NPK International Inc (NPKI) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Newpark Resources fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn conference over to Brian Feldott, Director of Investor Relations. Thank you, please go ahead.

Thank you, Brenda, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review our fourth-quarter and full-year 2014 results. With me today are Paul Howes, our President and Chief Executive Officer; Bruce Smith, President of our Fluids Systems business; and Gregg Piontek, our Chief Financial Officer.

Before I turn over the call, I have a few housekeeping items to cover. There will be a replay of today's call, and it will be available via webcast on our website at www.newpark.com. There will also be recorded replay available by phone, which will be available until February 27, 2015, and that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, February 13, 2015 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of replay.

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

And now with that said, I would like turn the call over to our President and CEO, Mr. Paul Howes.

Thank you, Brian. Good morning to everyone. We would like to thank you for joining us for today for our fourth-quarter 2014 conference call. 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 fourth quarter. I will then conclude with a discussion of our outlook related to the 2015 market, before opening the call for Q&A.

But before I cover the fourth-quarter, I'd like to begin by addressing our key accomplishments in 2014. We are extremely proud to announce today, for the full-year 2014 records for total revenues, EBITDA and operating income. Consolidated revenues in 2014 exceeded $1.1 billion for the year, representing a 7% increase over prior year, driven by record revenue in both the Fluids and Mats businesses. Our record performance is the direct result of our continued focus on three of our key strategic drivers, technology leadership, international growth and outstanding customer service.

Our technology leadership in 2014 continued in both of our businesses. In Drilling Fluids, our Evolution family of water-based products reached record revenues of $251 million, more than doubling prior-year levels. Also we continue to expand the technology internationally, from EMEA to Asia-Pacific and most recently in China. From our perspective, the Evolution family of technology is being recognized around the world for it's ability to drive operating efficiency, while working in harmony with the environment.

In our Mats business, customers continue to recognize the value of our technology, resulting in record rental revenues and profitability of our DuraBase product line. Our new manufacturing facility is nearing completion, and when fully operational will double our existing capacity. We've also made meaningful progress in our efforts to expand beyond our historical E&P markets, entering the North American pipeline market, as well as the utility infrastructure market both in North America and Europe. And most recently, we formally launched the DuraBase Defender Spill Containment System which takes our technology to an entirely new level of performance. Also we recently broke ground on our new technology center which will provide new R&D capabilities to model and enhance the performance of our products in the field.

Our international growth strategy continued with another record year, generating international revenues of $290 million with the majority of this year's growth coming from new contracts in the Black Sea, India, Kuwait and the Mats expansion into the UK. Within the Fluids segment, international revenues now represents nearly 30% of our segments revenues. We expect this to provide a greater level of stability, heading into a challenging 2015. International revenues have now increased for eight consecutive years and we expect to see this growth continue in 2015, as we start work on the recently announced $350 million contract to provide Drilling Fluids and related services to Sonatrach's natural gas drilling activities.

And lastly, very proud to announce that we've won 17 Energy Point Research first-place awards for best-in-class service for their most recent annual customer satisfaction survey. To me, this is a direct reflection of the commitment that our employees bring to work every day. For 2014, Newpark has again taken the top award, first place in total customer satisfaction for all oilfield services, an award we have now won with the past three consecutive years.

With that, I will now turn my attention to the fourth quarter. We are very pleased to post another record quarter, with consolidated revenues coming in at $306 million in the fourth quarter, reflecting a 3% sequential increase and a 24% year-over-year improvement. Fourth-quarter net income also remained strong, coming in at $0.25 per diluted share from continuing operations, consistent with the $0.25 per share in the third quarter, and a substantial improvement over the $0.11 per share in the fourth quarter of last year. The fourth quarter results were driven by continued strength in both operating segments.

The Fluids business set a record with $261 million revenues, and excluding the charges in Brazil sustained double-digit margins in the quarter. In the international Fluids market, we are continuing to see benefit from our recent contract start-ups in the Black Sea, Kuwait and India, which contributed a combined $9 million of revenue to the quarter. Our Mats business also posted a record fourth-quarter, with revenues of $45 million and an operating margin over 50% which reflects record quarterly earnings, and our highest operating margin in this business in more than three years.

