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Newpark Resources Inc (NYSE:NR)

Q4 2013 Earnings Conference Call

February 14, 2013 08:30 ET

Executives

Ken Dennard - Managing Partner

Paul Howes - President & CEO

Bruce Smith - President, Drilling Fluids

Gregg Piontek - CFO

Analysts

James Rollyson - Raymond James

Neal Dingmann - SunTrust

Mike Harrison - First Analysis Securities

George O'Leary - Tudor, Pickering, Holt

Jeff Spittel - Clarkson Capital Markets

Marc Bianchi - Cowen and Company

Tristan Richardson - D.A. Davidson & Company

Bill Dezellem - Tieton Capital Management

Presentation

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Newpark Resources Fourth Quarter Earnings Conference Call. (Operator Instructions). This conference is being recorded today, February 14, 2014.

And now I would like to turn the conference over to Ken Dennard. Please go ahead, Ken.

Ken Dennard

Thank you George and good morning everyone. We appreciate you joining us for the Newpark Resources conference call today reviewing 2013 fourth quarter year-end results. We would also like to welcome our internet participants listening to the call that’s been cast live over the web. Before I turn the call over to management and the normal housekeeping details to run-through, for those of you who do not receive an email the release yesterday afternoon and would like to be added to the distribution list call our offices at Dennard Lascar at (713) 529-6600 and provide us with your contact information. Also there will be a replay of today’s call and it will be available as a webcast for 90 days in the Company’s website and that’s www.newpark.com. There will always be a recorded replay by phone which will be available through February 28, 2014 and that information is in yesterday's release on how to access that feature.

Please note that the information reported on this call speaks only as of today, February 14, 2014 and therefore you’re advised the time sensitive information may no longer be accurate as the time of any replay listening or transcript reading. In addition, the comments made by management of Newpark today 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 the 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. The listener or readers are encouraged to read the Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q, our current reports on form 8-K to understand certain of those risks, uncertainties and contingencies.

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

Paul Howes

Thank you Ken and good morning to everyone. Thank you for joining us today for our fourth quarter 2013 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 our market outlook before opening the call for Q&A.

Before I move into the details of the call I would like to briefly discuss something we have emphasized many times in the past the challenges we face as a focused provider in the oil fields service industry and more specifically the periodic volatility that can impact our short term financial results due to our size and customer concentration. At a high level our fourth quarter was negatively impacted by four large customer accounts across three regions most of which are transitory in nature. As these challenges arise such as in our fourth quarter we take appropriate actions to address the issue while continuously maintaining our focus on executing our strategy and delivering long term results to our shareholders. To that point I like to highlight some of the noteworthy accomplishments and events of 2013. A year ago I spoke to you about Newpark achieving an all-time high in total revenues for the full year 2013 surpassing the $1 billion mark for the first time in our Company’s history. This year we exceeded that performance and established a new record high posting full year 2013 revenues of 1.1 billion an increase of 7% over last year. This achievement was driven mostly by gains in our fluids business which experienced growth in the U.S., EMEA and Latin American regions.

Net income for 2013 was $0.69 per diluted share up 11% from a year ago. I would also like to point out that our 2013 operating cash flow exceeded 150 million another new record for the Company. We have seen growth and noteworthy expansion both domestically and internationally with our proprietary matting and drilling fluid systems including Durabase and Evolution and that continues to help define Newpark as a driving force in the industry and to that point we are extremely pleased to announce today that the USPTO has formally issued a patent covering Newpark’s evolution system. The clear testament to the strength and quality of our research team and IP pursuits.

Evolution revenues have grown from roughly 27 million in 2010 the first year of it's commercialization to 120 million in 2013. Throughout it's introduction into various new geologies and regions would not only emphasize but also clearly demonstrated our products unparalleled performance in the head to head competition with some of the largest oil field service companies in the world.

One example worthy of mentioning involved a difficult and technically challenging well that we recently completed with the Italian company ENI. During a technology presentation at a November industry conference in Abu Dhabi a co-authored paper was presented with ENI. ENI credited our Evolution system for dramatically increasing the rate of penetration and reducing the time to reach total depth by 30% which translated into significant savings to ENI’s total well cost.

Now turning back to our accomplishments for the year. We strongly emphasize positioning of our core assets for future growth and evaluating strategic alternatives for our non-core and underperforming assets. To that end in June we completed the construction of our new fluids technology center which is now the hub for our global fluids research efforts which we believe will act as a catalyst to accelerate new product developments and further enhance our existing fluid systems.

I know many of you have had a chance to visit the technology center during our first Analyst Day last fall. We’re also pleased with the visits from my customer’s to-date including several IOCs, super majors and NOCs. There is no better environment to showcase our technology and our expertise.

We have also added several meaningful fluid contracts in 2013 as part of our continuing efforts to expand internationally. There were three previously announced contracts including two in deepwater as well as our five year contract with the Kuwait Oil company which represents a significant first step for Newpark into the Middle-East region.

The deepwater contracts are important for different reasons. First, the Black Sea contract with a super major is the result of our first effort to leverage our success in the Brazilian deepwater market to another global region. The other contract with Total and Deepwater Brazil represents another milestone in leveraging our global relationships. Both of these data points are noteworthy as Newpark positions itself for expansion into the deepwater Gulf of Mexico.

