NPK International Inc (NPKI) 2015 Q1 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Feldott, Director of Investor Relations. Thank you, sir; you may begin.

Thank you, Donna, and good morning everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review our first-quarter 2015 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 by webcast on our website at www.newpark.com. There will also be a recorded replay available by phone, which will be available until May 15, 2015. And that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, May 1, 2015 and, therefore, you are advised that time-sensitive information may no longer be accurate as of the time of the replay.

In addition, the comments made by Management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities Law. These forward-looking statements reflect the current views 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 current reports on form 8-K to understand certain of those risks, uncertainties, and contingencies.

And now with that said, I would like to 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 today for our first quarter 2015 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 first quarter. I will then conclude with a discussion of our outlook before opening the call for Q&A.

First quarter of 2015 proved to be extremely challenging, both for our industry and Newpark, as we witnessed one of the most severe rig count declines in over a decade, surpassing the rate of decline experienced in early 2009. While the declines came much faster than most expected, we are continuing to follow the playbook that we discussed in last quarter's call, taking swift action to reduce costs while maintaining our focus on our long-term growth strategy. As the rig reduction accelerated throughout the first quarter, we took significant actions to right-size the North American organization. In total, we've eliminated nearly all contract positions and reduced our full-time employees in North America by 25%, with the majority of the reductions coming out of the Fluids segment. Most of these actions were taken towards the end of the first quarter so the benefit will not be realized until the second quarter.

For the first quarter, consolidated revenues were $208 million, reflecting a decline of 32% sequentially and 14% year over year. First quarter net income was $0.01 per diluted share from continuing operations, down from $0.25 per share in the fourth quarter and $0.13 per share in the first quarter of last year. As highlighted in our press release, the first quarter was negatively impacted by $0.04 of charges related to workforce reductions and currency exchange losses. Despite the steep decline in North American activity and the charges taken in the period, we are pleased to remain profitable for the first quarter. I would also like to highlight that our cash generation has remained strong as cash flow from operations totaled $32 million in the quarter.

As I mentioned, the pace and the magnitude of the US rig count decline is worse than 2009, with activity down more than 50% from the peak in Q4. In comparing our consolidated results for this quarter to early 2009, it highlights the significant changes in our business over that time. Most notably, I would like to highlight the performance of our mass integrated services segment.

In 2009 the industry downturn forced us to take drastic actions and the Mats units generated a significant operating loss. In 2015 we are facing much different dynamics in this business, as our matting technologies have gained acceptance in new markets and new geographies. And despite the challenging North American drilling environment, our Mats segment has maintained operating margins above the 40% mark.

In Fluids we're realizing the benefits of our strategy to expand our international business. Today our international Fluids revenues are roughly twice the levels of 2009. And similar to our experience in the last downturn, our international activities have proven to be more stable than North America. And while we would always like to be further down the path in the execution of our long-term strategy, events such as a current North American volatility serve to validate that we are on the right course.

Another key difference for Newpark today is the strength of our balance sheet. We ended the first quarter with over $90 million in cash on hand and no borrowings outstanding on our US revolving credit facilities. And despite the challenging credit environment in our industry, we further enhanced our balance sheet flexibility during the first quarter, increasing the size of our credit facility from $125 million to $200 million and extending the term, while at the same time holding firm our borrowing rates and improving our flexibility over uses of cash. With a strong balance sheet we have the ability not only to maintain our focus in our long-term strategy while managing through the current volatility, but also to position the Company for the eventual market recovery. To that point, we have continued strategic investments in both of our businesses, from our new Mats technology center to our Fluids blending plant.

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

Thanks, Paul. Good morning.

