NPK International Inc (NPKI) 2016 Q3 法說會逐字稿

Greetings and welcome to the Newpark Resources third quarter earnings conference call. At this time all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As reminder, this conference is being recorded. It's now my pleasure to introduce your host, Brian Feldott. Thank you, you may begin.

Thank you, operator and good morning everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review our third quarter 2016 results. With me are Paul Howes, our President and Chief Executive Officer; Bruce Smith, President of our Fluids Systems business; and Gregg Piontek, our Chief Financial Officer.

Following my remarks, Paul provide a high-level commentary on the Third Quarter. 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 quarter. Paul will then conclude the discussion before opening the call for Q&A.

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 newpark.com. There also will be a recorded replay available by phone which will be available until November 11, 2016 and that information is included in yesterday's release.

Please note that the information reported on this call speaks only as of today, October 28, 2016. And therefore you're 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 laws. 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 listeners are encouraged to read our annual report on Form 10-K, current quarterly reports on Form 10-Q, and current reports on form 8K to understand certain of those risks, uncertainties and contingencies.

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

Thank you, Brian, and good morning to everyone. While market conditions remain challenging, we're encouraged by the early signs of recovery in North America, where we have seen for the first time in nearly two years a sequential rig count increase. And while these rig additions have tended to focus on less intensive wells, we've seen a steady increase in customer activity over the last four months, following the trough in the second quarter.

Revenues in our North American fluids business improved by 22% in the second quarter, benefiting from the improving rig count and customer activity along with our first revenues from our upgraded deep water facility in Fourchon, Louisiana. This revenue represents a major milestone in our long-term strategy to penetrate the deep water Gulf of Mexico going head-to-head against the largest oil field service companies in the world.

As we highlighted in the July call, the first phase of our facility upgrade came online early in the third quarter allowing us to begin servicing the international oil companies in this important market. Meanwhile, we're continuing the qualification process with other large IOCs that operate in the deep water Gulf of Mexico.

On the international front, as expected, Fluids revenues declined sequentially driven primarily by the successful completion of the ultra-deep water exploratory well in Uruguay. As noted in yesterday's release, we recorded charges in the quarter with the wind-down of operations and asset demobilization in Uruguay. While we were naturally disappointed by the unfavorable findings from this record setting deep water well, we are extremely proud of our contribution on a project that Total recognized as an operational success.

I'm also excited to announce that we are have won a new international contract in the Latin American region with ENAP in Chile. Contract values estimated at $25 million over a five-year period and is expected to start in early 2017. In our EMEA region, activity has remained relatively stable overall, although as anticipated, revenues pulled back from the very strong second quarter results. The resiliency of the region is driven by our NOC customers in Algeria and Kuwait while IOCs continue to take a cautious approach in the current commodity price environment.

On the Mats side, third quarter revenues were in line with our expectations although the quarter's results were negatively impacted by the reconditioning charge as called out in yesterday's press release. While revenues were down from the second quarter, we're encouraged to see our first sequential increase in revenues from North American exploration markets in nearly two years.

As I mentioned last quarter, we were awarded two US patents related to our new equipotential zone matting system earlier in the year. We began our commercial launch of the EPZ system which has been well-received by customers in the utility market. We are very pleased with the initial commercial response including recent orders for fourth quarter EPZ mat sales.

Meanwhile, our balance sheet position remains strong as we ended the third quarter with a cash balance of $92 million. Working capital reductions provided cash to fund our strategic investments including the expansion of our Gulf of Mexico deep water facility as well as our acquisition of a specialty chemicals provider which further expands our technology portfolio and capabilities.

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

Thank you, Paul and good morning, everyone. In the third quarter, the Fluids systems segment generated total revenues of $89 million, reflecting a 7% decline from the second quarter and a 36% decrease year-over-year. Our strongest sequential improvement came from North America where the revenues increased by 22% sequentially to $40 million in the third quarter.

In the US, revenues were $34 million, up 10% sequentially. The third quarter benefited from improvements in most land basins with the Permian being a particular highlight. In addition, as Paul mentioned, the US benefited from elevated product sales into the deep water Gulf of Mexico as we recently brought online the first phase of our Fourchon upgrade.

The deep water revenues this quarter highlight the strategic importance of the Fourchon investment which is essential to opening up the sizable fluids market. On a year-over-year bases, US revenues were down 48%, clearly in line with the 45% reduction in rig count, reflecting declines in customer spending intensity and pricing, partially offset by improvements in market share.

