NPK International Inc (NPKI) 2014 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Newpark Resources Second-Quarter Earnings conference call.

(Operator Instructions)

This conference is being recorded, and I would now like to turn the conference over to Ken Dennard.

Good morning, everyone. We appreciate you joining us for Newpark Resources conference call today to review 2014 Second-Quarter Results. We'd also like to welcome our Internet participants listening to the call simulcast over the web.

Before I turn the call over to management, I have the normal housekeeping details to run through. For those that didn't receive an email of the earnings release yesterday afternoon and would like to be added to the distribution list, please call my offices, Dennard Lascar Offices, at 713-529-6600, and provide us your contact information or pop me an email. There'll also be a replay of today's call; it'll be available on the Company's website at Newpark.com.

There's also a recorded replay by phone, which will be available until August 8. That information is in the release, how to access. Please note that all information reported on this call speaks only as of today, July 25, 2014.

Therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management today of Newpark during this call may contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of the management of Newpark.

However, various risks, uncertainties, and contingencies could cause Newpark's actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the Company's annual report on Form 10-K, it's quarterly reports on Form10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies.

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

Thank you, Ken.

Good morning to everyone. We'd like to thank you for joining us today for our Second-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 second quarter. I will, then, conclude with a discussion of our market outlook before opening the call for Q&A.

Now turning our attention to the second quarter. We are pleased to report that both our Fluids and Mats segments posted strong results in the quarter. Despite the seasonal drop-off in Canada, fluid revenues increased 14% [sic, press release, "20%") sequentially, led by broad-based revenue gains in the US and a record $50 million of revenue from our EMEA region.

Activity under our new international contracts in the Black Sea and India began in the quarter, contributing $7 million to the EMEA region. Meanwhile, our focus on new technology has continued with our family of evolution system setting another quarterly revenue record of $67 million, which includes $14 million in the international market. While a portion of the international evolution revenues relate to lost circulation and are not expected to remain at that level, we are pleased with the continued improvement in geographical diversification and expansion of the evolution customer base.

As a result of the growth in revenues, combined with the improvement in sales mix and strong wholesale barite demand, our fluid margins have returned to double digits, surpassing the 11% mark in the second quarter.

In our Mats business, rental demand has remained strong, leading to another quarterly record for rental revenues, coming in at $28 million for the second quarter. As we discussed last quarter, demand has been robust, leading us to allocate the majority of our production to the rental fleet, leaving fewer mats available for sales. With a lowered mat sales in the quarter, our consolidated mat segment revenues were $31 million, down slightly from last quarter.

Total consolidated revenues for the Company were $272 million in the second quarter, a 12% sequential increase and a 5% increase over the prior year. Income from continuing operations, was $0.21 per diluted share in the second quarter, up from $0.13 per diluted share in both the previous quarter and prior year.

While we're continuing to invest in the organic growth of our two segments, we're also continuing to return value to our shareholders through our share repurchase program. Since the time of our call in April, we've executed an additional $20 million of repurchases, bringing our total year-to-date total to 4.3 million shares, or 5% of our outstanding share count, at the beginning of the year.

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

Bruce?

Thanks, Paul.

Good morning. In the second quarter, Fluids Systems generated total revenues of $241 million, which is up 14% from the first quarter and up 3% year over year. As Paul mentioned, the quarter benefited from strong performance from the North America and EMEA regions.

Looking at the quarter by region, revenues from the US were up 20% sequentially to $149 million, which represented a 5% year-over-year of decrease. On a sequential basis, we saw strengthening across nearly all regions of the US. In addition, our Louisiana business unit benefited from $4 million in revenue from a deepwater well in the Gulf of Mexico. Demand for wholesale barite was also particularly strong in the quarter, contributing a $7 million increase in revenue.

