NPK International Inc (NPKI) 2014 Q1 法說會逐字稿

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

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

(Operator Instructions)

This conference is being recorded, today, April 25, 2014.

I would now like to turn the conference over to Mr. Ken Dennard; please go ahead sir.

Thanks, Camille, and good morning everyone.

We appreciate you joining us for Newpark Resources' conference call today review 2014 first-quarter results.

I'd also like to welcome the Internet participants listening to the call 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 earnings release yesterday afternoon and would like to be added to our distribution list, please call our Dennard - Lascar offices at (713) 529-6600, and provide us your contact information or you can send me an e-mail and we will get you on that list.

There will be a replay of today's call.

It will be available by webcast at the Company's website which is newpark.com.

There will also be recorded replay by phone and that's available until May 9 and the information for the dial-up is in yesterday's release.

Please note that information reported on this call speaks only as of today, April 25, 2014, and therefore you are advised the time sensitive information may be no longer accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management today of Newpark during this conference call may contain forward-looking information and 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.

Our listeners are 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 all that 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.

I would like to thank you for joining us today for our first quarter 2014 conference call.

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

Following my remarks, Bruce will provide an update on our Fluids business and Gregg will discuss the Mats business as well as the consolidated financial results for the first quarter.

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

Now turning our attention to the first quarter.

Fluid revenues were flat sequentially with the fourth quarter at $211 million, with seasonal activity gains in Canada as well as improvements in the EMEA region being offset by declines in the US and Brazil.

In the US, the majority of the revenue decline reflected the combined impact of the expected loss of revenues following the sale of our mid-continent completion services business, along with decline in proppant sales.

Despite the flat revenue, we saw solid sequential improvement in our Fluids margins in the first quarter.

As we highlighted last quarter, if we exclude the one-time gains in the sale of the completion service business, as well as the non-recurring charges in Brazil, we achieved a normalized fourth-quarter operating margin of 6.5% for the worldwide Fluids business.

For the first quarter, we're normalized for $600,000 of cost related to that wind-down of the completion services business, the normalized margin improved to 7.7%, resulting in a 120-basis point sequential improvement in our Fluids margins.

The sequential improvement in Fluids margins are largely due to our ongoing efforts to drive stronger sales mix, which continues to benefit from market penetration of our Evolution family of water-based technologies.

We are extremely pleased with our progress with Evolution, which reached a record $48 million in the first quarter, up 40% from our previous record set in the fourth quarter of 2013.

This milestone was the result of our ongoing efforts to move customers from oil-based mud to our higher-margin water-based solutions.

As more customers recognize the benefits of this technology, we believe there are increasing opportunities to further grow sales of Evolution on a worldwide basis.

In our Mats business, our rental revenues continue to be strong, achieving another quarterly record of $25 million.

Demand has been robust and is leading us to allocate more of our production to the rental fleet, leaving fewer Mats available for sales.

For the lower Mats sales in the quarter, our consolidated Mats segment revenues were $31 million, down $4 million from the fourth quarter.

We continue to evaluate our spill containment system, completing several test sites throughout the winter season.

Based on the latest rounds of tests, we are making further refinements to the seal, although we still expect the system be rolled out later this year.

Total consolidated revenues from continuing operations were $243 million in the first quarter, a 2% sequential decrease.

Net income in the first quarter was $0.36 per diluted share, which included a $0.22 gain from the sale of Environmental Services Business.

Adjusting for the gain, first quarter total net income was $0.14 per diluted share, in line with the fourth quarter.

SG&A costs remained elevated in the first quarter, largely driven by the continued development of our deepwater strategy.

Though our work on this plan is ongoing, one of the key results of this study will be a targeted effort to grow our share in the Gulf of Mexico, which we anticipate will require significant capital investments in the region.

We will update you on our progress on next quarter's call.

In the Mats business, we remain on track with our $40 million expansion of the Mats manufacturing facility in Louisiana, with construction activities now underway.

The added capacity remains on schedule to come online in the first quarter of 2015 and given the strong demand we're seeing for our DURA-BASE mats, the new facility is essential to support the continued growth of this business, both domestically and internationally.

And last, with of the closing of Environmental Services sale last month, Newpark is well-positioned to focus on growing our global drilling Fluids and Mats businesses.

As was the case with the sale of our Completion Services Business during the fourth quarter, this was part of a larger strategic plan to divest our non-core underperforming assets, enabling us to pursue growth opportunities.

