NPK International Inc (NPKI) 2013 Q4 法說會逐字稿

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

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

(Operator Instructions)

This conference is being recorded today, February 14, 2014, and I'd now like to turn the conference over to Ken Dennard.

Please go ahead, Ken.

Thank you, George.

Good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today, reviewing 2013 fourth-quarter and year-end results.

We'd also like to welcome our Internet participants listening to the call, that's being simulcast live 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 the distribution list, call our offices at Dennard Lascar, 713-529-6600, and provide us with your contact information.

Also, there will be a replay of today's call.

It will with available as a webcast for 90 days on the Company's website, and that's www.Newpark.com.

There will also be a recorded replay by phone, which will be available through February 28, 2014.

That information is in yesterday's release on how to access that feature.

Please note that information reported on this call speaks only as of today, February 14, 2014, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

In addition, the comments made by management of Newpark 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 or reader is encouraged to read the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, or current reports on Form 8-K, to understand certain of those risks, uncertainties, and contingencies.

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

Paul?

Thank you, Ken, and good morning to everyone.

Thank you for joining us today for our fourth-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 Services 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.

Before I move into the details of the call, I'd like to briefly discuss something we have emphasized many times in the past -- the challenges that we face as a focused provider in the oilfield service industry, and more specifically, the periodic volatility that can impact our short-term financial results, due to our size and customer concentration.

At a high level, our fourth quarter was negatively impacted by four large customer accounts across three regions, most of which are transitory in nature.

As these challenges arise, such as in our fourth quarter, we take appropriate actions to address the issue, while continuously maintaining our focus on executing our strategy, and delivering long-term results to our shareholders.

To that point, I'd like to highlight some of the noteworthy accomplishments and events of 2013.

A year ago, I spoke to you about Newpark achieving an all-time high in total revenues for the full-year 2013, surpassing the $1-billion mark for the first time in our Company's history.

This year, we exceeded that performance and established a new record high, posting full-year 2013 revenues of $1.1 billion, an increase of 7% over last year.

This achievement was driven mostly by gains in our Fluids business, which experienced growth in the US, EMEA, and Latin American regions.

Net income for 2013 was $0.69 per diluted share, up 11% from a year ago.

I'd also like to point out that our 2013 operating cash flow exceeded $150 million, another new record for the Company.

We've seen growth and noteworthy expansion, both domestically and internationally, with our proprietary matting and drilling fluid systems, including DuraBase and Evolution, and that continues to help define Newpark as a driving force in the industry.

And to that point, we are extremely pleased to announce today that the US PTO has formally issued a patent covering Newpark's Evolution system, a clear testament to the strength and quality of our research team and IP pursuit.

Evolution revenues have grown from roughly $27 million in 2010, the first year of its commercialization, to $120 million in 2013.

Throughout its introduction into various new geologies and regions, we've not only emphasized, but also clearly demonstrated our product's unparalleled performance in head-to-head competition, with some of the largest oilfield service companies in the world.

One example worthy of mention involved a difficult and technically challenging well that we recently completed with the Italian Company ENI.

During a technology presentation at a November industry conference in Abu Dhabi, a co-authored paper was presented with ENI.

ENI credited our Evolution system for dramatically increasing the rate of penetration, and reducing the time to reach total depth by 30%, which translated into significant savings to ENI's total well cost.

Now, turning back to our accomplishments for the year.

We strongly emphasized positioning of our core assets for future growth in evaluating strategic alternatives for our non-core and underperforming assets.

To that end, in June, we completed the construction of our new fluids technology center, which is now the hub for our global fluids research efforts, which we believe will act as a catalyst to accelerate new product development and further enhance our existing fluid systems.

I know many of you had a chance to visit the technology center during our first Analyst Day last fall.

We're also pleased with the visits from many customers to date, including several IOCs, super majors, and NOCs.

There's no better environment to showcase our technology and our expertise.

We've also added several meaningful fluid contracts in 2013, as part of our continuing efforts to expand internationally.

There were three previously announced contracts, including two in deepwater, as well as our five-year contract with a Kuwait oil company, which represents a significant first step for Newpark into the Middle East region.

The deepwater contracts are important for different reasons.

First, the Black Sea contract with a super major is the result of our first effort to leverage our success in the Brazilian deepwater market to another global region.

The other contract, with Total in deepwater Brazil, represents another milestone in leveraging our global relationships.

Both of these data points are noteworthy, as Newpark positions itself for expansion into the deepwater Gulf of Mexico.

We're also pleased to announce today another significant international contract with Cairn Energy of India.

We expect to begin work on this four-year $40 million contract in the second half of the year.

In addition to this contract, we have extended our agreement with Petrobras for another three years.

We expect all four of these contracts to contribute meaningful revenue in 2014.

So, all in all, it was a very productive year toward our goal of securing new business internationally.

Now, turning our focus to our Mats business.

We announced, in late 2013, a $40-million expansion of our mat manufacturing plant in Louisiana.

The doubling of our mat production capacity will help us further expand into existing and new markets, both domestically and internationally.

And, coupled with the new research and development center, we believe that we are well positioned to continue being the market leader for matting systems.

I'd like to quickly highlight one of the new product innovations in our Mats business, the spill containment system.

Some of you saw the display at our Analyst Day last fall.

