NPK International Inc (NPKI) 2018 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.

It is now my pleasure to introduce your host, Ken Dennard, Dennard Lascar Investor Relations.

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 fourth quarter and full year 2018 results.

With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; and Matthew Lanigan, President of the Mats Business.

Following my remarks, management will provide a high-level commentary on the financial details of the fourth quarter and outlook before opening the call to Q&A.

Before I turn the call over to management, I have a few housekeeping details to run through.

There'll be a replay of today's call, and it will be available by webcast on the company's website, at newpark.com.

There'll also be a recorded replay available until February 22, 2019, and that information is included in yesterday's release.

Please note that information reported on this call speaks only as of February 8, 2019, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of 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 Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by management.

The listeners are encouraged to read the 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.

The comments today may also include certain non-GAAP financial measures.

Additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on Newpark's website.

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

Paul?

Thank you, Ken, and good morning, everyone.

Before I cover the specifics of the fourth quarter, I'd like to begin by reflecting on the achievements on the recently completed year starting first with a review of our safety performance.

Here at Newpark, employee safety is of critical importance to our leadership team and the companies that we serve.

2018 provided a unique challenge to us as we expanded our North American workforce and integrated the largest acquisition in our company's history.

Although we saw a modest increase in our total recordable incident rate, which came in at 0.62 for the year, I would, nevertheless, like to thank all of our employees for their unwavering commitment to working safely.

Turning to the year-end financial results.

We are very pleased with the improvements in both segments in 2018, but also recognize that there is more work to be done to improve our returns on invested capital, particularly in Fluids.

Revenues for the full year 2018 improved by 27% year-over-year to $947 million, while EBITDA improved by 56% to $108 million.

Beyond the improvements in our financial performance, we also continue to take meaningful steps in the execution of our long-term strategy.

In Fluids, our full year 2018 revenues were $716 million, reflecting a 16% year-over-year increase while operating income improved by 46%.

Meanwhile, we remain focused on our total fluid solution strategy, expanding our product offerings, further penetrating key IOCs around the world and becoming a recognized global leader in fluids chemistry.

A primary objective, as we entered 2018 was to break into the deepwater Gulf of Mexico market with our Kronos system.

The risk profile in deepwater requires countless hours of effort to qualify every aspect of our technology, systems and facilities.

And we successfully broke through in 2018 with Shell Oil, drilling multiple wells.

As you may recall, our relationship with Shell began a few years ago when we were awarded technically challenging contract in Albania.

And in 2018, our relationship expanded into the deepwater Gulf of Mexico.

So how are we doing with Shell?

While I'm extremely proud to say that I just returned from a trip to the Netherlands where earlier this week, Newpark team members from our North American and European operations accepted Shell Oil's award for global service supplier of the year for 2018 for service companies under 100,000 operating hours.

It goes without saying that we are extremely proud of the recognition from a highly regarded international oil company, like Shell Oil.

We believe it speaks volumes to the unique value that we are providing to our customers worldwide.

I would like to thank the many members of the Newpark team that contributed to this great accomplishment.

In addition to our successes with Shell, we're also making progress with other IOCs and NOCs around the world.

In Australia, we're very pleased with the success of the Woodside offshore drilling campaign where we partnered with Baker Hughes on their integrated service offering.

Also, we've been successful with our 2 key NOC contracts in the EMEA region.

As discussed last quarter, we received a new 3-year contract with Sonatrach in Algeria, valued at roughly $125 million.

With the new contract now finalized, transition for the previous contract is currently underway.

In addition, I'm extremely proud to announce that we were successful in the latest tender with KOC in Kuwait, receiving awards valued at approximately $165 million, covering drilling and completion fluids along with related services for a 5-year term.

These new contract awards expand our presence with KOC and includes drilling in some of the more technically challenging areas in northern Kuwait.

The awards remain subject to final contract execution, which is expected to be completed in the first quarter.

Building upon our historical success with independent operators around the world, our recent expansion of share with targeted IOCs and NOCs is now serving to provide greater balance in our customer mix, now accounting for nearly 1/3 of our total fluids revenue.

We've also made meaningful progress this year in the execution of, what we call, our total fluid solution strategy, expanding our technology and expertise across the full offering of drilling, completion and stimulation chemistries.

As we highlighted in our November Analyst Day, 2018 was the year focused on developing all aspects of our business plans for U.S. completion fluids and stimulation chemicals, including market studies, product line development, branding, manufacturing and logistics planning as well as the modest level of facility investment.