Excluding the impact of the deepwater well and barite sales, our US fluid revenues increased by approximately 11%, which compares favorably to the 4% sequential increase in US rig count and 5% sequential increase in wildcat. On a year-over-year basis, the 5% decrease in the US is primarily driven by declines with two key customers, reduced profit revenues, and the sale of the Completion Services business as discussed on last quarter's call.

In Canada, we achieved a record second quarter with revenues of $9 million. While we experienced the typical seasonal decline associated with the spring breakup, second quarter revenues are more than double the levels achieved in the second quarter last year, largely attributable to market share gains. Revenues from our EMEA region increased 44% sequentially to $50 million.

The second quarter benefited from the start-up of the deepwater Black Sea operation late in the quarter, which contributed $5 million of revenue, along with the start-up of activities under the Cairn contract in India, contributing an additional $1.4 million in the quarter. Also the region benefited from elevated product revenues from two evolution wells, which were running in a region where lost circulation is common, providing approximately $6 million of incremental revenues to the quarter.

In Brazil, revenues were up 23% sequentially to $27 million and up 20% year over year. The quarter benefited from the successful completion of the Total deepwater well, which started at the end of Q1 and contributed $4 million of revenue in the period. Also included in the quarter was $3 million of product sales to Petrobras for drilling in the Amazonia Region where sales are sporadic.

In the Asia-Pacific Region, revenues were down 29% sequentially to $6 million, which was down 47% year over year. Both the sequential and year-over-year declines are primarily attributable to our offshore contract with Santos, as the rig remained in [worked-over] activities during the quarter and contributed no revenue in the period. Additionally, we experienced decline from land activities in both Australia and New Zealand during the period.

As Paul mentioned, we are continuing to see good progress with our family of evolution systems, posting another record quarter of $67 million. The second quarter included $53 million in North America, $11 million in the EMEA region, and $3 million in Asia-Pacific. The EMEA region results included a $10 million contribution from one customer, which was positively impacted by lost circulation on the wells. Aside from this, however, we continue to see improving diversification among our client base with no other customer representing more than 10% of evolution revenues in the second quarter.

Within North America, West Texas continued to be our strongest evolution region, although we are continuing to see growth throughout the US. The Consolidated Fluids segment reported operating income of $27.6 million in the second quarter, reflecting an operating margin of 11.4%, up from 7.4% in the first quarter and 7.6% a year ago. Adjusting for a $600,000 gain on the sale of real estate in the period, our operating margin was 11.2% in the second quarter.

We are very pleased with the margin improvement this quarter, exceeding our double-digit margin objective by more than a full point. Most of the sequential improvement is attributable to the incremental margin on the higher revenues. Additionally, we saw over a 100-basis-point improvement, driven by a favorable product mix, including the continued growth of evolution.

In terms of the third quarter, July activity for the US is tracking at a similar pace to second quarter levels. We expect to see some modest improvements across our US regions, although these gains may be largely offset by the completion of the deepwater Gulf of Mexico well that benefited the second quarter. In addition, the wholesale barite environment may soften somewhat from the second quarter levels.

In Canada, we expect to see the typical seasonal recovery in the third quarter. Internationally, we expect the EMEA region revenues to pull back somewhat from the record second-quarter result, particularly due to the unusually large lost circulation impact this quarter. With the contributions of the new contracts in the Black Sea, Kuwait, and India, however, the third quarter should remain well above first-quarter levels.

In Brazil, the circumstances remain unchanged related to Petrobras; and we continue to take a balanced approach exiting low margin activities and reducing our footprint, while still maintaining our presence to serve the deepwater market. As we mentioned last quarter, we have requested that Petrobras remove the pass-through solids control component from our contract, which represents approximately 20% of the region's revenue in the first half of 2014. While we believe Petrobras is supportive of this change, we are still awaiting their official response to this matter.

For the third quarter, we expect revenues in Brazil to decline, particularly due to the completion of the Total deepwater well and the fact that no follow-up product rep sales into Amazonia are expected in the period.