We continue to refine the system and, as we indicated last quarter, throughout this winter season, we have been testing the ability of that system to handle temperature and environmental changes.

After the winter season, we will further analyze the system's performance prior to rollout.

We plan to formally launch the spill containment system later this year.

With our manufacturing expansion under way, we are now focused on extending the global reach of our mat rental business.

As an important first step, we recently acquired Terrafirma Roadways in the United Kingdom.

Terrafirma has been a strategic partner of Newpark since 2008, and the exclusive UK distributor for the DuraBase mat system.

We saw this as a natural fit with our strategy to expand our rental business globally.

The acquisition gives us a beachhead, not only in the UK, where shale development is anticipated but also into various markets throughout Western and Eastern Europe.

We're proud to welcome the Terrafirma team, and we look forward to their contributions.

Positioning the Company for future growth in 2013 meant not only adding to our existing operations but also exploring alternatives for non-core or underperforming businesses.

In the fourth quarter, we completed the sale of the completion service business, which had been negatively impacting our results for quite some time.

More importantly, we recently signed a definitive agreement to sell our Environmental Service business for $100 million to a strategic buyer.

As most of you know, we were not able to complete a prior sales process in 2008, at a price of $81.5 million.

Not only is the current agreement to sell the business at a better price than 2008, reflecting the improved performance of this unit, the terms of the transaction are also more favorable to Newpark.

As is typical for a business of this nature, which involves the handling, transportation, and underground injection of waste, a particular focus of diligence and negotiation revolves around the potential environmental liabilities associated with the operations.

The terms of the agreement reached with the buyer significantly limits Newpark's post-closing environmental obligations, including those related to the waste transfer and disposal facilities.

Taking into account both the price and the terms of the sale, we are convinced that this transaction is in the best interest of Newpark's shareholders.

The sale is subject to the pre-merger review process, but we fully anticipate it will be approved, and that the sale will be finalized in the current quarter.

With that said, now let me turn back to our fourth quarter.

While our Mats business continued to perform well at a high level, the quarter proved challenging for our Fluids business, both domestically and internationally, as I touched on earlier.

Total revenues for the Company were $263 million in the fourth quarter of 2013, which represents an 8% sequential decline from our record third-quarter revenues.

Consolidated operating income for the quarter totaled $27 million, which is down about 12% from the third quarter.

Our Fluids business was down 9% sequentially, driven mostly by the customer issues I mentioned, which negatively impacted the US, as well as the EMEA and Latin American regions.

Our US revenues flowed in the back half of the fourth quarter, which is attributed in part to the business realignment of two of our key customers, and to weather-related disruptions and lower seasonal activity during the holidays.

Our Mats and Integrated Services business continues to perform extremely well.

While total segment revenues were roughly flat sequentially, rental revenues continued to grow, up 5% from last quarter.

Finally, I want to point out that, given our strong cash flow performance, we continued to repurchase shares over the past quarter.

And, in conjunction with our pending sale of the environmental business, our Board of Directors recently approved an increase in our share repurchase authorization, from $50 million to $100 million, contingent upon the sale of the business.

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

Thank you, Paul.

Good morning everyone.

Just to recap, in the fourth quarter, the Fluids Systems segment generated revenues of $212 million, representing a 9% sequential decrease, and also down 8% year over year.

Our Fluids operating income was $15.2 million in the fourth quarter, down 12% sequentially, and down 14% year over year.

For the full year of 2013, Fluids revenues were $926 million, representing an 8% gain over 2012, while operating income came in at $73 million, representing a 21% improvement over the prior year.

Looking at the fourth quarter by region, North American revenues were down 8% sequentially to $150 million, although this was down just under 2% year over year.

The sequential decrease was driven by slowing in the US, with Canada benefiting from the typical seasonal improvements.

In the US, revenues were $136 million, which was down 11% sequentially, and down 4% year over year.

The majority of our declines were driven by activities with two large independents that made significant changes to their operations in the quarter.

One such independent is currently repositioning their business, in an effort to reduce their well costs and operating expenses throughout the Rockies and the Gulf Coast.

These efforts have resulted in a short-term period of transition and lower drilling activity.

While we expect this customer's activity levels to eventually return to more normal levels, in the near term, we expect some continued softness.

We also experienced declines with another large independent customer in south Texas.

As we touched on last quarter, this work was lost due to pricing, as well as the customer's decision to in-source certain activities previously provided by Newpark, and the ramp-down of that customer continued in the fourth quarter.

We view both of these unfavorable developments to be customer specific, and not indicative of any broader trends.

In addition to these customer-specific issues, our fourth-quarter results were also hampered by the late-quarter slowdown, as well as harsh weather conditions in several key markets.

Also, during the previous quarter, we benefited from a $2-million contribution from a deepwater well that did not recur in the fourth quarter.

Revenues from Canada increased 35% sequentially, significantly outpacing the 8% increase in the Canadian rig count.

On a year-over-year basis, Canadian revenues were up 16%, while the Canadian rig count was up about 3%.

Looking ahead, we expect the usual seasonal ramp-up from the Canada in the fourth quarter and, due to the extremely cold winter, there could be an extended drilling season before spring break-up.

Revenues from our EMEA region were down 17% sequentially to $29 million, which also represented a 16% year-over-year decrease.

In last quarter's call, we emphasized that there would be some weakness from the region, as a result of an Eastern European customer transitioning between contracts.