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

Bruce?

Thank you, Paul, and good morning, everyone.

In the first quarter the Fluids segment generated total revenues of $211 million, which was flat with the fourth quarter, and then 15% year-over-year.

Looking at the first quarter by region, the revenues from the US were down 8% sequentially to $125 million, which represented a 22% year-over-year decrease.

Of the $11 million sequential decline in US revenues, $3 million was associated with Completion Services Business, which we exited in December, and another $3 million was driven by the reduction of proppant sales with the remainder attributable to the ongoing Fluids business.

As we discussed last quarter, outside of Texas region has been negatively impacted by a large independent customer that was lost on pricing.

The wind down of this contract was completed in the fourth quarter.

With no revenue contribution in the first quarter, this customer accounted for a $7 million sequential decline.

Aside from these events, we've roughly tracked the 1% sequential rise in the US rig count.

As of our last call, we had expected that the first-quarter declines inside of Texas would be largely offset by additional deepwater in the Gulf.

However that work has been delayed into the second quarter.

On a year-over-year basis, the decrease in US revenues was also driven largely by these same issues.

In addition, the year-over-year comparison is negatively impacted by a second large, independent customer which has come in a period of transition.

[All in] declines with the two key customers, reduced proppant revenues on the sale of the Completion Services Business, accounted for almost 80% of the $34 million decrease.

In Canada, we achieved a record quarter with revenues up 50% sequentially to $22 million, outpacing the rate count increase.

Revenues were also up [16]% from a year ago despite a relatively flat recount.

Revenues from our EMEA region rebounded nicely, up 20% sequentially to $35 million, which was roughly flat with the first quarter of 2013.

The sequential improvement was driven by Algeria, as well as modest strengthening in Romania, partially offset by declines in Tunisia.

In Brazil, revenues were down 11% sequentially to $22 million which was down 12% year-over-year.

Petrobras remains heavily focused on completion activity, which continues to impact our revenues.

Also, while a deepwater well with Total started during the quarter, due to its late start, its contribution was minimal.

In the Asia-Pacific region revenues were up 2% sequentially to $8 million, which was down 19% year-over-year.

While the offshore [Campos] contract was active in Q1, it was largely offset by lower activity in New Zealand pulling down sequential gains.

On a year-over-year basis, the decline was primarily due to lower revenues from land activities in both Australia and New Zealand.

The consolidated Fluids segment reported operating income of $15.7 million in the first quarter, reflecting an operating margin of 7.4%, up from 7.1% in the fourth quarter, and then from 9.1% a year ago.

However, as Paul touched on earlier, while the fourth quarter was favorably impacted by $1.7 million of the unusual items, including the gain on the Completion Services asset sale, our first quarter was negatively impacted by $600,000 in costs associated with the final wind-down of Completion Services Business.

Adjusting for these items, our normalized margin was 7.7% in Q1, compared to 6.5% in the fourth quarter, giving us a 120-basis point sequential improvement in margin.

In addition, I'd like to highlight that our first quarter included roughly $0.5 million in added expenses related to preparations for our upcoming work in three new markets, the Black Sea, Kuwait, and India.

The sequential margin improvement is largely driven by favorable product mix and more specifically, the ongoing migration of oil-based mud customers over to our Evolution family of water-based systems.

We achieved record revenues of $48 million in the first quarter, with $40 million coming from North America and $8 million internationally.

We were very pleased not only with the growth, but also with the improvement in the geographic and customer diversification as no single customer accounted for more than 10% of Evolution revenues in the first quarter.

In terms of our current outlook, we are starting to see signs of improvement across some of our US regions as April revenues are tracking ahead of first-quarter levels.

In addition, we expect the Louisiana Gulf Coast region to benefit from a deepwater well that was delayed from the first quarter.

We expect Canada to fall with typical seasonal decline in revenues where we usually see a drop of approximately 60% to 70% from Q1 to Q2.

Internationally, the EMEA region should continue to show modest revenue improvement in Q2, although the more meaningful increase in revenue is expected with the new contracts coming online in the second half of the year.

In Brazil we remain concerned by the challenges we're facing with Petrobras.

We will continue to take a balanced approach in Brazil, exiting the lower-margin activities and reducing our footprint while still maintaining our presence to serve the deepwater market.

As part of that, we have requested that Petrobras remove the pass through solids control component from our contract.