In the Asia-Pacific region we expect revenues to recover somewhat in Q3, returning to levels similar to the first quarter. In terms of operating margins, the second quarter benefited from some activities that we don't expect to recur in Q3, which helped push us beyond the 11% mark, including the exceptionally strong EMEA revenues, the strong product mix, as well as wholesale barite demand within the US.

Given the nature of some of these benefits in the quarter, we expect to see some sequential margin decline in the third quarter, although our objective is now to maintain margins at the double-digit level.

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

Thank you, Bruce.

Good morning, everyone. I'll begin by discussing the results of our Mats business before finishing with our consolidated results. The Mats business reported second-quarter revenues of $31 million, down slightly sequentially, but up 22% year over year. Mat rentals established yet another new revenue record of $28 million, which was up 13% sequentially and up 54% year over year. Strong customer demand for our rental Mats in the Northeast US has continued through the second quarter, driving sequential revenue growth.

As we noted last quarter, we've been continuing to allocate our Mat production to meet the strong rental demand. And as a result, Mat sales declined 51% to $3 million, which also reflects a 55% year-over-year decline. Due to the continued strength in rental demand and the resulting high levels of utilization being achieved with our rental fleet, the Mats segment operating margin remains strong with operating income coming in at $13.7 million in the second quarter, up 2% from the first quarter and 32% year over year.

The 43.9% operating margin in the second quarter includes a $600,000 gain from the sale of real estate. Excluding this item, the operating margin for the second quarter was 42%, which compares with 42.6% in the first quarter and 40.7% in the second quarter a year ago. Looking ahead to the third quarter, we're continuing to focus on expanding the rental fleet to satisfy the strong customer demand, diverting production away from Mat sales opportunities. Therefore, we expect Mat sales in Q3 to remain at a similar level to Q2.

In addition, we're continuing to add costs in advance of the new plant start-up, which we expect to ultimately drive our operating margins below the 40% level. In the near term, however, our ability to maintain margins above the 40% mark is largely dependent on the continued strength in rental demand, particularly in the Northeast Region.

Now moving on to our consolidated results. For the second quarter of 2014, we reported total revenues of $272 million, up 12% sequentially and 5% year over year. SG&A costs were $28 million, up 10% sequentially and up 20% year over year. Of the $2.5 million sequential increase, about half of this relates to corporate office expenses, including an increase in personnel costs and higher performance-based incentives. As we discussed last quarter, corporate spending associated with strategic planning projects, including the deepwater project and the evaluation of other growth initiatives, have remained elevated.

Consolidated operating income was $31.8 million in the second quarter, which includes $2 million of other income, primarily reflecting the gain in the disposal of real estate mentioned previously. Excluding the Other Income contribution, operating income for the second quarter was $29.8 million, representing a 43% improvement sequentially and a 38% increase from the second quarter of 2013.

Foreign currency exchange also provided a benefit to the quarter, contributing a $1.8 million gain in the period. While we typically have some level of gain or loss associated with our foreign operations, the benefit was unusually large in the second quarter, primarily reflecting the impact of the weakening US dollar against the functional currency of our foreign subsidiaries.

The second quarter 2014 effective tax rate was 34%, which is in line with our expectations for the full year. Income from continuing operations in the second quarter was $20.3 million, or $0.21 per diluted share, compared to $0.13 per diluted share in both the previous quarter and the second quarter of last year.

Now, let me discuss our balance sheet and liquidity position. During the second quarter, operating actives used net cash of $9 million. This included $27 million of tax payments in the quarter, following the sale of our Environmental Services business in March.

We used $38 million to fund capital expenditures, with $24 million spent on the Mats segment, as we continued construction activities on our manufacturing facility, as well as the expansion of our Mat rental fleet. In addition, we used $34 million to fund repurchases of outstanding shares in the quarter, which included $18 million in purchases under the program completed prior to our April call. As Paul mentioned, since the time of our last call in April, we completed another $20 million of repurchases under our authorization, including $4 million of purchases completed after the end of the quarter.

