NPK International Inc (NPKI) 2013 Q2 法說會逐字稿

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

And welcome to the Newpark Resources second-quarter earnings conference call.

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

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

(Operator Instructions)

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

I would now like to turn the call over to Ken Dennard.

Please go ahead, sir.

Thanks, Craig, and good morning, everyone.

We appreciate you joining us for Newpark Resources' conference call to review 2013's second-quarter results.

We'd also like to welcome our Internet participants, as the call is being simulcast over the web.

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

If you didn't receive an eMail of the earnings release yesterday afternoon, and would like to be added to our distribution list, please call my offices at Dennard Lascar, 713-529-6600, and we will add you to the distribution list.

Also, my eMail is on the release as well.

There will be a replay of today's call, and it's available by webcast on the Company's website, which is, of course, www.newpark.com.

There will also be a recorded replay by phone, which will be available until August 2, 2013, and that information for access is in yesterday's release.

Please note that information reported on this call speaks only as of today, July 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 of Newpark during the conference call may contain forward-looking statements within the meaning of the United States Federal Securities laws.

These forward-looking statements reflect the current views of 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, let's turn the call over to Newpark's President and CEO, Mr. Paul Howes.

Paul?

Thank you, Ken.

Good morning to everyone.

We would like to thank you for joining us today for our second-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 opening 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 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 second quarter -- overall, I'm pleased with the progress made toward the execution of our long-term strategy.

International growth has been a key element of our strategy, and in the second quarter our fluids business continued to expand, generating total international revenues of $73 million, up 38% year over year.

Most of the increase came from the Europe, Middle East and Africa region, with revenues at all key markets were up.

We also saw strong revenue growth from both our Latin America and Asia-Pacific regions, with both regions posting year-over-year growth in excess of 20%.

Looking ahead, we had three recent international contract awards, including a five-year contract for land operations with a Kuwait oil company, as well as two deepwater contracts that we announced last quarter, which will provide plenty of opportunity to continue our international expansion.

In North America, despite facing an 11% year-over-year decline in US rig counts, along with the second-worst Canadian Spring break-up in the last 10 years, our fluid business reported $161 million of revenues in the second quarter, reflecting an 8% increase over last year's second quarter.

Financial results in the fluids business were impacted negatively by a few challenges in the quarter, including a $1.8-million charge taken in Brazil, which reduced our reported EPS by $0.02 per diluted share.

In addition, our mid-continent completion service business had another challenging quarter, reporting a $1.6-million sequential decrease in operating income, and contributing another $0.01 decline in diluted earnings per share.

In the mats business, we are very pleased with the progress in the development of our [linerless] spill containment system.

We have expanded our field testing, and currently have three spill containment sites in progress with three different customers in the northeast.

Based on the results of the testing completed to date, we are continuing to make enhancements, and have now tested the system in both drilling and completion applications.

While we are pleased with the initial results and customers' interest, it is important to highlight that we are progressing through the field test deliberately and methodically.

We are partnering with our customers to carefully evaluate the performance of each site to ensure that they are realizing the full value of this innovative technology.

Meanwhile, our recent efforts to expand our mat rental fleet are beginning to provide a meaningful impact.

In the second quarter, our total revenues for mat rental and services were $18 million, which represents a 22% sequential improvement, marking our strongest rental quarter in two years.

This improvement confirms our strategic decision to focus on expanding and diversifying our rental business in order to provide a more stable platform for future growth.

In the Environmental Service business, it was yet another solid quarter, with revenues up 30% from the second quarter of last year.

The Business continues to perform well, benefiting from increased activity in the Gulf of Mexico.

As we announced in May, we have initiated a sales process, and to date we are very pleased with the level of interest.

And now, I'd like to turn the call over to Bruce Smith, who will review the performance of our drilling fluids business.

Thank you, Paul, and good morning.

In the second quarter, the fluid systems and engineering segment revenues totaled $234 million, a 5% sequential decrease, but a 16% year-over-year increase.

As Paul mentioned, this year's Spring break-up in Canada was particularly challenging, leading to an 8% sequential decline in revenues.

Excluding our Canadian business, the revenues from the rest of the worldwide fluids business was up [about] $2 million sequentially, or 1%.

Looking at the regional results, North American revenues totaled $161 million, down 9% sequentially, but up 8% over last year's second quarter.

As noted, the sequential decline is almost entirely attributable to the Spring break-up, which drove a [$15 million] sequential decline in revenue, as the Canadian rig count was down 71% from the prior quarter.

Canadian revenues were also down 48% on a year-over-year basis, driven primarily by the timing of the Spring break-up, as operators shut down activities earlier this year.

In the US, revenues were down 1% sequentially to $158 million, which was in line with the flat US rig count.

Small decrease came from both south and east Texas, which offset revenue gains in the Rockies.