And with the majority of the business plans completed, we are excited to focus our energy in growing these important product lines.

But nothing happens overnight.

I expect our commercialization efforts will take some time to bear fruit.

However, we're optimistic that our customers are looking for new and creative solutions that drive unique value, which we believe is a hallmark of our Fluids business.

Now turning our attention to the Mats business.

We're extremely pleased with the segment's financial performance in 2018, posting $230 million in revenue and a 26% operating margin.

In addition to the strong financial results, we've also made significant progress on many strategic fronts.

During the first half of the year, we completed the integration of the Well Services Group, which is our largest acquisition to date.

I'd like to thank the many members of our cross-functional team as they did an outstanding job integrating this important acquisition.

Also, as highlighted in our recent Analyst Day presentation, throughout 2018, we've continued building out our organization in the Mats division, aligning around the industry verticals we've created in oil and gas, utility transmission and distribution and pipeline.

We believe that provides the necessary focus to each of these industry verticals, will better position us to understand the customer requirements, align our product development process and deliver superior value through product innovation and enhanced service.

We believe that success across these areas will accelerate our penetration of these targeted end-user markets and create additional value for our customers and shareholders.

And to that point, I'm very pleased to report that our market diversification efforts are gaining traction with 2018 Mats segment revenues evenly split between E&P and non-E&P markets.

Benefiting from the exceptionally strong mat sales, total non-E&P revenues were approximately $115 million for the year, representing a growth rate in excess of 30% over 2017.

We've also been very active on the innovation front.

In 2018, we increased our organizational investments in R&D and expanded our portfolio of intellectual property as we develop next-generation products to meet more of our customer site access needs in an efficient, safe and environmentally sensitive manner.

Our latest product launch was highlighted at our recent Analyst Day, a modular aboveground storage tank utilizing our Dura-Base matting system.

This innovation system was developed to solve our customers' need for safe and cost-effective on-site water storage, which we offer in capacity configurations up to 80,000 barrels.

And finally, I'd like to touch on our balance sheet.

As we've consistently stated throughout the years, we believe that protecting our balance sheet remains paramount.

To that point, I'm pleased to report that we've maintained a modest debt burden through 2018, ending the year with a leverage ratio of less than 1.5x EBITDA.

Now turning to the specifics of the fourth quarter.

We're extremely pleased with the performance of our Mats segment in the quarter, while in Fluids, we're seeing meaningful progress in the execution of long-term strategy, which we believe is setting the course for improvements going forward.

Consolidated revenues were $248 million for the fourth quarter, representing a 5% improvement from Q3 and our strongest revenue quarter since 2014.

In Fluids, fourth quarter revenues for the segment came in at $178 million, a 2% sequential decrease, driven primarily by the slowdown in Canada and the delay of the Shell projects in the deepwater Gulf of Mexico as the projects moved into the first quarter.

Internationally, revenues were relatively flat to prior quarter, as anticipated declines in Kuwait, Albania and Brazil were offset by broad-based improvements across other markets.

Despite the modestly softer revenues, our Fluids operating income remained in line with prior quarter.

As highlighted in yesterday's press release, similar to the third quarter, the fourth quarter also include the impact of $2.5 million of charges, primarily attributable to severance and other charges related to cost optimization efforts.

Turning to the Mats business.

Fourth quarter revenues achieved a record of $70 million, which included $24 million of revenues from direct sales.

Consistent with our experience in recent years, the fourth quarter direct sales benefited from strong year-end demand from the utility sector.

In addition, we saw that heavy rainfalls, as discussed on our October call, continued through the quarter, which benefited rental and service demand.

With the exceptionally strong top line performance, the segment's operating margins improved to 30%.

And with that, I'd like to turn the call over to Gregg to discuss the financial details of the quarter.

Gregg?

Thanks, Paul, and good morning, everyone.

I'll begin by discussing the details of our operating segments before finishing with our consolidated results.

The Fluids Systems segment generated total revenues of $178 million for the fourth quarter of 2018, reflecting a 2% sequential decrease from the third quarter and a 9% improvement year-over-year.

In the U.S., revenues were $107 million, flat sequentially, and relatively in line with a 2% increase in U.S. rig count.

As Paul touched on, although we continue to make meaningful progress, penetrating the deepwater Gulf Mexico market, we experienced a sequential pullback in Q4, as the start of the Shell projects were delayed into the first quarter of 2019.