However, the drop was actually more significant than we had anticipated, and this resulted in the bulk of both sequential and year-over-year declines.

In Brazil, revenues were down 8% sequentially to $25 million, which was down 13% year over year.

The business environment there has become more challenging with Petrobras, an issue that is negatively impacting most oilfield service companies.

In addition to the decline in revenue, the quarter was hampered by an unfavorable sales mix, as Petrobras had many of their rigs doing completions rather than drilling.

Also, another IOC completed its well in October, leading to a drop in one of our higher-margin revenue streams.

These revenue declines were offset by a high volume of lower-margin commodity sales, leading to an operating loss in the period.

In addition, we took a $1-million charge in the quarter related to a Brazilian value-added tax assessment, which covered a period of several years, as well as restructuring expenses as we look to right-size this business.

In the Asia-Pacific region, revenues were $8 million for the fourth quarter, up 12% sequentially, but down [46%] from a year ago.

The offshore activity with our largest customer in the region remained in temporary shutdown during Q4, however, our land revenue showed some improvement.

We expect the offshore work to return in the first quarter.

As Paul mentioned earlier, we completed the sale of our mid-continent completion services and equipment rental business.

As a result, our fourth quarter includes a $2.7 million pretax gain on the sale of assets.

This business generated $3.3 million of revenue, and $2.6 million of operating income during the fourth quarter, including the $2.7 million gain on the sale.

Excluding the contributions of the completion service business and the charges in Brazil, our total Fluids revenue in the fourth quarter were $209 million, with an operating margin of 6.5%.

Obviously, the most significant drivers to this quarter's margin decline was the 11% sequential decline in US revenues, as well as losses generated in Brazil.

As we've discussed in the past, we've been focusing our efforts on improving our margins, particularly in the US.

Early in the fourth quarter, we appointed Phil Vollands as President of our North American business, in part to provide better focus on these efforts.

So, while the near-term headwinds and revenues have certainly made the initiatives more challenging, we remain convinced that, as revenue picks up, our margins will recover.

On the technology front, Evolution continues to perform very well, and is gaining good traction in the marketplace.

Revenue from Evolution was a record $34 million in the fourth quarter, compared with the previous record of $33 million in the third quarter, bringing the full-year revenue to $120 million, up from $110 million in 2012.

We've now completed four successful Evolution wells in the Asia-Pacific region and anticipate seeing its continued expansion there in 2014.

And, as Paul noted, we are pleased to have recently received patent coverage for the Evolution system.

In terms of our current outlook, although we expect the softness in the US to continue for the next quarter or so, we remain very optimistic that our revenue will rebound in 2014.

In Canada, we expect to see the usual first-quarter seasonal increases, which are likely to surpass last year's first quarter.

Internationally, with the Eastern European transition issues now behind us, we expect near-term revenues in the EMEA region to improve, although not all the way to historic levels.

In the Asia-Pacific region, our offshore work in Australia should return in Q1, as the transition issues there are now complete.

In Brazil, we remain cautious in the near term, although the first quarter should benefit from our first well under the new Total deepwater contract, which is now under way.

Overall, the business environment is increasingly challenging, with Petrobras' inability to keep pace with the desired level of drilling, completion, and production activities.

In response, we are pursuing a balanced approach.

We are looking to selectively reduce costs and limit our exposure on working capital investments, while also being more selective of work opportunities.

At the same time, we need to be mindful that participating in Brazil's deepwater market remains an important part of our global deepwater strategy, allowing us to leverage that experience to other parts of the world.

Longer term, we remain very optimistic, with several additional contracts coming online later this year.

Our new contract with Cairn Energy in India is expected to begin operations in the second half of the year.

Meanwhile, preparations for the Black Sea deepwater contract are continuing, as work is expected to begin in the third quarter.

We recently completed and successfully tested the mixing and storage facility related to this contract, and have been requested by the customer to triple the capacity of this facility.

When complete, Newpark will have the largest and most strategically positioned facility, which can be used to provide services for other customers coming into this region.

Another major contract will kick off in the third quarter with the start of the contract in Kuwait.

Similar to the Black Sea effort, construction is currently under way at our fluids plant.

With the contributions of these new contracts, we are confident that 2014 will be another year of growth for the Fluids business.

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 result of our Mats business, before moving on to the Environmental Services business, and finishing with our consolidated results.

The Mats business reported $35 million in revenues for the fourth quarter, a slight sequential decrease, but up 31% year over year.

Operating income was $15.2 million in the fourth quarter, down slightly from the third quarter, and up 40% year over year.

Operating margin in the fourth quarter was 43.7%.

This matches our third-quarter margin and is above the 40.8% margin in the same quarter a year ago.

For the full-year 2013, Mats revenues were $116 million, representing a 5% decline from 2012, while operating income came in at $49 million, down 9% from the prior year.

For the quarter, mat rental revenues were up 5% sequentially to $20 million, up 49% from the same period a year ago, and another record quarter.

Rentals continue to benefit from strong demand, particularly in the Northeast, as well as our continuing fleet expansion, in part driven by the expanded use of our rental mats in all phases of exploration.

Mat sales in the fourth quarter were in line with our expectations noted on last quarter's call, coming in at $15 million, down 7% sequentially, but up 13% from the same period last year.