On a year-over-year basis, US revenues were up 11% from a year ago, despite the 11% decline in the rig count.

This was driven by growth in the Rockies and south Texas.

In addition, our Alliance acquisition has been a strong contribution to the west Texas region, which generated $12 million increase in revenues from a year ago, including a $3 million of profit sales.

These revenue gains were partially offset by declines in Oklahoma and third-party barite sales.

While we are pleased with the progress of our US drilling fluids business over the past year, one area that continues to wear on US results is our completion fluids and equipment rental business.

As we have previously discussed, we experienced a significant increase in competition over the past six quarters in the mid-continent region in which this business operates.

After taking significant actions in late 2012 to right-size this business, which initially seemed to provide a catalyst for a turnaround, we again experienced disappointing results, generating a $1.1-million operating loss in the second quarter, which is down $1.6 million sequentially.

In light of the persistent ongoing difficulties in this business, we have decided to evaluate strategic alternatives.

Now moving to our international business, Europe, the Middle East and Africa posted a record-high revenue quarter increasing 13% sequentially to $39 million, and reflecting a 54% increase from the second quarter of last year.

In the region, we saw sequential revenue increases coming primarily from Italy and Tunisia.

Algeria revenues increased modestly, although they still remain below historical levels.

As we mentioned during our first-quarter call, work in Libya has restarted, although the revenue contribution was not significant in the quarter.

On a year-over-year basis, revenues were up in all of our key EMEA markets.

In Brazil, revenues were down 10% sequentially, but up 24% year over year to $22 million.

During the second quarter, we identified inconsistencies in the previously reported estimated revenues and profits associated with unbilled sales to Petrobras.

As a result, the second quarter includes a $1.8-million charge to adjust for these inconsistencies that had accumulated over the previous five quarters.

I would like to note that even after adjusting for this, our Brazil business was profitable in 2012.

Revenues in the Asia-Pacific region were up 10% sequentially to $11 million, and also up 20% year over year.

As mentioned during the first-quarter call, [Santos] was transitioning to a larger rig, and activity resumed in the second quarter once the transition was complete.

We saw the benefit of the additional offshore work in the second quarter, despite a sequential decline in onshore activity in the region.

As Paul mentioned, our international business units combined to generate $73 million of revenue in the second quarter, a 38% year-over-year increase.

Our continued international expansion remains a key component of our long-term growth strategy.

The consolidated segment reported operating income of $17.7 million in the second quarter, down 22% sequentially, but up 31% year over year.

The operating margin for the segment in the second quarter was 7.6%, down from 9.1% in the first quarter, but up from 6.7% a year ago.

Despite the continued progress that we've made in improving margins in our US business, our second-quarter margins were impacted by the adjustment in Brazil, the loss in the completion fluids business, as well as the Spring break-up in Canada.

The Brazil charge and the operating loss in the completion service business combined to reduce our second-quarter operating margin from 9% to 7.6%.

In addition, Canada's Spring break-up contributed almost another full point of margin compression in the quarter.

As we've stated in the past, returning to double-digit margins in 2013 remain our near-term goal.

Second-quarter revenues from Evolution were $25 million, which was down from the $29 million in the first quarter and $27 million a year ago.

The decrease is due to timing issues rather than any real fundamental change in demand.

Our largest Evolution customer is currently transitioning between basins.

Also, after completing two successful wells in the EMEA region in the first quarter, our customer is currently in an evaluation period, and we expect further Evolution wells to begin in this region later in the year.

We also expect to have our first Evolution trial wells drilled in the Asia-Pacific region during the third quarter.

Therefore, we expect Evolution revenues to increase in the back half of the year.

Looking ahead, we expect North American revenues to improve in the third quarter due primarily to the typical seasonal recovery in Canada.

Internationally, we expect to see a revenue decline, particularly with the EMEA region coming off a record-high second quarter.

Also, Asia-Pacific revenues are expected to decrease due to a temporary shutdown of drilling activities by one of our key customers following a fatality on a rig site unrelated to Newpark.

We are also currently preparing for the three new international contracts that we recently announced, and expect work under all three contracts to begin in late 2013 or early 2014.

As I stated, returning to double-digit margins by the end of 2013 remains a key focus for us, and we feel confident that we can achieve this goal assuming market conditions hold up.

Finally, I'd like to highlight that we recently opened the Newpark Technology Center, our new world headquarters, state-of-the-art research and training facility.

This 106,000-square foot building in Katy, Texas, will house all the major functions of our drilling fluids business under one roof, enabling more efficient work, and access to a full range of world-class analytical capabilities.

We are extremely proud of this new facility and the impact it will have on driving innovation as we continue our progress as a recognized technology leader in drilling fluids.

With that, I'll 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 Environment Services, and finishing with a discussion of our consolidated results.