Under the latest program, we acquired a total of 1.7 million shares at an average price of $11.90. With the timing of these purchases falling late in Q2 and the beginning of Q3, the impact of the latest program on our outstanding share count will largely be realized next quarter. Combined with purchases completed earlier in the year, we've now repurchased a total of 4.3 million shares year to date, which reflects 5% of our outstanding share count at the beginning of the year.

Following this latest repurchase, we have $43 million remaining under our authorization. Borrowings under our foreign line of credit increased by $4.7 million. There were no borrowings outstanding under our US revolving credit facility. We ended the second quarter with cash of $57 million and a total debt balance of $193 million, resulting in a total debt-to-capitalization ratio of 24.4% and a net debt-to-capitalization ratio of 18.6%.

For 2014, we now expect our capital expenditures to be in the range of $90 million to $110 million. The increase in anticipated capital spending estimate is largely driven by the accelerated expansion of our Mat rental fleet, as well as the timing of expenditures associated with key projects within the Fluids business.

And now with that, I would like to turn the call back over to Paul for his concluding remarks.

Thanks, Gregg.

We are very pleased with the progress made in several key fronts in the quarter, which are significant to our long-term strategy. Specifically, the top-line growth of our Fluids business benefiting from recovery in the US; the start of key international contracts that we've been discussing for the past several quarters; the continued market penetration of our family of evolution systems achieving another quarterly revenue record, which represented more than 25% of our Fluid segment revenues in the second quarter; and the resulting margin improvement returning the Fluids segment to the double-digit levels.

In the Mats business, we have continued the recent string of success by posting another 13% sequential increase in rental revenues, achieving a new high-water mark of $28 million in the quarter. I'd like to further highlight that we've have been able to achieve this top-line growth by maintaining margins above the 40% level.

As we discussed over the past several quarters, we see a lot of opportunities to accelerate the growth of our Mats business globally, but are currently limited by our production capacity. To that point, construction activities continue on our planned expansion; and we remain on track to bring this facility online in the first quarter of 2015. On the new product development front, we are continuing to test our latest refinements to our spill containment system and plan to formally launch this technology in November of this year. However, commercialization of this technology will be limited until the new production capacity comes online next year.

On the Fluids side, we are continuing our work on advancing our long-term strategy. In addition to the ongoing work associated with our Gulf of Mexico deepwater plans, we're also in the process of designing a new manufacturing facility to handle the increasing demand for our proprietary Fluids technologies, including our evolution systems. In summary, we continue to execute on our long-term strategy of being recognized as a global technology leader in our industry.

After completing the sale of Environmental Services last quarter, we are accelerating our 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?

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions)

Our first question today is from Jim Rollyson with Raymond James.

Good morning, guys, and excellent job this quarter.

Good morning, Jim. Thank you.

Paul, when you think about what happened this quarter, is it simply a case of just, volumes on the Fluids side ramped up enough across the various geographies with contracts and certain projects, that you more than covered the cost and it just stalled the bottom line that drove margins? Or were there any unusual things like particularly high margin sales, like the barite or whatever? I'm just trying to get to, when you think about the things that don't repeat going into the third quarter, plus the growth spots that you mentioned, or that Bruce outlined, just trying to get comfort in how well we think about maintaining double digit margins?

Sure. You know, we've talked on previous calls about the incremental margins and the impact on the top line historically being in that 25%. I think if you look at this quarter, the incrementals were much higher, maybe around that 35% to 38% level. That higher incremental margin certainly is a result of our proprietary technology, the growth of evolution in the quarter. So, those have been the key drivers. Gregg, would you like to comment a little further?