On a year-over-year basis, U.S. revenues have increased 19% from Q4 of 2017, roughly in line with the 17% improvement in average rig count.

In Canada, revenues were $15 million for the fourth quarter, reflecting an 11% sequential decline, relatively in line with the 14% reduction in average rig count.

Despite the challenging market conditions, Canada's year-over-year comparison reflects the benefit of our expanding market share as revenues improved 11% year-over-year, meaningfully outperforming the industry rig count, which declined 12% over this period.

Turning to our international regions.

Revenues in the Eastern Hemisphere were $50 million in the fourth quarter, relatively flat to prior quarter levels.

The sequential comparison primarily reflects the anticipated impact from the wind down of the current contract in Kuwait and project timing in Albania.

These expected declines were largely offset by broad-based improvement across other markets in the region, most notably, Algeria and Australia.

On a year-over-year basis, revenues from the Eastern Hemisphere improved by 4% with the benefit of the Baker Hughes integrated services project in Australia and growth in Germany, somewhat offset by declines in Kuwait, Romania and Algeria.

In Latin America, fourth quarter revenues came in at $6 million, primarily consisting of the Petrobras contract in Brazil, which concluded in December.

On a year-over-year basis, revenues from the region declined by $5 million, primarily attributable to lower Petrobras activity.

Operating income for the consolidated Fluids segment was $8.2 million for the fourth quarter, relatively unchanged sequentially from the third quarter.

As highlighted in yesterday's press release, the fourth quarter includes $2.5 million of charges, primarily reflecting employee severance and related costs.

As we discussed in last quarter's call, the third quarter also included $2.5 million of charges, primarily related to Brazil restructuring and the fire at our Kenedy, Texas facility.

As a reminder, we continue to carry additional cost in the fluids business related to investments in our total fluids solution strategy, which provide a modest headwind to our current operating margins.

We believe these investments, however, are necessary to expand our total addressable market and improve our long-term Fluids segment profitability.

Turning to the Mats business.

As Paul touched on, total segment revenues were $70 million for the quarter, representing a record quarter for this segment and a 29% sequential improvement.

The sequential improvement was primarily driven by strong direct mat sales, which more than doubled sequentially to $24 million in the fourth quarter.

The exceptionally strong result was driven in part by year-end demand from utility customers as well as timing of large sales into other industries.

Meanwhile, rental and service revenues also strengthened sequentially, reflecting increasing demand from the utility T&D market, which benefited from heavy rainfalls throughout the southern U.S.

Overall, rental and service revenues came in at $46 million for the fourth quarter, reflecting an 8% sequential improvement.

Comparing to the fourth quarter of last year, Mats segment revenues increased by 67%, primarily reflecting the impact of the stronger mat sales as well as our continuing expansion into pressure pumping and utility T&D markets.

The Mats segment operating margin improved to 30% for the fourth quarter, compared to 24% for the third quarter and 28% for the fourth quarter of last year.

The improved margin is largely attributable to the strength in mat sales as well as robust demand in rental and services, which included the strong weather-related activity.

Now turning to our consolidated results.

Fourth quarter 2018 revenues were $248 million, representing a 5% increase from prior quarter and a 21% improvement year-over-year.

SG&A costs were $30 million in the fourth quarter, relatively in line with both last quarter and the fourth quarter of last year.

Fourth quarter SG&A includes approximately $1.5 million of severance charges, while the third quarter included $1.8 million of cost associated with the September retirement of our General Counsel.

Total corporate office expenses were $8.5 million in the fourth quarter compared to $11.2 million in the third quarter, $9.3 million in the fourth quarter of last year.

The prior quarter included the $1.8 million GC retirement charge.

Interest expense was $4.2 million for the fourth quarter compared to $3.7 million for the third quarter and $3 million in the fourth quarter of last year.

The sequential increase in interest is attributable to the $500,000 payment of additional interest on our convertible bond, as described in our recent Form 8-K filings.

Consistent with prior quarters, the fourth quarter interest expense includes approximately $1.4 million of noncash expense, primarily associated with our convertible bonds.

The provision for income tax for the fourth quarter was $4.9 million, reflecting an effective tax rate, 32%.

Net income from continuing operations for the fourth quarter was $0.11 per diluted share compared to $0.04 in the previous quarter and $0.09 in the fourth quarter of last year.