In summary, the fourth quarter was a strong finish to a very successful year, which positions us well to take on the challenges of 2015. 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 fourth quarter, Fluids Systems generated total revenues of $261 million, a record for our segment, and reflecting a 4% increase from the third quarter, and 23% increase year-over-year. Looking at the quarter by region, the revenues from the US were up 6% sequentially to $172 million, which compares favorably to both the sequential US rig count and well count changes which were essentially flat. The majority of the sequential increase was driven by an unusually high volume of oil-based mud product sales due to lost circulation events.

However, due to low margin profile of this commodity product, the higher sales provided only a modest impact to income. Wholesale barite also remained strong in the quarter, although we saw a modest sequential decline. On a year-over-year basis, US revenues were up 26%, which also compares favorably to the year-over-year rig count and well count which increased 9% and 5%, respectively.

Our Canadian operation continued to perform at a high level, generating revenues of $26 million in the fourth quarter which reflects an increase of [17]% sequentially and 81% year-over-year. Both the sequential and year-over-year increases significantly outpaced the overall market activity, reflecting our continued gains in market share.

Our EMEA region continued to perform well in the fourth quarter, generating revenues of $41 million. Excluding the impact of exchange rates, the region was up nearly 10% sequentially, benefiting from increases in North Africa, Romania and India. However, this increase was partially offset by the strengthening US dollar, with currency rates having a $2 million negative impact on revenues in the quarter. On a year-over-year basis, the EMEA revenues were up 44% largely attributable to higher activities in North Africa, along with the contributions of the new contracts that started in 2014.

In Latin America, revenues were down 23% sequentially, and 37% year-over-year to $[15] million. Our Latin America revenues were also negatively impacted by the strengthening US dollar, which accounted for almost half of this regions sequential revenue decline. The remaining revenue decline predominantly reflects the expected reductions in product sales to Petrobras, as we discussed on last quarter's call.

In the Asia-Pacific region revenues were down 12% sequentially to $6 million, with the majority of the decline driven by the strengthening US dollar. One year-over-year basis, the Asia-Pacific region declined 21%, primarily reflecting the impact of lower drilling activity in New Zealand. On the technology front, our family of Evolution systems continues to perform well, generating $68 million of revenues in the fourth quarter consistent with the prior quarter. The regional breakdown also remain similar to the prior quarter including $63 million in North America, $2 million in the EMEA region, and $3 million in Asia-Pacific. With the strong fourth-quarter performance, our total Evolution system revenues for the full-year 2014 came in at $251 million, reflecting a year-over-year growth of more than 100%.

Operating income for the Fluids segment came in at $24.5 million in the fourth quarter, reflecting an operation margin of 9.4%, which was down from 11% in the third quarter, but up significantly from the 7.1% a year ago. The fourth quarter was negatively impacted by approximately $1.5 million of charges in Brazil, related to costs associated with fourth-quarter workforce reductions, and the impairment of certain indirect tax assets. Adjusting for these charges, the Fluids operating margin in the quarter came in at 10% level. The margin decline of roughly 100 basis points from the third quarter was driven primarily by product mix in the US business.

With regard to our nearer term outlook, we expect North America to be the most challenging market, with US rig counts already off 25% from fourth-quarter levels. In addition to the rapid decline in activity which is also impacting our wholesale barite sales, we expect to see some pricing erosion as operators continue to seek pricing concessions from all of the service vendors. In light of the lower activity, we have reduced our North American workforce by approximately 10% since the beginning of the year, reflecting a combination of contract and full-time employees. We are continuing to closely monitor activity levels in each region, moving quickly to adjust our cost structure to match reduced activity levels.

Outside of North America, while we are seeing some isolated impacts from the recent decline in oil price, we expect activities to hold up better consistent with our experience in past cycles. In the EMEA region, we expect our business to remain fairly stable in the first quarter, although the recent surge in the US dollar continues to provide negative pressure on revenues. In Brazil, there was really no change to our approach, particularly with respect to Petrobras. Consistent with our recent actions, we remain committed to taking the necessary steps to reduce the volatility of this business, and our exposure to Petrobras. In Asia-Pacific region, we don't expect any meaningful change in revenues in the near-term.