Yes. As you bridge the gap from last quarter, I think the bulk of the gain came from just that incremental revenue. As Bruce had commented on a little bit earlier, we also had over 100 basis points coming from the mix improvements. The evolution growth, again, we feel good about the traction we're getting there, and also when you look at the diversification, if there's not a high level of concentration, we feel good about the sustainability of that going forward. But there were some things in the period, the barite, there were some other things that happened where it was unusually strong in the quarter. As you know from the past, sometimes you'll have the strong quarters, the weak quarters, so that's where we wouldn't be surprised to see that back off a little bit here in Q3.

Okay. That's very helpful. So, kind of lumpy, but targeting that double digit range as a base.

Absolutely.

In the follow-up, Paul, you talked about investments in other technology leading things. One of the things you've mentioned in the past is interest in spending capital to maybe replicate your market position in Brazil here in the Gulf of Mexico in deep water. Can you spend a minute just on where you guys stand on that? I think you had hired an outside consultant to take a look at that and see if you were going to invest and look to grow?

Right. Yes, we have continued that work and have been moving that forward, Jim. It's not changed our view that we believe the opportunity exists for us to re-capitalize our assets in the Gulf of Mexico, and, over a up to five-year period of time, achieve, hopefully, in the net range of maybe 15 to 20% market share in the Gulf of Mexico. So, no change. We're moving forward, and we're looking to gain approval here in the next couple months.

Great. Thanks.

You bet. Thank you.

And, Neal Dingmann with SunTrust has our next question.

Mornings guys, great quarter. Paul, I'm not sure if this is for your or Bruce. First question on evolution. Are you still seeing the above average margins on this product? And then, we just wondered, on the growth that you're seeing, is that continuing to be from new customer adds in the US? Or is that just the existing customers adding even more business?

This is Bruce. I'll take that one. It's a bit of both. We are making a significant end roads with existing customers, and we're also continuing to add new customers. And the premium that we get for evolution's certainly alive and well and playing well in that context. So, the continued growth, I think, will continue to come from advancing it with existing and new customer bases, both domestically and internationally, and the premium will still exist.

Got it. And then lastly, I know you guys in the past have had done some fantastic just with your general fluid business so much offshore that you've been called out on some contracts, and it really hasn't had a competitive bid. Are you seeing that kind of demand where, I guess I'm looking at specifically offshore, is there still the growth there? Has it become more competitive? I guess, Paul, you and I've had that discussion. We just wondered your thoughts around that offshore Fluid market, internationally.

Off shore you really have to break it into two areas, right. You've got the inland marsh and the shelf here in the Gulf of Mexico, and you've got deep water. As we talked about, we continue to do work in the Gulf of Mexico deep water with one account. But really to move it up beyond that, we have to re-capitalize those assets. So, really haven't had any issues there.

Inland marsh shelf, we continue to do quite a bit of work there. When you look at our other offshore deep water work, the Total contract, we've successfully completed that well with them Brazil and successfully started up the deep water work in the Black sea. So, we see a lot of strong performance in that area.

Very good. Thanks, guys.

Mike Harrison from First Analysis. Please go ahead with your question.

Hi, good morning.

Good morning, Mike.

Just wondering if you can talk a little bit about the international contracts, the Black sea, the one in India, and the one in Kuwait. How are those contracts structured as compared to the contracts that you've had for example with Petrobras, where you guys spent some capital and then had the work ramp up a little bit slower than you like? I guess what I'm trying to get at is how much risk is associated with those three pieces of the contracts?

This is Bruce. Let's take the contract in the Black sea first. That's a contract for multiple wells. Theoretically, they will drill these wells back to back to back. But, of course, that's in their hands, and they decide how they do that. But, that's a multi-well, multi-year contract, so we expect the revenues from that to keep coming as we move forward. India, with the Cairn contract, the same way. That's ramping up a little more slowly, but it's ramping up to a higher level now, and we expect that to continue going forward.

The Kuwait contract has not yet started but will start to ramp up some time we think in the third quarter. That'll be a little slower ramp-up than the Black sea, but we expect that to be with us for some years to come and that should start growing significantly during the coming quarters.