In the first quarter Fluid Systems generated total revenues of $172 million, reflecting a 34% decrease from the fourth quarter and 19% year-over-year. Looking at the quarter by region, the revenues from the US were down 43% sequentially to $98 million compared to the 27% rig count decline over this period. In addition to the impact of the 27% rig count decline, the sequential revenue comparison in the US was further impacted by several other factors, including an unusually high volume of oil-based mud product sales in the previous quarter, as discussed in our February call; modest pricing erosion; a disproportionate decline in fluid systems additive sales as customers slowed their purchases and worked through their inventories at the rig site ahead of laying down rigs; and a decline in wholesale barite sales to third-party drilling fluids customers, including the loss of sales into Canada, driven by the strength of the US dollar.

On a year-over-year basis US revenues were down 21%, in line with the 21% reduction in rig count. Revenues in Canada were also impacted by the reductions in drilling activity, the early spring break-up, and the strength in the US dollar generating [$18 million] in the first quarter, which reflects a decrease of 31% sequentially and 17% year-over-year.

Activities outside of North America held up much better in the quarter, although the strength in the US dollar continues to be a headwind. Our EMEA region posted revenues of $36 million compared to $41 million in the fourth quarter and $35 million in the first quarter of last year. Changes in currency exchange rates caused a $3 million decline in revenues compared to the fourth quarter and a $7 million decline compared to the first quarter of last year. Excluding the impact of currency rates, revenues from the EMEA region were roughly down 5% from the prior quarter, but up 25% from the prior year. The sequential decline is primarily due to reduced activity under the Cairn contract in India, while the year-over-year increase is largely attributable to an $8 million increase from the new contracts that started up in 2014, along with higher activities in North Africa.

Our Latin America region posted revenues of [$14 million] in the first quarter, down 12% sequentially and 38% year over year. Similar to EMEA, our Latin America revenues were negatively impacted by the strengthening US dollar, with currency accounting for the majority of this region's sequential revenue decline. I would like to highlight that, due to our continuing efforts to right-size our Brazilian business unit, this region generated a small operating profit in the first quarter.

In the Asia-Pacific region, first-quarter revenues were $6 million, down 6% sequentially with substantially the entire decline driven by the strengthening US dollar. On a year-over-year basis, the Asia-Pacific region declined 27%, primarily reflecting the stronger US dollar along with reduced drilling activity in New Zealand.

On the technology front, like others in the industry have reported, we have experienced a change in customer decision-making in the current environment, with operators tending to favor low-cost product offerings rather than value-added technology. With his headwind, revenues from our family of Evolution systems declined to $31 million in the first quarter. Regionally, Evolution revenues were $27 million in North America, $2 million in the EMEA region, and $2 million Asia-Pacific. As rig count stabilize, we would expect this trend to moderate, with customers becoming receptive again to value-added technology.

With a decline in revenues, an unusually weak sales mix, and the natural lag in realizing the impact of cost reductions, the Fluids segment had a $1.7 million operating loss in the first quarter, which includes approximately $2.6 million in charges related to our workforce reductions, along with $600,000 for the impairment of receivables. Adjusting for these charges, the Fluids Systems segment was slightly above break-even for the quarter. As we highlighted on the February call, in periods of sharp activity declines, our operating margins are negatively impacted by the natural lag between activity declines and the timing of associated workforce reductions. The quarter was further impacted by an usually weak sales mix, including not only lower Evolution sales but also by a higher percentage of low-margin base fluid and barite sales as customers worked through their fluid systems additive inventories, which carry a higher margin.

With regard to our near-term outlook, we expect North America will continue to be the most challenging market, with US rig counts already off more than 30% from the average first-quarter levels. In April, our US revenues have tracked approximately 15% below the Q1 level, reflecting a favorable comparison to the 30% industry rig count decline. We also expect Canada to experience the typical seasonal trough during breakup. As Paul highlighted, we have reduced our North American workforce by more than 35% since the beginning of the year, reflecting a combination of contract positions and full-time employees. We continue to closely monitor activity levels in each region and are prepared to take further actions as warranted.