For the second quarter we do not expect significant changes to our results in Brazil.

In the Asia-Pacific region we expect revenues to be flat with Q1.

While revenues from New Zealand should rebound, we expect this to be offset by lower offshore activity in Australia, due to the rig entering the completion phase.

Improvement in our margins remains a primary goal and we anticipate some modest improvements from the normalized Q1 margin of 7.7%.

As we stated previously, however, a more meaningful margin improvement will be predicated on more significant top-line growth.

Finally, I'd like to give you an update on the international contracts coming online this year.

As mentioned earlier, we incurred approximately $0.5 million of expenses in the first quarter as we ramp up our operational support for the upcoming work.

We have completed construction of the Fluids plant, which will service our contract work in the Black Sea.

This facility, which was expanded due to the customer's request, was capable of handling multiple customers in the region and gives us an additional foothold to expand our market share.

Work in the Black Sea contract is expected to begin in Q3.

We are also nearing completion of another plant which will service our Kuwait contract.

This contract is also expected to start in Q3.

And finally, we have just recently begun work on the four-year Cairn Energy contract in India, so we expect to see modest contribution from this contract in a second quarter.

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

Thank you, Bruce and good morning, everyone.

I'll begin by discussing the results of our Mats business before finishing with our consolidated results.

The Mats business reported first-quarter revenues of $31 million, a 10% decline sequentially but 53% year-over-year increase.

Mat rentals established a new revenue record of $25 million, which was up 24% sequentially and up 66% year-over-year.

Sequential gains were driven by strong demand in US Gulf Coast and Northeast regions, as well as an additional $1.3 million increase from Terrafirma, our recently acquired business in the UK.

Total mat sales were $7 million, which was down 54% sequentially and up 19% year-over-year.

As we mentioned last quarter the sequential drop in sales was anticipated as we deployed a greater portion of our mat production to our rental fleet.

The Mat segment generated operating income of $13.4 million in the first quarter, down 12% from the fourth quarter but up 58% year-over-year.

The strong demand on the rental side kept utilization at a high level, contributing to a 42.6% operating margin, which compares to 43.7% in the fourth quarter, and 41.2% in the first quarter a year ago.

Because the strong utilization of our rental fleet in Q1 reflected near-peak performance, we expect some modest decrease from these levels in Q2.

Meanwhile, we are continuing to focus on expanding the rental fleet to satisfy the increase in customer demand diverting production away from mat sales opportunities.

Therefore we expect mat sales in Q2 to decline further from Q1 levels.

In addition, as we continue to add costs to support our growth initiatives, we expect to see modest declines in the operating margins, possibly dipping below the 40% level.

As you already are aware, the sale of the Environmental Services Business was completed in March, generating total cash proceeds of $89 million, net of $8 million held in escrow and $3 million of transaction-related expenses.

The business contributed $0.23 of EPS to the first quarter, including $0.22 from the gain on sales.

Following the closing of this transaction we expect to make a federal tax payment in excess of $20 million in the second quarter, resulting from the gain on sales.

Now moving on to our consolidated results.

For the first quarter of 2014, we reported total revenues of $243 million, a 2% sequential decrease, and a 9% year-over-year decrease.

Consolidated operating income was $20.8 million in the first quarter, down 7% sequentially and down 17% from the first quarter of 2013.

Income from continuing operations in the first quarter was $11.7 million, or $0.13 per diluted share, compared to $10.5 million, or $0.11 per diluted share in the fourth quarter, and $14.9 million, or $0.16 per diluted share a year ago.

SG&A costs were $25.5 million, up 6% sequentially and up 14% year-over-year, largely the result of $1.7 million of corporate office expenses associated with strategic activities, including the deepwater initiative that Paul mentioned, along with International Treasury and tax planning projects.

The first-quarter 2014 effective tax rate -- effective tax rate was 34%, which is in line with our expectation for this year.

Now let me discuss our balance sheet and liquidity position.

During the first quarter, operating activities generated cash of $4 million, we used $19 million to fund capital expenditures including $10 million spent on the Mat segment as we continued to expand the mat rental fleet and began construction activities on our manufacturing facility.

Since our last call in February, we completed another $20 million of repurchases under our authorization, acquiring a total of 1.8 million shares at an average price of $11.33.