The mat segment reported second-quarter revenues of $25 million, a 23% sequential increase, but a 15% year-over-year decrease, as we continued our focus on expanding our rental business.

Rental revenues were up sharply, posting a 22% sequential gain and 14% year-over-year increase to $18 million, reflecting strong demand as we continue the expansion of our fleet, as we mentioned during the first-quarter call.

The second-quarter results reflect our strongest rental quarter in two years, with the northeast region of the US being the primary driver behind both the sequential and year-over-year increase.

Market share gains in the northeast region helped drive this region's revenue up 33% year over year despite a 14% decline in rig count over the same period.

Mat sales were up 28% sequentially to $7.4 million, but down 48% from a year ago, reflecting our strategic decision to dedicate mat production to increase the size of our rental fleet.

Also, we saw a $2-million mat shipment pushed into the third quarter due to flooding problems affecting a Canadian customer.

As Paul mentioned, our spill containment system remains on track, and we currently have the system deployed with three different customers in the northeast.

Customer interest remains strong, and we have been encouraged by its performance.

As we mentioned during the first-quarter call, we are continuing to evaluate the anticipated demand from our rental customers, which may limit mat sales going forward.

The mat segment generated an operating margin of 40.7% in the second quarter, which compares to 41.2% margin in the first quarter, and a 43.5% margin in the same quarter a year ago.

Due in part to the deferred mat sale that I mentioned earlier, we expect stronger mat sales in the third quarter, returning back above the $10-million level.

Meanwhile, rental activity should benefit modestly from the continued fleet expansion effort.

Also, as we mentioned on last quarter's call, giving the continued strong performance of this business, and high level of interest in the spill containment system, we remain optimistic that we can maintain margins near the 40% level in the current environment.

Now moving on to the Environmental Services business -- for the second quarter of 2013 we reported total revenues of $17 million, an 18% sequential increase and a 30% year-over-year increase.

The sequential increase was driven by higher oil field waste volumes from the Gulf of Mexico.

The higher revenues helped push the operating margin to 30.9%, up from 24% in the first quarter and 26.4% in the same quarter a year ago.

As the deepwater Gulf continues to show improvement, this business should benefit.

Now moving on to our consolidated results -- for the second quarter of 2013, we reported total revenues of $277 million, a 2% sequential decrease, and a 13% year-over-year increase.

SG&A costs were $24.7 million, up 2% sequentially and 24% year over year.

The year-over-year increase is largely due to increases in personnel and administrative costs related to company growth, along with the cost of strategic planning projects.

Operating income was $26.9 million, down 5% sequentially and up 9% year over year.

As Bruce mentioned, the second-quarter results included a $1.8-million adjustment related to unbilled sales to Petrobras.

Under the process followed with Petrobras, our invoices are not entered into our financial system until they are approved by the customer, which tends to be a lengthy process.

Therefore, at any point in time, we have a fairly significant amount of sales activity that is tracked and accrued based on contract pricing and estimated materials costs.

In the most recent quarter we discovered inconsistencies in the estimates used to record these unbilled sales, which have now been adjusted.

While not material to any period reported, the cumulative impact of this issue over the previous five quarters was $1.8 million, or a $0.02 charge to diluted earnings per share.

Including the Brazil charge, our reported net income in the second quarter was $15.7 million, or $0.17 per diluted share, compared to net income of $17.4 million or $0.18 per diluted share during the first quarter, and $14.5 million, or $0.15 per diluted share in the second quarter a year ago.

The second-quarter 2013 tax rate was 34%, which is in line with our expectations for this year.

Now let me discuss our balance sheet and liquidity position.

During the second quarter, operating activities generated cash of almost $29 million.

We used $21 million to fund capital expenditures, primary consisting of construction cost for our new technology center and the expansion of our mat rental fleet.

As a result of the elevated capital spending, borrowings under our revolving credit facility increased by $8 million in the quarter.

We ended the second quarter with cash of $58 million, predominantly in our forward operations, and a revolving credit facility balance of $78 million.

Our total debt at the end of the second quarter was $260 million, resulting in a debt-to-capitalization ratio of 32%.

Due in part to additional capital investments required to prepare for the two deepwater contracts and the Middle Eastern contract, we have increased our 2013 capital expenditures expectation, and are now looking at a range of $55 million to $65 million.

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

Thanks, Gregg.

Overall, we are pleased with our continued success in implementing our strategy on a global basis.

Our international drilling fluids business continues to expand, with revenues growing 38% year over year, including a record revenue quarter in our EMEA region.

We expect to see continued revenue growth in international business as new contracts start up in late 2013 or early 2014.

Over the last several quarters, we made steady progress and improvements in margins for our drilling fluids business, and although in this quarter our margins moved sideways a bit, we fully anticipate regaining momentum in the second half of this year.

Another key driver of our strategy is the continued rollout of new fluid technology around the world.

