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Newpark Resources, Inc. (NYSE:NR)

Q4 2012 Earnings Call

February 15, 2013 10:00 am ET

Executives

Ken Dennard – Dennard-Lascar Associates

Paul L. Howes – President and Chief Executive Officer

Gregg Piontek – Vice President and Chief Financial Officer

Bruce C. Smith – Executive Vice President and President-Fluids Systems & Engineering

Analysts

James M. Rollyson – Raymond James & Associates, Inc.

Neal Dingmann – SunTrust Robinson Humphrey

Michael J. Harrison – First Analysis Securities Corp.

Jeff D. Spittel – Global Hunter Securities LLC

Stephen D. Gengaro – Sterne, Agee & Leach, Inc.

John A. Allison – BB&T Capital Markets

Bill Dezellem – Tieton Capital Management

Tom Nowak – Advent Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Newpark Resources’ Fourth Quarter Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions (Operator Instructions). Today’s conference is being recorded, February 15, 2013.

I would now like to turn the conference over to Ken Dennard of Dennard-Lascar Associates. Please go ahead.

Ken Dennard

Thank you Alicia, good morning everyone. We appreciate you joining us for the Newpark Resources conference call today to review 2012 fourth quarter and full year results. We’d also like to welcome our Internet participants listening to the call as it’s being simulcast over the Web.

Before I turn the call over to management, I have the normal housekeeping details to run through. For those of you who did not receive an email of the release yesterday and would like to be added to the distribution list, please call the Dennard-Lascar offices at 713 529-6600, and provide us your contact information or you can email me at the contact information from the press release. There will be a replay of today’s call. It will be available as webcast for 90 days at www.newpark.com. There is also a telephonic recorded replay which will be available through March 1 2013, and that information for access is in the yesterday’s release.

Please note that the information reported on this call speaks only as of today, February 15, 2013, therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. In addition, the comments made by management today of Newpark during this call may contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of management of Newpark. However, various risks, uncertainties and contingencies could cause Newpark’s actual results, performance or achievements to differ materially from those expressed in the statements made by management. Listeners are encouraged to read the Company’s annual report on Form 10-K, its 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’d like to turn the call over to Newpark’s President and CEO, Mr. Paul Howes. Paul?

Paul L. Howes

Thank you, Ken and good morning to everyone. We would like to thank you for joining us today for our fourth quarter 2012 conference call. With me today are Bruce Smith, President of our Drilling Fluids business, and Gregg Piontek, our Chief Financial Officer.

Following my opening remarks, Bruce will provide an update on our Fluids business and Gregg will discuss the Mats and Environmental Services businesses, as well as the consolidated financial results of the quarter. I will then conclude with a discussion of market outlook before opening the call for Q&A.

Let me begin by stating how pleased I am that Newpark was able to achieve an all time high in total revenues for the full year of 2012 surpassing the $1 billion mark for the first time in our Company’s history. This important milestone was achieved through contributions from all segments including record revenue levels from our Fluids and Mats businesses along with solid revenue growth from environmental services. We’re very proud to have reached this important milestone.

This achievement is the result of our strategic efforts to expand the Company’s presence in domestic and international growth markets as well as our emphasis on new technology. By acquisition of Alliance Drilling Fluids in December represents the most recent example of our expansion strategy.

Alliance immediately increases our presence in the Permian Basin and Eagle Ford, and our focus on water-based technology, makes them a natural fit with our own Fluids business. We are excited to have the Alliance team join the Newpark family.

Internationally, the continued expansion of our global reach has long been a pillar of Newpark’s growth strategy, and has served us extremely well over the years. When I first joined Newpark in 2006, revenues from outside North America were about $62 million and made of 9% of our total sales. In 2012, our international revenues reached $251 million, a 300% increase from 2006, representing a 26% compounded annual growth rate. Our international business units now contribute 24% of our total consolidated revenues. Our initiatives to grow the business outside of the North American continent has been a tremendous benefit to Newpark, both as a means for us to access growth opportunities and as a way to diversify our revenue stream.

On a technology front, Newpark is known industrywide for its innovation in developing more effective high performance drilling fluid solutions. This innovation is embodied in evolution. Our flagship fluid system that provides performance that equal or exceeds traditional oil-based muds, while also delivering the environmental and safety benefits of a water-based system, evolution revenues have grown from $27 million in 2010 to $110 million in 2012 as we continue to roll out the system into new markets.