Looking ahead, we plan to continue our focus on rental fleet expansion, including the deployment of mats into Europe, following the Terrafirma acquisition.

Similar to early 2013, we again expect to deploy a higher level of mats into the rental fleet in the near term, leaving fewer produced mats available for sale.

As a result, we currently expect Q1 mat sales to be below $10 million.

Now, moving on to the Environmental Services business.

Revenues in this segment were $15.6 million, down 11% sequentially, but up 8% from prior year.

Operating income in this segment was $4.3 million, compared to $4.7 million in the third quarter of 2013, and $3.4 million in the same quarter a year ago.

Upon completion of the pending sale transaction, we expect net cash proceeds to be about $70 million after taxes.

In anticipation of this transaction, we will be moving the Environmental Services business into discontinued operations from this point forward.

Now, moving on to our consolidated results.

For the fourth-quarter 2013, we reported total revenues of $263 million, an 8% sequential decrease, and a 3% year-over-year decrease.

Consolidated operating income was $26.6 million in the fourth quarter, down 12% sequentially and up 1% from the fourth quarter of 2012.

Net income in the fourth quarter was $13.5 million, or $0.14 per diluted share, compared to net income of $18.8 million, or $0.20 per diluted share, in the third quarter, and $11.2 million, or $0.12 per diluted share, a year ago.

SG&A costs were $25.3 million, down 70 basis points sequentially but up 4% year over year.

The year-over-year increase is primarily attributable to the charges in Brazil, along with about $1 million of costs associated with strategic activities, including the sale process for the Environmental Services segment, and completion services business, as well as the acquisition of Terrafirma.

The fourth quarter included $736,000 of foreign exchange losses, down from $975,000 in the prior quarter, and up from $333,000 in the fourth quarter of last year.

The fourth-quarter exchange losses is largely driven by the recent currency devaluation in Brazil.

The fourth-quarter 2013 effective tax rate was 40%, bringing our full-year 2013 rate up to 34%.

This unusually high quarterly rate was mostly the result of fourth-quarter pretax losses in Brazil, for which US GAAP does not allow the recording of the tax benefit.

Because of our operating losses generated in Brazil, compounded by the $1 million of tax assessment and restructuring charges, along with FX losses, this caused our effective rate to be higher than it normally would have.

In 2014, we expect our effective tax rate to be roughly 34%, which is in line with the full-year 2013 level.

Looking at the full-year 2013, we reported record revenue of $1.1 billion, which is up 7% from prior year.

Operating income in 2013 was $112 million, up 6% from 2012, while net income for 2013 came in at $65 million, or $0.69 per diluted share, compared with 2012 net income of $60 million, or $0.62 per diluted share, reflecting an 11% year-over-year increase.

Now, let me discuss our cash and liquidity position.

As Paul mentioned, 2013 was a record year for cash flows, as we generated $152 million of cash from operating activities, and approximately $85 million of free cash flow.

Our cash flow benefited from a 10-day reduction in DSOs, driven largely by sustainable process improvements in the North American business.

Similarly, cash flow also benefited from inventory reduction programs, particularly in the US.

While we're pleased with our progress in managing our working capital, and we will continue to make improvements through 2014, we do not expect it to match the degree of improvement we achieved in 2013.

For our consolidated fourth-quarter cash flows, operating activities generated cash of $54 million.

We used $7 million to fund the Terrafirma acquisition and another $15 million for capital expenditures.

$6 million was also used in the quarter to fund share repurchases.

Through today, we've purchased a total of $17 million under our current repurchase authorization.

Also, we fully paid off the remaining $47 million in the revolving credit facility balance by the end of the fourth quarter.

Our cash balance at the end of the quarter was $66 million.

Total debt was $186 million, with a resulting debt-to-total capitalization ratio of 24.2%.

Our full-year 2013 capital expenditures totaled $68 million, and our depreciation and amortization expense was $44 million.

For 2014, we expect capital expenditures to total in the $75 million to $100 million range.

Part of this will be driven by the $40-million expansion of the mat manufacturing facility.

In addition, we are currently developing our deepwater market penetration strategy, and anticipate that an additional expenditure will be needed for our deepwater infrastructure for the Gulf of Mexico later in the year.

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

Thanks, Gregg.

Clearly, you are not satisfied with the fourth-quarter results.

We are addressing the issues, and expect 2014 to be another good year, with many new contracts already in hand.

Our team has made significant changes over the course of 2013, which have strengthened our position as the technology leader in the fluids and mats businesses, and our proved ability to further expand those businesses into new markets worldwide.

We successfully divested some of the businesses that were no longer a part of our long-term strategy, and expanded operations to better serve our growth markets.

Looking at our strategic and operational developments, we are in the early stages of construction of our new mats manufacturing and R&D facility.

We expect those facilities to be operational by the end of the first quarter of 2015, as stated previously.

In addition, as Gregg noted, we are developing a global deepwater strategy, which will likely result in additional capital investments in the Gulf of Mexico.

We expect to complete that study around mid-year.

Our current market share in the global deepwater market is approximately 18%.

Once we complete our required investments, our goal is to obtain roughly the same share in the Gulf of Mexico, within the next five years.

With respect to our Fluids business, we do not expect the first two quarters -- we do expect the first two quarters to remain soft.

However, we're still committed to achieving double-digit margins longer term.