Pursuant to a 10b5-1 program, most of this activity was completed following the end of the first quarter, so the impact of the latest purchase on outstanding shares will largely be realized next quarter.

Following this latest purchase, we have $63 million remaining under our authorization, and based on a current outlook for cash needs, we anticipate that we will be able to continue repurchasing shares in 2014.

Borrowings under our four lines of credit increased by $2.9 million, and there are no borrowing under our revolving credit facilities.

We ended the first quarter with cash of $130 million and total debt balance of $189 million, resulting in a total debt-to-capitalization ratio of 23.7% and a net debt-to-capitalization ratio of 8.8%.

For 2014 we now expect our capital expenditures to be in the range of $65 million to $85 million, which is down from the $75 million to $100 million that we previously projected during the fourth-quarter call, in part driven by the expected timing of cash outlays related to our Gulf of Mexico deepwater shore base infrastructure, a new water-based Fluids manufacturing facility as well as our Mats facility expansion.

And now I'd like to call back over to Paul for his concluding remarks.

Thanks, Gregg.

As anticipated, our first-quarter revenues did not show meaningful improvements from the prior year, as improvements in our Mats business were offset by losses with two key accounts and the sale of the Completion Services Business and drilling fluids.

On a sequential basis, we were pleased with the drilling fluids margins, 120-basis point improvement as we make our way a way back to historical levels.

In addition, our Evolution family of products is gaining momentum, both domestically and internationally, achieving record revenues as customers continue to recognize the benefits of the technology and the impact it has on the drilling programs.

Although some of the larger service companies market mud as a commodity, Newpark is breaking through traditional barriers by driving operational efficiency and reducing the cost of drilling.

We're starting to see this play out around the world, from various regions in the US and Canada to Italy, Algeria, Australia, and New Zealand.

Also, we are pleased with the growth in our EMEA region, as we are benefiting from the contracts we have in North Africa.

In Brazil, we are focused on improving our performance under the Petrobras contract, which could lead to reduced revenues, but improved margins.

We are pleased with the start of the Total deepwater contract, another example of Newpark's expanding presence with IOCs around the world in technically challenging environments, another step towards a goal of being recognized as a global technology leader in the industry.

As Bruce mentioned, April is off to a good start, and aside from the Canadian seasonality, we do expect an improved performance from our Fluids business, and particularly in the US operations in the second quarter.

Our Mats business continues to run strong with customer demand increasing for the product line across multiple regions.

Our rental revenues have achieved another record level with sequential and year-over-year gains of 24% and 66%.

With more of our production being diverted to our rental fleet, we do expect to see lower revenues from mat sales in the second quarter.

Not dissimilar to our Fluids business, we continue to develop new technology in the Mats business, specifically the spill containment system.

The cold winter proved beneficial, both in terms of driving natural gas storage levels down to near-record low levels, but also gave us more insight into the performance of the system which has led us to modify the [fields].

We are planning the formally launch the spill containment system later this year.

Looking out to the remainder of the year, we expect to see continued improvements in our drilling fluids business, both domestically and internationally, driven by a combination of improved market share in the US, continued market penetration of Evolution, and the ramp-up of our new contracts in the Black Sea, India, and Kuwait during the second half of the year.

In the Mats business, we expect to see continued increases in rental revenues through the end of the year driven by the increasing size of our rental fleet.

Now turning our attention to the balance sheet for a moment, after several previous attempts to sell the environmental business, we are pleased to have closed the sale.

This transaction was important to Newpark, not only because it allows more focus on our core businesses, but more importantly, it provides additional liquidity and flexibility to grow our Company globally.

To that point, we are in the process of designing a new manufacturing facility to handle the increasing demand for our water-based fluids technology, including our Evolution family of products.

Also, we are working on our strategy to define our deepwater Gulf of Mexico investment plan.

It is our hope that we will finalize the plan later this year.

With the projected increase in deepwater rigs entering the Gulf of Mexico over the next 18 to 24 months, timing is essential on this project.

In summary, we continue to execute on our long-term strategy of being recognized as a global technology leader in our industry.

Over the last several quarters, we have made significant progress rationalizing our portfolio, exiting non-core businesses, and making strategic investments in our core Fluids and Mat businesses.

We remain focused on bringing innovative products and services to the oil and gas industry with the ultimate goal of continually increasing shareholder value over the long-term.

With that, we'll now take your questions.

Operator?

(Operator Instructions)

Marshall Adkins, Raymond James.