Revenues in Canada followed the typical seasonal pattern coming out of spring break-up, improving by $4 million over the prior quarter and outpacing the improvement in rig count. On a year-over-year basis, revenues were down $9 million as the Canadian market continues to run well below prior year levels. Despite the improvements in the North American market, the revenue gains in this region were not sufficient to fully offset the anticipated declines in Uruguay and the EMEA region. Our Latin American region posted revenues of $8 million in the third quarter, down $9 million from Q2, largely reflecting the completion of the ultra-deep water project in Uruguay.

As we discussed last quarter, the Uruguay project contributed $11 million of revenue to Q2. This decline was partially offset by a modest increase in Brazil. On a year-over-year, Latin America are down $5 million or 38% reflecting the decline in Petrobras activity.

Revenues in our EMEA region were $40 million in the third quarter down $4 million sequentially reflecting a 9% decrease. As we highlighted last quarter, Q2 benefited from elevated product sales which account for about half of the sequential decline. The remainder of the decline is primarily attributable to a reduction in customer activity in the Republic of Congo.

The technically challenging Shell project in Albania also provided a modest lift to revenues in the third quarter. On a year-over-year basis, revenues from the EMEA were down only 2% despite the completion of our deep water Black Sea contract and modest currency headwinds as this impact is largely offset by market share gains in Kuwait and Algeria.

Activity in our Asia-Pacific region continues to remain extremely soft with the region contributing only $1 million of revenue in the third quarter. As highlighted previously, we recorded charges for asset impairment in the second quarter reflecting the ongoing weakness and outlook for drilling activity in this region. With the follow-up deterioration in the most recent quarter, we're revaluating additional measures to right-size our cost structure.

As discussed in yesterday's press release, the third quarter included $2.6 million of charges in Uruguay reflecting the costs associated with asset demobilization and wind-down of our operation. While Total publicly highlighted the rack of setting while as an operating success, the decision was made to discontinue their off-shore exploration efforts in the country for the foreseeable future. Adjusting for the Uruguay charges, the segment operating loss was $6.4 million in the third quarter.

On the technology front, while opportunities have been somewhat limited by the soft market environment, we're starting to see improvements in certain basins. Revenues from our Evolution family of systems were up modestly from the previous quarter with the increased concentrated in the Permian and Eagle Ford basins.

Despite the current market cycle, it's important to highlight that we've maintained our focus on our differentiated technologies which we see as a distinct competitive advantage as the market recovers. To that point, it's worth noting that we acquired pragmatic drilling fluid additives during the most recent quarter.

Although a relatively small acquisition for us, Pragmatic's technical expertise was critical to the development of our fusion technology and enhances our talented R&D team as we continue to develop the next generation fluid systems.

Turning to our near-term outlook, we expect to see a modest strengthening in total segment revenues, primarily driven by improvements in North America. Overall, we've seen steady month-over-month improvements since the Q2 trough with a Q3 North America exit rate running approximately 10% ahead of our Q3 revenue level.

We expect near-term revenues will track fairly closely to overall rig count although the impact of the holiday season has always a bit of an unknown. Outside of North America, we don't anticipate any significant changes to current activity levels until we receive a further recover in commodity prices.

In terms of our segment operating margin, we expect to see a margin improvement driven by the North American revenue growth which should flow-through in our typical range for incremental margins. The North American improvements will likely be somewhat offset by charges in the international business as we finalize our Asia-Pacific restructuring and the exit from Uruguay. And finally, as Paul mentioned, I would like to highlight the multi-year contract award in Chile which serves to continue our international expansion.

Last month we were awarded a five-year contract to provide drilling fluids and related services to ENAP in support of the land drilling operations in Southern Chile. This contract is particularly noteworthy as the program includes complex horizontal drilling which could provide an opportunity for our Evolution system. The contract is expected to begin in early 2017 and provide revenues of up to $5 million per year.

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

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

The Mats business reported third quarter revenues of $15 million, down 19% from the second quarter year-over-year. Sequentially, the revenue decreases primarily attributable to a $3 million decrease in Mats sales.

Rental and services revenues came in at $14 million for the third quarter down modestly from the second quarter. The decline is primarily driven by the lower revenues from the power transmission markets where we experience delays in certain projects during the quarter. The delays were driven in part by the heavy demand in the power transmission grid in periods of extreme heat such as those experienced in the South during July and August which prevent the utilities from taking the infrastructure offline for maintenance.