Our Mats business -- while we take steps to develop new markets and prepare the plant start-up in early 2015, we do expect to add support cost to the business this year, which will put some pressure on margins, particularly in the back half of 2014.

In North America, we expect to see a flat rig market, but anticipate a 5% increase in the number of horizontal wells, due in part to pad drilling.

In the international markets, it appears that rig count will grow by about 10%, and with our new contracts coming online in the second half of 2014, we expect to have another record revenue year in our international operations.

In closing, I'd like to comment on our capital structure and how we have positioned ourselves for future growth.

We have significantly improved our balance sheet in the quarter, paying off the outstanding balance under our revolving credit facility.

And, once we close the sale of the environmental business, we will have excess cash to fund our growth initiatives, which may include: investments in our deepwater assets in the Gulf of Mexico and globally; continued build-out of our fluid assets in regions around the world; the purchase of solids control equipment and bundled contracts; the expansion of our mats manufacturing facility; the continued build-out of our mat rental fleet in the US, and now in the UK and Europe; and, allow us the opportunity to make potential acquisitions that are consistent with our strategy.

And lastly, with the doubling of our share repurchase authorization, we have greater flexibility to return excess cash to our shareholders.

With that, we'll now take your questions.

Operator?

(Operator Instructions)

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

Please go ahead.

This is I guess is either for Paul or Bruce.

When you take together the recent and near-term challenges you mentioned in the US market and Brazil, and you take your cost-cutting efforts to try and right-size those for the time being until things improve, and then you layer in the new contracts you've got that come on throughout the course of this year, what's your best guess today of how margins progress throughout the year in the Fluids business?

I think as the revenues ramp up in the business we certainly expect the margins to come up accordingly.

Let me take the pieces.

Brazil is certainly challenging, and in the quarter, we did have a lower margin mix of products, and when you look at financing cost and management costs and so on, there's not much left.

So going forward in that piece of the business, we're going to be very selective in terms of how we take on new business with Petrobras.

So that's a part of the answer in Brazil.

Also in Brazil, we have negotiated some improved payment terms with Petrobras, which hopefully, as the year goes on, will kick in and give us a reduced DSO, as things go forward there.

So in that regard, we're taking certain actions in Brazil, that will help us both short term and longer term, as we roll through the year.

In the US business, the revenue decline quarter-over-quarter of about $17 million was really contained within two independent companies that we've talked about.

75% of the decline was contained in two companies.

But we're actively pursuing one of the companies again, who is getting slowly back to a drilling campaign.

We're actively pursuing many other customers in that region, so we believe our market share there will begin to pick up.

So as those revenues increase, we expect the margins to increase along with it.

And as you flow through the end of the year I think, Bruce, one of the things that we're looking at, is that we would expect margins to recover more towards the historical levels, as we move into that fourth quarter.

Yes.

I mean, a big piece of it from where we currently stand is the top line impact.

Right.

And you always see whether it's incremental or a decremental with near term swings you generally see that flow through in the 20%s range.

Below 20%.

In terms of the margin impact, and that's what we saw on the way down.

The top line recovery is a key piece to that --

Margin movement -- improvement.

Sounds like your maybe first quarter is not that dissimilar, plus or minus, from fourth quarter, and then as you get through the year, it is steady.

And then the pick-up when all this stuff kicks in toward the latter part, as you mentioned, Paul, I think the fourth quarter.

Maybe you get to 10% or high single-digits in the fourth quarter kind of thing?

I think that's a pretty fair way to articulate it.

In the first quarter, not a lot of changes, other than your Canadian, obviously, seasonal benefits that you see, and then the uptick a bit of the revenues in the international region.

But the more meaningful growth it really comes with these new contracts that are coming online as well as the recovery of the US business which as we said is going to take a little bit longer to get there.

Makes sense.

One follow-up.

Paul, you mentioned doing your study and working towards getting market share in the Gulf of Mexico at some point over a periods of time similar to what you're doing maybe in Brazil.

You mentioned capital investment there.

What kind of magnitude of capital investment are you going to have to make to get there?

It's probably premature because we're just in the development of the strategy.

Currently, the assets there are not configured really for deepwater work, and to handle the larger OSVs that are coming in.

And so it's going to be a sizable investment, could come in phases, but it's pretty hard to put numbers to it at this point in time.

Probably at the end of the first quarter call, we could give you more guidance on that.

Gregg, do you want to add a thought?

The other thing I would add there is it is a number that I think -- it's measured in tens of millions.

Yes, it's meaningful.

I could be something similar to the size of the Mats expansion, plus or minus, from there.

Depending on how far we go with it.

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

Please go ahead.

Paul, two questions.

Either for you or Bruce.

Just first on -- great comments on the press release on Evolution.

Really seems like to me it's picking up.

And I just wondered, Paul, if you or Bruce could comment on -- you mentioned in the past, the expansion in two areas, really.

Internationally, both offshore and onshore, and then in some of these newer developed areas in the US.

I'm just wondering what -- again, it certainly seems like it's finally now picking up.

Two questions around that.

Is it picking up in both international and these other US areas?

And again, am I correct by thinking that the margins are, I don't know, a bit higher there, maybe another 10%-or so higher in the Evolution than they are in your typical Fluids?

I'll take the first part first.

In terms of the roll-out of Evolution, we're very encouraged, very pleased with where it is.