In the fourth quarter, we’ve continued to achieve new milestones with its technology, now approaching 7 million feet drilled mostly in unconventional formations. We also successfully completed our first evolution well in the EMEA region, and the second well is now underway.

We are also continuing to do about new technology for our customers in our Mats business, with the increasing impact of environmental regulations in many U.S. land basin, our composite mats systems have provided our customers with superior performance and environmental protection on the well site. As I mentioned last quarter, we are currently developing a wireless spill containment system, which will provide a sealed service on the drill site without the use of aligner.

We completed our first field test of a spill containment mat on a customer site in the fourth quarter in essence deployed the complete system on a socket customer project, drilling on the site is ongoing and we are encouraged by the system’s performance. Customer’s interest in the spill containment system remains strong, however much like our introduction and roll out of the evolution system; we plan to carefully and methodically roll out the new system to help ensure the success of this new technology.

With that said, let me now give a few highlights of our fourth quarter performance. Total revenues for the fourth quarter of 2012 were $270 million, the highest quarterly revenues that Newpark has ever achieved. Our fluids business was up 8% sequentially, driven by gains at all of our international units. In the U.S. revenues were up slightly despite declining rig counts. Our environmental service revenues were also up 10% sequentially as activity levels continue to increase in the U.S. Gulf Coast region. These revenue gains are partially offset by the expected sequential decline in our Mats business as a result of the prior quarter Mats sales highlighted on last quarter’s call.

Operating income totaled $26 million, which was down about 9% from last quarter. The sequential decline is primarily driven by our shift in revenues as the gains in the fluids and environmental service segments were more than offset by the decline in the higher margin mat business. Our net income per diluted share for the fourth quarter was $0.12 compared to $0.20 in the third quarter of 2012.

As Greg will explain in more detail our fourth quarter included approximately $0.05 of unusual items, which brings our adjusted non-GAAP earnings for the fourth quarter to $0.17 per diluted share.

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

Bruce C. Smith

Thank you Paul and good morning everyone. Just a recap in the fourth quarter the Fluids Systems & Engineering segment generated revenues of $229 million, representing an 8% sequential increase and 4% year-over-year. As Paul stated this was a new record quarter for fluids revenues. North American revenues were up 2% sequentially to $154 million, although the fourth quarter was down 6% on a year-over-year basis. The sequential increase was driven primarily by a 22% revenue increase from Canada, which outpaced the 14% increase in the Canadian rig count. On a year-over-year basis, the fourth quarter Canadian revenues were lower, as the Canadian rig count is off more than 20% from prior year levels.

Looking ahead, we expect the usual seasonal ramp up from Canada in the first quarter although it remains dependent on the timing of spring breakup. In the U.S., the revenues for the quarter were $141 million, up slightly from both the prior quarter and year-over-year, revenues compared favorably to the 5% sequential decline in the U.S. rig count, largely due to $6 million of revenue generated from the deepwater Gulf of Mexico project.

I will note that since this well has not been completed, we expect revenues from the U.S. to be lower in the first quarter, excluding the contribution from our Alliance acquisition. Our mid-continent completion services and equipment rental business continues to face challenges due to the heightened levels of competition in this region.

During the fourth quarter, we took additional actions to right size the business, which include workforce reductions, the impairment of certain assets along with the continued reallocation of assets to other regions. As a result, our fourth quarter includes about 900,000 in charges associated with these actions.

Our International Fluids business posted excellent results in smaller regions as total international revenues for the quarter grew 31% year-over-year to $76 million, which is a 24% sequential increase. Revenues from our EMEA region were up 16% from a year-ago to $34 million, which represented a 24% sequential improvement. The sequential increase was driven by exceptionally strong revenues in Continental Europe.

As we touched on previous calls, Sonatrach continues to work through the contract renewal process with those service vendors, and because of this ongoing issue revenues from Algeria were down modestly from the third quarter. We expect to see a gradual ramp-up in the near-term, and should see that Sonatrach will impact within the next two quarters; however this remains subject to the social unrest across North Africa.

In Brazil, we had another record performance with quarterly revenue of $28.6 million, up 31% sequentially, and 56% year-over-year. The revenue gains were partially driven by our deepwater work for IOC, which has since been completed. Because of this we expect our first quarter Brazilian revenue to dip from the record levels we achieved in the fourth quarter, then to more recent historical levels.