Turning to cash flow.

Cash generated from operating activities was $43 million in the fourth quarter, which included $26 million of cash from operations along with $17 million net decrease in working capital.

Capital expenditures used $12 million in the quarter, the majority of which was used to fund investments in the Mats business.

In addition, the fourth quarter CapEx included $2 million of infrastructure investments, including the Port of Fourchon completion fluids facility and the blending facility in Saudi Arabia.

Cash used in financing activities totaled $28 million, largely reflecting the $27 million net reduction in bank facility borrowings.

We ended the year with a total debt balance of $162 million and a cash balance of $56 million, resulting in a total debt-to-capital ratio of 22% and a net debt-to-capital ratio of 16%.

Substantially all of our cash on hand remains within our foreign subsidiaries.

As announced last quarter, our Board of Directors expanded our share repurchase authorization to $100 million, which provides us added flexibility to use excess cash and optimize our capital structure.

While there were no purchases under this plan during the fourth quarter, we completed $5 million of share repurchases subsequent to year-end under a 10b5-1 trading plan, purchasing 656,000 shares.

Now turning to our near-term outlook.

In the Fluids business, although we see a general strengthening as we progress through 2019, we expect revenues will be modestly softer in the near term, primarily driven by transitory declines in the international units.

From an operating income perspective, we expect that margins will remain in similar territory as Q4 as the impact of the lower revenues should be largely offset by the benefit from the $2.5 million of Q4 charges, which we do not expect to recur.

Looking more closely at the revenues by region, we expect North America to remain fairly stable in Q1.

The Canadian market continues to be impacted by takeaway issues, which is severely limiting the seasonal strength typically seen in Q1.

Meanwhile, in the U.S., we expect the start of the 2 Shell deepwater projects will largely offset the impact of the modestly lower land revenues, which we expect to track with overall rig counts.

Internationally, while we continue to see a general broad-based strengthening across markets, the near-term outlook is unfavorably impacted by temporary project delays, driven in part by the recent volatility in oil prices as well as our contract transitions.

Specifically, we expect declines in Algeria this quarter, as the new contract is now underway.

While we also expect to see continued delays in certain activities in Kuwait as we begin the transition to the new awards.

Although we'll take some time for the new Kuwait awards to hit full run rate, based on the plans currently in place, we expect the revenue run rate will ultimately surpass the levels achieved on the previous contract.

Also, with the recent completion of the Petrobras contract, we expect revenues from Brazil to decline, although we are maintaining key infrastructure and personnel in the Brazil market to support IOC deepwater opportunities going forward.

Turning to the Mats segment.

Following the extremely strong Q4 result, we expect Q1 revenues will return to the levels seen in previous quarters.

The fourth quarter benefited from strong year-end spending from a number of utility customers as well as weather-related demand that drove both the timing of large orders from other direct sales customers as well as strong demand in rental and services.

With the resulting in record level of mat sales in the fourth quarter, we expect direct sales to pull back significantly in Q1.

We expect rentals and services will show year-on-year growth, although we are continuing to monitor the extreme cold temperatures in the Northeast and the ongoing volatility in completions activity.

All of this considered, we expect total segment revenues likely in the low 50s range.

With revenues at this level, we'd expect segment operating margin to be in the low 20s range.

Corporate office expenses should remain relatively stable in the near term.

With regard to capital expenditures, we currently expect 2019 CapEx to be modestly lower than 2018.

As we plan for 2019 investments, we believe the most significant variables will be the requirements to support Mats rental business, which we continue to flex based on utilization levels and near-term outlook as well as the timing of capital investment to support our expansion in northern Kuwait, where we expect to invest approximately $8 million to construct a second base of operations.

Regarding tax rate, we expect our effective rate to be in the low to mid-30s.

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

Thanks, Gregg.

As we look ahead to 2019, we are optimistic for our business.

While some near-term headwinds remain, we continue to be focused on becoming the global technology leader in Fluids Systems, while building on our strong position in mats and generating free cash flow for our shareholders.

In our Mats business, we continue to see the benefits of our diversification strategy.

While we've experienced significant revenue growth from non-E&P markets in recent years, it's important to note that we're still in the early stages of penetrating those markets.

We believe this provides us with a significant opportunity for growth in industries that have historically been less volatile than the oil and gas industry.

In Fluids, I continue to be encouraged by the expanding opportunities, particularly with our deepening relationships with IOCs and NOCs.