As Bruce discussed, we are now expecting to start drilling our first Evolution well in the Asia-Pacific region during the third quarter, after a very successful introduction into the EMEA region, with a major IOC.

In addition, we are starting to see the benefits of our new fluids Technology Center.

Just recently, we hosted a meeting with a large national oil company, where we discussed their future drilling programs and the benefits of our technology.

We expect to be announcing the grand opening event for the facility in the near future.

Our mats business continues to execute on its growth strategy, deploying additional mats into the rental fleet during the quarter.

Similar to drilling fluids, our mat business is becoming a technology leader in their market segment by developing and deploying its new spill containment system, which utilizes our patented DURA-BASE mat system.

Although we shall have work to do on the spill containment system, we are pleased with the progress to date and the customer feedback we are receiving from the test sites.

In addition, we are extremely pleased with the growth in the northeast region, where revenues grew more than 30% year over year, despite the rig count falling by nearly 15% in this region.

This is a testament to the value of the technology we are providing our customers.

It's clear that our customers see DURA-BASE mats as an integral part of the drilling program in the northeast region.

Lastly, the Environmental Service business continues to deliver excellent results.

We'd expect to see future performance track with activity levels in the Gulf of Mexico.

With that, we will now take your questions.

Operator?

Thank you very much.

(Operator instructions)

Jim Rollyson, Raymond James.

Good morning, guys.

Good morning Jim (multiple speakers).

Paul, I guess, first question just on -- going back to mats.

Good -- you know, great quarter in that regard there, from a revenue standpoint and certainly the margins continue to hold up, which is great.

Maybe talk a little bit about the spill containment system in terms of, you said you got, three customers out there now, and it's gaining, you know, traction to other folks.

What do you think the opportunity set might look like for that and maybe equally as important, how does that subset of your business there or that marketing approach affect margin?

Does that allow you to help keep margins up?

Because for the longest time you guys were worried about competition dragging margins down, and you know, it's actually held up very well.

So I'm just -- maybe a little bit of color around how that procedures going forward.

Sure, absolutely.

Yes, and we have said I think this, in maybe a prior call that the spill containment system is kind of a system solution to preventing pollution on the site and containing any possible spills.

So our approach would be to -- that we think it could hold margins, stabilize margins, and prevent erosion, probably premature to say that that's going to be the case, but that's our expectation.

In terms of future demand, we have seen a lot of strong interest from customers.

The most recent site that we've laid, we actually removed the liner from the site so we're sitting on the bare ground now with the mats completely sealed.

And the other thing I'd like to comment is the fact that as we said in earlier calls too, we're trying to developing a new market segment and not just in the drilling side but also on the completion side, and we have had one full site in the completion market segment as well, so.

That's great.

And then as a follow-up, going back to the fluid side of things, you know, obviously margin had a couple challenges with Brazil, right, you know, adjustment factor and then the completion side, margins going back to double digits.

Is that something that the new contracts starting up late this year going into next year, do those initially help or hurt your margins and you know, how do you get back there, especially just given the kind of issues you're facing with the completions part of your business?

This is Bruce.

I'll take that one.

The new contracts certainly will help, but it's not going to affect the margin drive in the third and fourth quarter.

We expect the third and fourth quarter to get back closer to where we were first quarter and drive to the double digits regardless of the new contracts that are coming later in the year or early next year.

Yes, and the other thing I would say too in the completion services business, as we mentioned, we are pursuing or evaluating strategic alternatives for that business.

And you know, we'll make those decisions as we move through the end of the year.

Okay, helpful.

Thanks.

Neal Dingmann, SunTrust.

Morning, gentlemen.

Say Paul, for you or Bruce, just wondering you did mention a great update on Evolution as far as international, just wanted to hear thoughts.

I know there was some different things coming out in the US that we are supposed to look for on Evolution as far as some people using it out west and some different, you know, instances, or different type of circumstance we're going to use it.

Bruce could you just comment overall on the growth you've seen US as far as current customers and new customers and then regionally speaking as well?

Yes, in the US, it continues to gain traction in all areas.

Out west, in the Permian area, it's gaining more traction now than had in the past, so we're beginning to make some significant progress there.

Our customer base continues to grow, I believe we are 170 customers now that have used the system.

And we are approaching 1900 wells now, with the system in the US.

So all good milestones are there.

We have drilled 8.5 million lateral feet so, it's quite a significant step forward in the US as we have gone through last year and the beginning of this year.

So we're very pleased, really, with where Evolution is and how it's being rolled out, the acceptance of it from the customers both in the US and internationally, although international is -- we're at the early stages there.

But really very pleased with the way things are going on the Evolution side.

Great and then, Bruce, if you could continue you mentioned on reliance it seems like you saw nice pickup in west Texas, especially on the profin side.

I know for a while I think you and maybe you and Paul maybe considered about selling the profin side of this.