As we have emphasized in the past, revenues in this country can vary from quarter-to-quarter, based on the activity of Petrobras and/or IOC customers. In the Asia-Pacific region, revenues were $12.6 million for the fourth quarter, up to an 11% sequentially and up 33% from a year ago. This was another record quarter positively impacted by the continuation of our offshore work in Australia.

In the first full view of following our acquisition of this business unit, our Asia-Pacific region contributed $42 million of revenues in 2012; the consolidated Fluids segment reported operating income of $17.7 million for the fourth quarter, up 20% sequentially but then 29% year-over-year. The operating margin for the segment in the fourth quarter was 7.7%, which was up from 7% in the third quarter, but down from an 11.3% a year ago.

As we’ve discussed for the past several quarters, margin improvement remains a primary objective for us, despite the headwinds of the declining U.S. rig count, and the 900,000 charge in the mid-continent completion service business. We have continued to make progress back towards the double-digit margins. Going forward, our focus on improving margins will continue in 2013. Although to some extent, our ability to achieve this will be dependent upon the North American market conditions.

Evolution, our high-performance water-based drilling fluid system continues to perform well. Revenue from Evolution was $31 million in the fourth quarter, compared with $29 million in the third quarter, bringing the full year revenue to approximately $110 million, up from $67 million in 2011. As Paul noted, we have successfully completed our first international Evolution well with a major IOC and a second well is now underway with the same customer.

Finally, I’d like to briefly comment on Newpark’s recent acquisition of Alliance Drilling Fluids. This acquisition gives us a much stronger competitive position in two key plays: the Permian Basin and the Eagle Ford shale. Given Alliance’s sizable presence in these important markets, their expertise in water-based technologies and shared commitment providing best-in-class drilling fluids and engineering services. There are natural fits with our fluids business and we’re happy to have them onboard.

In addition to the fluids business, this acquisition serves as our entry point into the proppant distribution business. We’re very interested in learning more about the proppant business and have this offers an opportunity to bring additional value to our customer base.

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

Gregg Piontek

Thank you, Bruce, and good morning everyone. I’ll begin by discussing the results of our Mats business, before moving on to the environmental services business and finishing with our consolidated results. The Mats business reported $27 million in revenues for the quarter, a decline of 24% sequentially, a 9% year-over-year. The Mats segment generated operating income of $10.8 million in the fourth quarter, down 32% from the third quarter and 7% year-over-year.

Operating margin in the fourth quarter was 40.8%. This compares to 45.6% margin in the third quarter and a 39.7% margin in the same quarter a year ago.

As you may recall, during the third quarter call, we emphasized the return of our Mats sales to historical levels after achieving record sales that benefited from a large sale into the utility industry, along with the benefit of increased mat rentals from the Summer Olympics.

During the third quarter, the impact of these items helped to offset the downward trend in the U.S. rental market, driven by declining activity and increased competition, primarily due to the non-recurring sale in the third quarter, mat sales were down about 35% sequentially to $13.3 million. Our mat rental revenues were down about 8% sequentially with increases in the Northeast and Gulf Coast being offset by a decline in the Rocky’s and the UK.

As Paul mentioned earlier, we are making good progress on our new spill containment system, which we discussed on prior calls. We continue to develop and refine the system and as customer interest is high, we expect additional spill containment sites to be deployed before the end of the first quarter.

In anticipation of this, we will be allocating more of our near-term DURA-BASE mat production to our spill containment fleet, leaving fewer mats available for sale to customers. As a result, we expect mat sales to be lower in the first quarter than they were in the fourth quarter. We also expect the segment margin to be below 40% in the near-term.

Now moving on to our Environmental Services business, revenues in this segment were $14.4 million in the fourth quarter, up 11% year-over-year, and up 10% sequentially. The revenue increase was driven by higher oil-field waste revenues, which were generated by both offshore and onshore activities in the Gulf region.

Fourth quarter operating income in our Environmental Services segment was $3.4 million, compared to $2.4 million in the same quarter a year ago and $3.1 million in the third quarter. Operating margin for this segment was 24% compared to 18% a year ago and 24% in the third quarter.

Looking ahead, well deepwater Gulf activity has been increasing 2013 activity levels remain uncertain. Now moving on to our consolidated results, for the fourth quarter of 2012, we reported total revenues of $270 million or 4% sequential increase and 3% year-over-year increase. Operating income was $26 million in the fourth quarter, down 9% sequentially and down 23% from the fourth quarter of 2011.