Outside of North America, we expect activities to remain stable, aside from the impact of fluctuations in the US dollar exchange rate. Kuwait has been a bright spot, as activities have ramped up ahead of our original expectation. Also, the transition to the new Sonatrach contract in Algeria is currently underway, although we do not expect to see any meaningful increase in revenues until the back half of the year. In terms of operating income, we expect to see modest sequential improvement in the second quarter with a positive impact from our cost-reduction actions and improved sales mix to be partially offset by the lower revenues in North America.

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 our results of our Mats business before finishing with our consolidated results. The Mats business reported first quarter revenues of $37 million, down 19% from the fourth quarter but up 16% year-over-year. The lower revenues were relatively in line with our expectation discussed on February's call. The Mats sales declined by $3 million from the prior quarter but remained $3 million above the first quarter of last year. Rental and service revenues declined $6 million from the prior quarter but improved $2 million from the first quarter of last year. This sequential decline was attributable to lower activity levels, combined with pricing compression in our E&P markets. Outside of E&P, activity levels remained stable with non-exploration customers contributing approximately 25% of rental and service revenues in the first quarter.

On a year-over-year basis, segment revenues improved by $5 million, including a $3 million increase in Mats sales and a $2 million increase in non-exploration rental revenues, while the contribution from E&P activities remained relatively flat. Operating income for the Mats segment was $15.6 million in the first quarter, down 32% from the fourth quarter but up 17% year over year. And despite the significant pricing compression, we achieved a 42.8% operating margin in the first quarter, down from the 50.9% last quarter, but in line with the 42.6% operating margin a year ago.

Looking ahead to the second quarter for Mats, while there's still an elevated level of uncertainty regarding drilling activity and pricing stability, we expect total segment revenues to remain relatively stable with the Q1 level. We expect the weakness in the drilling and completion activity will be somewhat offset by gains in our non-exploration markets. With the weakness in the exploration markets as well as the added cost associated with our new manufacturing facility, we expect to see a modest reduction in operating margins from Q1 levels, likely hitting the high 30%s.

Now moving on to our consolidated results. For the first quarter of 2015, we reported total revenues of $208 million, down 32% sequentially and 14% year over year. SG&A costs were $26 million, down 15% sequentially but up 2% year over year. The sequential decrease in SG&A is primarily attributable to the decline in revenues, along with lower performance-based incentives. Corporate office expenses were $7.8 million in the first quarter, down $1.1 million from the prior quarter, primarily driven by lower incentives. First quarter spending included about $600,000 in legal costs associated without outstanding litigation, including the wage and hour litigation matters described in our year-end Form 10-K. Consolidated operating income was $6.1 million in the first quarter, down substantially from the $38.6 million in the fourth quarter and $20.8 million in the first quarter of last year.

Foreign currency exchange was a $1.6 million loss in the first quarter, largely reflecting the impact of the continued strengthening of the US dollar against the functional currencies of our foreign operations, most notably Brazil. The revaluation of US dollar-denominated balances due from our Brazilian subsidiary resulted in a large currency exchange loss in Brazil. Further, due to the fact that the currency losses caused a pretax loss in Brazil, for which we are not permitted to recognize a tax benefit, this resulted in an unusually high 57% effective tax rate for the first quarter of 2015. Going forward, currency fluctuations notwithstanding, we expect our tax rates to return to levels consistent with prior year.

Income from continuing operations for the first quarter was $1 million, or $0.01 per diluted share, compared to $0.25 in the previous quarter and $0.13 in the first quarter of last year. As noted in yesterday's press release, diluted earnings per share for the first quarter of 2015 excluded the impact of the assumed conversion of our senior convertible notes. Specifically, since their impact would have increased our diluted earnings per share for the first quarter, accounting rules required us to exclude this from the first quarter calculation, leaving diluted EPS at the $0.01 for the period. In addition, as highlighted in the release, the severance charges and unfavorable foreign currency loss combined to reduce our reported earnings by $0.04 per diluted share.