The lower revenues from power transmission were partially offset by a modest improvement in oil field markets, which as Paul mentioned reflects our first quarterly improvement in revenues from the oil field in nearly two years.

Overall, non-exploration markets contributed approximately two-thirds of total segment revenues in the third quarter, including $9 million of rental, some service revenues and substantially all of our Mat sales. Comparing to the third quarter of last year, rental and service revenues have increased by $1 million, reflecting a $3 million increase from non-oil field markets, offset by a decrease from exploration customers.

As highlighted in yesterday's press release, the third quarter included a $700,000 charge resulting from our decision to recondition customer mats that were produced in 2015 as part of our initial startup of the new manufacturing line. The reconditioning was isolated to a single batch of mats produced from one customer last year, addressing quality issues detected in the finished product.

Including the impact of the Mat reconditioning charge, segment operating margin came in at 6% for the third quarter compared to 21% last quarter. Adjusting for this charge, third quarter operating income was relatively in line with our expectations.

Turning to our near term outlook, while the timing of Mat sales was always a challenge to predict, we are encouraged by the increasing pipeline for mat sales opportunities and the fitting from customers looking to use their remaining budgets to purchase mats prior to year end, as well as the recent orders for our recently launched EPZ matting system. Driven by stronger Mat sales, we expect revenues and margins to rebound somewhat, returning more toward the level of the second quarter.

Now moving on to our consolidated results. For the third quarter of 2016 we reported total revenues of $105 million, down 9% sequentially and 32% year-over-year. SG&A costs were $21.7 million relatively flat sequentially but down 16% year-over-year. The year-over-year decrease is primarily attributable to cost reduction programs executed over the past year.

Corporate office expenses were $6.9 million in the third quarter, compared to $7.2 million in the second quarter and $7.9 million in the prior year. Consolidated operating loss was $15.1 million dollars in the third quarter compared to $15.1 million lost in the second quarter and a $9.3 million loss in the third quarter of last year.

Foreign currency exchange resulted in a $1.5 million sequential decline with the third quarter currency exchange netting to an $800,000 loss compared to a $700,000 gain in the second quarter. Foreign currency netted to a loss of $3.2 million in the third quarter of last year.

Third quarter interest expense netted to $2.1 million which compares to $3 million in the second quarter and $2.1 million in the third quarter of last year. As highlighted last quarter, the second quarter included a $1.1 million charge for the write-off of deferred financing cost associated with the termination and replacement of our revolving credit facility.

The provision for income taxes for the third quarter of 2016, with a $4.5 million benefit reflecting an effective tax rate of roughly 25%. The third quarter provision was unfavorably impacted by pre-tax losses in Uruguay where the business activities were exempt from income taxes.

Net loss for the third quarter was $13.5 million or $0.16 per share compared to a loss of $0.17 per share in the previous quarter. And $0.05 per share in the third quarter of last year. As noted in yesterday's press release, the third quarter 2016 results included three sense of charges, associated with the demobilization in Uruguay and reconditioning of customer mats.

Now, let me discuss our balance sheet and liquidity. During the third quarter, operating activities provided cash of $10 million including $14 million from working capital reductions. We used $7 million to fund capital investment, the majority of which was spent on the Gulf of Mexico deep water infrastructure project in the port of Fourchon. We also used $4 million to fund the acquisition that Bruce mentioned.

As of the end of the quarter, total borrowings were $170 million including a $161 million of convertible bonds that mature in October of next year. No borrowings are currently outstanding under our credit facility. We ended the third quarter with cash of $92 million resulting into a total debt to capitalization ratio of 25.7% at a net debt to capitalization ratio, 13.7%.

For the full year 2016, we expect capital expenditures to be approximately $40 million with the majority of the fourth quarter spending, related to the completion of the deep water shore-based project.

As we highlighted previously, we expect our ongoing maintenance capital requirements to be fairly limited for the foreseeable future, which we expect to benefit our cash flow during the recovery of the industry.

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

Thanks, Gregg. While markets remain soft, we're encouraged by the improvements in North America over the past few months, benefitting from the strength of laboring focus through the downturn, Newpark remains well-positioned to capitalize on the improving market conditions.

Our focus on managing our balance sheet, cash flow and cost structure has enabled us to continue the execution of our strategic plan. Our strategy relies heavily on the continued advances in technology and outstanding customer service where we've made meaningful progress in both segments.