We’re also pleased to announce today another significant international contract with Cairn Energy of India. We’re expected to begin work on this four year $40 million contract in the second half of the year. In addition to this contract we have extended our agreement with Petrobras for another three years.

We expect all four of these contracts to contribute meaningful revenue in 2014. So all in all it was a very productive year toward our goal of securing new business internationally. Now turning our focus to our mats business. We announced in late 2013 a $40 million expansion of our mat manufacturing plan in Louisiana. The doubling of our mat production capacity will help us further expand into existing and new markets both domestically and internationally and coupled with a new research and development center we believe that we’re well positioned to continue being the market leader for matting systems.

I like to quickly high highlight one of the new product innovations in our mats business, the spill containment system. Some of you saw the display at our Analyst Day last fall. We continue to refine the system and as we indicated last quarter throughout this winter season we have been testing the ability of that system to handle temperature and environmental changes. After the winter season we will further analyze the systems performance prior to roll up.

We plan to formally launch the spill containment system later this year. With our manufacturing expansion underway we are now focused on extending the global reach of our mat rental business. As an important first step we recently acquired Terrafirma Roadways in the United Kingdom. Terrafirma has been a strategic partner new part since 2008 and the exclusive UK distributor for the Durabase mat system. We saw this as a natural fit with our strategy to expand our rental business globally. The acquisition gives us a beach head not only in the UK where shale development is anticipated but also in the various markets throughout Western and Eastern Europe. We’re proud to welcome the Terrafirma team and we look forward to their contributions.

Positioning the Company for future growth in 2013 mat not only adding to our existing operations but also exploring alternatives for non-core or underperforming businesses. In the fourth quarter we completed the sale of the completion service business which have been negatively impacting our sales for quite some time.

More importantly we recently signed a definitive agreement to sell our environmental service business for 100 million to a strategic buyer. As most of you we were not able to complete a prior sales process in 2008 at a price of 81.5 million. Not only is the current agreement to sell the business at better price than 2008 reflecting the improved performance of this unit, the terms of the transaction are also more favorable to Newpark. As it's typical for business of this nature which involves the handling, transportation and underground injection of waste, a particular focus of diligence and negotiations revolves around the potential environmental liabilities associated with the operations.

The terms of the agreement reach for the buyer significantly limits Newpark’s post-closing environmental obligations including those related to the waste transfer and disposal facilities. Taking into account both the price and the terms of the sale we’re convinced that this transaction is in the best interest of Newpark shareholder’s. The sale is subject to the pre-merger review process but we fully anticipate it will be approved and then sale will be finalized in the current quarter.

With that said now let me turn back to our fourth quarter. While our mats business continue to perform well at a high level the quarter proved challenging for our fluids business both domestically and internationally as I touched on earlier. Total revenues for the Company were $263 million in the quarter 2013 which represents an 8% sequential decline from our record third quarter revenues. Consolidate operating income for the quarter totaled 27 million which is down about 12% from the third quarter. Our fluids business was down 9% sequentially driven mostly by the customer issues that I’ve mentioned which negatively impacted the U.S. as well as the EMEA and Latin American regions.

Our U.S. revenues slowed in the back half of the fourth quarter which is attributed in part to the business realignment of two of our key customers and to weather related disruptions and lower seasonal activity during the holidays.

Our mats and integrated services business continues to perform extremely well while our total segment revenues were roughly flat sequentially rental revenues continue to grow up 5% from last quarter. Finally I want to point out that given our strong cash flow performance we continued to repurchase shares over the past quarter and in conjunction with our pending sale of the environmental business, our Board of Directors recently approved an increase in our share repurchase authorization from $50 million to $100 million contingent upon the sale of the business. With that let me now turn the call over to Bruce Smith who will review the performance of our fluids business.

Bruce Smith

Thank you Paul. Good morning everyone. Just to recap in the fourth quarter the fluids system segment generated a revenues of 212 million representing a 9% sequential decrease and also down 8% year-over-year. Our fluids operating income was 15.2 million in the fourth quarter than 12% sequentially and then 14% year-over-year. For the full year of 2013 fluids revenues were 926 million representing an 8% gain over 2012 while operating income came in at 73 million representing a 21% improvement over the prior year. Looking at the fourth quarter by the region North American revenues were down 80% sequentially to 130 million, although this was then just under 2% year-over-year.

The sequential decrease was driven by slowing in the U.S. with Canada benefiting from the typical seasonal improvements. In the U.S. revenues were 136 million which was then 11% sequentially and then 4% year-over-year. The majority of our declines were driven by activities with two large independents that made significant changes to their operations in the quarter. One such independent is currently repositioning their business in an effort to reduce their well cost and operating expenses throughout the Rockies and the Gulf Coast.

These efforts have resulted in a short term period of transition and lower drawing activity. While we expect this customers activity levels to eventually return to more normal levels, in the near term we expect some continued softness. We also experienced declines with another large independent customer in the South Texas. As we touched on last quarter this work was lost due to pricing as well as the customers decision to insert certain activities previously provided by Newpark and the ramp down of that customer continued in the fourth quarter.

We view both of these unfavorable developments to be customer specific and not indicative of any broader trends. In addition to these customer specific issues our fourth quarter results were also hampered by the late quarter slowdown as well as harsh weather conditions in several key markets.

Also during the previous quarter we benefited from a $2 million contribution from a deepwater well that did not recur in the fourth quarter. Revenues from Canada increased 35% sequentially significantly outpacing the 8% increase in the Canadian rig count.