Now let me discuss our balance sheet and liquidity position. During the first quarter, operating activities provided net cash of $32 million, including $15 million from reductions in working capital. We used $19 million to fund capital expenditures, with $11 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, changes in exchange rates resulted in a $5 million reduction in the value of cash held in our foreign subsidiaries. As of the end of the first quarter, borrowings under our foreign lines of credit were $10 million. And there were no borrowings outstanding under our US revolving credit facility. We ended the first quarter with cash of $92 million and a total debt balance of $182 million, resulting in a total debt-to-capitalization ratio of 22.9% and a net debt-to-capitalization ratio of 12.9%.

For the full year 2015, our capital expenditure expectation has modestly declined, with CapEx now expected to be in the range of $65 million to $80 million, with the majority of the spending focused on the four key strategic growth projects outlined on last quarter's call. We expect near-term cash flow to remain strong, benefiting from working capital reductions. Most notably, we ended the first quarter with an elevated days sales outstanding level driven by the natural lag between the decline in revenue and the ultimate collection of receivables. We expect that as revenues stabilize, our DSOs will return to recent historical levels.

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

Thanks, Gregg.

While Q1 certainly has been a challenging quarter, we moved quickly to right-size the organization for the current activity levels. As we continue to evaluate the changing landscape, particularly in North America, we're also not losing sight of our long-term goals. And with our strong balance sheet, we are continuing to fund our growth strategy, including our Fluids blending plant, the new Mats technology center, and our deepwater Gulf of Mexico facility. Consistent with our guidance last quarter, we will continue to take a cautious approach with other discretionary uses of cash in North America, while aligning operating expenses to match activity levels.

With that said, we have also elected to carry a little extra cost through the cycle, protecting and strengthening our core capabilities. One example of this is within our Mats business, where we are adding to our organization in the areas of sales, business development and technology -- all capabilities that are critical to the accelerating the growth of the business and further diversifying our revenue stream into non-E&P markets. I would also like to mention that we are currently in the initial stages of starting up our new Mats manufacturing plant. As we ramp up the plant over the next several quarters, we will look to take down our existing plant for some long-overdue maintenance.

In our international business, we remain confident in our approach and believe that we will see continued year-over-year growth in our largest region, EMEA, barring any major currency fluctuation. As we stated in the past, it is our belief that our international operations will help offset some of the North American volatility. And although we have seen the price of oil rebound recently, we have to be prepared for prolonged periods of low activities levels in North America. With our continued investment in new assets and our strong balance sheet, it is our belief that we are positioning Newpark to emerge from the current cycle a stronger Company.

In closing, I'd like to thank all of our employees for the dedication and commitment through this cycle. With that, we'll now take your questions. Operator?

(Operator Instructions)

Our first question today is coming from Marshall Adkins of Raymond James. Please proceed with your question.

Thanks for all of the commentary. Could you give us a little more color, though, on duration of the Fluids business? And specifically, I am looking for how much do you think was activity driven versus pricing driving? Also address share issues in that sub-sector.

This is Gregg. I will take that first one and then probably hand it over to Bruce. In terms of bridging the gap, it is really the 43% decline in revenue against the 27% rig. Obviously the 27% rig count is the biggest piece of it.

We did have a little bit of unusual sales -- unusually high oil-based mud sales that we talked about last quarter. That was probably 3% or 4% of it. Pricing was roughly another 5% of it. We saw mid single-digit pricing compression. And then the majority of the rest relates to this anomaly that we talked about in terms of the additive inventory of the purchasing slowed down in advance of laying down rigs. Barite is kind of a little piece of it.

But you catch that back when the thing does turn or early stabilize, right?

That is exactly correct. That is an anomaly that you see is they do have levels of inventories on hand when it is coming down things slow, but as they ramp -- as they flatten, it normalizes. As things ramp-up, you see a little bit of a tailwind.