And finally, as Paul mentioned, I am very pleased to highlight our recently announced three-year $350 million Sonatrach contract, which represents the largest award in Newpark's history. At the maximum annualized value, this award reflects an increase of approximately 165% over our 2014 revenues with Sonatrach. The transition to the new contract is expected to occur in the second quarter, with revenues beginning to ramp up throughout the second half of 2015. And while we expect this award to contribute to incremental growth in the EMEA region in 2015, we don't expect to achieve the full run rate of this contract until early 2016.

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

Thank you Bruce, and good morning, everyone. I will begin by discussing the results of our Mats business, before finishing with our consolidated results.

The Mats business reported fourth-quarter revenues of $45 million, down slightly from the record $46 million of revenues in the third quarter, but up 29% year-over-year. Revenues from Mats rentals and services were down $9 million sequentially, reflecting the expected reduction from the large site preparation project in the Gulf Coast region during the third quarter. Mats rental activity remained relatively stable for the quarter. As we mentioned last quarter, we are continuing to focus on expanding our rental activities outside the E&P industry, including our entry into the utility and pipeline markets.

During the fourth quarter, approximately $7 million of our rental and services revenues were derived from non-exploration customers, including the impact of our UK operations acquired last year. Regionally, the Northeast which includes activities in the Marcellus and Utica, continues to represent roughly half of our total rental and service revenues. The sequential decline in rental and services revenues was largely offset by the expected rebound in Mats sales, which increased by $8 million to $13 million for the fourth quarter. However, even with the sequential increase, fourth-quarter Mats sales remained $2 million below prior-year levels.

Due to the continued strength in rental demand and the revenue mix shift for lower margin site preparation work to higher-margin Mats sales, the Mats segment achieved a record operating income of $23 million in the fourth quarter, up 12% from the third quarter, and 51% year-over-year. The 50.9% operating margin in the fourth quarter, compares with 44.9% last quarter, and 43.7% a year ago.

Looking ahead to the first quarter for Mats, we expect to see a pullback in Q1 as compared to Q4. While our Mats rental activities are more heavily leveraged to natural gas drilling, we are experiencing significant pricing pressures across all of E&P markets, which will serve to reduce both revenues and operating margins. Mats sales are also expected to decline from the level achieved in the fourth quarter. With the impact of the weaker activity levels and pricing pressure, combined with the added cost associated with our Q1 plant start-up, we expect our first-quarter operating margin to be moderately lower than historical levels.

Now moving onto our consolidated results. For the fourth quarter of 2014, we reported total revenues of $306 million, up 3% sequentially and 24% year-over-year. SG&A costs were $30.4 million, up 6% sequentially, and up 26% year-over-year. The sequential increase in SG&A is primarily attributable to the increased revenues, along with higher performance-based incentives.

Corporate office expenses were flat to the prior quarter at $8.9 million, although the fourth quarter included about $500,000 in legal costs associated with the wage and hour litigation which we described in our prior quarter Form 10-Q. Consolidated operating income was $38.6 million in the fourth quarter, representing a 2% decline sequentially, but a 73% increase from the fourth quarter of 2013. Foreign currency exchange was a $600,000 loss in the fourth quarter, reflecting the impact of the continued strengthening of the US dollar against the functional currencies of our foreign operations. The fourth quarter 2014 effective tax rate was 34%, consistent with the full-year tax rate. Income from continuing operations in the fourth quarter was $23.4 million or $0.25 per diluted share, compared to $0.25 in the previous quarter, and $0.11 in the fourth quarter of last year.

Now let me discuss our balance sheet and liquidity position. During the fourth quarter, operating activities provided net cash of $66 million. We used $22 million to fund capital expenditures, with $13 million spent on the Mats segment as we continued construction activities on our manufacturing facility, as well as the expansion of our Mats rental fleet.