On a year-over-year basis Canadian revenues were up 16% while the Canadian rig count was up about 3%. Looking ahead we expect the usual seasonal ramp up from Canada in the fourth quarter and due to the extremely cold winter there could be an extended drilling season before spring breakup. Revenues from our EMEA region were then 17% sequentially to 29 million which also represented a 16% year-over-year decrease. In last quarter’s call we emphasized that there would be some weakness from the region as a result of an Eastern European customer transitioning between contracts. However the drop was actually more significant than we had anticipated and this resulted in the bulk of both sequentially and year-over-year decline.

In Brazil revenues were down 8% sequentially to 25 million which was then 13% year-over-year. The business environment there has become more challenging with Petrobras and this has negatively impacting most our oilfield service companies. In addition to the decline in revenue the quarter was hampered by an unfavorable sales mix as Petrobras as many of the rigs doing completions rather than drilling. Also another IOC completed it's well in October leading to a drop in one of our higher margin revenue streams. These revenue declines were offset by a high volume of lower margin commodity sales leading to an operating loss in the period and in addition we took a $1 million charge in the quarter related to our Brazilian value added tax assessment which covered a period of several years as well as restructuring expenses as we look to right size this business.

In the Asia-Pacific region revenues were 8 million for the fourth quarter up 12% sequentially but then 36% from a year ago. The offshore activity was our largest customer in the region remained a temporary shutdown during Q4; however our land revenue has showed some improvement. We expect the offshore work to return in the first quarter.

As Paul mentioned earlier we completed the sale of our mid-continent completion services and equipment rental business as a result our fourth quarter includes a 2.7 million pretax gain on the sale of assets. This business generated 3.3 million of revenue and 2.6 million of our operating income during the fourth quarter including the 2.7 million gain on the sale. Excluding the contributions of the completion service business and the charges in Brazil, our total fluids revenue in the fourth quarter were 209 million with an operating margin of 6.5%. Obviously the most significant drivers to this quarter’s margin decline was the 11% sequential decline in U.S. revenues as well as losses generated in Brazil.

As we discussed in the past we have been focusing our efforts on improving our margins particularly in the U.S. Early in the fourth quarter we appointed Phil Vollands as President of our North American business in part to provide better focus on these efforts. So following the near term headwinds and revenues of certain initiatives more challenging. We remain convinced that as revenue picks up our margins will recover. On the technology front Evolution continues to perform very well and is gaining good traction in the marketplace. Revenue from Evolution was a record 34 million in the fourth quarter compared with the previous record of 33 million in the third quarter bringing full year revenue to 120 million up from a 110 million in 2012.

We have now completed four successful Evolution wells in the Asia-Pacific region and anticipate seeing as continued expansion there in 2014 and as Paul noted we’re pleased to have recently received patent coverage for the Evolution system.

In terms of our current outlook although we expect the softness in the U.S. to continue for the next quarter or so we remain very optimistic that our revenue will rebound in 2014. In Canada we expect to see the usual first quarter seasonal increases which are likely to surpass last year’s first quarter. Internationally with the Eastern European transition issues now behind us we expect near term revenues in the EMEA region to improve although not all the way to historical levels.

In the Asia-Pacific region our offshore work in Australia should return in Q1 as the transition issues there are now complete. In Brazil we remain cautious in the near term although the first quarter should benefit from our first well under the new Total deepwater contract which is now underway.

Overall the business environment is increasingly challenging with Petrobras’s inability to keep pace with the desired level of drilling, completion and production activities. In response we’re pursuing a balanced approach; we’re looking to selectively reduce cost and limit our exposure on working capital and investments but also being more selective of work opportunities. At the same time we need to be mindful that participating in Brazil’s deepwater market remains an important part of our global deepwater strategy allowing us to leverage that experience to other parts of the world.

Longer term we remain very optimistic with several additional contracts coming online later this year. Our new contract with Cairn Energy in India is expected to begin operations in the second half of the year. Meanwhile preparations for the Black Sea deepwater contract are continuing as work is expected to begin in the third quarter. We have recently completed and successfully tested the mixing and storage facility related to this contract and have been requested by the customer to triple the capacity of this facility. When complete Newpark will have the largest and most strategically positioned facility which can be used to provide services for all the customers coming into this region.

Another major contract will take off from the third quarter with the start of the contract in Kuwait. Similar to the Black Sea effort construction is currently underway of our fluids plan. With the contributions of these new contracts we’re confident that 2014 will be another year of growth for the fluids business. With that I will now turn the call over to our CFO, Gregg Piontek.

Gregg Piontek

Thank you Bruce. Good morning everyone. I will begin by discussing the results of our mat business before moving on to the environmental services business and finishing with our consolidated results. The at business reported 35 million in revenues for the fourth quarter a slight sequential decrease but up 31% year-over-year. Operating income was $15.2 million in the fourth quarter down slightly from the third quarter and up 40% year-over-year. Operating margin in the fourth quarter was 43.7% this matches our third quarter margin and is evolved to 40.8% margin in the same quarter a year ago.

For the full year 2013 mats revenues were a $116 million representing a 5% decline from 2012 while operating income came in at $49 million down 9% from the prior year. For the quarter mat rental revenues were up 5% sequentially to $20 million up 49% from the same period a year ago and another record quarter. Rentals continued to benefit from strong demand particularly in the North East as well as our continuing fleet expansion in part driven by the expanded use of our rental mats in all phases of exploration.