I think you really get into distinction of IOCs versus NOCs as well, and that's where the Kuwait contract is a little bit different. Between NOC, it may be a little slower to ramp up than the IOCs typically do.

Which will be more similar to Petrobras; the India contract, the Black sea are IOCs, and when they get in their mind to drill, they move quickly. They don't hesitate. So, we expect those contracts will move faster.

And then just looking at the balance sheet and the working capital, it looks like receivables went up by about $40 million quarter on quarter. What's going on there?

The biggest piece is revenue driven. DSOs did move up a little bit in the quarter. That's really driven by the uptick in the EMEA activity. Also, on the [nemits] side as the Mats business, as we're growing that business out, we're seeing DSOs uptick a little bit. Overall, we would expect that to come back down here.

All right. Thanks very much.

Thank you. Hello?

Next, Jeff Spittel with Clarksons Capital Markets.

Hey, good morning, guys.

Morning, Jeff.

Maybe if we could follow up on evolution. Obviously, you're benefiting from share gains and then picking up wallet share with the customers too; I'm sure the well count moving up isn't hurting. I know we talked about this a little bit in the past. Could you give us an update on the longer lateral lengths and the well architecture? How that's impacting the business for you, if at all right now?

Certainly going to [pad-rolling] helps quite significantly in terms of the lateral sizes and extensions, and it varies by area, what sizes they are. We have been up to 14,000 feet lateral now in some areas. So laterals in some areas are getting quite remarkably large. But the system's handling them very well. Results are great, and we expect to [leverage] those results into future things.

Yes. I think the biggest driver there that we're seeing is we continue to see lower torque and drag on the drill strength, which allow you to get these long laterals. It's bringing significant value to the operators, as well as to Newpark in terms of the incremental margins, which historically have been running 500 to 800 basis points higher. We believe that kind of differential is sustainable going forward.

Good news. Bruce, maybe just an update. I know we've got the three contracts ramping up internationally in the third quarter. I don't see anything else major in the next couple quarters in my notes of the model. Just wanted to make sure I'm not missing anything, if there are any other larger well contracts launching in the next couple quarters.

Not launching in the next couple of quarters. We're in the usual process of responding to tenders as we always do. But nothing confirmed major in the next quarter or two other than the ones we've talked about.

Thanks, gentlemen. Nice quarter.

Thank you.

And next we'll hear from George O'Leary with Tudor, Pickering, Holt, & Company.

Good morning, guys.

Good morning.

I want to ask a question as it pertains primarily to US onshore and your Fluids business. Are you guys seeing any pricing power in the market, just given the robust activity levels that we've seen this year and what we just discussed, longer laterals, from underlying pricing?

No. It's all in the competitor's market, but there's no pricing pressure as such. Our differentiation with evolution, of course getting us that premium, takes any pricing pressure that may be there away. So, we're not experiencing any of that really.

Yes, and as we have seen in the past in both the upticks and the declines in activity, pricing in the Fluids business has never been a real significant factor. You'll have a little bit of swing here and there, but it's not a major factor.

And then, looking forward when you stick to North America onshore, from an underlying growth standpoint, is that the market where you guys see the most growth in the back half? Or are there international opportunities that get you excited as well?

I think both. But, certainly, the US market is a good market right now, and we fully expect to take advantage of that going forward. Internationally there are opportunities out there for us as well, and we'll, obviously, do our best to take advantage of those.

Yes. If you look at the sequential improvement in the US, 20% roughly, we believe that the US market will continue to be strong the rest of the year. And in addition to Bruce's comments, we do have those international contracts, the Black sea that's going to continue, the Kuwait contract that's going to come online probably near the fourth quarter and, then, increased revenue from the Cairn contract in India. So, yes, we feel pretty bullish about the international. I think Australia or Asia-Pacific somewhat soft throughout the rest of the year, but it's not a big growth area for us right now.