And, Marshall, to your point about market share, what we've seen in April is that we're taking back some market share.

Okay. So does that imply maybe lost a little bit on the downturn and you're going to recapture it? Or just overall you think you come out of this better off than you entered?

Well, Bruce, you can comment on that and then I'll add to it.

I think initially we lost quickly initially in terms of market share. But as the quarter went on and now into April, we have certainly gained that and more back. So from a market share perspective we are a little better.

And what really drives that to some degree is you customer mix. Right? If we have particular accounts that laid down the majority, then obviously you got a [sharing] issue and then we start working and tacking on other accounts. And that is what we have been successful doing in April.

Last question for me, I think I heard you mention that in that -- this area you expect a modest sequential improvement. Is that due to proving activity or stabilization of pricing with the little [marcher] gains? Help me understand how you are going to get a sequential improvement?

I guess most people are looking for Q2 as the bottom and then a pick up in Q3. It sounds like in this sector you are looking for a modest improvements in Q2. Did I hear that correctly?

Yes. That is correct. So you have a few factors that are going in our favor. One, the cost reduction actions that we had taken in the first quarter. Obviously we start to see the benefit of that in the second quarter. We have the anomaly of the weak mix that we had in Q1. That kind of reverses itself. So that is another tailwind.

But then you're -- that's largely offset by the fact that the revenues had not hit bottom. The revenues will be lower in Q2 from Q1. So you put all of that together and really we see a modest improvement over what we had. And our objective is to maintain this above breakeven through trough.

Good to hear, guys. Thank you all.

Thank you, Marshall.

Thank you. Our next question is coming from Jim Wicklund of Credit Suisse. Please proceed with your question.

Good morning, guys.

Good morning, Jim.

We have long said that in the down cycle, price is all that matters and value does not. Your Evolution revenues -- can you talk a little bit about the difference in margins and evolution and when does the market really start caring about value again? I know it is a pad answer to say eventually they always will. But your market penetration was getting better and this strikes me a little bit of a setback. Can you talk about your views and strategy on Evolution to the next year or two?

Jim, this is Bruce. I will take at least a part of that. You are right. When there's a significant decline in a market, the first reaction is always price.

And there comes a point there very quickly in a rapid decline when service companies cannot go any lower and there's still a need for more efficiency. So at that point, the focus very much comes back to value-added propositions.

We have not lost a focus on Evolution at this current time. We are still talking to all of our customers about Evolution. We're still promoting the value of Evolution. So that has not changed and we will continue to do that.

Jim, this is Paul. One thing that during this first quarter, we still maintain the significantly higher margins within the Evolution product line as well. So we did not see the compression there on our margins in Evolution. And as you say, at some point they will get back to buying the value-added technology.

I think our challenge is we got to do a better job of selling the technology to our customers in terms of total cost savings, And that is what Evolution is really about, driving your total AFE costs down. And we are starting to get a little more traction in that discussion at this time.

Okay. Thank you on that. My follow-up, if I could, if you lose money in Brazil again and you cannot claim the tax benefit, then your tax rate would be high again. And you said that your tax rate would normalize down to about last year's level. Can you explain to me what is happening in Brazil that allows that to happen? Is Brazil going to get better?

Yes. The point there was that the loss in Brazil -- Brazil was actually profitable in the period. The loss was caused by the currency fluctuation. And so that was a point of currency rates notwithstanding -- fluctuations notwithstanding, we expect our tax rate to get back to the normal level.

Now, obviously if it swung in the other direction, that provides us a little better tax rate. If we continue to have the hits from currency exchange, that would go the other way.

Okay. So we could just look at the dollar versus the real for the first quarter and do a calculation on that, right?

Absolutely.

Okay. Thanks, guys. I appreciate it.

Thanks, Jim.

Thank you. Our next question is coming from Neal Dingmann from SunTrust, Robinson, Humphrey.