In addition, we borrowed $4 million under our [foreign] lines of credit. During the fourth quarter, there were no share repurchases under our outstanding authorization. As of the end of the fourth quarter, borrowings under our foreign lines of credit were $11 million, and there were no borrowings under our US revolving credit facility. We ended the fourth quarter with cash of $85 million, and a total debt balance of $184 million, resulting in a total debt to capitalization ratio of 22.7%, and a net debt to capitalization ratio of 13.7%.

Looking ahead at 2015, while our share repurchase program remains an important element of our capital allocation strategy, we expect to take a cautious approach toward additional share repurchases in the near-term, at least until there is greater stability in the North American market. We currently expect our 2015 capital expenditures to be in the range of $70 million to $90 million, which includes approximately $40 million to $50 million on four key strategic projects. The completion of our Mats manufacturing capacity expansion and technology center; the Fourchon, Louisiana deepwater shore-based expansion which is expected to be completed in early 2016; our blending facility and distribution center project which is expected to be completed by the end of 2015; and the investment in additional valve control equipment necessary to support the expanded work in Algeria.

Looking beyond these strategic projects, we expect to slow our overall capital spending levels in 2015. That said, required investments into the expansion of the Mats rental fleet will remain dependent on demand levels, as well as our strategic decisions around further expansion into new rental markets. As we have done historically, we will continue to closely monitor demand levels for rental Mats, and adjust our investments accordingly. Also I would like to highlight that we expect the current pullback in North America to contribute to strong near-term operating cash flows through working capital reductions. We are entering 2015 with $450 million invested in working capital, with receivables and inventory representing the largest components. As activity declines, we expect to see reductions in working capital, with reductions and receivables providing the most immediate cash flow benefit.

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

Thanks, Gregg. We are very pleased with another strong quarter, highlighted by record revenues in the Fluids business, and record profitability in the Mats business. Furthermore, with a strong finish, we achieved Company record for both revenue and profitability for the full-year 2014. And while we are pleased with the progress we've made over the past year, we are now focused on navigating through a challenging landscape in 2015, particularly in North America.

While our team has been through these cycles before and know the actions required to successfully navigate through the volatility, it is also important to highlight that we are ending the current cycle as a very different Company. Heading into 2015, we have a very strong liquidity position, and as experienced in past cycles, periods of decline tend to generate strong operating cash flow through the associated reductions in working capital. The strong cash profile affords us the opportunity to continue that execution of our long-term growth strategy.

As Gregg mentioned, we plan to continue to fund our long-term capital investments related to our deepwater facility, our water-based blending plant, and our Mats technology center. We will take a cautious approach with other discretionary uses of cash including capital investments and share repurchases, while aligning operating expenses to match activity levels. Over the past year, our Drilling Fluids business has continued to gain market share, led by our differentiated technology and expanding international footprint. As we have done in previous cycles, we plan to closely monitor North American activity levels, to ensure that we can take swift actions to efficiently manage through the changing landscape. That said, we are balancing our short-term needs with an effort to protect organization and strengthen our capabilities for the long-term.

Internationally, as Bruce mentioned, we expect 2015 to be a year growth in the EMEA region. As we stated in the past, our international expansion efforts are critical to driving greater stability in our revenue stream, serving to offset some of the North American volatility. In the Mats business, with our added manufacturing capacity coming online, there's no question that the near-term impact of expansion will be somewhat muted by the current weakness in North American drilling. Given this weakness, we intend to intensify our focus on the development of non-E&P market opportunities, both in North America and internationally.

And finally, I would like to close by recognizing the contribution of our dedicated employees around the world, in making 2014 a record year for Newpark. Without the commitment and tireless efforts of our employees, none of these accomplishments would be possible. With that, we will now take your questions. Operator?

(Operator Instructions)

Jonathan Sisto, Credit Suisse.

Good morning, gentlemen.

Good morning.

Paul, you are really start to string together a few good quarters here. Congrats.

Thank you very much.