It's still gaining momentum in the US, and any time you're introducing a new technology, it's never a line that's always up to the right all the time.

You have moments of flatness and new customers come on-board and so on.

But we're still rolling it out very favorably in the US, it's getting good traction, better traction.

Internationally we expect really good things in 2014.

The Asia-Pacific region has just really be begun now to get a flavor for the Evolution performance metric, and it's so significant that we feel very encouraged that 2014 will see a substantial increase in the sale of Evolution -- or in the revenues of Evolution, in the international marketplace going forward.

I guess, in terms of growth, I see it both domestically and internationally for the Evolution product line.

The other thing that I think is important too is, the United States Patent and Trademark Office issued the patent for us.

So that certainly puts barriers to entry for the large oilfield service companies that are starting to see this as a viable threat to their business.

It really provides some interesting barriers that they will not be able to overcome.

So I think that also strengthens our entire IP portfolio.

Okay.

And then one follow-up.

Paul, just wondering, on the Mats side, on the spill containment, I'm just -- I'm trying to get a handle around it.

Certainly to me seems like the upside now on the Mats -- for a while, it seemed like there were more challenges because of all the competition.

Now it seems like you guys have really started to differentiate yourself on that side.

I'm wondering, is that differentiation really because of the -- enhanced because of the spill containment system.

And if so, I mean, how much more upside, obviously you're building more facilities, I understand that from the press release.

How much more does that spill containment do for that side?

In terms of the competition, the competition continues to run at us.

Whether it's wood mats or other composite mats, any time you've got these kind of margins, you attract competition.

I think our team does a great job in terms of how they position the total value.

And that's something new that we started in the second half of the year, and obviously are moving forward, is communicating with the customer the total value of our system, and that seems to be gaining traction.

With respect to spill containment, as we have stated previously, we really wanted to get through this winter season, and to look at the stability of the seals.

When you get these large temperature differentials, and certainly we've had one of the coldest winters on record.

So we're collecting a lot of good data, and we'll be analyzing that, and we will be formally launching that system.

And obviously, we think that's going to help fill up some of the new capacity, as well as the acquisition that we've made in the UK on top of that.

Thank you.

Next we have Mike Harrison with First Analysis.

Please go ahead.

Just wanted to dig in a little bit further on the business in Brazil.

You've taken that from around $15 million in annual revenue in 2008, you're at something closer to $100 million a year run rate right now, and we're still posting losses.

I understand that's a challenging market structurally, and Petrobras in particular is a difficult customer, a very demanding customer.

But I just wanted to dig in a little more on why we haven't seen the profitability improve as that business has scaled up?

What actions do you need to be taking?

What are you considering right now in order to get to a point where you're more consistently profitable?

What kind of decisions are you making about mix?

What kind of products you will and won't provide?

What do you need to provide?

And what can you get away with not doing for the customers, if it's lower margin?

All right.

I'll take the start of that six-part question.

(laughter) There was a lot there.

As we grew in Brazil, part of our approach, in terms of maintaining or getting to a point of profitability in the business, was also trying to add on a lot of different product offerings, outside of the direct Fluids contract, in order to get some top line growth and get some benefit to the bottom line.

And part of what we've discovered here is that it is -- with it being a very difficult place to do business, and the working capital that you tie up, et cetera, a lot of these lower-margin offerings by the time all is said and done, it's hurting you more than helping you.

That's part of the solution, is now re-evaluating what we're looking at, and being more selective, as Bruce had mentioned earlier, about what pieces of business that you chase.

And looking at both the profitability, but also your working capital investment in the business.

I think ultimately for us, and Gregg's specifically talking there with Petrobras, the keys to profitability one is the IOC work.

So in the quarter we had very little, almost no IOC work in the fourth quarter.

When that happens, obviously, you're running strictly on Petrobras.

That is the problem child not just for us, but for other oilfield service companies, as well.

We're going to have to take a tough approach there in terms of when these rigs go into just a completion workover mode, and we're simply providing labor with no products.

We're going to have to push Petrobras to honor the contract, and it has Fluids revenue as well.

That's part of the issue, is we're going to get tough with Petrobras.

We don't have a choice, we have to.

That may at some point require us scaling back some in some of that revenue with Petrobras.

On the other side of it though, all of the IOC work we've done there has been very profitable.

We've done very well with the IOCs.

We need to continue to win those contracts, as Bruce mentioned, we've got the Total contract starting now in the quarter.

So longer term, it's going to take a lot of focus, but I'm involved in it with Bruce, and so we would expect longer term to see that business stabilize.

All right.

If we can kind of contrast that with -- you have had some nice success in the deepwater market there, and talking now about trying to transition that success over to the Gulf of Mexico.

Do you have some firm commitments in-hand in the Gulf of Mexico?

Or is the expansion there a little bit -- build it and they will come?

And I guess my question is what structural differences do you see or different competitive dynamics that you see in the Gulf of Mexico versus Brazil?

Do you think it's going to be more challenging to penetrate that market?

Or once you get in the appropriate position, do you have a pretty good, firm hold on being able to succeed there?

There are several pieces to the answer.

Firstly, the deepwater work we do with Petrobras and the IOCs in Brazil certainly give us a base of knowledge, and a base of expertise that we can lever into other parts of the world, particularly as you're talking about the Gulf of Mexico.