In fluids, we continue to focus on introducing new technology including our Kronos and infusion lines aimed at driving operating efficiency for our customers. And as Bruce touched on, we've recently completed an acquisition to further enhance our ability to develop next generation fluid systems.

In our Mats segment, we're also introducing new technologies. As I touched on earlier, we've now launched our patented equipotential zones matting system which provides an innovative solution to meet customer needs for the power transmission market.

In addition to the introduction of new technology, we have also captured additional market share in both segments. Internationally, our Fluids share gains in the EMEA region have been a particular bright spot, benefitting from our geographic expansion in the Middle East and increasing market share with NOCs.

The most recent contract award with ENAP is yet another step in our international market share expansion, building upon our Latin America presence and providing the opportunity for us to highlight the benefits of our technology in a complex, horizontal drilling application. And it's important to highlight that these shared gains are not limited to the international markets.

While overshadowed by the market condition, we've also seen a steady improvement in our US market share over the past two years. We believe that our US market share now stands at a record level, the number two drilling fluids provider to the US land market. Thus, the share increase is meaningful as it provides the foundation for improved financial performance as the market recovers particularly as activity focuses on unconventional formations where operators drill deeper wells with longer laterals.

In Mats, our focus has been on diversifying into the new end-user markets where we are seeing meaningful progress. In 2016, non-exploration markets represent over two-thirds of our revenue. Even though we remain early in our penetration of these markets. Meanwhile, we believe the improving economics with exploration will bring continued increases in the drilling and completions activity. Our matting systems have long been the established leader in key exploration markets such as the Northeast, positioning as well to benefit in the recovery.

In summary, while it appears, the worst of the current cycle is behind us, Newpark is not standing still. The strength of focus in our long term strategy is now more important than ever. And to that point, I'd like to thank all of our employees for their hard work and continuing dedication during these difficult times.

With that, we'll now take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Praveen Narra with Raymond James. Please go ahead with your questions.

Hi. Good morning, guys.

Good morning. Is there deepwater sales out of Gulf of Mexico, I was wondering if you could add a little bit more color on what you're seeing there in terms of customer mix the reception that you're seeing so far just on the initial stuff that's gone out.

Yes, I will take that one, this is Bruce, historically we've been promoting technology as a driver for operational efficiency on land and offshore and deepwater is no exception to that. So we've been finding during the build-up to our launch of our new facility that customers are particularly excited about the fact that someone else is coming into this market that might be able to do something a little bit different.

So we're very pleased with our early success that we had since commissioning the first phase of our upgraded facilities, so very pleased with that. And in terms of the meaningfulness of it, 50% of the increase in the U.S. revenues came from that deepwater customer and one other question you have is on the customer mix, this is for one IOC predominantly.

Okay. That's very helpful and then if I could ask a question on the Mats side, we continue to hear about your well size in terms of pad size and in terms of how long the equipment on site. Could you walk through how your value added proposition for the Mats business is increased or how it's affected by the longer equipment on site near the bigger pad sizes?

Yes, certainly it has a direct correlation to potentially that the mats rental revenue as the market recovers. As you know most of our revenue comes from the Northeast historically. So as they have equipment long run site, larger pads, more pad drilling, that would actually increase our utilization of the Mats and for longer period of time, so would provide an uplift.

In terms of how the customer would view using either you guys or an alternative, does the bigger size add to that proposition from you guys and further displacing other options?

No, I don't think it really changes any of the perspective from the customer's point of view.

Okay, perfect. Thank you very much guys.

Thank you.

Our next question comes from the line of Neal Dingmann with SunTrust. Please go ahead with your question.

Good morning guys. Paul you or Bruce just obviously that acquisition, the $4 million acquisition you did this specialty chemicals how that, will you combine that with Evolution or how are those two going to be completely separate I am wondering how those two will work together if they will?

However looking at this, the offerings are so differentiated. Chemistry that fits well with what we are doing in a bigger scheme of things. Initially, the chemistry was on the drilling fluid additive side, but we see the chemistry that they were developing as being able to transition into either other segments of our industry for example may be into completion fluids and we also see that it might travel geographically as Evolution did in the early days, but at early stages of this, but we saw them as good add on to the differentiated chemistry format that we're following.

Yes, so it will be fully integrated into our drilling fluids organization and really into our technology group.