Good morning, guys. I guess the question would be more for Bruce. Just, Bruce, obviously it looked like to me -- or maybe even for Paul -- that your international on the Fluid side, despite obviously being weak in North America -- a lot of the Fluids other than -- obviously Jim's comment about Brazil. Your other areas international on Fluids continue to maintain quite a good pace.

And I'm wondering, going forward, would you guys think about entering new markets internationally to try to maybe offset some of this North American volatility? Or is there more market share that you can penetrate in existing international?

I am just wondering, Paul, between you and Bruce right now -- when you're looking at the international market, what kind of opportunities you see and how do you see it?

This is Bruce. In the international market, we are seeing slight weaknesses in some of the regions but we have certain strong areas that will more than offset those witnesses. So we still feel that the international market will be better this year than it was last year.

To answer your other question, yes, there are areas that we still have to go into and are still looking to go into. We're working on several of those now but I do not want to call them out at this time. But there are opportunities for us in existing areas and in new areas. And we are going to hopefully take advantage of both of those.

Neil, what I would comment on is that we have not seen any slowdown in the opportunities that are being presented to us in the international market -- mostly in the EMEA region.

That make sense. Okay. And then just lastly, you mentioned in the press release here that part of the hit in the US was a lower wholesale barite sales. Just wondering, again, what can you do in that business -- or is that business you will just scale back or what can you do in that area to try to sort of right that ship?

Really, you hit upon it. We scale back for now. All of the customers that they have are in the same position and in the same market as of the rest of us in North America. So we scale back for now.

Okay. Thanks, guys. All the best.

Thanks, Neal.

Thank you. Our next question is from George O'Leary from Tudor, Pickering, Holt.

Good morning, guys.

Good morning, George.

So on the pricing front, you said pricing down on the Fluids business kind of mid single-digits, is that really driven by your competitors lowering their prices? Or are you more just getting direct negotiations with your customers asking for pricing relief on your Fluids products? And then just generally, how would you say competitors behavior is or has been in this downturn?

I would say it is a combination of a competitors and direct initiation by customers. So it is a blend of both. We have had a modest pricing erosion in the first quarter, but as of this moment in time, we are not seeing any further pricing erosion at this time.

Okay. That is helpful color. And then on the cost-cutting front, it sounds like you guys have done a lot of the heavy lifting there already -- what's left for you to do there? Is it really just supply chain driven? Is that something that kicks in over a longer duration rather than what we're going to see from the headcount reductions in Q2?

And then are there any sort of beyond that efficiencies that you guys can gain via logistics? What are the other cost-cutting opportunities that you have?

This is Bruce. Our supply chain group obviously have been very active during this period. As we are being forced down in price by our customers, we are also dealing with our suppliers and trying to get better agreements and relationships and pricing from them. And that is being successful to -- up to this point. There probably is still headcount reductions to come but that will be on a regional basis, based upon need, and probably quite small from this point going forward.

Yes, the one thing I would like to comment on, obviously we have not been buying a lot of raw material and inventory. And so the real benefit from a supply chain will not kick in until we start purchasing more raw materials. And that's starting to move forward as we speak.

Okay. And then maybe just one more, if I could -- and thanks for the color on that. On the Mats side, very impressive margins in Q1. I know it dipped a little quarter-on-quarter but what's your confidence level that you can, assuming you achieve the flat revenue that you are desiring for the rest of the year, that you can keep Mats margins in or around that 40% level?

As I mentioned, and I think we touched on this on last quarter's call, I think over 2015 we definitely expect them to be drifting into the 30s. And actually as we're looking at Q2, it is likely that that will happen this quarter. We are seeing some level of stabilization in the environment. But part of the challenge here with entering new markets is you are adding cost, you are building fleet and those opportunities do not necessarily come through immediately. So you have some timing issues and that's going to create some natural volatility in the margin on a quarter-to-quarter basis.

Thank you. We will move on to our next question from Stephen Gengaro of Sterne, Agee.