Quick question on market share and Fluids.

Over the past decade you guys have merged as one of the dominant market share gainers in a market dominated by the big boys.

Do you see more room for improvement in market share or are we stagnating here?

I'm talking just Fluids.

With the exception of the one large account that we lost in South Texas, and another large accounts that's in kind of a transitional phase, we'll certainly see there's opportunities to gain additional market share in the US, both through some existing technology but also with our Evolution family of products.

Internationally, we see a lot of opportunities to continue to take market share there as well.

Follow-up to that, you mentioned that we can get, maybe, higher margins as we go through the year in Fluids.

7.7% normalized, I believe I heard.

How high do you think you think they can get this year?

Marshall, this is Bruce.

I think we can continue to grow the margins as we've done in the first quarter.

But the big jump will be predicated, really, on the top-line growth so as we get the top-line growth coming back, which we fully expect to do as the year goes on, the margin will follow a bit that incremental margin we get will follow.

Yes, we had talked, obviously, in previous quarters about that 10% mark and that's still not an unrealistic goal, but again, the revenue declines that we've seen in recent quarters, really, we have to get that back to the level they were at for that 10% to be in line.

Is 9% too aggressive to model as we go through the year?

No, I think you could see us rolling past the fourth quarter in that 9% range as we roll out.

The second quarter is, as we had talked about, our outlook is not much changed from where we were here on the normalized basis in Q1, maybe modest, just modestly higher, but more meaningfully, once the revenue picks up in the second half of year, that's where you get more meaningful pick-up.

Exit rate around 9, that sounds reasonable.

Neal Dingmann, SunTrust.

So I was (multiple speakers) rectify a little bit, obviously you had just a tremendous quarter with Evolution and I'm trying to figure out, I guess given the bump in margins that you generally see from Evolution, I guess I'm just a little surprised that you didn't get maybe a bigger bump from the overall Fluids group in the quarter because of how much -- I think you had about 23% from Evolution this quarter versus, generally, it's been trending a bit lower than that on a percentage basis.

So I'm just wondering why, in your thoughts, maybe the margin didn't bump up a bit more.

Is it that both Evolution as well as the general, we'll see, kind of to Marshall's question, growth later this year, or is there something, kind of a one-time, why maybe Evolution just didn't see the margin that we should see here later this year?

This is Bruce.

Obviously there's a lot of moving parts here, but of the normalized 120 basis points, 50% of that, or 60 basis points, came from the increase in Evolution revenues.

Yes, the Evolution -- the sequential gain in Evolution revenue's at $14 million quarter-over-quarter and we've talked in past about the premium being somewhere in that 500 to 800 basis points so you do the math there and that's roughly where it's that.

[Neon too] and we are not seeing any compression on the Evolution margins.

They continue to remain, as Gregg just said, in that 500 to 800 basis point higher range than our traditional Fluids so no decline there.

I was just going to ask that, Paul, I mean, Paul, have you seen any push but it seems like this product is remarkable, you're just not seeing any push-back, not even in the margins, but just, I think last time you talked about international, starting to see some traction, I think it was the quarter before that, Bruce talked about a client using this with a high-pressure, I think it was in the Rockies, wherever that might have been.

Maybe if you can comment -- again, are you seeing any push back anywhere from this proprietary product?

No.

No, we're not.

The product's rolling out very, very well and as customers begin to recognize the value of it, which normally comes not on the first time they use it but on the second and third time and fourth time they use it, they begin to recognize the real value that it's bringing.

And that's what's really driving the growth.

Yes, and I would say too that we spent a lot of time in Bruce's organization doing value-added selling and so we continue to emphasize the total value, the technology for when you spud the well to when you complete it and when you look at it from that perspective it is a clear winner over oil-based muds.

Mike Harrison, First Analysis.

Just following up a little further on Evolution.

You mentioned that the international side is now to $8 million.

Can we look at the trajectory of what you guys did with Evolution in North America and assume that you're going to follow a similar trajectory as you roll this out internationally?

Or, because of the experience that you've had you had in North America and the learning effects and maybe some additional advantages that you have internationally, maybe tighter environmental regulations, is a possible that we even see the trajectory better than what you saw in North America?

This is Bruce.

Yes, in fact I think that's correct.

I think the international marketplace holds a far better opportunity for the growth of Evolution due to the reasons that you quoted.