What are your thoughts on that business both, you know, any plans to either grow it or look to divest that, monetize it, and then just how that business has grown since you bought it?

It was actually a little soft in the second quarter, and that goes along with fracking.

You know, fracking has been a little down in the second quarter.

We expect the profin sales to be a little better in Q3 than they were in Q2, and we really haven't made any final judgments yet as to what we may or may not do with that business going forward.

But we're still evaluating it as we get -- gain new information and new insight into it.

Okay, and then last one if I could just on the US fluids overall.

You know, I know for the area, there was some things that hurt just the overall fluid business margins, but just wondering in just US just the pure fluids business, you know, as we continue to see longer and more well -- number one wells drilled, and then, you know, again, longer reach type wells, are you continuing to see just the expansion there?

And just wondering on market share what you're seeing.

All of the above, actually, so there's not one element.

But I will say that on Q2, it was sort of disguised with the other issues that we had in the quarter.

But the US business did quite well, and compared to Q1, it was very positive.

Yes I think as you look at, you know the impact of the couple issues that we had highlighted as Bruce had mentioned, you know, the completion service business was a drag on it.

But between that and Brazil, that took it down from a 9% margin on the business for the quarter, and that also included a fairly healthy hit from Canada.

So you know, you back that out and you see what the rest of the underlying business did, and it was showing, you know, nice continued progression upward.

Into the US market specifically we saw modest margin improvement in the US market I think, as well.

George O'Leary, Tudor, Pickering, Holt.

Good morning, guys.

The morning, George (multiple speakers).

Quick question, just in the prepared comments, there was some commentary around international revenues set to potentially decline a bit in the back half.

Does that put some pressure on the margin progression moving upwards just given that international margins are typically a little bit better than you see in North America?

This is Greg.

I'll take that.

Not really.

The -- as we had noted, you know the EMEA region had a very strong revenue quarter.

Some of it was types of product sales that we see as a little more nonrecurring and therefore don't expect that to come through.

But in terms of that having any -- putting any more significant margin pressure, we really don't see that.

All right.

That's helpful.

Thank you.

And then looking at the mat segment kind you know, and acknowledging that you guys did put up very good margins, but I would have expected margins to maybe move higher sequentially given the incremental rentals that you guys had and the higher-margin nature of that business.

Going forward, as rentals gained share within that business, do you expect margins to creep higher from current levels?

And then maybe what was the driver of margins not moving up sequentially, is that just ramping in -- ramping capacity to grow margins going forward.

Sure.

Well, I guess first of all, I'll start by highlighting that the, you know, the margin profile in this business, we're started from a very strong point, running at the 40% range.

In terms of the rental growth not providing more lift, we also have to recognize that we are investing more into the business.

We are expanding the rental fleet so you are adding cost to the business as well.

So that's why you don't often see a higher incremental flow through of those revenues.

And as we had mentioned, based on what we see in this business, you know we -- our expectation is that we can maintain, you know, in that 40% range based on the current market conditions as we grow out the fleet.

And I think it's worth noting too, that in, you know, in that business, and our strongest region is the northeast, we've seen a 15% reduction in rig count, and are still holding 40% margins.

So we're very pleased with the efforts of the team there.

Mike Harrison, First Analysis.

Hi.

Good morning.

Good morning Mike.

Just kind of tagging along the last question.

If you're investing for growth in the mats business, I guess I would think that most of that is capitalized as you build up the rental fleet.

Are there key [analy] investments that are going in in terms of personnel or other sales or marketing infrastructure that we should keep in mind?

Yes, there's some of both.

And that's the other element that goes along with this.

Obviously, when you're investing in the mat fleet, those are capital investments that you're making.

But also, you know, the costs, there are some OpEx costs that go along with developing a new system, as well as, as you mentioned, the sales and marketing efforts that you do have to build up if you look to expand a business beyond it's existing market.

And we have been expanding our marketing efforts to again, you know, be able to quantify the total value that this technology is bringing to the marketplace.

The other thing too that, you know, our plant is located in Louisiana, so as we're producing new mats and then taking them to the northeast, we got to track them up there.

We don't immediately deploy them, so we got additional transportation expense as well.

Got you.

And then on the Evolution business, one of the issues there are you were first rolling it out, was just kind of figuring out from a marketing perspective, whether you are pricing it correctly in order to capture some of the value that you're providing while still making it attractive in terms of the value proposition for the customer.

Can you talk a little bit about how the pricing or the value proposition maybe has changed over the past couple years with Evolution?

Are you at a point now where you're happier with the value that you're capturing?

And is it fair to assume that Evolution growth would be a mixed driver of higher margins over time?

Certainly, we look at this all the time.

And it's quite different in different areas.

For example, the two wells that we recently did for a major IOC in the EMEA region, those wells are significantly more expensive to grow so we would try and drive a better value on those wells for us as well, as we are saving them cost, saving them time.