And to that point, I can't think of a better example of the traction we are developing than the recent recognition award as a supplier of the year with Shell Oil.

This award speaks volumes about our technology and service quality.

We are honored to be considered for such an award, much less win it.

Remember, when we are competing for work with IOCs, we are competing against some of the largest service companies in the world.

As a large service companies try to commoditize the fluids space, our customers have a different plan.

We are aligned with our customers and our shared belief that Fluids can and will be an integral part of driving efficiency and lowering total project cost, whether they are drilling in shale or deepwater.

And speaking for a moment about technology, we firmly believe that as our success from the 8 offshore wells we drilled in 2018 with the Kronos system builds, so will our reputation and relationship with other key operators.

And to that point, it's worth noting that in addition to the 2 Shell projects scheduled this quarter, we've also been awarded deepwater well with Fieldwood Energy, which is anticipated to begin early in the second quarter.

And before I turn the call over to the operator for questions, I want to provide you with a quick update on our total fluids solution strategy, specifically our progress in building out our completion fluids infrastructure for the Gulf of Mexico and commercializing our simulations chemical business.

As discussed earlier, with our deepwater completion fluids plant at the Port of Fourchon operational, we now have the ability to supply our Gulf of Mexico customers with a full line of drilling and completion fluid systems.

As far as stimulation chemical business, last week, we successfully trialed our stimulation chemicals for a major operator in the U.S. land business.

This field trial was important for 2 reasons.

First, it provided us with the opportunity to go head to head with an existing simulation chemical provider to prove the efficacy of our products.

And second, it validated our commercial strategy of leveraging our established brand identity in our drilling fluids business to gain access to customer personnel who are responsible for stimulation chemicals in their fracking operations.

While we expect our entry into the stimulation chemical market will take some time to make a meaningful contribution, the successful trial on our frac spread with the leading independent operator is an important first step.

With that, I'd like to close the call, as I always do, by thanking our shareholders for investing in us and thanking our employees for their hard work and dedication in Newpark as well as their continued focus on safety.

We'll now take your questions.

Operator?

(Operator Instructions) Our first question comes from the line of Praveen Narra with Raymond James.

I guess, if we could start maybe on the mat side.

Just in thinking about the sales, and obviously, there's year-end impact to it.

But I guess, can we try to further break it down in terms of did you see additional customers ordering it?

Whether it were existing customers ordering more?

And maybe if you could talk obviously the south -- southern impact with the weather?

But what was the geographic dispersion like?

Praveen, it's Matthew.

I'll take that one.

Couple of questions in there.

I think generally there were more customers purchasing from us in Q4.

If you look at that, over half of those sales were into utilities customers than sort of spread between that general construction.

Few pipeline customers and some oil and gas customers in there as well.

So really pleased with the diversification in that sales footprint.

Geographically, I think it's fair to say they were all over the country.

Utility customers primarily focused in the northeast from the sales perspective or in the north and then sales throughout the country from there.

So really pleased with the way that's developing.

That's great to hear.

And I guess, just in terms of small follow-up on the weather-related impact in 4Q.

How much do you estimate that to be?

I think it'll be sort of high single-digit on that, Praveen, when you look at it.

Primarily, just the extension of jobs that we had planned that otherwise would have been picked up.

So not insignificant, but not very meaningful.

And as -- it's Gregg, as I had touched on my comments earlier that weather benefit also impacted not only the rental and service side, but also the timing of some of the orders.

And that's what led to Q4 being such a strong quarter on the mat sales side.

Right.

Right.

And then I guess, final question, just in terms of capital allocation.

You guys are obviously pretty well capitalized and you looked like you're going to generate some pretty good free cash flow in 2019.

A lot of competitors, especially private, seem to like they're less well capitalized and the volatility seems like it's adding a little uncertainty.

How do you think about M&A in this environment, given kind of your better capitalized nature?

Is it attractive further opportunities?

Yes.

This is Gregg.

In terms of the M&A opportunities as we've always discussed, they're part of the picture, we evaluate what opportunities are out there.

Obviously, our history speaks for itself in terms of where we choose to invest.

Most of our investment goes to organic investments, and we have a number of initiatives here that's really the primary focus of our capital spend, with most of it being really on the mat side and the diversification efforts there.

Our next question comes from the line of Jacob Lundberg with Crédit Suisse.

Just to start it off.