Mat sales in the fourth quarter were in-line with our expectations noted on last quarter’s call coming in at $15 million down 7% sequentially but up 13% from the same period last year. Looking ahead we plan to continue our focus on rental fleet expansion including the deployment of mats into Europe following the Terrafirma acquisition.

Similar to early 2013 we again expected to deploy a higher level of mats into the rental fleet in the near term leaving fewer produced mats available for sale. As a result we currently expect Q1 mat sales to be below $10 million. Now moving on to the environmental services business, revenues in the segment were $15.6 million down 11% sequentially but up 8% from prior year. Operating income in the segment was $4.3 million compared to $4.7 million in the third quarter of 2013 and $3.4 million in the same quarter a year ago. Upon completion of the pending sale transaction we expect net cash proceeds to be about $70 million after taxes. In anticipation in this transaction we will be moving the environmental services business into discontinued operations from this point forward. Now moving on to our consolidated results, for the fourth quarter 2013 we reported total revenues of $263 million and 8% sequential decrease and a 3% year-over-year decrease.

Consolidated operating income was $26.6 million in the fourth quarter down 12% sequentially and up 1% from the fourth quarter of 2012. Net income in the fourth quarter was $13.5 million or $0.14 per diluted share compared to net income of $18.8 million or $0.20 per diluted share in the third quarter and $11.2 million or $0.12 per diluted share a year ago.

SG&A cost were $25.3 million down 70 basis point sequentially but up 4% year-over-year. The year-over-year increase is primarily attributable to the charges in Brazil along with about a $1 million of cost associated with strategic activities including the sale process for the environmental services segment and completion services business as well as the acquisition of Terrafirma.

The fourth quarter included $736,000 of foreign exchange losses down from 975,000 in the prior quarter and up from 333,000 in the fourth quarter of last year. The fourth quarter exchange losses is largely driven by the recent currency devaluation in Brazil. The fourth quarter 2013 effective tax rate was 40% bringing our full year 2013 right up 34%. This unusually high quarterly rate was mostly the result of fourth quarter pretax losses in Brazil for which U.S. GAAP has not allowed the reporting of the tax benefit.

Because of our operating losses generated in Brazil compounded by the $1 million of tax assessment and restructuring charges along with FX losses this caused our effective rate to be higher than it normally would have. In 2014 we expect our effective tax rate to be roughly 34% which is in-line with the full year 2013 level. Looking at the full year 2013 we reported record revenue of $1.1 billion which is up 7% from prior year. Operating income in 2013 was a $112 million up 6% from 2012 while net income for 2013 came at $65 million or $0.69 per diluted share compared with 2012 net income of $60 million or $0.62 per diluted share reflecting an $0.11 year-over-year increase.

Now let me discuss our cash and liquidity position, as Paul mentioned 2013 was a record year for cash flows as we generated a 152 million of cash from operating activities, an approximately 85 million of free cash flow. Our cash flow benefited from a 10 day reduction in DSOs driven largely by sustainable process improvements in the North American business. Similarly cash flow also benefited from inventory reduction programs particularly in the U.S. While we’re pleased with our progress in managing our working capital and we will continue to make improvements through 2014, we do not expect it to match the degree of improvement we achieved in 2013.

For our consolidated fourth quarter cash flows operating activities generated cash of $54 million, we use $7 million to fund the Terrafirma acquisition and another $15 million for capital expenditures, $6 million was also used in the quarter to fund share repurchases. Through today we have purchased a total of $17 million under our current repurchase authorization.

Also we fully paid off the remaining $47 million in the revolving credit facility balance by the end of the fourth quarter. Our cash balance at the end of the quarter was $66 million. Total debt was at $186 million with a resulting debt to total capitalization ratio of 24.2%.

Our full year 2013 capital expenditures totaled $68 million and our depreciation and amortization expense was $44 million. For 2014 we expect capital expenditures to total in the $75 million to $100 million range. Part of this will be driven by the $40 million expansion of the mat manufacturing facility. In addition we’re currently developing our deepwater market penetration strategy anticipate that an additional expenditure will be needed for our deepwater infrastructure for the Gulf of Mexico later in the year.

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

Paul Howes

Thans Gregg. Clearly we’re not satisfied with the fourth quarter results. We’re addressing the issues and expect 2014 to be another good year with many new contracts already in hand. Our team has made significant changes over the course of 2013 which have strengthened our position as a technology leader in the fluids and mats businesses. And our proved ability to further expand those businesses into new markets worldwide. We have successfully divested some of the businesses that were no longer a part of a long term strategy and expand operations to better serve our growth market. Looking at our strategic and operational development we’re in the early stages of construction of our new math manufacturing in R&D facility. We expect those facilities to be operational by the end of the first quarter 2015 as stated previously. In addition as Gregg noted we’re developing a global deepwater strategy which will likely result in additional capital investment in the Gulf of Mexico. We expect to complete that study around mid-year. Our current market share in the global deepwater market is approximately 18%. Once we complete our required investments our goal is to attain roughly the same share in the Gulf of Mexico within the next five years.

With respect to our fluids business we do expect the first two quarters to remain flat. However we’re still committed to achieving double digit margins longer term. Our mats business while we take steps to develop new markets and prepare the plant startup in early 2015 we do expect to add support cost to the business this year which will put some pressure on margins particularly in the back half of 2014.