We have had some experience in the Gulf of Mexico historically, and currently in deepwater markets.

Now, we're planning to gain much better focus on that, level these experiences we've had in different parts of the world to come to bear on what is a lucrative market, sitting right in our doorstep here at home.

We are getting a lot of traction with customers, who are looking for another player to come into the deepwater market.

So it's not really a build them and they will come.

There are certainly indications out there that our entry would be welcome by certain people.

So we're certainly moving in that direction.

The challenge though for us is that -- and we're getting more opportunities to look at tenders in the Gulf of Mexico and deepwater, but really is the assets.

They're not configured to be able to handle more than a couple OSVs that are coming in.

And as Bruce said, we're currently doing deepwater work in the Gulf of Mexico, typically it's one rig, and so you got limited OSVs.

So we're going to have to get those assets up to another level, to be able to compete there.

But again, Brazil is strategically important, because that's where we've been able to develop our credibility in deepwater.

And really that's with accounts like Total and Exxon Mobil and Maersk, and work we've done for other IOCs, leveraging that work into the deepwater, Black Sea.

We're very excited by the fact that the super major there originally had asked us to build a plant, which we completed for them, and then recently asked us to triple that volume in the Black Sea.

Another strong indication that we're a preferred vendor for a new market they're moving into.

And so we think those kind of data points play very well in terms of the Gulf of Mexico.

Thank you.

Next we have George O'Leary with Tudor, Pickering, Holt.

Please go ahead.

I just wanted to touch a little bit on your comments around Petrobras, and the shift to more completions versus drilling activity.

Is that a trend you expect to continue throughout 2014, or is there any chance of reversal of that, and seeing a little bit of a pick-up on the drilling side in late this year?

That's very difficult to predict.

Petrobras being Petrobras, they have different key things that they're looking at.

So the completions and production activities are just part and parcel of the game.

It's been more weighted toward completion and production recently.

So we hope that at some point going forward, they'll get back more into the drilling mode, which of course is better for our business.

I think historically, while we've seen these shifts in their activity quarter to quarter, it's not something that sustains for a long period.

Correct.

It will move from quarter to quarter.

So we'll see more drilling this quarter and --

Okay.

Thanks.

And then you mentioned in the opening comments that some of the Fluids weakness this quarter, both on the margin and the revenue side, was transitory, and a portion of that was not transitory.

Can you maybe break out your thoughts around what percentage of that falls into the transitory bucket, and the percentage that doesn't?

Yes.

We mentioned really the four customers and of which three of them, one in the US as well as the EMEA, and the issues with Petrobras down in Brazil, those three are really categorized more as transitory shift in their activity, that we see more short-term in nature.

The fourth one, the last one, which is this customer that Bruce had mentioned in the US, that's an issue where it was work that was lost on pricing.

So that one's more of a long-term impact.

So you take a step back, and you look at it, and the lion's share of it is really transitory in nature.

It's the one customer that's a more significant longer term impact.

Next question is from Jeff Spittel with Clarkson Capital.

Please go ahead.

Maybe if we could follow up on Brazil and Petrobras, more of a big picture philosophical question.

I think we all recognize they're an important strategic client, and it's been a good proving ground for you in deepwater.

How long, if ever, does it take for you to build your book of business with the IOCs down there, or maybe, as we think about the offshore markets in totality, where you could afford to say to them -- listen, we'll issue you more of an ultimatum, or we'd have to reconsider what we're doing with you there?

It's all timing.

We just need to pressure up on that contract on a daily, weekly basis to ensure that they're honoring it, not just in terms of product sales, but also the improvements that we signed in the new contract, in terms of billing to reduce our DSOs.

Because we're borrowing money down there at very expensive rate, and so that interest charge hits those local books, so we think there's some impact there as well.

But I don't think we ever get to an ultimatum with them.

But we're going to certainly pressure up on them.

I would agree with the comment on the ultimatum.

It is a fair point that, given where we are at in terms of our progress on our global deepwater strategy, it is very critical today.

As we progress and as we make a greater impact into other regions, it has a lower level of criticality to us.

Absolutely.

As we start picking up contracts in the Gulf of Mexico and developing credibility there as well, Brazil becomes less important from a Petrobras perspective.

Sure, sure, appreciate that.

Switching to the US Fluids market, I kind of think about you as a play directly on stage and well intensity.

Can you talk a little bit about how a typical ticket, whether it's for Evolution or just for the business as a whole, in the shale plays have evolved over the last year or so?

And then where do you see that progressing over, say, the next 12 months?

On Evolution, are you talking primarily about the margin difference?

No, it's more about the revenue per well, length of -- (multiple speakers)

Okay.

Well, revenue per rig, certainly we see going forward, I think as increasing, a lot to do with pad drilling, a lot to do with larger step-outs, larger linear footage being drilled, larger lateral footage being drilled.

I think, certainly, going forward, we will see the revenue per rig increase.

Volumetrically, any time they're drilling longer laterals and more wells, and we expect, as we said, about a 5% increase in the total number of wells being drilled, although rig count will be somewhat flat.

Currently, putting aside any increases in price of natural gas that may occur as a result of the storage issues, we think there's going to be a pretty good year coming up in the US, for increased drilling of wells.

Thank you.

Next is Marc Bianchi with Cowen.

Please go ahead.

Just wanted to go back to the Fluids -- US Fluids, and the competitive dynamic there.

