operating income of $8.5 million in the first quarter, down 22% from the fourth quarter and 41% year-over-year.

We were very pleased with the 41.2% operating margin in the first quarter, which compares to a 40.8% margin in the fourth quarter and a 47% margin in the same quarter a year ago.

The first quarter margin exceeded our expectations, due primarily to stronger mat rental activity.

As Paul mentioned, the development of our new spill containment system is progressing in line with our expectations, as results have been encouraging and customers are showing strong interest in the system.

A third field test site is currently in progress, and a fourth one coming within the next few weeks.

We would like to emphasize that the ongoing roll-out will be carefully controlled in order to ensure the success of the new system.

While we expect mat sales to rebound somewhat in the second quarter, meeting the ongoing needs of the rental business and preparing for the still containment system launch will remain a high priority in the near term, which may continue to limit the sale of mats.

Further, while we are expanding our rental mat fleet, the revenue impact may be delayed due to the controlled nature of the initial spill containment system roll-out.

Now moving on to the Environmental Services business.

Revenues in this segment were $14.6 million, up about 1% sequentially, and up 10% from a year ago, benefiting from increased activity in the deepwater Gulf of Mexico.

Operating income in Environmental Services segment was $3.5 million, compared to $3.4 million in the fourth quarter, and $3.6 million in the same quarter a year ago.

Our first quarter operating margin was 24%, which was essentially flat with the fourth quarter and down from the 26.9% operating margins that we achieved in the first quarter of 2012.

We are pleased with the consistent performance of this business, and remain optimistic that we'll continue to benefit from the improvements in the offshore Gulf of Mexico.

Now moving on to the consolidated results.

For the first quarter of 2013, we reported total revenues of $283 million, a 5% sequential increase and an 8% year-over-year increase.

SG&A costs were $24 million, relatively flat sequentially, but up 13% year over year, largely reflecting the elevated cost of supporting the higher revenue levels along with the cost of strategic planning projects.

Operating income was $28 million in the first quarter, up 8% sequentially and 9% year over year.

Net income in the first quarter was $17.4 million or $0.18 per diluted share, compared to net income of $11.2 million or $0.12 per diluted share in the fourth quarter and $15.6 million or $0.16 per diluted share a year ago.

The first quarter 2013 tax rate was 34%, which is in line with our expectations for the year.

Now let me discuss our balance sheet and liquidity position.

During the first quarter, operating activities generated cash of over $15 million.

We used $16 million to fund capital expenditures, primarily consisting of construction costs for our new technology center and the expansion of the mat rental fleet.

Borrowings under a revolving credit facility decreased by $14 million.

We ended the first quarter with cash of $42 million and a revolving credit facility balance of $70 million.

Our total debt at the end of the first quarter was $252 million, which was down $8 million from the fourth quarter, resulting in a debt-to-total capitalization ratio of 32%.

I would like to note that our short-term debt, which reflects foreign borrowings, was up $6 million in the first quarter due to increased borrowings in Brazil.

Petrobras has been slow in making payments to all vendors in recent months, and as a result Brazil accounts receivables increased by about $9 million in the first quarter, necessitating an increase in our short-term borrowing.

We continue to expect 2013 capital expenditures to be $50 million to $60 million, inclusive of $20 million allocated for the completion of the new technology center, as well as increased investments in rental mats.

Before turning the call back over to Paul, let me highlight that we've obtained Board approval for another $50 million share repurchase program following the completion of our previous $50 million program in December.

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

Thanks, Gregg.

Let me start by saying that we are pleased with our first quarter results.

The Company continues to perform well with another record revenue quarter.

Our drilling fluids segment posted solid results, both from our domestic and international operations.

The two recent contract awards for deepwater work in the EMEA and Latin American region are a clear sign that Newpark is becoming a recognized leader in deepwater work, a significant departure from where the Company was historically.

Just a few years ago, our Drilling Fluids business saw the vast majority of its revenue come from land-based drilling, and the large majority of that came from the US operation.

Today, we are truly a global fluids company.

We can compete head to head and win against any of the largest integrated service companies in the world, whether on land or in deepwater, from the Gulf of Mexico to Latin America to EMEA -- a giant leap for Newpark.

Looking out over the next several quarters, we would expect to see continued strength in our Drilling Fluids business, both domestically and internationally, with some softness in the second quarter related to the seasonality in Canada.

Our Mats business also had a solid quarter as we saw margins hold around the 40% level, which included lower sales of mats to third parties.

We've reduced more mats for our rental fleet in the quarter to support demand both for our ongoing rental business, and also our spill containment system.

The new system is gaining traction in the marketplace with customers, but like any new technology, it takes time to bring it to market, and we will continue to provide you updates on our quarterly calls.

Looking forward in this business, we are more optimistic today than we have been in the past that we can sustain our operating margins around the 40% level.