Paul, you mentioned some efforts around trying to drive increased returns, specifically in the fluids business.

I was just wondering if we could get a little more color on some of the specific actions that you guys are taking in the Fluids business to try and drive increased returns?

And then, what sort of metrics are you looking at?

Is there a particular threshold that you'd like to achieve that you can share with us?

Yes.

Certainly, covering our cost of capital is the most important thing.

And roughly, we get the Fluids business around 11% margins; we're covering our cost of capital.

In terms of some of the levers that we're looking at, certainly, where we have our largest amount of invested capital, as you probably know, is in the Gulf of Mexico and the Port of Fourchon.

And that's why, we're very excited about the work that we've got with Shell Oil, the recognition from Shell Oil, the new contract with Fieldwood.

As we begin to fill up those facilities, that will be a natural pull to get us back up close to those 10% operating margins.

Gregg, any other comment?

Yes.

I mean, if you look at, there's several elements to it.

The growth initiatives that Paul had touched on, whether it be the deepwater Gulf of Mexico, the stimulation chemicals, et cetera, there's also buckets -- the cost optimization continues to be a focus of ours.

We've taken some additional actions here in the quarter, and that will remain our focus as we continue to refine the business to match the activity levels overall.

Pricing is another lever that we continue to focus on.

I think it's broadly understood that the pricing levels in the industry as a whole are still at -- in our top territory.

And so disciplined on the pricing side is absolutely critical.

And then the last lever is really the working capital side.

We have done a lot here as we progressed through 2018.

Q4 was a strong quarter in that sense.

But there's more work to be done, specifically in Fluids.

When we look at the inventory levels, they've grown pretty substantially in 2018.

So we see that as an area of focus in '19.

Got it.

And then relatedly, could you just remind us about the amount of costs that you're carrying in the Fluids business that you mentioned in your prepared remarks?

When do you expect to see those to -- see those fade?

Yes.

The costs that we're carrying associated with the growth areas, it continues to provide a headwind of around 1 point of margin in the Fluids business.

And really, it's a matter of those investments and costs that we're carrying ahead of the revenue stream.

And so it's -- once we start generating the sustainable revenues in those areas that you really see that alleviate.

And that's why, we were encouraged by our first field trial in our stimulation business that was successful, again, being able to leverage our brand equity, brand identity with our drilling fluids customers to be able to get on a frac fleet, get our technology tested, have an opportunity to prove its efficacy.

And -- so we believe, obviously, that we're going to be seeing sales this year in the stimulation chemical space.

Our next question comes from the line of Ken Sill with SunTrust Robinson Humphrey.

I got a question on the stimulation and completion fluids.

Is -- could you describe the kind of volume opportunity or margin opportunity relative to traditional chemicals?

Trying to figure out, is this something that -- it's really more about pushing more volume to the facilities, which improves returns?

Or is it going to drive better margins too?

It's a combination of both.

I'll let Gregg take it first and then I'll also process my comment.

Yes.

I mean, in terms of the margin profile, I think it's fair to say that it's -- in terms of the incremental margins of those areas, it's similar to what we see in the drilling fluids.

We've always talked about the drilling fluids, providing somewhere in the 20s range of the incremental margins, stimulation chemicals, completion fluids, once you get rolling and get some critical mass with that, you would expect to see a similar lift from those areas.

Obviously early on, it's a little bit different because you don't have the consistency in the revenue stream and that makes it a little more cost inefficient.

So if you look at some of the fixed assets that we have in place, our Conroe facility that we build a few years ago is running at, I wouldn't say low utilization, but there's a lot of available capacity.

And as the stimulation market and sales grow, our goal is to be able to fill up that facility.

So that again will help on return on invested capital.

Okay.

And that's what I was trying to get at.

And then in terms of the total revenue dollar potential, I know stimulation chemicals are a small volume that goes into the stimulation fluid.

And I'm not actually is up to speed on what goes under production chemicals.

But drilling fluids is a big volume.

Yes.

I mean the way to frame it up here is in terms of the overall stimulation chemical market.

A single frac fleet that it can range depending on the specifics.

But a single frac fleet can consume 5 to 10 million of stim chemicals per year.

So that gives you a sense of the size of the market overall.

And on the completion fluids side, I think the way to frame that up is, when you look at the anchoring off of the drilling fluids experience that we have, when you look at the standard of drilling fluids versus completion fluids, it's kind of an 80-20, 80% drilling fluids, 20% completion fluids in that mix.