Net income in the fourth quarter was $11.2 million or $0.12 per diluted share, compared to net income of $18.7 million or $0.20 per diluted share in the third quarter and $22 million or $0.22 per diluted share a year ago. As reflected in the non-GAAP earnings reconciliation contained within our press release, adjusted net income for the fourth quarter was $15.9 million or $0.17 per diluted share after adjusting for the following items.

First, following the recently completed statutory tax audit covering several years in a North African subsidiary, we received an income tax assessment, which resulted in a $3.9 million charge during the fourth quarter of 2012. The fourth quarter charge reflected an adjustment to taxes on accumulated earnings covering a seven-year period from 2006 through 2012.

While the impact of this rate differential in any individual year was minimal, the combined impact of the seven-year catchup resulted in a $0.04 impact in the fourth quarter 2012 earnings per share. Also as Bruce mentioned earlier, the fourth quarter included $900,000 of restructuring costs in our mid-continent completion services, and equipment rental business, and we also incurred $400,000 of transaction costs related to the Alliance acquisition. These two items combine for another $0.01 a share and costs recorded in the fourth quarter, bringing our total adjustment to $0.05 per diluted share.

As we highlighted on the last call, our third quarter EPS benefited by about $0.01 due to a favorable tax adjustment within the U.S. In 2013, we expect our effective tax rate to be between 34% and 35%. Looking at the full year 2012, as Paul discussed, we reported record revenue of $1.38 billion, which was up more than 8% from 2011.

Operating income in 2012 was $106 million, which was 20% less than 2011, due mostly to fluids margin compression in 2012. Net income for 2012 was $60 million or $0.62 per diluted share compared to 2011 net income of $80 million or $0.80 per diluted share. Now let me discuss our cash and liquidity position. We continue to make good progress on our receivable reductions in the U.S. fluids business following last year’s ERP system conversion.

Overall, our U.S. fluids receivables came down by another $22 million in the fourth quarter, bringing our total reduction to $60 million from the peak level in the first quarter of 2012. This fourth quarter reduction was partially offset by a revenue-driven increase in our international fluid business units, primarily Brazil, along with $23 million increase for receivables acquired in the Alliance acquisition. Excluding the Alliance receivables acquired, our DSOs remain at a 100 days of sales outstanding and this will continue to be a focus going forward.

Turning to our consolidated fourth quarter cash flows, operating activities generated cash of almost $30 million. We used $53 million to fund the Alliance acquisition and another $9 million to fund capital expenditures. We also spent $15 million on share repurchases, which completed our $50 million authorization, under which we purchased a total of 7.2 million shares for the year or 8% of shares outstanding at an average price of $6.92 per share.

Our revolving credit facility increased by $56 million during the quarter, largely attributable to the Alliance acquisition and share repurchases. We ended the year with cash of $47 million and a revolving credit facility balance of $84 million. Our total debt at the end of the fourth quarter was $259 million with a resulting debt to total capitalization ratio of 33.6%. Our full-year 2012 capital expenditures totaled $44 million and our depreciation and amortization expense was $33 million.

For fiscal 2013, we expect our capital expenditures to total $50 million to $60 million which includes approximately $20 million for the completion of the new technology complex, as well as increased investments in the rental mats for the spill containment system.

Now I’d like to turn the call back over to Paul for his concluding remarks.

Paul L. Howes

Thanks, Gregg. We’re very pleased to finish 2012, with record revenues exceeding $1 billion a major milestone in our Company’s history. When the new management team joined Newpark seven years ago, revenues were approximately $530 million. In seven years, we have increased revenues by over $500 million, representing a 10.1% compound annual growth rate, over the same period net income has increased from $24 million to $60 million, representing a 14.1 compound annual growth rate.

A vast majority of these gains have come from global expansion and market share gains. I’m very proud of the organization and company we have built, but it’s just the beginning. Through continued investment in technology and people, we expect our future to be even brighter. Our drilling fluids business is increasingly recognized as the technology leader as customers appreciate the benefits of our high-performance water-based Evoluation system. To-date the Evoluation system had drilled over 7 million feet in just three years; with most occurring at unconventional formations, recently we were successful in unbundling a bundled service contract, held by a competitor with a major natural gas producer in North-America. This is another testament to the success of the Evolution system and the value E&P operators place on superior water-based systems over traditional oil-based mud.