The reason for our changing view is the continued strength of our existing rental business, and the early indications we are seeing from our spill containment system.

Lastly, our Environmental Service business had another solid quarter, even with slower activity in the deepwater Gulf of Mexico.

Looking forward, we see continued upside for this business, as activity increases in the Gulf of Mexico, from the shelf to the deepwater and eventually to ultra deepwater.

In closing, we see a lot of exciting opportunities.

On the technology front, we look forward to the formal launch of our spill containment system, the opening of the Newpark Technology Center, and the continued market penetration of Evolution.

We're also optimistic about our growth opportunities, particularly in the international market.

The two recent deep-water awards are the just latest example of our progress in our global expansion, and we look to continue to be able to plant our footprint in all of our worldwide regions.

Operator, we will now take questions.

(Operator Instructions)

Our first question is from the line of Jim Rollyson with Raymond James.

Good morning, guys.

Good morning, Jim.

Nice solid results, and a question on the Fluids business.

I'm sure you get this question all the time, but you've had a pretty nice recovery trend in margins over the last few quarters, and maybe notwithstanding the second quarter seasonality impact that you'll have out of Canada, do you think the trend continues back towards those kind of low to mid-teens margins that you guys always strive for?

Do you think, from what you see, given the recent contract awards, et cetera, that things are trending in that direction?

Okay.

This is Bruce.

I'll take that one.

Yes, I think we are trending back towards that low teens area, and we don't see anything currently that's going to stop us getting there.

Well, that's certainly a great answer.

And then, just as a followup, switching gears to mats, Gregg, you talked about expecting second quarter to bounce back a little bit from the first quarter.

Maybe a little order of magnitude of what you're thinking, and then just how do you think about the timing of the roll-out of your spill containment system?

And kind of how that should start showing revenue improvements once that starts to roll out?

You know, as we had talked about last quarter, one of the challenges with forecasting in the Mats business is the fact that you don't have a real long backlog, and, therefore, the timing of orders and exactly where those fit make it a bit challenging.

We -- so we do expect some improvement over the $6 million of mat sales that we had in this period.

I don't see it's necessarily returning to the levels we had last year.

And, again, it's somewhat dependent on the exact timing of these orders, so -- and then, secondly, in terms of the spill containment roll-out, as we had mentioned, it's still -- we're still in the pretty early stages here on the third site, a fourth site coming.

And the plan for additional sites are made based on the progress that we're making.

Yes.

Just maybe a little more color, on the spill containment roll-out, Jim.

I think it's going to be a couple of quarters before you start to see some real revenue impact there.

But what we're real excited right now is the initial acceptance by the customers.

They're very excited about it.

Some of the regulators in those areas too, have come out and looked at the site.

Some of the cleanest, best protection in terms of the environment they've seen.

So we're real encouraged by the initial feedback.

But it's going to be a couple of quarters before I think you see any real revenue impact there.

That's very helpful.

Thank you, guys.

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

Good morning, everyone.

Good morning, Neil.

This is actually Neal Dingmann's associate, Neil Wiese.

I was hoping to start off by getting a better sense of Evolution in terms of what percent of US customers are using the product, overall margins for just Evolution, and hopefully if you guys can elaborate on international expansion there.

Thanks.

This is Bruce.

I'll take that, I think.

The Evolution continues to roll out very well.

All the customers that are using it are still excited about it.

The new customers that we're roping in are very excited about it.

We're very excited about the roll-out, particularly now internationally because of where we've been domestically.

Fairly successful.

Now we want to take that success and put it in the international marketplace.

We've done over 1,700 wells now with Evolution, so we're not at the learning stage anymore, we have a very solid background.

We have over 160 operators that have used the system to date, and we have approximately 8 million lateral feet drilled with Evolution.

So very substantial criteria that we've established now for Evolution, and we see nothing but continued good things as we roll it out internationally.

The other thing I would like to comment on, that Bruce covered in his opening remarks, is that we had our first opportunity to do a joint paper.

This was with Occidental Petroleum on the benefits of Evolution.

So I think that's kind of the beginning.

I think you're going to see a lot more traction, a lot more operators doing joint papers with us on the success of the water-based technology and how it overcomes -- how it could compete with oil-based and provide additional value.

Something that's never been done before in this industry.

So, very excited about that -- the paper with Occidental.

Great.

That's very helpful.

One more from me.

Moving to the fluid segment overall.

With the strong growth in the quarter, what are you guys seeing for market share versus 4Q '12 and year-over-year?

And following up from that, just broader-based international potential for the rest of 2013.

We don't necessarily comment on what we expect on market share going forward.

But we certainly feel that we're winning more than our fair share of the contracts.

We're very pleased, obviously, with the deep-water work and the share that's being taken there.

Now, certainly, we did pick up market share with the Alliance Drilling Fluids acquisition, in really two key regions, Bruce, the Permian and the Eagle Ford.