Similarly, in all other areas, there's a mathematical formula that works for everyone.

So we do try and drive it based upon where we are, what we're doing.

Yes, one of the things that, as -- you know, we've been out there now for a couple years cost so the market place and the customers are starting to see the value, and believe in the value right?

And we've been successful in getting couple of papers co-authored by major customers as well, that are out there.

So once the marketplace starts to see the value and they are starting to believe in the technology, then we need to be looking at, is it time to start moving pricing up, you know by regions if we can, to really try to extrapolate the total value for our shareholders, because certainly we have not seen any reduction in the value we have been providing to our customers.

In fact, the value equation, we continue to bring new and unique value to our customers.

So our performance is continuing to increase in the Evolution area as well.

And then I would just add, to address your last question, Mike, that the overall margin profile of Evolution, you know, does continue to be at a premium of our -- you know, versus our traditional work, and yes, to the extent that we can continue to grow that, that is part of the margin improvement equation.

Michael Marino, Stephens Inc.

Good morning.

I wanted to try to look out a little bit further and, and look -- because you guys laid out a road map of how you get back to double-digit margins in the fluids business.

But if I look out into next year, where you've got the international -- a couple international projects ramping up, starting, I mean, should we think of those as margin accretive in 2014 or are there some kind of start up costs and things like that maybe it's more revenue than incremental margins?

I think it's a 2014 event, and the margins certainly will be accretive to what we have now.

And some of it is deepwater, which is, obviously demands a higher technology loop from us and a higher technology support from us, and we get a premium for providing that technology and service.

Yes, the one that would be in exception to that is the Kuwait oil contract was on land.

You might see some modest expense increases in the first quarter to ramp up some of these contracts.

But as you get into them, we would expect and two be accretive to margins.

Okay.

That's helpful.

And then as a follow-up just kind of, digging a little deeper on Brazil, historically the margins there have been, I think, well below average., but maybe, you've got a contract renewing there.

I'm just -- I guess help me understand, I mean, how should we think about Brazil from a margin standpoint on a go-forward basis based given all the moving parts and generally the choppiness historically there.

Sure.

This is Gregg.

I'll take that.

You know, the one thing that's important to highlight with Brazil is there is a fairly healthy piece, that, roughly a third of the revenue is solids control, which is through a partner.

So it's important to remember that about a third of the revenue there is basically a pass-through.

Very, very minimal margin on it.

So, you know, the business as a whole, it's -- you know, we are obviously we are not yet where we want to be, where it was profitable in 2012, you know, in the single digits.

Obviously after this adjustment that we had made lower, but still profitable.

So you know, the key there to continuing to move that margin upward is really continuing to grow the business, expand on the base that we have of the cost, IOC work, and then continuing to expand from there.

Yes, just a couple of thoughts on the Brazil.

First, you know, our goal has been to with Petrobras, to be -- that's kind of the base loading for that business for that region.

And we've said, you know, our goal there is to break even and make some money with Petrobras.

You're never going to make a lot of money with Petrobras.

I don't think anybody does.

The key is a lot of the IOC activities and certainly the new win with the Total deepwater contract helps along with other major and super majors that we've been down there running with.

So there's certainly a lot of opportunity to improve margins as some of those IOCs go more into a development mode.

The other important aspect of Brazil is the strategic impact of deepwater.

We have a significant number of rigs that we run in deepwater in Brazil.

That helped us achieve that contract in the Black Sea, and eventually we believe it will help us penetrate the Gulf of Mexico as well.

Georg Venturatos, Johnson Rice.

Good morning, guys.

Good morning.

I just wanted to touch on the fluid side of the business to follow on a previous question.

Obviously internationally, seeing that the revenue growth there.

Just curious how margins are holding up in those regions, how you see those progressing, you know, typically in relation to the US margins.

Obviously we have seen those higher.

Can you just speak on that a little bit?

Yes, this is Bruce, I will take that.

The margins generally in our international business are somewhat higher than we experience here in North America.

That's always been the case.

And I don't see that changing as we drive the international business forward.

I see more of the same.

Yes.

In fact, I mean, if you look at kind of the structure of the market domestically and then internationally, domestically here in the US there is a lot of competition, a lot of drilling fluids companies.

As you move to the international market, there's really only four players there.

And so we feel there's lots of opportunity for future growth there.

Okay, great.

And you know, just to touch on the deepwater side, obviously the Total contract and the IOC contract in the Black Sea, could you maybe talk about has this prompted any additional conversations and, you know, kind of the benefits of this longer-term, you know, for additional awards?

Well, we certainly have a deepwater strategy that we roll out throughout our company, and we're in the process of doing that.

And as Paul had mentioned, the work that we have in Brazil has been really key to some of the things we're achieving now in deepwater.