I wanted to focus in on the fluids business if I could. So this might be a question for you, Paul or Bruce. We've gone through earnings season. We're hearing about these E&P form letters that are going out to their suppliers. Bruce, you mentioned pricing pressure, just trying to get a better sense of what kind of pricing pressure, degree of magnitude you are speaking of, for maybe for 2015?

Certainly, there is pricing pressure happening now. And to your point, there are some letters circulating from certain customers, looking at cost reductions for them, price reductions for us. But to give that some framework, we've also had recently from a major customer, a letter inviting us to come in, and talk about how we might be able to help drive their efficiency. So not all customers are going down the path of pricing reductions.

However, pricing pressure is there. We are dealing with it. A part of our push during this period, of course, will be to try and develop our Evolution technology, try to focus on those customers that value service, and value efficiency drive. So that will be our focus going forward.

I think it is a little bit early right now to say, how hard the pricing is, but we are certainly getting all the form letters, as Bruce talked about. But clear -- I think that's the opportunity. In this kind of environment, customers too are looking to drive down their total costs. And I think that's one thing unique about the Company, that our technology can really reduce their total operating expense. So we're really trying to double down on those kind of customers that appreciate the value of the technology.

In your level of expertise, is this down cycle that we look to be going into as severe as say, the 2008, 2009 cycle? And with that maybe -- as the operators get more conscious of cost, are they going to focus more in on the lower margin products?

Well, there is really going to be -- we try to break our customers up into different segments. There's certainly some customers that will just buy the cheapest product, right? And then, there's others that are looking to drive their total costs down.

Is it as steep as 2008, 2009? Yet to be determined I think. Certainly, the trends in the last couple weeks on the rig count reduction could tend to imply that. But I wouldn't want to project at this point, that it would be as deep as 2009.

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

Good morning, guys.

Good morning.

Just trying to get a sense around kind of what levers you have to pull, on the cost cut front, as we move into this North American kind of rig count [role] environment, and what lever you may have already begun to pull, as we moved into the beginning of the first quarter?

This is Bruce. We've certainly begun reducing headcount, to reflect a somewhat decline of the market. There is always a bit of a lag time between market declines, rig declines, and how quickly we can react to it. But as we see the declines coming, and as we talk with our customers and get a better understanding of what projects they are going forward with, what they are canceling, we are taking actions appropriately at that point.

Yes, a couple things to add to that. One of the challenges is always when you're going through a declining market, is you also have to make some calls on how long, how long will it be down? And then based on that, you make some decisions on the costs to cut. And what I would say then, turning to the other side of the business, the mat side of the business, there it's a different animal. Because as everyone knows, we have the new plant coming online and growth plans into other markets. Obviously, with the suppressed oil and gas market, really it is more of a slowing of the ramp-up, or holding your cost structure where it is, rather than a cutting mode like you have on the other side.

Okay. Thanks, that's helpful color. And then, just given your presence on the fluids side in the Permian -- and we've certainly been surprised by the magnitude of the rig count cuts, in that basin in particular. Just curious to hear your thoughts on that market in particular, with respect to the fluids business, and what you're seeing today, with the rapid decrease in rig count?

Yes, I think it is fair to say, that all of the [oily] plays are the ones that are most dramatically affected at the moment. So that would be Permian, that would be the Bakken, and so on. But we have other areas like the Mid-Continent region, and like our East Texas region, and like our Northeast region that are holding up a better than those with the oily plays. So I think your assessment is correct. Those with oily plays are more affected currently.

Mike Harrison, First Analysis.

Hi, good morning.

Good morning, Mike.

Just looking for a little bit more clarification, you mentioned a 10% headcount reduction. Was that in fluids overall, or is that just in North America fluids?

That was North America fluids.

Yes. In fact, internationally, and specifically in the EMEA region with the new contracts, we are actually adding personnel at this time.

That make sense. And then, on the Evolution side, it seems like maybe the times there, the rapid improvements in sales have kind of slowed. And I am wondering, are we seeing a plateau there, just based on the market activity? Have you guys pulled back on your marketing efforts, in trying to grow that into new geographies? And what are you seeing on pricing specific to Evolution right now?