In North America we expect to see a flat rig market but anticipate a 5% increase in the number of horizontal wells do in part the pad drilling. In the International markets, it appears that rig count will grow by about 10% and with our new contract coming online in the second half of 2014 we expect to have another record revenue year in our international operations. In closing I like to comment on our capital structure and how we have positioned ourselves for future growth.

We have significantly improved our balance sheet in the quarter paying off the outstanding balance under our revolving credit facility and once we close the sale of the environmental business we will have excess cash to fund our growth initiatives which may include, investments in our deepwater assets in the Gulf of Mexico and globally. Continued build out of our fluid assets in regions around the world, the purchase of solids control equipment unbundled contracts, the expansion of our mass manufacturing facility, a continued build out of our rental fleet in the U.S. and now in the UK and Europe and allow us the opportunity to make potential acquisitions that are consistent with our strategy. And lastly with the doubling of our share repurchase authorization we have greater flexibility to return excess cash to our shareholders.

With that we will now take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of James Rollyson with Raymond James. Please go ahead.

James Rollyson - Raymond James

This I guess is either for Paul or Bruce, when you take together your recent and near term challenges you mentioned in the U.S. market and Brazil and you take your cost cutting efforts to try and right size those for the time being until things improve and then you layer in kind of the new contracts you’ve got they come on throughout the course of this year. What’s your best guess today of how margins progress throughout the year in the fluids business?

Bruce Smith

As the revenues ramp up in the business we certainly expect the margins come up accordingly. Let me take the piece, Brazil is certainly challenging and in the quarter we did have a lower margin mix of product and when you look at financing cost and management cost and so there is not much left. So going forward in that piece of the business we’re going to be very selective in terms of how we take on new business with Petrobras. So that’s a part of the answer in Brazil. Also in Brazil we have negotiated some improved payment terms with Petrobras which hopefully as the year goes on we will kick in give us a reduced DSO as things go forward there. So in that regard we’re taking certain actions in Brazil that will help us both short term and longer term as we roll through the year.

In the U.S. business the revenue declined quarter-over-quarter by 70 million was really contained within two independent companies that we talked about, 75% of the decline was contained in two companies. But we’re actively pursuing one of the companies again who is getting slowly back to a drilling campaign. We’re actively pursuing many other customers in that region so we believe our market share there will begin to pick up. So as those revenues increase we expect the margins to increase along with it.

Gregg Piontek

And as you pull it through the end of the year I think Bruce one of the things that we’re looking at is that we would expect margins to recover more towards the historical levels as we move into that fourth quarter.

Paul Howes

Yeah I mean a big piece of it from where we currently stand is the top line and you will obviously see whether it's in incremental or decremental with near term swings you will generally will see that flow through in the 20s range in terms of the margin impact and that’s what we thought on the way down so the top line recovery of the key piece to that margin improvement.

James Rollyson - Raymond James

But it sounds like, yeah maybe first quarter is not that dissimilar plus or minus from fourth quarter and as you get through the years kind of steady and then the pickup with all this stuff kicks in for the latter part as you mentioned Paul in the fourth quarter and maybe you get to 10% or high single digits in the fourth quarter kind of thing.

Paul Howes

I think that’s a pretty fair way to articulate it. In the first quarter not a lot of changes other than your Canadian obviously seasonal benefit that you see and then the uptick a bit of the revenues in the international regions but the more meaningful growth it really comes with these new contracts that are coming online as well as the recovery of the U.S. business which has we said it's going to take a little bit longer to get there.

James Rollyson - Raymond James

And then just one follow-up, Paul you mentioned doing your study and working towards getting market share in the Gulf of Mexico at some point over a period of time similar to I mean what you’re doing in Brazil. You mentioned capital investment there, what kind of magnitude of capital investment you’re going to have to make to get there?

Paul Howes

Well it's probably premature because we’re just in the development of the strategy but currently the assets there are not configured for really for deepwater work and they handle the larger OSVs that are coming in and so it's going to be a sizeable investment. It could come in phases but it's pretty hard to kind of put numbers to it at this point in time probably at the end of the first quarter call we can give you more guidance on that. Gregg do you want to add some thoughts?

Gregg Piontek

The other thing I would add there is that it is a number that I think, it's measured in 10s of millions and so it could be something similar to the size of the mass expansion, you know plus or minus from there.

Paul Howes

Depending on how far we go with it.

Operator

Thank you. And our next question is from the line of Neal Dingmann with SunTrust. Please go ahead.

Neal Dingmann - SunTrust

Paul two questions either for you or Bruce, just first on great comments on the press release, on Evolution you know really seems like to me it's picking up and I just wanted Paul or Bruce to comment on you mentioned in the past sort of the expansion in two areas, really, internationally both offshore and onshore and then in some of these newer developed areas in the U.S. I’m just wondering what again it certainly seems like probably now picking up. Two questions around that is it picking up in both international and these other U.S. areas? And again am I correct by thinking that the margins are a bit higher there may be another 10 or so percent higher in the Evolution they are on your typical fluids?