And the plan is obviously to lever that success we're having to other parts of the world, which we're doing.

We will try to speed that up as much as we can, of course, but it certainly gives us a great amount of credibility, and it's a key part of our strategy as we roll out our deepwater exporting.

Yes, and I think it's fair to say that, you know, since a lot of the success we've had in Brazil and some of these new contracts, we've had other IOCs that working deepwater ask us to present to them our capabilities in what we're doing around the world.

So yes, there's definitely more traction developing.

Robert Norfleet, BB&T.

Hey, guys.

This is as actually Basil Jones on for Rob.

Welcome.

Just to tack on to that last question, on those deepwater-- that deepwater work in the Black Sea then with Total in Brazil.

Is there any indication from those operators since first quarter on how many wells they are looking at doing?

And what your opportunity set might be on those?

They really don't specify.

They normally just give a range of wells, and we drill from one to seven wells, or one to four wells, or whatever.

But that's subject to change, and their desires.

So at this moment in time, we really don't know how many wells might or might not be drilled under the contracts.

Okay.

That's fair.

And then, last question, you mentioned last quarter as well that some of the revenue impact from the rental fleet additions and spill containment might be delayed a little bit.

Do you all have any idea -- any more visibility on when we could expect to see some of that top line impact?

And I mean, it looks it looks like some of the rental growth is starting to creep through revenue line, but maybe in terms of spill containment, and when the two might couple together and, you know, see a lift in the top line in that.

Sure, this is Gregg.

Well in terms of the top line lift, obviously the second quarter, again with the expansion of the fleet, we're already seeing the benefits of that.

Right.

We had a very strong sequential growth.

So, you know, based on the continued demand for our products as we expand out the fleet, we expect to see a corollary impact on the revenues.

In terms of the spill containment specifically, that's where it gets back to the comment that Paul had made, you know, we've expanded our testing, now on three sites with three different customers.

But that said, it's still a very methodical approach that we're following.

Each of these wells can take, you know, 60 to 90 days to complete and then go through your evaluation period partnering with your customers, get the feedback, etc., and then moving forward.

So it's -- we've got a bit to go yet in terms of that.

I mean, it's building momentum, but the thing to remember, I think, foremost in this business that we are capacity constrained, right?

My plant is running essentially 24 hours a day, 7 days a week.

And so we've had to slow down sales of mats to move that into the rental fleet, and obviously you take a revenue hit when you're doing that.

I think for this business to see the next big jump, a significant jump in revenue, is, you know, we have talked some about when we might have to invest in new manufacturing capacity.

And that's something that we currently are evaluating.

Ryan Fitzgibbon, Global Hunter Securities.

Good morning, guys.

Good morning (multiple speakers).

First question relates to a couple of your international contracts.

On the Petrobras fluids contract what do you view as the risk for that not being extended at year end?

And then secondly on the Kuwait contract disclosed during the quarter, how should we view that ramping up in Q4 this year in the first half of 2014?

On the Petrobras contract, we are in discussions now of course, with respect to the renewal.

I don't see anything at this moment in time that's going to stop that renewal process.

We are going down the road, and we expect sometime in September, probably, to finalize that.

So at the moment we're seeing nothing there that's different from what we're doing today.

In terms of Kuwait, we have to do some work in Kuwait to get ready for the business in 2014.

They will have to build a small plant, but it's a -- it's not a very significant cost at this moment in time.

So we don't expect to see any huge impact in the cost side of things ramping up for this business.

And I would also high on the Kuwait, you know, the dollar value associated with the contract, within the context of our total division, is not real large, $75 million over a five-year period.

But what's more important there is just the strategic step there of entering into the Middle East.

Yes, I mean it's -- and so we would expect maybe some modest revenue in 2014.

I would not expect anything in '13, Bruce, from what we're currently seeing.

And -- but Greg's point is well taken.

Bruce has been very successful in the team in that part of the world and, you know, we get our foothold on -- in the Arabian Peninsula in Kuwait, and obviously then we'll continue to look at the step out to additional countries.

Okay, that's helpful.

And the second question is, in the release, I know you talked about this in the past, you've got some efforts underway to rationalize your cost basis.

Can you talk about maybe where you are in that initiative, what you have seen so far in cost saving and maybe what's left at this point?

Well, you know, in terms of our rationalizing the cost structure, you know, it's -- I mean, quite frankly, it's a process that never ends.

We did have last year, you know, after we went through the change in the US, we had a fair amount of cost inefficiencies that we had talked about that would -- really in the area of overall personnel as well as facility costs after the, we had to shift in the region that we have continued to work on, through.

So the margin improvements that we have seen over the past year, are largely attributable to the progress that we've made on all fronts in addition to supply chain, and driving supply chain cost reductions.

So in terms of where we are and how much further we have to go, like I said, I see it as a continual effort, and it's just kind of the way of running business.