Yes, this is Gregg. Let me take part of that. The pricing, I will defer to Bruce on. But I mean, in terms of that plateauing, I think you've got to take a step back, and look at the progression that we've had on the Evolution growth, over the -- since it's initial introduction back in 2010. And you look at the growth, and it has not been a steady growth curve, it has been spike, plateau, spike, plateau, spike, plateau. So having a flat quarter over quarter isn't particularly concerning. Definitely not backing off, in terms of our marketing efforts on it.

Yes, and just to comment, I would probably refer back to the 100% growth year-over-year. We continue to see tracks with Evolution, and with respect to international rollout, as I mentioned in my read in, that we have now moved into China with the technology which is a new country for us as well. Go ahead, Bruce.

Yes, on the pricing question that you had, certainly there's pressure on Evolution as well, as with everything else. But that differentiated technology is certainly holding up to that pricing pressure much better than conventional systems.

Neal Dingmann, SunTrust.

Good morning, guys.

Hi, Neal.

One question for you or Bruce, obviously activity still seems quite good on the fluid side. I was wondering about bidding activity, how that is looking and thoughts about market share? You certainly have done a great job holding that, based on Sonatrach and some of these others. Should we even potentially think about even maybe an increase in market share?

Yes, internationally bidding activity continues to be out there, there is a lot of tenders available. It is kind of an ongoing process that you see on an annual basis. Don't -- a little bit of a slowing maybe on international tenders, and then obviously here domestically, it is MSAs so.

So the activity in the North American side, I mean, you really need to look no further than the rig count as a good indicator of the direction.

Okay. That's what I thought. Thanks, Gregg. And just one follow-up on the mat side, maybe for Gregg. Just wondering obviously, margins were phenomenal again. They are even higher. Your thoughts -- I know you said, that you expect that to come down a little bit. Is that just product mix, Gregg, less rental sales, or how should we think about the product mix for the next -- I mean, for the remainder of this year?

Yes, we touched on this a little bit earlier. But obviously with the weakness that we have in the exploration side, we are putting greater efforts into these other areas. That said, again back to this pricing pressure that you are facing, we are seeing pricing pressure across the board. So we're -- definitely expect that to have a meaningful impact here in the upcoming quarters.

Especially when you're coming from such a strong margin profile as we are, you would expect to see a little greater impact of that. So that's why we expect that our margins here, will come back to that, call it that low 40% range where we have been. And I know while we've talked about it many times, about the dropping into the 30%s, I think we feel that it is a highly likely that we will see a three handle on the margins here in 2015. It is really more of a question of when, which quarter does that happen.

Marc Bianchi, Cowen.

Hi, I was hoping to talk about the fluids pricing just a little bit. We are hearing prices for other service lines down in the 15%, 20% range. Maybe you can give us some historical perspective for fluids during the downturn, in terms of what peak to trough pricing was, and maybe any insight as to what you've seen thus far? I know it is going to be hard to say, for the first quarter what we will see. But maybe so far in the first quarter, what you've seen?

Yes, this is Gregg. I will touch on that, but in terms of the pricing pressure here in the fluids side of things -- as we've experienced in the past, well, yes, you always start out with that request for a 20% reduction. When you have a business that's running around the 10% mark, you don't have 20% to give. And that's really where that discussion starts on it. So you do see some pricing pressure that comes in, but it is a much smaller impact than that.

Okay, thanks, Gregg. Could you guys say how much prices have come down so far this quarter?

Yes, I guess, the way I would describe it, is really more so than getting into the specifics of the pricing here, because there's a lot of variables in this mix here. You really take a step back, and you look at the business as a whole, and the expectation and overall margin profile. And I guess, I would start with the historical experience on incremental, decrementals in the business. And historically, we've seen incremental, decrementals in that 25% to 30% range as activity levels change.

And there's -- obviously, there's the volume, there's your cost adjustments, pricing, that all works into that. In periods of dramatic change, such as what we are seeing now, you obviously have a little bit of a lead lag issue as Bruce commented on, about taking your costs out. So maybe in a period of a deeper decline, you will see that decremental margin be more on the high side, maybe into that 30%s range on it. But that as you take the costs out, that kind of normalizes back to that, in the 20%s that we've seen historically.