However, having said that, there are still many areas in the US marketplace where there's room for growth and we're very pleased with that growth also.

Yes, I would say the one thing too, just to add to the international, one point you didn't reference, Mike, was the fact that internationally you don't have 50 years of experience with oil-based muds either, in some of these developing areas.

So getting the water-based technology in there, getting accepted, understanding the value of it is an easier sell.

All right, and if I could just follow up on Brazil, you mentioned that Petrobras, maybe, or you're working to get Petrobras out of the one portion of your contract.

What would it do for your profitability if you could get out of that piece of the contract and was the Brazil business profitable this quarter?

The Brazil business was not profitable this quarter.

It generated a small loss.

Where we are with Brazil -- we're doing some very specific things.

We are exiting the lower margin portion of the Petrobras business, which normally comes through the [BR] bidding process, so we're exiting that.

There's a piece that's left that we'll complete in the second quarter but by the end of the second quarter we'll be out of the low-margin Petrobras business.

We have already closed two warehouses in Brazil.

We are working now on closing the third warehouse facility, and of course, reducing staffing levels accordingly.

And as you mentioned we are working with Petrobras to remove the pass through solids control equipment from our contract and have that as a standalone contract directly with Petrobras; and that will -- if that succeeds, it will certainly reduce the revenue but will have a minimal impact and may raise the bottom line.

So it sounds like Q2 should be significantly better, not just in Brazil with Petrobras, but also with the Total contribution?

No, these actions that Bruce mentioned are a little bit longer-term, and specifically with the pass through solids control we didn't expect that to take place here in a second quarter, so our second-quarter expectation is really not much different than Q1.

Some modest improvement because of the Total contract.

So that well has just started here in the second quarter, so typically we do very well margin-wise on the IOC work.

Jeff Spittel, Clarkson Capital Markets.

Maybe if we could stay on Evolution, can you speak a little bit with the pick-up in revenues in the first quarter, if it was in the US in particular, a little bit more attributable to market share gains?

Follow through in activity with the rig count or what precisely was going on there?

Several pieces.

There were some gains with existing customers where we expanded with the existing customers, we also had some gains with new customers that came onboard, we also had some new customers coming onboard in the international piece of the business.

So it was a combination of several things.

And then Bruce, as you think about the different unconventional basins in the US, particularly with the Permian ramping, I know we've touched on this in the past, but would it be fair to say that that might be the area that could be the greatest driver of growth within the US business in 2014?

Certainly, that's correct.

It's beginning to happen now and that's correct.

And the Permian is also our strongest basin from an Evolution perspective.

Yes, I guess in particular, I'm assuming the Evolution is going to enjoy some good penetration as people kick off their horizontal campaigns.

We are excited about that.

George O'Leary, Tudor, Pickering, Holt & Co.

Talk a little bit about the competitive landscape in the US market today, just what you're seeing competitors do from a pricing perspective, and then with rig count kind of running ahead of expectations outside of the Permian, where are some other potential growth opportunities through your Fluids business onshore US?

I'll take your pricing question first; we're not seeing any real pricing pressure, it's always competitive.

But we're not seeing any real pricing pressure.

And of course the more we roll out our differentiated technology, the less dependent we've become on that competitive pricing.

So from that perspective, I think we are not really suffering too badly at all.

Yes, on the competitive pressure, it's interesting, we have yet to see any of the large integrated service companies come out with a water-based technology that can run with Evolution.

So again, I think competitive pressure there, the landscape is pretty clear and we're pushing hard.

As you look out in the Middle East and you guys are starting to ramp up with this year in Kuwait, are there any other opportunities there?

I think that's a region where people think rig count is biased higher especially when you look at what Saudi is doing, so any other countries within that region where you're tracking opportunities and we could see some growth later this year or maybe into 2015?

I think more a 2015 event.

Certainly getting the Kuwait contract has given us that foothold into the Middle East that we needed.

We will certainly use that opportunity, and from that footprint, we'll attempt to grow throughout the region but that's more a 2015 event, I'd say.

Yes, and if it is, it's going to be the back end of 2015.

We really want to lock down, first, that KOC contract, bring that home, but it's certainly a target-rich environment for us to continue to grow in.

Tristan Richardson, D.A. Davidson.

Just curious, on the -- when you look at G&A levels and corporate overhead as you continue the offshore strategy study, should we expect to see similar G&A levels that we saw in Q1 as you progress through 2014?