And then, we also have the seasonal recovery up in Canada, and the team up there has been doing a great job.

Good point.

We mentioned the record second quarter coming off of a record first quarter. They've been continuing to gain share and do an excellent job up there of hitting new highs.

Right. And they're running strong right now. So --

Just one more, if I could. The strong sequential growth in the US, 20% quarter on quarter, and you compare that to the rig count and well count that was up less so. Would you guys say you're taking share or is some of that also recapturing some of the customer attrition that we saw in recent quarters?

Yes. I think that's a fair way to look at it. You look at the decline that we had talked about in previous quarters, and some of it is a matter of recapturing some lost share. The other thing to highlight, again, a couple pieces there, the deep water well, which, again, that activity when it does happen, it's got some lumpiness to it but helps the quarter nicely, as well as the barite demand, which ebbs and flows. But, even excluding that, when you look at the 11% increase versus a rig count or well count that is up in the 4%, 5% range, we're clearly gaining some share over that period.

Awesome, thanks very much, guys.

Thank you.

And next up, from Cowen and Company, we have Marc Bianchi. Please go ahead, sir.

Hey guys, excellent quarter. One thing, I'm just trying to take all of this commentary that you've offered for Fluids on the forward outlook and try to see where things shake out. It seems like Fluids revenues are around flat with second quarter. Is that a fair way to look at it? Or maybe you could give us a range dependent on activity levels to think about?

Yes. I mean, you take it piece by piece. While the commentary on the US that we noted was -- you know, we're seeing things early in July being kind of flattish to the second quarter levels. Canada, obviously up. You've got that recovery. So, North America, in total, that would be up. EMEA region, again, after that strong surge that we had in the second quarter, coming back up, and, then, Brazil also declining a little bit. So, net net, where that all comes out I think, the biggest variable you have in there is something we mentioned was what we're doing with this pass-through piece in Brazil, you know, and the timing of that. So, flat's reasonable, but there's a lot of moving pieces there to it.

Okay. On the evolution, pardon me, on the Black sea and the Cairn contracts, what is the quarterly run rate for those now that they're in a regular -- kind of on a regular work schedule?

Yes. You know what I will say is on that -- with the contract in the Black sea, obviously, it started up at the end of the quarter. You do have a high level of product delivery, basically, to start that work. So, you get a natural pop there. So with that, you know, Q3 revenues may not be at that same level. The Cairn contract we mentioned that was a $1.4 million contribution. Again, in that range, that's not unreasonable. But, again, it's a question of their pace of their ramp-up.

Okay. Great. And then, just on evolution. Do you reach a point where you're constrained on how quickly that can grow, and maybe that's just from a manufacturing perspective or supply chain?

Yes. One of the things that we're currently doing is building a new plant, particularly to take advantage of the increased evolution systems and product lines and any other new technology that we're launching and moving ahead through the system. So, that's certainly not going to be a constraint. We're currently about 25% of our revenues is evolution, and I think there's room for considerable growth above that. So, our next goal is probably to get to about 50% of our revenues being evolution and our additional technologies. And then, once we achieve that, we'll go to the next target level.

So you have capacity to get to 50% of revenues without really making any changes right now, including that --

We will.

Yes. We're in the process, as Bruce said, of designing the plant. We have not broken ground yet. We are building that capacity in advance of the need. So the current capacity in advance of the need, so the current capacity as it exists will not limit our growth. New capacity will come online to help support future growth. So, we'll be fine.

Okay. Thanks, Paul. I'll turn it back.

Tristan Richardson from D.A. Davidson. Please go ahead.

Good morning, guys.

Good morning.

Just a couple of questions. We've heard a lot from industry players about logistics being a challenge, getting material to the sites. I'm curious if that's something you're seeing at all, and if that's a challenge for you guys?

Certainly nothing we've have seen. No, we're not challenged in that regard at all.