We know performance matters and Newpark is committed to offering customers differentiated products and services that offer real value. While our operating margins in the Fluids business have proved from the third quarter to 7.7%, we still have work to do to fill our goal of achieving double-digit margins, but we’re confident we are on the right path.

In our Mats business, we’re excited by our new spill containment system and the initial customer feedback. We expect to see our spill containment system gain traction over the course of the year, but since we’re diverting production of new Mats to develop this containment system we expect to see Mats sales revenues decline in 2013.

We are very hopeful that if I bring our technology focus to the Mats business that we will open up new growth opportunities for Newpark. We will keep you updated on this important technology development on future call. Our environmental service business continues its solid performance and we will expect to see this business continue to grow as activity levels pick up offshore.

Before opening the call to Q&A, I would like to provide some insight into the global E&P market, with the respect of the North American market, we anticipate some incremental improvements from current levels as operators continue to drill and liquid-rich and oil-laden formation. It’s still not clear where and when we will exit the injection fees of natural gas, but it is clear they will be continued downward pressure on dry gas.

Rigs drilling for oil remain the driving force in the U.S. land market as drilling rigs are 75% weighted towards oil, and with crude oil price is now at about $98 per barrel, it’s fair to say that the economics of oil remains healthy.

On the international front, we expect to see healthy activity levels in all of our markets, but as Bruce mentioned we remain concerned about the unrest in North Africa that aside we expect our foreign revenues to grow in 2013.

In closing I would like to once again welcome the team of Alliance Drilling Fluids to our company to thank all the employees at Newpark for their outstanding results over the past year and their continuing efforts in making Newpark the world class organization that it is.

With that we’ll now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

James M. Rollyson – Raymond James & Associates, Inc.

Good morning guys.

Paul L. Howes

Good morning Jim.

James M. Rollyson – Raymond James & Associates, Inc.

Paul, I know your longer-term kind of goal is on the Fluids margin is to trend back towards the low to hopefully eventually mid-double digit range though this kind of shorter-term thinking, where we look into the first quarter, it seem likes you’ve got the Gulf of Mexico benefit, you have last quarter that maybe doesn’t repeat and you mentioned Brazil probably will be a little bit softer quarter-over-quarter. Canada probably stable, the U.S. onshore business probably a little bit better, this with budgets renewing and everything. How we think about margins in the first quarter just in relation to the fourth quarter, do you think all these moving parts get you to stable margins in 4Q or do you think they come off a little bit before they build back up in next of the year.

Bruce C. Smith

This is Bruce, I’ll take that. What we are seeing so far is stability, I think we’re not seeing anything heading or trending downwards from the fourth quarter at this point.

James M. Rollyson – Raymond James & Associates, Inc.

Okay, very helpful. Then for a follow-up, Paul when you guys roll about Evolution, it’s just kind of slow process, it’s built into a really nice business for you. How do you think about this spill containment system in terms of maybe timing, and ability to move the needle on the mats business, is a kind of add-on to the crazy strong margins, you’ve had consistently for a while now?

Paul L. Howes

Well, the needle on the mats business, we like obviously where it is today. Again, we’re going to roll out the spill containment system similar to what we’ve done in Evolution, very methodical in how we approach the marketplace, ensure success one side at a time. And so we will continue to update the market as we make progress over the next several quarters.

James M. Rollyson – Raymond James & Associates, Inc.

And it’s not a short-term benefit; it’s over time you think?

Paul L. Howes

I would say it’s a longer-term benefit. Again, the marketplace and we really got to gain some acceptance though again, the initial installations we are getting some very positive feedback from customers, but we need more time to really hone in on the value.

Gregg Piontek

This is Gregg. the other thing that I would add there is we’ve talked quite a bit over the past several quarters about the margin compression and competitiveness, and the spill containment system is another step towards trying to maintain the margins and help prevent for the erosion.

James M. Rollyson – Raymond James & Associates, Inc.

Great, good color. Thanks guys.

Paul L. Howes

Thanks, Jim.

Operator

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

Neal Dingmann – SunTrust Robinson Humphrey

Good morning gentlemen, nice quarter. Hey Paul, for you or Bruce, maybe just two quick ones, first, could you talk a little bit just on Evolution of the water-based business now with Alliance, what’s your thinking, you’ve seen it’s kind of nice steady ramp with Evolution even pre-aligned from their water business. What do you foresee maybe Paul, for you or Bruce, just kind of bigger picture by maybe late this year, what kind of percentage that water-based could be contributing?