Yes, I wouldn't expect to see a real significant change.

We called out the $1.7 million of spending that we had on strategic activities here in Q1.

While it may come down modestly, as we're -- especially after completing the sale of the Environmental Services Business, obviously there's a much greater focus on where do we grow from here.

That obviously requires spending, not only in the area of the deepwater but also looking at other opportunities that are out there.

So I think those activities will continue to drive the spending a little higher than it had been historically.

Consistent with -- close to existing quarter.

And then, I guess, just on the Mats business.

Can you talk a little bit about, sort of -- you touched on this in the prepared comments about sequentially seeing margins slightly lower just given the extremely high utilization in Q1.

Can you talk a little bit about how you see that trajectory in the later part of 2014 and into 2015 as you continue your construction efforts and once the facility does come online, could you talk about the implications for margins as you ramp up in 2015?

Yes, I think you touch on the challenges there.

There's a number of moving pieces here, but you take a step back and you look at it with a new production facility coming online in Q1 of next year, as well as the efforts that we're making towards growing the various markets, really, to feed the demand for that plant.

We're obviously needing to add up -- add some resources and staffing to the organization in order to prepare for that.

So you see a modest ramp-up of cost as we go through the year but most -- the biggest piece really comes online right close to proximity of the opening of the new site.

Yes, 30 to 60 days before we start up manufacturing and we're going to have to have our crews online trained from the safety perspective, processes, etc.

So we'd expect that a little bit in the back half, but the other thing, too, that we're adding is market development resources to continue to expand this business internationally.

As you know we bought the business in the UK in the fourth quarter.

We see demand increasing there for our products in the UK, but also believe that the mainland is an interesting market for the mats too.

The other thing, too, that we're excited about in the Mats business, we are building a new technology R&D center as part of the manufacturing facility and we're going to be adding some new people in that organization.

I know the proppants business is small, and you came across it through your acquisition, but given the high margins in that business it does have an impact.

I'm curious how you view that business in the overall Fluids portfolio.

Would you consider it a small but a core piece of the business?

I mean looking to grow it?

I'm curious of your thoughts there.

Sure; if we were vertically integrated and manufactured the ceramic proppants I would agree that the margins are high.

When we bought this business, Alliance, they were simply importing the proppants from China.

And so the margins in that business, from an import perspective, are pretty thin.

They're are not high-margin.

And further I was just going to emphasize that when we did the Alliance acquisition we specifically had an earn-out attributable to that proppant business because it was really the core Fluids business that was the real value that we're after, and in this case was a little less certain.

So we really don't see proppants as a core business, however, we do think we have Fluids and chemical expertise that in the future, things like frac chemicals, production chemicals, etc., there may be some opportunities in those kind of spaces.

Marc Bianchi, Cowen and Company.

I was hoping you could address the US Fluids outlook sequentially in a little bit more detail.

It sounds like things are accelerating there.

Maybe you could just talk a little bit more about that.

Sure.

As Bruce had mentioned in the earlier comments, so far, early in the quarter, we are seeing some modest improvements, call it single-digit type of percentage improvements over the level that we had in the first quarter.

In addition, the one other item that should benefit in the second quarter is the deepwater work.

As Bruce had mentioned, we had the expectation originally of having this well in the first quarter, the timing of it split from Q1 to Q2, and so obviously any time we get a deepwater well that's a meaningful impact on the quarter.

Does that push the percentage growth into the high-single-digits once it kicks in for the quarter?

That's -- it is possible to pending on when they spud and how much the pub and update you versus getting to higher fluid margin.

There's a lot of pieces and parts to it.

Okay.

And then just a follow-up on the competitive commentary.

You guys mentioned that there wasn't any price weakness.

On the legacy fluids are you seeing any opportunities to move prices higher?

Whatever we can, we do, and we test the market regularly.

So we are very active in trying to do that at all times, and there are areas in which we can do that.

But the real way to do it is through the differentiated technology.

I think we see the biggest opportunity on the oil-based muds to move pricing is that we've got a larger increase in the number of rigs, some of the other smaller service companies that are out there unable to support, and then we'd be able to come in and move some pricing up.

But that's the US-driven situation.

Internationally, it is different.

Christopher Butler, Sidoti and Company.

Circling back to Brazil, as we look to the second half of the year, I know one of your peers indicated that Brazil in general was going to be country in transition this year.