Doug Dyer, Heartland Advisors.

Good morning, gentlemen

Hey Doug, how are you doing?

Doing great.

Once the environmental business is sold, what are the allocations of that capital that you would be looking at taking into account the need to expand net capacity, share repurchases, things like that.

How would you see reallocating that capital?

Sure, this is Greg.

Initially, our first priority is growing our existing businesses, growing the fluids business, growing the mats business.

As Paul mentioned, on the mats business is where we have the larger near-term decision, as we are continuing to produce mats, run our plant at capacity, and we're gauging the long-term demand for the rental business.

So that's obviously one option.

There's, you know, various opportunities to continue to grow our drilling fluids business, especially as we are looking to expand internationally.

Share repurchase, that always comes into play.

That's always part of the evaluation.

But that is done based on your availability after first looking at your internal investment needs.

Alright.

And one more question quick question.

Are there any updates with regard to potential regulations coming out of Pennsylvania that could help your business?

You know, we've said -- you know, interesting in both our environ -- in the mats business as well as in drilling fluids, any time there's movement in environmental regulations, that creates wind at our back both for Evolution and for our spill containment system.

So any new regulations that would come forward, I think I would help the business, certainly.

But we're not -- I'm not aware of anything in Pennsylvania right now that would be meaningful in that regard.

Bill Dezellem, Tieton Capital Management.

Thank you.

A group of questions.

First of all, the Alliance acquisition, would you please provide us an update as to the integration and any relevant points there?

This is Bruce.

I'll take that.

The integration has actually gone very very well.

Really has been a terrific add to our business out in that area.

So we're very pleased, very pleased with the way things are going.

They adopted the Evolution technology very quickly.

They understand the value of it.

They are passing that message to their customers that came with the acquisition.

So all and all very pleased with that integration.

And then specifically with -- in terms of integration costs, we did have some costs in the first quarter, some modest costs in the first quarter as we integrated the business in.

But those largely dissipated in the second quarter, and as we have completed that process.

Yes, roughly 80%, 90% through the integration.

We got a few little things, but we've made a lot of progress.

And in -- I guess continuing relative to Alliance, the US fluids business I think you said was up 11% -- on an 11% decline in the rig count.

How much impact did Alliance have on that positive 11% number?

So I guess I'm trying to do is get a true apples-to-apples, how much you are up relative to the 11% decline in rig count.

Yes, as Bruce had mentioned, now keep in mind the Alliance business is not standalone.

It's embedded within our west region, and as Bruce had mentioned, the west region is up $12 million year-over-year.

So that is the lion's share of the year-over-year increase.

But again that's against the backdrop of an 11% rig decline.

So --

And as we move forward, it's going to continue to be a little tougher to try to segregate how much of it is the Alliance revenue because we had a pretty sizable business in west Texas to begin with, and we have fully integrated those businesses into one unit.

(Operator instructions)

Mike Harrison, First Analysis.

Hi, just going back to the completion services business, you've talked in the past about the need to bundle services there in order to be able to compete better.

Is that still your view of how to best compete in that business?

And if so, is one of the strategic alternatives that you're potentially looking at, could that involve adding some additional capabilities for that business and going forward with a bigger completion services business?

Hey, this is Bruce.

I'll take that one.

This business has several distinct product lines.

So we're going to look and evaluate each of the product lines as quickly as we can, and we will activate whatever the correct strategic option is either for the whole or for the individual pieces.

It's a fairly simple service business, so I don't see anything right now that would lead me to suggest we're going to build on what we have now.

Yes, one of the -- I mean in terms of evaluating strategic options, it is not doubling down and adding more.

Got it.

And then just in terms of the fluids business and some of the margin pressure you're seeing, is anything there that could, could that be attributed to the Oracle rollout, and can you maybe just remind us overall where you are in the Oracle rollout process, when we should start to see benefits from that?

Just real quick how we're not seeing margin pressure in the US outside the completion fluids.

Actually the US drilling fluids margins went up in the quarter, okay?

Modestly, but they went up.

So we're not under margin pressure.

Gregg go ahead with Oracle.

Yes, I mean, in terms of where we are at with it, it's still just in the US, and has not moved internationally.

That cost has really, you know, now stable.

We don't -- last year we had some incremental costs associated with the retraining, etc.

And that's all done and behind us.

The benefits, you know, we're on the front end of starting to see the benefits of it in terms of better information availability.

That's some of what's helping with some of the cost actions that are being taken throughout the business.

But we're still, you know, when you look at the landscape of a system like this, I mean, quite honestly, we're -- it's the infancy of it.

And it's a process where you just continue to build over the years and continue to focus on improvement.

And at this time, there are no further questions.

I would like to turn the call back over to management for any closing comments.

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

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

Thank you.

Thank you very much.

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