So certainly see a stronger presence there with Newpark.

Our next question is from the line of Mike Harrison with First Analysis.

Hi, good morning.

Good morning, Mike.

Just going back a little bit to the Mats business, you talked a little bit about the timing, and maybe not seeing revenues until kind of Q4ish, from the spill containment.

And obviously you're capitalizing the production costs, but how does the accounting work in terms of the costs of the depreciation for the new rental fleet?

Does that hit the P&L ahead of the revenue ramp in the sense that we could see some margin compression before we really see those revenues start to come in?

Yes.

As we do expand our mat fleet and you place those mats into service, yes.

That's when the depreciation begins on them.

But in terms of the magnitude of the expansion that we're doing overall, it's not a real significant change to the overall cost structure of the business.

Great.

And then a couple of questions on the Alliance acquisition.

I know just looking at the margin structure of that business, it was positive in terms of mix.

But did you guys have any kind of integration costs during the quarter that hurt your margin a little bit?

And can you also give us an update on what you plan to do with the profit distribution business that Alliance has?

I'll take the first part of that in terms of the integration costs.

Yes.

We did have some integration costs that were incurred during the period as we were incorporating the business into our own structure and processes.

Not real significant.

It's south of a million dollars in terms of the costs that were incurred during the period.

This is Bruce.

I'll take the profit piece.

The profit sales were off from the historical run rate that we had.

So to the extent there's a gap between -- to fill, it's the profit sales that were down.

We haven't really established that.

We're only a quarter into those.

So we haven't really made any great discoveries on profits and how we go forward with it or what the value is.

We're still looking at that picture.

The only other comment, Bruce, on that would be, certainly that the market is over-supplied right now.

And there are pricing pressures in the profit side.

All right.

Thanks very much.

Our next question is from the line of Trey Cohen with Clarkson Capital Markets.

Good morning.

Just following up.

I just want to make sure I understand this correctly.

Did the Alliance purchase actually benefit your Fluids margins in the first quarter?

I would say that the -- modestly.

The business, as we had talked about on the last call -- the business did have a higher operating margin than our Consolidated Fluids business.

However, a lot of that is negated in the early periods because of all of the purchase accounting.

You have a large amortization charge that goes along with that.

So that negates some of that lift.

So modest impact.

Got you.

Okay.

And then switching gears.

As you look to the phase shift into more pad drilling that we're seeing occur across the industry, how does that affect your Mats business and your roll-out of the spill containment?

Or do you see an impact from that?

It's maybe early to tell, but we've talked some about that, and certainly if they're going more to pad drilling, the mats actually would remain on the site longer, which typically would drive up your utilization.

If the rigs are mobing and demobing and moving around a lot, then you get lower utilization because I have to pull the mats up and move them a lot.

You'll probably see utilization go up more with pad drilling.

Might have to be more competitive on pricing.

Don't know.

We're certainly starting to move in that direction.

Great.

Thank you very much.

Our next question is from the line of Bill [Mazolum] Tieton Capital Management.

Thank you.

That's Tieton Capital.

Specifically to the contracts that you referenced that you won outside of the US in the Black Sea and Brazil, you said those would be starting up in the fourth quarter.

Are those contracts significant enough in size that externally we'll see a bump up in revenues from those?

This is Bruce.

Let me see if I can frame it a little for you.

The Total work in Brazil is -- could be two to four wells subject to the operator's desire, of course.

And each well could be in the magnitude of $6 million to $8 million per well.

If that helps frame that piece.

The piece in the Black Sea, similarly, it could be up to seven or eight wells.

Again the operator will decide that based upon what he finds in the first few.

But it could be that many wells, and again in that $6 million to $8 million range.

Yes, the revenues are quite significant, and we expect that to have a good effect in the second quarter --- second half of the year.

And the two to four wells and six to eight wells, are you anticipating those will mostly be done in the fourth quarter?

No, no, no.

They will roll through into -- all of next year also, probably.

In terms of the eight wells, particularly.

Yes.

A deep-water well, Bruce, can run two to three months, easily, one well -- four months -- just depending on how many difficulties they have.

Yes.

And there are lengthy planning cycles for future wells.

And sometimes rigs go and do something else and then come back.

So it's a lengthy time.

And then secondarily, the four mat trials, or the three that you have done or are in the middle of, and the fourth one that's coming.

How many customers does that represent?

It's a couple key customers.

Great.

Again, we're being controlled in how we roll out the technology and being focused.

Thank you, both.

Thank you.

Thank you.

And I'm showing no further questions.

I'll turn the call back to management for closing remarks.

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

And we look toward to talking to you again after the conclusion of the second quarter.

Take care.

Ladies and gentlemen, this concludes our conference for today.

We thank you for your participation.

You may now disconnect.