Bruce C. Smith

This is Bruce, I’ll take that. At the moment, what we’re doing with Alliance is we’re following a sort of fundamental integration plan right now, and part of that integration plan of course includes looking at the different technologies they have and marrying that with the technologies that we have, but obviously as we go forward in the year, we want to begin to solidify some of the Alliance engineering folks on our Evolution system, and until we do, it’s difficult to move forward with Evolution until everybody understands the same way. So we are in the process of doing that type of integration now, and we feel that lead technologies that Alliance can bring to us and Evolution staff they will bring to them, we’d be hope to benefit from that later on this year.

Neal Dingman – SunTrust Robinson Humphrey

All right, that’s great. And just one Paul, a little bit separately just again, for you or Paul, Bruce, just wondering on the Gulf of Mexico obviously was great contributor but on a couple of the segments there, was wondering now when you see how you see that shape up, it looks likes obviously offshore, a lot of big things still expect for the reminder of the year, and do you continue to see a greater ramp there than you do onshore and international, or how do you kind of view, I guess if I look at sort of the three segments U.S. onshore, Gulf and international, if you kind of look at each of those segments, how you see kind of growth divided?

Paul L. Howes

Well, just generally speaking about the Gulf of Mexico, obviously as rigs will come back, permits are increasing, but the number of new wells being drilled or still I think below what pre-Macondo levels are. So we do expect to see increased activity there that we’ll probably have more of a direct benefit on environmental business to begin with. Longer-term as you know, our strategy has always been to penetrate the deepwater Gulf of Mexico with drilling fluids. We have a very successful deepwater business down in Brazil, and over the long period, we plan to reverse leverage that into the Gulf of Mexico.

U.S. land again, see we think we’re going to see some modest improvements there in the oil and liquid-rich plays, certainly the Alliance acquisition is right in that sweet spot. So we should hope to see some growth there. Internationally, putting aside any unrest in North Africa, we would expect to see our international revenues growing drilling fluids.

Operator

Thank you. Our next question comes from the line of Michael Harrison with First Analysis. Please go ahead.

Michael J. Harrison – First Analysis Securities Corp.

Hey, good morning.

Paul L. Howes

Good morning.

Gregg Piontek

Good morning, Mike.

Michael J. Harrison – First Analysis Securities Corp.

Maybe Paul or Gregg, can you talk about how much annual cost savings you would expect from the mid-continent completion restructuring efforts?

Paul L. Howes

At this point in time, it’s pretty early to tell. We talked about the costs that were incurred in the period that took out a fairly healthy portion of the workforce there. But overall in the grand-schema thing, it’s not a real significant piece to the overall fluids.

Gregg Piontek

My take on it, Mike is that, we’re taking the actions that were necessary in the fourth quarter and now it’s more about focusing on sales, growing the top line.

Michael J. Harrison – First Analysis Securities Corp.

And can you maybe talk a little bit about what you’re seeing in terms of any raw material pressures, I know barite has been an issue for the last few quarters and maybe talk a little bit about what you’re seeing in terms of fluids pricing overall in the context of raw materials?

Paul L. Howes

Yeah. I’ll cover the barite question, and I’ll let Bruce handle the Drilling Fluids in general. But on the barite side, we’ve seen it stabilizing market in terms of the costs coming out of China. So I don’t see any real changes or any major fluctuations there.

Michael J. Harrison – First Analysis Securities Corp.

Okay. In regard to pricing pressure within Drilling Fluids, certainly some in the U.S. market undoubtedly. But part of our response to that of course is to provide Evolution to the industry, which isn’t subject to the same pricing pressure.

Operator

Thank you. Our next question comes from the line of Jeff Spittel with Global Hunter Securities. Please go ahead.

Jeff D. Spittel – Global Hunter Securities LLC

Thanks. Good morning, folks.

Paul L. Howes

Good morning.

Jeff D. Spittel – Global Hunter Securities LLC

Maybe if you can start-off with the Alliance integration and just getting a sense you’re kind enough to provide an update on revenues and operating income for the full year ‘11 in the press release initially. Can you give us a sense of how that worked in 2012 just so we have a little better sense in that model?