Bruce Smith

I will take the first part. In terms of the roll out of Evolution we’re very encouraged; we’re very pleased with where it is. It's still gaining momentum in the U.S. and anytime you’re introducing a new technology it's never a line that’s always up to the right all the time, you’ve got moments of flatness and new customers come and go and so on but we’re still rolling it out very favorably. In the U.S. it's getting good tractions, ideal tractions. Internationally we expect really good things in 2014. The Asia-Pacific region has just really begin now to get a flavor for the Evolution performance metric and it's so significant that we feel very encouraged that 2014 will see a substantial increase in the sale of Evolution or in the revenues of Evolution in the international marketplace going forward. So I guess in terms of growth I see it both domestically and internationally for the Evolution product line.

Paul Howes

The other thing that I think is important too is the United States Patent and Trademark Office issued the patent for us, that certainly puts barriers to entry for the large oilfield service companies that are starting to see this as a viable threat to their business. It really provides some interesting barriers that they will not be able to overcome. So I think that also strengthens our entire IP portfolio.

Neal Dingmann - SunTrust

Okay and then one follow-up Paul just wanted on the mat side, on the spill containment I’m trying to get a hand around, certainly to me it seems like the upside now and the mats for a while I think that it seemed like there was more challenges because of all the complications but now it seems like you guys have really start to differentiate yourself on that side and I’m wondering is that differentiation really because of the enhanced because of this spill containment system and if so I mean how much more upside, obviously you’re building more facilities I understand that from the press release. You know how much more does that spill containment do for that side?

Paul Howes

In terms of the competition, the competition continues to run at us. Whether it's wood mats or the composite mats, anytime you got these kind of margins you attract competition. I think our team does a great job and how they position the total value and that’s something new that we started in the second half of the year and obviously moving forward is communicating with the customer and the total value of our system and that seems to be gaining traction. With respect to spill containment as we stated previously that we really want to get through this winter season and to look at the stability of the seals when you get these large temperature differentials and certainly we have one of the coldest winters on record. So we’re collecting lot of good data and we will be analyzing that and we will be formally launching that system and obviously we think that’s going to help fill up some of the new capacity as well as the acquisition that we have made in the UK on top of that.

Operator

Thank you. And next we have Mike Harrison with First Analysis. Please go ahead.

Mike Harrison - First Analysis Securities

Just wanted to dig in a little bit further on the business in Brazil, you’ve taken from around 13 million in annual revenue in 2008, you’re something closer to a $100 million a year run-rate right now and we’re still posting losses. I understand that’s a challenging market structurally and Petrobras in particular is a difficult customer, a very demanding customer. But I just wanted to dig in a little more on why we haven't seen the profitability improve as that business has scaled up, what actions do you need to be taking? What are you considering right now in order to get to a point where you’re more consistently profitable? What kind of decisions are you making about mix? What kind of products you will and won't provide? What do you need to provide and what can you get away with not doing for the customers if it's lower margin?

Gregg Piontek

I will take just third of that six part question. There is a lot there. Now as we grew in Brazil part of our approach in terms of maintaining or getting to a point of profitability in the business was also trying to add on a lot of different product offerings outside of the direct fluids contract in order to get some top line growth and get some benefit to the bottom line and part of what we have discovered here is that it is, with it being a difficult place to do business and the working capital that you tie up et cetera a lot of these lower margin offerings but I’m all said and done is hurting you more than helping you. So that’s part of the solution is now revaluating what we’re looking at and being more selective has Bruce had mentioned earlier about what pieces of business that you chase and looking at both the profitability but also your working capital investment in the business.

Paul Howes

I think ultimately for us and Gregg specifically talking there with Petrobras, key to profitability one is that is the IOC work and so in the quarter we had very little almost no IOC work in the fourth quarter, when that happens obviously you’re running strictly on Petrobras and that is the problem child not just for us but for other oilfield service companies as well. So we’re going to have to take a tough approach there in terms of when these rigs go into just to completion, work over mode and we’re simply providing labor with no products we’re going to have to push Petrobras down under the contract in that it's got it has fluids revenue as well. So that’s part of the issue is we’re going to get tough with Petrobras, we don’t have a choice we have to. And that may at some point require us scaling back some of that revenue of Petrobras. On the other side of it though all of the IOC work we have done there has been very profitable. We have done very well with the IOCs and so we need to continue to win those contracts, as Bruce mentioned we got the Total contract starting now in the quarter. So longer term it's going to take a lot of focus but I’m involved with Bruce and so we would expect longer term to see that business stabilize.

Mike Harrison - First Analysis Securities

All right and if we can contrast that with the you have had some nice success in the deepwater market there and talking now about try and transition that success over to the Gulf of Mexico. Do you guys have some firm commitment in hand in the Gulf of Mexico or is the expansion there a little bit kind of build it and they will come and I guess my question is what structural differences do you see or different competitive dynamics that you see in the Gulf of Mexico versus Brazil. Do you think it's going to be more challenging to penetrate that market or once you get in the appropriate position do you have a pretty good firm hold on being able to succeed there?

Bruce Smith

There are several pieces to the answer so firstly the deepwater work we do with Petrobras and the IOCs in Brazil certainly give us a base of knowledge and a base of expertise that we can lever into other parts of the world particularly as you’re talking about the Gulf of Mexico. We have had some experience in the Gulf of Mexico historically and currently in deepwater markets. Now we’re planning to gain much better focus on that level of these experiences we have had in different parts of the world to come to bear on what is a lucrative markets sitting right in our door step here at home.

We’re getting a lot of traction with customers who are looking for another player to come into the deepwater market so it's not really a build them and they will come, there are certain indications out there that our entry would be welcomed by certain people and we’re certainly moving in that direction.