Could you speak to what you're seeing out of your business there in Petrobras as far as the second half, is that going to bounce back as you had expected last quarter?

The Petrobras situation's ever-evolving of course.

Probably what our peers were alluding to, is this is an election year in Brazil.

So everything grinds to a halt in terms of decision-making within Petrobras.

Currently, the split between active drilling and completion in workover is about 60% on the completion side, 40% on the other side.

Our revenues, obviously, are largely driven by the drilling side and not the completion side so I expect much of the same going through the year.

And help me understand where Brazil will be as far as your business, say, 2015 as you manage your relationships there and try to grow some of your higher-margin business.

Is revenue higher in 2015 and than it was in 2013?

Is this still a growth opportunity over the next couple of years, or is your management going to reduce your exposure?

This is Paul.

If you look out to 2015, you asked about revenues increasing, certainly if we're successful with Petrobras and reassigning that pass through solids control contract, that will have a negative impact on revenues.

But it will help us on the margin line.

The other thing that's in transition in Brazil right now is the IOC work.

We've got the Total contract but there's not a lot of IOC drilling today.

It's our expectation as you look out to the second half of 2015 and 2016 that the IOCs are going to be coming back in and drilling and have a larger campaigns down there, so we think longer-term, Brazil certainly is an interesting market, it's a market you have to be in, we like the deepwater side of it, it plays to our technologies and our service capabilities.

But is it going to be as good as what people thought five years ago?

I don't think so.

I think it is going to be muted some, and really yet to see how the government works with Petrobras and how that whole situation plays out.

Bill Dezellem, Tieton Capital Management.

I had two questions.

First of all, did you say what the Evolution revenue number was in Q1 of 2013?

And if not, would you please discuss the comparison versus Q1?

Yes, Q1 of 2013 I believe was $29 million.

So obviously 48 -- near $20 million increase over Q1 of last year.

And I know that there was the comparison that Bruce gave relative to Q4 of what caused the change, could you do the same relative to Q1?

And then my follow-on question is accrued liabilities were up about $20 million versus Q4, could you discuss that?

Sure.

I'm a little bit unclear on the comparison --

On Evolution.

I guess, other than breaking it down, last year, I think maybe that's what you're looking at was the North America versus International, last year the $29 million, very small contribution in that period came internationally; I think we may have had a very small contribution in the EMEA region, but it was minimal, and that $29 million is essentially all North America.

As far as the accrued liabilities, that is the accrued taxes associated with the sale of the Environmental Services Business that's driving that so we had a --

That's a $20 million (multiple speakers) --

(Multiple speakers) long-term differed to accrued payable.

Mike Harrison, First Analysis Securities.

Just wanted to ask a little bit around the Mats business.

You mentioned the cold weather test phase and needing to go back and retool the seals.

I guess I was just kind of wondering, do you feel like this system's going to be ready for prime time and understanding that deploying it during the summer and into the fall is probably okay, but do you feel like you're comfortable that you'll have a fix in place and be able to roll this out so you can use these during next winter in deploying something that's really linerless, which is a big step for customers to take?

Yes, Mike, we do have a lot of confidence that we are going to launch the product.

We may not launch it, initially, totally linerless.

We may still have something, because you know around the cellar that's where you got most of the concerns, so we may have a thin liner or around the cellar possibly.

But we had five test sites running this winter, and we think we've done a great job of collecting the data.

Certainly, once we launch it formally, not unlike Evolution, it will be very controlled as we move it out and continue to collect information.

But we will launch formally this year.

And in terms of the way you're going to be pricing that offering, again, is it kind of similar to Evolution where you're -- you have to be testing that and experimenting a little bit in how much value the customer's realizing and how much of that you can capture for yourselves?

Yes, again, it comes back to the value-added selling and understanding all of the puts and the takes and the president of that business, Jeff Jergens, has been working with his sales organization and how they do that.

They've been putting in what they call their value calculated that are on iPads that they can go in and the lay out, here's your total cost that you're incurring, if you go with our technology let's go through the calculation and then while they're sitting there in front of the drilling manager or the purchasing agent, they can see the value of the technology, so that's the approach we're going to take similar to Evolution.

Ladies and gentlemen, that does conclude the question-and-answer session.

I'd now like to turn the call back over to management for closing remarks.

I'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 next quarter.

Take care.

Thank you.

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

(Operator Instructions)