Stephen Gengaro, Sterne, Agee.

Thank you. Good morning, guys. Just two things. One, I was actually going to follow-up on that question about decremental margins. And I would assume higher earlier in the year, and then flattening out, and it sounds like where you are targeting. So any further comments on that is helpful. But second, when we think about the split, and I think you said about 30% now of business is international, can you give us a sense for relative profitability of the two areas, assuming that international probably holds up better here near-term?

That's correct. And well, I will take your two pieces. First of all, I think you've got it right in terms of that decremental, maybe a little steeper decline in that North American market initially. And then as you rightsize your organization, and get those cost out, then it comes back at that more typical level. In terms of the comparable margins between the regions, the international piece has historically been a higher margin than the overall fluids segment combined. So and, we expect that area to continued. So that does have a favorable impact as you are shifting your mix then, as with having a greater international component.

So would that suggest that if I use the 2008, 2009 time frame as a guideline, you should do a bit better this time, because you have a larger international presence?

Absolutely. Yes, we're -- it's a much different situation today, than it was back then in terms of our international component. And if you look back at 2008 to 2009, the international business was actually relatively flat year-over-year. And as we talked about, particularly with the new contract start-ups in 2014 for which we will see a full-year benefit in 2015, as well as the Sonatrach contract that's coming online later in the year, we are expecting to see growth out of that region in the double-digit percentage range, north of the 10% mark. So we will actually have a growing EMEA region this time around.

(Operator Instructions)

Doug Dyer, Heartland Advisors

Hey, good morning, everyone. You've talked about maybe working down the accounts receivable a bit. It looks like it hasn't grown substantially over the last year, but how much do you think you can bring that down to, and still operate the business the way you want to?

Well, typically the business has -- we've got DSOs overall around the 90 day mark, and you would expect that to remain relatively stable. The improvements that we've made recently -- we have been bringing down our DSOs through internal efforts over the past few years actually. And that's part of what has contributed to the improvement that we've seen here this year. But with a stable DSO assumption here through 2015, and you just look at the pullback in the North American activity, that obviously will generate a fair amount of cash flow.

All right. And just looking at the inventory, what's -- if you were to break that down into some buckets, what's in inventory, please?

Yes, well, the biggest component of your inventory is your fluids systems piece -- actually the mat pieces has very little inventory that we maintain. The other piece, which in the fluids business is the barite component, and because those are long-lead items, that one tends to be a bit lumpy from time to time. Where we will get large shipments in, and we will have larger quantities on hand that we run down. So it's inventory you can't expect will come down at the same rate, as maybe a receivables, if you're holding DSOs. Your days of inventory will go up, when you are seeing reductions. But nonetheless, you are able to get reductions across the board in that area.

Marc Bianchi, Cowen.

Hi, thanks for squeezing me back in. What was the lost circulation in the first quarter? And that was entirely -- or in the fourth quarter, excuse me? That was entirely in the US, correct?

That's correct.

Actually, it was actually several different projects that had some lost circulation, where there was a higher than usual oil-based mud consumption.

Okay. So excluding that impact, would you have been flat sequentially?

Pretty close to flat sequentially, when you exclude that component, yes.

Okay. And then just unrelated -- with Brazil and with everything that's going on with Petrobras, how does that impact the wind-down there for you guys? And then, can you give us some commentary about how you conduct business there? There is some concern with other companies that work with Petrobras, about the use of agents and any kind of concerns about corruption. Can you discuss how Newpark conducts business?

Yes, with Petrobras, we haven't changed our approach to Petrobras at all. We've been working down our relationship if you like, and trying to become less dependent on them. Nothing that's currently happening is changing that approach.

We're continuing with that approach. In terms of the way we conduct business there, it's as normal business as we conduct in the USA. We don't do anything different.

As we do anywhere in the world. Any problems that Petrobras has had with corruption, certainly has not involved Newpark.

Thank you. And it seems that we have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

We would 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 again at the conclusion of the first quarter. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.