Paul Howes

The challenge for us that and we’re getting more opportunities to look at tenders in the Gulf of Mexico and deepwater but really it's the assets. They are not configured to be able to handle more than a couple of OSVs that are coming in and as Bruce said we’re currently doing deepwater work in the Gulf of Mexico typically it's one rig and so you got limited OSVs. So we’re going to have to get those assets up to another level to be able to compete there. But again Brazil is strategically important because that’s where we have been able to develop our credibility in deepwater. And really that’s with accounts like Total and Exxon Mobil and Maersk and work with them for other IOCs, leveraging that work into the deepwater on Black Sea. We’re very excited by the fact that the super major there originally they had asked us to build a plant which we completed for them and recently asked us to triple that volume in the Black Sea another strong indication that we’re a preferred vendor for a new market. They are moving into and so we think those kind of data points play very well in terms of the Gulf of Mexico.

Operator

Thank you. And next we have George O'Leary with Tudor, Pickering, Holt. Please go ahead.

George O'Leary - Tudor, Pickering, Holt

I just wanted to touch a little bit on your comments around Petrobras and kind of the shift and more completions versus drilling activity. That in terms you expect to continue throughout 2014 or is there any chance of reversal of that and seeing a little bit of pick-up on the drilling side in late this year?

Bruce Smith

Well that’s pretty difficult to predict, you know Petrobras being Petrobras, they have a different key things that they are looking at. So, a completion and production activity is just part and parcel of the game. It's being more weighted towards more completion and production recently. So we hope that at some point going forward they will get back more into the drilling mode which of course is better for our business.

Paul Howes

Yeah I think historically while we have seen these shifts in their activity quarter-to-quarter it's not something that sustains for a long period….

Bruce Smith

Correct, it will move from quarter-to-quarter so we will see more drilling this quarter.

George O'Leary - Tudor, Pickering, Holt

And then you mentioned in the opening comments that some of the fluids weakness this quarter was on the margin and the revenue side was transitory and a portion that was transitory. Can you may be break out your thoughts around what percentage of that falls into the transitory bucket and the percentage that doesn’t.

Paul Howes

We mentioned really the four customers off which three of them one in the U.S. as well as the EMEA and the issues with Petrobras down in Brazil those three are really categorized as more as transitory shifts in their activity that we see more short term in nature. The fourth one the last one which is this customer that Bruce had mentioned in the U.S. That’s an issue where it was work that was lost on pricing so that one is more of a long term impact. So you take a step back and you look at it and the lion share of it is really transitory in nature it's the one customers that’s more significant longer term in fact.

Operator

Thank you. And our next question is from Jeff Spittel with Clarkson Capital. Please go ahead.

Jeff Spittel - Clarkson Capital Markets

Maybe if we can follow-up on Brazil on Petrobras more of a big picture philosophical question. I think we all recognize that they are an important strategic client and it's been a good proving ground for you in deepwater. How long if ever does it take for you to build your book of business with the IOCs down there or maybe as we think about the offshore markets in totality where you could afford to say to them listen we will issue you more of an ultimatum or we would have to reconsider what we’re dealing with you there.

Paul Howes

It's all timing, we just need to pressure up on that contract on a daily, weekly basis to ensure that they are honoring it not just in terms of product sales but also the improvements that we signed in the new contract in terms of billing to reduce our DSOs because we’re borrowing money down there at a very expensive rate and so that interest charge hits those local books but we think there is some impact there as well. But I don’t think we ever get to an ultimatum with them but we’re going to certainly pressure up on them.

Gregg Piontek

Yeah I would agree with the comment on the ultimatum but it is a fair point that given where we are at in terms of our progress on our global deepwater strategy. It is very critical today as we progress and as we make a greater impact into other regions, it has a lower level of criticality to us. That’s there.

Paul Howes

Absolutely as we start taking up contracts in the Gulf of Mexico in developing credibility there as well, Brazil is kind of less important from a Petrobras perspective.

George O'Leary - Tudor, Pickering, Holt

And maybe switching to the U.S. fluids market. I kind of think about you guys play directly on stage and well intensity, can you talk a little bit about how a typical ticket whether it's for Evolution or just for the business as a whole in the shale play that has evolved over the last year or so and then where do you see that progressing over say to the next 12 months?

Bruce Smith

On Evolution are you talking primarily about the margin difference there?

Paul Howes

Revenue per rig.

Bruce Smith

Okay, revenue per rig certainly we see going forward I think is increasing, a lot to do with pad drilling, a lot to do with larger step-outs, larger linear footage being drilled, larger lateral footage being drilled. I think certainly going forward we will see revenue per rig increase.

Paul Howes

Volumetrically, any time they're drilling longer laterals and more wells and we expect as we said about a 5% increase in the total number of wells being drilled although rig count will be somewhat flat currently putting aside any increases in price of natural gas that will occur as a result of the storage issues. We think there is going to be a pretty good year coming up in the U.S. for increased drilling of wells.

Operator

Thank you and next is Marc Bianchi with Cowen. Please go ahead.

Marc Bianchi - Cowen and Company

Just wanted to go back to the U.S. fluids and the competitive dynamic there. There was one customer that was lost, due to competition. What's the overall competitive landscape like? It seems like you don't think that things will get more competitive from here. What gives you confidence in that?