Gregg Piontek

Yeah. It’s Gregg, I’ll take that. Obviously, with any business in this nature, your activity levels kind of ebb and flow on a quarter-to-quarter basis, based on the specific customer concentrations you have and their activities et cetera, but ultimately the business that we acquired in December, the profile is pretty consistent with that revenue level that we had disclosed for 2011 year, so not significantly different.

Jeff D. Spittel – Global Hunter Securities LLC

Okay, that’s great. And then maybe just kind of digging in on the profits footprint I’m not particularly familiar what end of the market that they traffic in. Could you give us a little bit of flavor for exactly where they and how they approach that market?

Gregg Piontek

As you can imagine the new segment for us, we only have the business about 45 days, basically their distribution business of ceramic proppants, but beyond at this point, we’re not providing additional color. We’re still trying to understand the business and what kind of value we can bring to our customers.

Operator

Thank you. Our next question comes from the line of Stephen Gengaro with Stern Agee. Please go ahead.

Stephen D. Gengaro – Sterne, Agee & Leach, Inc.

Thank you, good morning guys. Can you give us any more color; I know you gave some Alliance numbers in the press release for 2011. Should we assume sort of did what your fluids business in North-America did in ’12 to get a kind of run rate into ’13 or maybe better because the regions they were in specifically.

Gregg Piontek

Yeah, I mean as I mentioned a minute ago, where that business is running today is not significantly different from that 2011 levels.

Bruce C. Smith

So 2012 very close in terms of the 2011 run rate.

Gregg Piontek

Yeah.

Stephen D. Gengaro – Sterne, Agee & Leach, Inc.

Okay, great and some margin perspective, are they kind of neutral to your progress towards double-digit or helpful?

Gregg Piontek

In overall as we had disclosing those 2011 numbers, you see the operating income was running a little stronger than what our fluids business had done, so to that extent ignoring the fact that you do have some costs that you bring the business together, it would be a natural lift modest lift to our margins.

Operator

Thank you. Our next question comes from the line of John Allison with BB&T Capital Markets. Please go ahead.

John A. Allison – BB&T Capital Markets

Good morning guys. Thanks for taking my questions.

Paul L. Howes

You bet.

John A. Allison – BB&T Capital Markets

I know that you mentioned that revenues internationally are expected to increase, but didn’t recent North American drilling market weakness, are you looking towards increasing your operations overseas, to realize better volume and margins especially in the emerging markets, and if so, what are some of the hurdles and some of the threats that you might face in getting exposure there.

Paul L. Howes

Well certainly on of our strategic initiatives since 2006 was to expand our presence internationally, because it gives weighting to sometimes the volatility in the North American market, so yes we will continue to push aggressively into the international markets as we see opportunities, and in terms of hurdles, it’s hard to describe those are really is more country-by-country, depending on which continent you are on, so yes we would expect to continue to move into new countries and see revenues grow in 2013 internationally.

John A. Allison – BB&T Capital Markets

Okay. And one last one in regards to your future uses of cash, do you expect to continue to new share buybacks is a viable option, and how is this comparing in your mind M&A debt reduction organic growth et cetera.

Gregg Piontek

The share buybacks are always part of the equation, but when we’re looking at our cash flow being generated in our opportunities for investment, we look first towards both organic investment in the Company as well as our M&A type opportunities to the extent that our cash flow afford this the ability then that’s where share buybacks come into play as well.

Operator

Thank you, our next question comes from the line of (inaudible). Please go head

Unidentified Analyst

Hi, good morning gentlemen.

Paul L. Howes

Good morning

Unidentified Analyst

Looking at the Fluids growth quarter-over-quarter, could you talk to the delta, it sounds like most of that was due to international growth, but could you speak to how much of that was Evolution versus your more conventional fluids.

Paul L. Howes

Evolution was pretty flat quarter-over-quarter and the big uptick most of the uptick was in the international part of the business as I described earlier, and driven really by very strong Continental Europe in the quarter, was the main difference.

Bruce C. Smith

As well the Brazil work, the IOC project that was mentioned earlier that was another piece that provided some healthy revenues in the fourth quarter.

Unidentified Analyst

Okay, great, and then getting back to Alliance acquisition when we look at that based of the 2011 numbers look like you picked up a pretty good asset at a decent price, how do you think that that the purchased price shaped up versus other deals that you’re seeing out there recently?