Make sense. Okay, got it Paul and then just lastly just one more just that as you mentioned in your prepared remarks Paul that EMEA region continues to stay very resilient and I'm just wondering are there additional parts of that area or more particular additional customers in there that you continue to look at or continue to have conversations with them?

Again you guys historically did a great job of over the years developing those markets and developing that market so I'm just wonder ones that you haven't said too much about at this time that could play out in the next year or two.

Yes certainly the two strongest players for us right now or Algeria and Kuwait but the Middle East in general is an area that we've been targeting for some period of time. Whether its Oman as you know we just picked up a small contract there. That's normally our way we go in, find a small contract and then find a way to grow. Saudi Arabia is very interesting too as well, Qatar. So we spent a lot of time and effort in the Middle East currently.

That makes sense. Thanks guys.

Thank you.

Thank you. Our next question comes from the line of [Steven Dinger] with Loop Capital. Please go ahead with your question.

Thanks. Good morning, gentlemen.

Hey, good morning Steven. How are you doing?

Good. Thanks. So two questions, the first is can you give us some color as I sort of think about incremental margin progression on the Fluids side, I think about North American mix you gave us some help there I think with the answer to a prior question but is given the new facility is the land business currently more profitable or is it or not because of the high-end nature of what's offshore?

Yes, it's Gregg, I will take that. As far as the breakdown in the split of our overall profitability between land and offshore, we don't really break things down and disclose it that way. Obviously where we stand right now, the offshore activity is very limited. We're very early in that, in the stages there, but back to the broader question about your incremental margins however, the expectation that we have is not just similar with the historical progression of that business and that is in that call at 25, 30 range is usually where things go whether it's declining in the decremental or then recovering with the incrementals and that would be our expectation.

The one big variable that you have in it is the impact of technology and we saw that a few years back particularly in '14 where we saw really significant penetration with Evolution. So, we saw incremental that were well above that so, that's the one variable in it.

And that's a Fluids wide comment, not a North American comment, right.

Correct.

Okay and thank you. As the follow up, would it be as the Gulf of Mexico business hopefully expands for you over the next one to two to three years that should be additive to the overall margin given the higher-end nature of it, is that fair once it becomes a more sizable business.

I think that's fair comment and that's correct.

Whether you remember about revenue offshore for us is that obviously an offshore rig represents a lot more revenue than the land break.

Yes, yes okay. Great now that's helpful. Thank you.

Thank you.

Our next question comes from the line of Bill DelHagen with Titan Capital Management. Please go ahead with your question.

Thank you. I want to start by following up relative to the acquisition you made reference to some chemicals that may be relevant to the completion fluids market and that is not an area you've historically addressed, is that something that should be on our radar screen as to your roadmap going forward? How do we think about that please?

Yes, this is Paul, Bill, certainly we have sold completion chemistry before but mostly in our EMEA region and so, little bit of vertical integration but you think about completion chemistry, it is a concentric ring around drilling fluids so, that's an area we certainly are interested in on a go-forward basis.

What is the timing that we ought to think about?

In terms of the well the acquisition was completed, so we'll continue to take that technology and spread it around the globe for us but that will take time.

Yes and I think again it's important to highlight the overall size of this acquisition as well and while there is a little bit of activity in these other areas at this point it's pretty small overall.

I'm sorry where I was going with that question is the timing that you might focus more on the completion fluids market.

Well in the EMEA region, we continue to do that as we win new business we're quite often asked by customers to bundle that with drilling fluids, so that's kind of an ongoing part of our business in that part of the world.

All right, thank you. And then looking at the fluids business you lost less money in the third quarter than you did in the second quarter on lower revenues that is a bit counterintuitive how do you accomplished that.

Well I think you have to normalize that a little bit for as we did have charges in the second quarter but when need to normalize that you will see that the overall margin profile is improving and it's really a reflection of the fact that we're seeing the full benefit of the cost, that the breakdown in the cost from all of the cost actions taken prior in the year we're now on a more normalized level going forward and that's what we were starting to see that the stronger margin profile in North America.

Great. I'm not used to saying congratulations on losing less money but congratulations.

We understand, but thank you for the comments.

Thank you.

All right.

That concludes our question-and-answer session. I would now like to turn the call back over to management for final comments.

We'd like to thank you once again for joining us on the call and for your interest in Newpark Resources. We look forward to talking to you next quarter. Good bye everyone.

Ladies and gentlemen thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.