Bruce Smith

I wouldn’t categorize the one we lost as a competitive pricing issue. I think we were pushing for higher margins although I don’t think there is trend there in any way shape or form, I think the market is similar to what it has always been. It's a competitive market but overly so and there is no undo price or wrong pricing or and above of what we have had in the past.

Marc Bianchi - Cowen and Company

Just a follow-up on the mats business. There was a mention of some higher support costs going forward. Can you quantify that or quantify the margin impact, what to expect?

Paul Howes

Yeah. As we progress through the 2014 we talked about the need to build up a demand in advance of the new production capacity coming online as well as you start building up cost of your infrastructure for the new capacity that’s coming online late in the year. So you’ve additional cost associated with developing these new markets and headcount that you need to add to support that. So in terms of the overall margin progression of it what we would expect to see is a ramping of cost in the back half of the year that would probably pull your margins into the high 30s level all other things unchanged as you’re adding cost in advance of additional revenue. I mean probably the biggest, the single biggest factor there is that you know we will be adding a lot of manufacturing people in the fourth quarter, getting them trained and startup the plant in the first quarter. You’ve always got increased labor cost when you’re bringing on a capacity expansion on this size and then that will take time till we get the new product sales out of that plant to cover it.

Marc Bianchi - Cowen and Company

And then in the near term, margins should be pretty similar to what we've seen recently, maybe it sounds like sales are going to be a little bit lower than rental. So I suspect that has a little bit of impact. Can you kind of help us understand the trajectory there?

Paul Howes

Yeah I mean we have been operating in that 40% range plus or minus now for quite some time and I don’t see anything in the near term that dramatically changes that.

Operator

Thank you. And our next question is from Tristan Richardson with D.A. Davidson & Company. Please go ahead.

Tristan Richardson - D.A. Davidson & Company

Just to touch on the deepwater Gulf of Mexico, it sounds like as you go through this analysis process and likely make some investments, I'm thinking about, in the interim given the constraints of the assets you have, how should we think about opportunities for Gulf of Mexico growth, until you get to that point where you've decided to add capacity and then go forward with it?

Bruce Smith

As Paul had mentioned with the current configuration on what we have for deepwater it's very difficult to see any significant ramp up from where we’re based upon what we have. So the facility upgrade if you like we have to come ahead of any significant uptick.

Paul Howes

Yeah so we would see it pretty flat at this point.

Tristan Richardson - D.A. Davidson & Company

And then you guys have talked about taking some action on paying down the credit facility and obviously expanding…

Paul Howes

And paying it off.

Tristan Richardson - D.A. Davidson & Company

Right. And doubling the size of the authorization, but then you've also talked about some of the spending coming on the horizon to expand capacity. I guess I'm curious sort of how you rank those in terms of priority and/or relative size as you look out over the next 18 months?

Paul Howes

Our overall approach is really unchanged and it's always, our first priority is always the growth of the business and the repurchase of our shares, the return of excess cash that’s what we do if our current structure has the excess capacity to do it. So that’s part of the mix but it's not the priority. Where we’re at right now given the strength that we have in the balance sheet we have zero on the revolver we have the cash coming in from the environmental services business while we have a lot of capital expenditures and other opportunities here to redeploy into the business, we’re also in a position where we have, we have some flexibility to…

Gregg Piontek

We continue to generate cash. We’re generating a lot of cash on a quarterly basis. So growth is always going to be first and then returning some to the shareholders we think is a priority as well but probably a second tier.

Operator

Thank you. Next is Bill Dezellem with Tieton Capital Management. Please go ahead.

Bill Dezellem - Tieton Capital Management

I believe in your opening remarks you made reference to your Black Sea customer was requesting that you expand the plant there, the fluids plant by roughly three-fold. Assuming if I heard you correct, would you kind of discuss the dynamics behind that and how we should be thinking about that?

Bruce Smith

I think directionally the customer is suggesting we triple the size of the plant is a good sign directionally for us. They have given us no indication really as to additional revenues but directionally they are preparing us for something which I think is very positive.

Paul Howes

Anytime you’ve got a super major that’s looking for those kind of incremental capacity improvements they have got something in their programs and they don’t share a lot of that information with you obviously. We expect increased revenues from what we originally anticipated but the timing of those revenues is really hard to understand until we get into that program the second half of the year.

Bill Dezellem - Tieton Capital Management

And what do you see as the risk that this is a customer just assuring their own supply and to some degree not worrying too much about the implications that has for the supplier?

Paul Howes

For this particular super major they have not done that to us in the past and they have been very supportive of the capital investments that go in.

Bill Dezellem - Tieton Capital Management

Operator

Thank you. The next is Doug Dyer with Heartland Advisors. Please go ahead.

Doug Dyer - Heartland Advisors

I'm sorry if I missed this earlier, but could you give us a little bit more color on the timing to increase the capacity at the facility in Louisiana, please?

Paul Howes

Timing on that, yeah, we’re in the process of putting together strategic plan for the deepwater globally and then obviously targeting that in terms of investments in the Gulf of Mexico. That study will be done kind of midyear and then we would hope to come to the Board later and so we would, our expectation would be start investments later this year but that process is at least an 18 month long process to get assets up and running in the Gulf.

Operator

Thank you. I’m showing no further questions. I will turn the call back to management for closing comments.

Paul Howes

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

Operator

Ladies and gentlemen this concludes our conference for today. Thank you for your participation. You may now disconnect.

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