Paul L. Howes

We very pleased with that what we able to accomplish by our shareholders like the multiple, that’s really good multiple.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Bill Dezellem – Tieton Capital Management

Thank you, relative to the spill containment rental revenues, when would you anticipate that they would surpass, what is the lost DURA-Mat sales and I guess part of that question is that the correct question or is the correct question when will you be expanding you capacity to allow you can have the capacity to sell through event.

Bruce C. Smith

I think the second part of your question is the right one, is it again if we see the continued success is the roll out of the spill containment system that certainly would open up opportunities to expand our capacity plan.

Bill Dezellem – Tieton Capital Management

And the timing in which you would anticipate making that decision and how long it will take to implement the decision.

Bruce C. Smith

Yeah in terms of when those decisions would be made that’s probably premature at this point, but any kind of the plant capacity you can take to 12 to 18 months to expand the plant of this size.

Operator

Thank you. Our next question comes from the line of Tom Nowak with Advent Capital. Please go ahead.

Tom Nowak – Advent Capital

Hi good morning. Not to beat the dead horse, but just back to the Alliance margins, when I pro forma you guys, Newpark’s standalone versus combined with Alliance, and the numbers you provided I get a 75 basis point uplift to your fluid margins, but it doesn’t seem like that’s what’s you’re thinking from 1Q, so can you help me out there.

Gregg Piontek

Well like I had mentioned earlier, this first half, the first quarter, we have a fair amount of integration effort that’s going on, and that brings with some costs in order to bring them in combined systems et cetera. So that’s why in the near-term, you don’t see that full benefit, but we would expect that over time, we would start to see the real benefits in the synergies associated with it.

Tom Nowak – Advent Capital

Okay. And then sorry if I missed this, but magnitude of the decline in mats revenues, are you thinking double-digits here, or should we be annualizing 4Q revenue numbers to look to ‘13 or what kind of help us out a bit with the order of magnitude of decline in mats revenues?

Gregg Piontek

Well, going out. When you go out several quarters, it becomes obviously a lot more difficult to estimate the backlog and our mats sales tends to be relatively short. So taking the fourth quarter level and annualizing it, it’s pretty tough to say, but we do expect Q1 to be down from the Q4 levels, I would say at least $4 million, but that also depends somewhat on the timing of orders whether things get slowed at Q1, Q2 et cetera. So it’s a bit tough to tag that cut-off point.

Operator

Thank you. Our next question comes from the line of John Allison with BB&T Capital Markets. Please go ahead.

John A. Allison – BB&T Capital Markets

I wanted to ask another question based on the elevated cost of barite and I wanted to see how effectively you’re able to pass these higher costs on to your customers or is it actually putting some downward pressure on your profitability?

Bruce C. Smith

This is Bruce. It certainly puts at the moment some downward pressure on profitability and our ability to pass on to the customers is reasonable, we managed to do it, but there is a time lag, there is always a time lag, by the time you approach the customer with the price increase, and by the time he ultimately accepts it.

Paul L. Howes

But as I mentioned earlier too, we’ve seen barite pricing stabilize, so it’s not increasing right now.

John A. Allison – BB&T Capital Markets

Got you, okay and one last one recently we’ve heard from other service company that drilling efficiency is becoming a larger theme especially in North America, and I want to know if this drive towards more efficient operations, is actually a positive theme for the Mats business like for example our operators opting to use Mats at their drilling sites as opposed to not using a Mats in order to increase their efficiency.

Bruce C. Smith

John, let me give it two parts, first on drilling efficiency, we hope we’re driving force behind that with Evolution because we’re driving a significant amount of efficiency on every well with Evolution, related to the Mats business certainly we think there is some opportunities there, I don’t know that efficiency has any negative impact it’s more the environmental aspect, the regulations that continue to grow that product line.

Gregg Piontek

Although to the extent that you can use the system like there is still containment to help offset the amount of aggregate et cetera, you’re reducing the amount of time it takes them to set up a well.

Operator

Thank you. I’m showing no further questions in the queue at this time. I’d like to turn the conference back to management.

Paul L. Howes

Thank you. 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 after the conclusion of our first quarter. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. If you’d like to listen to a replay of today’s conference, you may do so by dialing 303-590-3030 and entering the access code of 4587015 followed by the pound sign. Thank you for your participation. You may now disconnect.

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Source: Newpark Resources' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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