Thank you, guys. Good morning. When I look at the Fluid side, the decremental margins are actually not so bad. You lost, I think, 34%, 35% in revenue. Your decrementals were pretty good. You're talking in the next quarter about a similar type of revenue decline and slightly higher margins? Am I reading that right?

No. That is accurate. We are expecting the revenues to continue to come down. But again, because of all the cost actions that we've taken, the more stable operating [increment].

But the revenue decline not at the same pace.

Not at the same pace. Correct.

Okay. And then as we look ahead with the lower cost structure, when I look at your history -- the decremental margins we can take a look and see what they said -- but would this suggest maybe you start to get better margin progression coming out of this because of some of the cost saving initiatives you're putting in place now?

That is a correct assumption. Absolutely.

Okay. And then just one final one. When we look at -- and this came up a little bit earlier in the call as far as competition and with some of the larger players with Fluids businesses are doing in this type of market -- how do you fight that and claw back shares if their customers are not maybe as willing to pay for technology as they are in a stronger market? The things we hear and read is people love your product. I'm just kind of curious how you [work through that].

A couple of different questions. The one, again, on customers buying value on technology. Again, initially they kind of get into what we call a spreadsheet mentality. They're just looking at unit cost. But again, that starts to transition into more value in terms of driving the synergy.

And how we have been winning for a long period of time is around service quality. We do an exceptional job of servicing the customers.

The third question you asked is around the large competitors. And I would say, to some degree, we have not really seen it quite yet, but there is some confusion in that large customer base because of the announced merger between Baker and Halliburton. And we are starting to see some customers asking about Newpark coming in and helping with them.

Thank you. Our next question is from Marc Bianchi, Cowen and Company.

Hi. Good morning.

Good morning.

Just to start at a point of clarification on the outlook for the Fluids profitability, is the sequential margin improvement in second quarter -- is the starting point first quarter excluding the one-time cost for workforce? Or are you saying the profit is up, even after adding back that headwinds that occurred in 1Q?

The comparison that I was referring to was actually the as reported numbers. The small loss. And so as I had stated, our objective here for Q2 is trying to keep this above breakeven as the revenue hits the trough.

Okay. Thanks for that, Gregg. The Cairn contracts in India, the falloff that was mentioned there, was that something that was expected? And can you maybe update us on the other contracts, the large international contracts you have and the revenue visibility that you have over the next few quarters? Is there anything that is sort of scheduled to roll off and where are things maybe more visible than others?

The Cairn contract -- we are still active with Cairn. They have certainly reduce their activities levels for now based upon the oil price. But we expect, as the oil price comes back, that the activity will come back.

I mentioned a little Kuwait was running a little ahead of where we hoped it would be. So that is a very positive development. And the large contract that we gained in Algeria, although it will be the back half of the year as it ramps up, it will be a significant addition to our international business.

Okay. Thanks for that. Just one more on the Mats side, you mentioned some offset from non-exploration sales supporting the business. I assume that when you say non-exploration, that is non-energy. Can you just help us with some more color on that and maybe discuss the mix that you have between energy and non-energy within that business and how you see that playing out over the next few quarters?

Yes. I would probably characterize it under the energy umbrella. It is pipeline, construction, power transmission, maintenance -- those types of projects.

Yes. So the separation is really not tied to the bit and the drilling activity or rig count.

Thank you. Our next question is coming from Joe Gibney of Capital One.

Thanks. Good morning, guys. Just one quick clarification. Gregg, I apologize if I missed it, but did you quantify the annual savings and a dollar perspective that you're going to be achieving from the headcount reductions for North America Fluids?

No we did not.

Okay. And then on the Mat side, I want to clarify that last comment and explore a little bit further. The expansion on non-oil and gas mix, utility, pipeline, et cetera. You had 25% of the mix.