Okay. Just thought I'd ask. And then, I guess on the Eagleford: we've seen some ownership changes over the past couple of quarters, and you guys talked about recapturing market share. Do you guys seeing acreages changing hands as an opportunity to recapture some business in that region.

I think that's a fair comment. Certainly the Eagleford is one of our main targets for continued rollout of evolution and further rollout in that area. Any time things change, there are opportunities come with that. So, we'll certainly try to take advantage of those things as they arise. We're not seeing anything negative in the Eagleford with the change in ownership of any of the land properties. So, we're just seeing it as a business as usual.

Sure. Okay. Well, thank you, guys, very much.

Next we'll hear from Doug Dyer with Heartland Advisors.

Good morning, gentlemen.

Good morning.

Just one question about the Gulf. If there are competitors that are dedicating less effort to the Fluids out there, does that open up the opportunity for you to purchase some assets? Or are we committed to building out our assets here?

Yes. In our particular case, not knowing what the other large integrative players are doing there, they're the ones that have the fixed assets. There really isn't any other independence of any size. Our desire is to build our own unique assets, and what we're going to try to do is bring some incremental value that those older assets don't have, such as flow rates so that we can turn the OSVs around quicker. So, we're going to try to get a little bit of a competitive advantage because our facility would be the newest.

Okay. And I apologize if I missed this earlier, but as far as getting evolution introduced into the Gulf, is it really just a matter of getting your infrastructure set up? Or is there something else that has led us not to be aggressive there yet?

No. I think in producing evolution -- I'm assuming you're talking about off-shore deep water gulf. I'll make that assumption.

Yes.

So there's several elements to that. Certainly facilities is part of that, but there's also a technical element that would have to come with that and changing the current process and the current things that are being used, so that's a little longer term.

Yes. Synthetic based drilling fluids have been used in the Gulf of Mexico for a long period of time. Obviously, from a safety perspective, there's risk at first in changing out technology. If you look at how we look at technology longer term, we think as you look out maybe three to five years, that water-based technology, maybe an evolution derivative, could bring some unique value. But, it's going to be several years from now.

All right. Thank you.

And next we'll hear from Bill Dezellman with Titan Capital Management.

Thank you. First question is relative to Kuwait. Once the fourth quarter of this year rolls around, what is your rough guess as to what the revenues will be there? And then, how does that compare to what you think the longer term steady run rate will ultimately reach?

I'm not sure I can quantify that for the simple reason that when you get the contract with the Kuwaiti oil company, you first have to build the facilities. You first have to get everything in place, people in place, living accommodations and so on. And then, they kind of decide which rigs they may or may not give you and whether those are drilling rigs or completions or work-overs. So, at this early stage, that's kind of hard to quantify. As we roll through Q3, Q4, we'll have a better handle on that, but right now it's probably impossible to say.

Yes, you look at that longer term run rate and, again, the quantification in the contract is about $75 million over a 5-year period. So that tells you it's a $15 million a year run rate, once it hits there. But, as we touched on earlier, particularly with NOCs, it's a little bit tougher to project that ramp and when they'll get to that level.

That's helpful. Thank you. And then, I'd like to circle back to the a quote in the press release that references other technologies or implies new technologies, including evolution. And we've talked about, of course, a lot over the time about evolution. But, penetrating the market with new technologies, what are you referring to there in addition to evolution?

Well, certainly, as you know, we made a fairly large capital invest in our new technology center for drilling fluids, and our expectation is that as the years roll out, we will continue to bring new innovative products to the marketplace. We're working on things, but, obviously, we're not in a position to discuss those right now.

Thank you both.

Thank you.

There are no further questions at this time. I'll turn the call back over to management for any 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 of the third quarter. Thank you.

Ladies and gentlemen, this concludes the Newpark Resources second quarter earnings conference call. If you'd like to listen to a replay of today's conference please dial 1(719)457-0820. Again, that's 1(719)457-0820. The conference center would like to thank you for your participation. You may now disconnect.