Okay.

And then, I'm just kind of curious, lot of people sell chemicals and stuff.

Is this strategy -- is there much in the way a proprietary chemistry?

Or is it really, look, you can have a single-point supplier of your stimulation and -- I mean, your drilling stimulation and production chemicals, right -- or completion, I'm sorry, not production?

Or is it...

Yes.

On the stimulation side, there is some proprietary technology.

But again, there's also some that's more commodity based, an example would be like biocides would be more commodity based, maybe some of the friction reducers, flow back enhancers have a little more proprietary technology in them.

And another piece of this, obviously, is a service element.

And again, that's something I think we do exceptionally well in the company.

Our next question comes from the line of Jon Hunter with Cowen and Company.

So first one I had is, just on the Kuwait oil contract.

Is this -- I know that you had signed 1 back in 2014, so my first question is, is this a follow on to that same contract?

And are you offering anything incremental?

Should we be thinking about this as apples-to-apples and then from a revenue perspective, same question, is the $165 million similar to what the 2014 contract was?

Yes.

In terms of a follow-on, part of that is, yes, part of it's, no.

In the southern part, where we have our existing facility that is a follow-on of the existing work that we've been doing.

What we're also excited about is that we won a new contract in the northern part of Kuwait, which is the high-temperature, high-pressure regions, which obviously requires a different level of technology.

Our hope is a different level of margins as well, higher service intensity.

And so that is new work that we're doing.

And as Gregg had referenced in his comments was that that's roughly about an $8 million plant that we'll end up building.

Yes, and in terms of the reference to the volume or revenue potential as compared to the previous work, I think I would frame it up is although the contract award value is a bit less than what we had been running more recently on the previous contract, what we found in working with them is their drilling plans change over time.

And just like in the last contract, we ended up running at a much higher rate than what was originally anticipated.

And so there's some of that goes into our thinking as we -- the comment that I made earlier, it's our expectation that once we hit our full run rate with the addition of the second base of operations in northern Kuwait, we think the run rate will be modestly higher than the previous contract.

Got it.

Okay.

And then my second question is, just on use of cash, you should be generating a good amount of free cash flow in the next couple of years.

So how do you way paying down debt versus buying back your stock?

Yes.

Our approach on that does not change.

We've always been thoughtful and prudent with our capital deployment, maintain a modest debt load.

We're pleased with where we're at now, with our leverage ratio back under 1.5x EBITDA.

With putting the share buyback program back in place, it just provides us the flexibility to use excess cash.

And just as we've done in past years, pre-downturn, using that as a maintenance program, where each quarter, we evaluate what's our leverage level, what's our near-term outlook in terms of cash flows.

And then based on that, you'll use the excess to repurchase shares under our maintenance program.

(Operator Instructions) Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

I had one question for each of the 2 businesses.

First of all, relative to the Fluids business, you had a 4.6% operating margin in the fourth quarter and yet the full year was 5.6%.

Can you help us understand, I feel like the slow pony here, why that business was lower margin in the fourth quarter?

And then relative to the Mats business, the seasonal strong purchases from the utility business, we understand, what about the other sales?

Were those also year-end seasonal buys?

Or is there something different going on there?

You want to take the Mats one first?

Yes, Bill, it's Matthew.

I'll take that one on the mat.

Look, I think it was a combination of a lot of project activity, we mentioned part of it being driven by the weather.

I think there was some significant project activity also going on that pulled forward people's purchase requirements, not so much year-end driven as we see typically around the utility space, but project related as well.

And with regard to the fluids margins out of the 4.6% that we had in the fourth quarter, now that includes the $2.5 million of charges.

Obviously, if you normalize for that, you're in the 6-ish range.

Now as far as that comparing to the overall year, now if you look at our flow through the year, Q1 and Q2, we had some very strong mix that we had talked about on those few quarters.

And then as we got into the end of the year, we've had a little bit of a transition.

We started to see the transition of the Kuwait contract coming to an end as well as the issue of continuing to add cost, as we've progressed through the year, associated with these targeted growth areas.

So that's what weighing on the margins a little bit on the back-end of the year.

Ladies and gentlemen, that concludes our question-and-answer session.

I'll turn the floor back to management for any final comments.

All right.

Thank you, once again for joining us on our call and for your interest in Newpark Resources.

And we'll look forward to talking to you again next quarter.

Thank you.

This concludes today's teleconference.

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