It takes time to get the tentacles in, I understand. What is sort of a reasonable assumption for what that mix could be into 2016? And how aggressive do you want to be from a sales perspective? And what is a reasonable expectation for growing outside of your base oil and gas business?

In terms of what we expect, in terms of that ratio split in 2016 -- really premature to give you any guidance at this time. I would say, though, as I mentioned in my script that we are adding new resources -- sales management, business development managers -- to go after those segments. So there will be a little bit of a lead lag. We certainly anticipate to have some more revenue in the backend of the year but we will wait and see what 2016 brings.

Alright. Fair enough. Thanks, guys.

Thank you. Our next question is coming from Doug Dyer of Heartland Advisors.

Good morning. I see that the receivables came in quite a bit, which was to be expected. So I would like to know if you anticipate further receivables collection to help build up the cash flow a bit? And at the same time, does some of that go out if you are starting to build up some of your early inventories you just stated?

Yes. I touched on this a little bit in my commentary. The DSO's did jump by something close to 20 days. And that's that natural lag. So you quantify the impact and that is roughly $40 million of AR that that reflects. So we definitely expect to see that DSO now continue to come down as revenues stabilize out and ultimately getting back to our more typical levels.

Inventory, on the other hand, there will be some benefits that come from reducing your inventory. But that one is a little more challenging just because of the logistics of managing your various warehouses and bases.

So, yes, we would expect our cash balances to continue to build as we move through the second quarter.

Okay. And just a question on the Mats, I know that the goal had been to build up the rental fleet and have a smaller amount that is actually sold. How do you foresee that mix of sales versus rentals progressing in this type of lower price environment? Or does it actually stay the same?

Longer term -- and I go back to our previous comments about our long-term vision and the reason for the plant expansion et cetera. And it is our desire to continue to build out that rental business and largely building out this business outside of the E&P space. So over the long term you would expect that to become a bigger piece of it. The bigger question, as we touched on a little earlier, is the timing of how that build flows.

Thank you. Our next question is from Bill DelHagen of Titan Capital Management.

Thank you. A couple of questions. I will follow up on the Q1 cost-reduction. You said you had not quantified them. Will you quantify what those cost savings are, please?

We are not prepared to do that at this time.

It's -- as I'm sure you can appreciate -- as we are looking at what is still a rapidly moving environment with the top line, there is just a lot of moving pieces to it.

I thought we would at least provide you the opportunity.

(laughter) Thank you. Bill.

My pleasure. Moving to another question please. You mentioned that the April decline in your business was roughly half the rate of the rig count decline. And you talked around the edges of that issue. But I just want to ask you point-blank, why is it that you believe that your business is doing that much better than the rig count?

It really comes back to the -- that anomaly that we had talked about within the first quarter of the purchasing behavior changing. So you take a step back and you look at our current run rate versus where we were in Q4 at the peak levels, our revenues are tracking very closely to the rig count. Obviously we had an under performance in Q1 for a variety of reasons but we are seeing that issue now reverse here in Q2 and it comes back more to that long-term picture.

And ultimately we are seeing market share gains as a result of that.

And I want to take this one step further. I think that you touched on this a little bit. But are you finding that the operators are now more interested in looking at technology or are they still focused on lowest price, what the spreadsheet shows, period, end of discussion?

It is really a mix. We have certain customers that are beginning to get back focus now on these value-added technologies. And we have some that are still in the pricing -- the low pricing mode. So it is a blend of both. But we are obviously focusing on those that are looking for other answers.

Yes, and that is really to give Bruce some credit in his sales organization in North America. What they have been doing is really prioritizing the accounts and the ones that are starting to move towards the value-added technology that takes down their total costs, reduces the cost of [AFP]. That's where we are prioritizing our sales organization.

Thank you. That concludes the Q&A portion of today's call. I would like to turn it back to management for final remarks.

We'd like to thank you once again for joining us on this call and for your interest in Newpark Resources. We look forward to talking to you again at the conclusion of the fourth quarter.

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