There was one customer that was lost, due to competition.

What's the overall competitive landscape like?

It seems like you don't think that things will get more competitive from here.

What gives you confidence in that?

I wouldn't categorize the one we lost as a competitive pricing issue, I think we were pushing for higher margins.

I don't think there's a trend there in any way, shape or form.

I think the market is similar to what it's always been.

It's a competitive market, but not overly so, and there's no undue pressure on pricing, over and above what we've had in the past.

Okay.

Great.

Just a follow-up on the Mats business.

There was a mention of some higher support costs going forward.

Can you quantify that, or quantify the margin impact, what to expect?

Yes.

As we progress through the 2014, we talked about the need to build up a demand in advance of the new production capacity coming online, as well as start building up costs of your infrastructure for the new capacity that's coming online late in the year.

You have additional costs associated with developing these new markets, and headcount, that you need to add to support that.

So in terms of the overall margin progression of it, what we would expect to see is a ramping of costs in the back half of the year, that would probably pull your margins into the high 30%s level, all other things unchanged.

As you're adding costs in advance of additional revenue.

Probably the biggest -- the single biggest factor there is that we'll be adding a lot of manufacturing people in the fourth quarter, getting them trained and set up to start up the plant in the first quarter.

You've always got increased labor costs when you're bringing on a capacity expansion of this size, and then that will take time then until we get the new product sales out of that plant to cover it.

Okay.

That's helpful.

And then in the near term, margins should be pretty similar to what we've seen recently, maybe it sounds like sales are going to be a little bit lower than rental, so I suspect that has a little bit of impact.

Can you help us understand the trajectory there?

We've been operating in that 40% range, plus or minus, now for quite some time.

I don't see anything in the near term that dramatically changes that.

Right.

Thank you.

Our next question is from Tristan Richardson with D.A. Davidson and Company.

Please go ahead.

Just to touch on the deepwater Gulf of Mexico, it sounds like as you go through this analysis process and likely make some investments.

I'm thinking about, in the interim, given the constraints of the assets you have, how should we think about opportunities for Gulf of Mexico growth, until you get to that point where you've decided to add capacity, and go forward with it?

As Paul had mentioned, with the current configuration of our -- of what we have for deepwater, it's very difficult to see any significant ramp-up from where we are, based upon what we have.

So the facility upgrade, if you like, would have to come ahead of any significant uptick.

So we'd see it pretty flat at this point.

Sure.

Okay.

And then you have talked about taking some action on paying down the credit facility, and obviously expanding -- (multiple speakers)

Paying it off.

(laughter)

Right.

And doubling the size of the authorization, but then you've also talked about some of the spending coming on the horizon to expand capacity.

I guess I'm curious, how you rank those in terms of priority and/or relative size, as you look out over the next 18 months?

Our overall approach is really unchanged and it always -- our first priority is always the growth of the business, and the repurchase of shares to return excess cash, that's what we do if our current structure has the excess capacity to do it.

So that's part of the mix, but it's not the priority.

Where we are at right now, given the strength that we have in the balance sheet, we have zero on the revolver, we have the cash coming in from the Environmental Services business.

While we have a lot of capital expenditures and other opportunities here to redeploy into the business, we're also in a position where we have -- we're in a good -- we have some flexibility to --

To return to shareholders.

We continue to generate cash.

We're generating a lot of cash on a quarterly basis, so growth is always going to be first, and then returning some of that to the shareholders, we think is a priority as well, but probably a second tier.

Thank you.

Next is Bill Dezellem with Tieton Capital Management.

Please go ahead.

I believe in your opening remarks you made reference to your Black Sea customer was requesting that you expand the plant there, the Fluids plant by roughly three-fold.

Assuming --

Correct.

-- I heard you correct, would you discuss the dynamics behind that, and how that -- how we should be thinking about that?

I think directionally the customer's suggesting we triple the size of the plant is a good sign directionally for us.

They've given us no indication really as to additional revenues, but directionally, they're preparing us for something which I think is very positive.

Any time you've got a super major that's looking for those kind of incremental capacity improvements, they've got something in their programs.

They don't share a lot of that information with you, obviously.

We expect increased revenues from what we originally anticipated, but the timing of those revenues, really hard to understand until we get into that program, in the second half of the year.

And what do you see as the risk that this is a customer just assuring their own supply, and to some degree, not worrying too much about the implications that has for the supplier?

For this particular super major, they have not done that to us in the past, and they've been very supportive of the capital investments that go in, so --.

That's helpful insight.

Thank you both.

Thank you.

Next is Doug Dyer with Heartland Advisors.

I'm sorry if I missed this earlier, but could you give us a little bit more color on the timing for the -- to increase the capacity at the facility in Louisiana, please?

Timing on that, yes, we're in the process of putting together a strategic plan for the deepwater globally and then obviously targeting that in terms of investments in the Gulf of Mexico.

That study will be done mid-year and then we would hope to come to the Board later and so we would -- our expectation would be to start investments later this year but that process is at least an 18-month long process to get assets up and running in the Gulf.

All right.

Thank you.

Thank you.

I'm showing no further questions.

I'll turn the call back to Management for closing comments.

We'd 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 at the conclusion of our first quarter.

Ladies and gentlemen, this concludes our conference for today.

Thank you for your participation.

You may now disconnect.