Newpark Resources Q3 2007 Earnings Call Transcript

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 |  About: Newpark Resources Inc. (NR)
by: SA Transcripts

Newpark Resources (NYSE:NR)

Q3 2007 Earnings Call

November 5, 200711:00 am ET

Executives

Ken Dennard - IR

Paul Howes - President, CEO

Jim Braun - CFO

Analysts

Karen David-Green - Oppenheimer

John Fitzgerald - Raymond James

Vijay Singh - Janco Partners

John Flanagan - First Analysis Securities

Rob Young - Wm Smith & Co.

Operator

Welcome to the Newpark Resources third quarter earningsconference call. (Operator Instructions) I would now like to turn theconference over to our host, Mr. Ken Dennard of DRG&E. Please go ahead,sir.

Ken Dennard

Thanks, Josh. Good morning, everyone. We appreciate youjoining us for Newpark Resources' conference call today to review third quarterresults. We would also like to welcome our Internet participants as they arelistening to the call live over the web. There will be a replay of today's calland it will be available via webcast on the company's website at www.Newpark.com.There is also a telephonic recorded replay that will be available for the nextseven days until November 12, and that information is in the press release.

Please note that information reported on this call speaksonly as of today, November 5, 2007, and therefore you are advised that time-sensitiveinformation may no longer be accurate as of the time of any replay listening.

In addition, the comments made by the management of Newparkduring this conference call may contain forward-looking statements within themeaning of the United Statesfederal securities laws. These forward-looking statements reflect the currentviews of management of Newpark; however, various risks, uncertainties andcontingencies which are described in the company's annual report on Form 10-Kfor the year ended December 31, 2006could cause Newpark's actual results, performance or achievements to differmaterially from those expressed in the statements made by management.

Now with that said, I would like to turn the call over toNewpark's President and CEO, Mr. Paul Howes.

Paul Howes

Thank you, Ken. Good morning to everyone. We would like totake this opportunity to thank all of you for joining us today for our thirdquarter conference call. With me today is Jim Braun, our Vice President and ChiefFinancial Officer.

Before we go through the quarterly results I would like tostart out by briefly revisiting the strategy approved by our board earlier thisyear and discussing where Newpark stands on certain key strategic initiatives.By doing this, I hope to highlight some of our accomplishments thus far, andwhile there are still more to be done, give you a sense of the progress thathas been made as we execute on our strategy and move towards our vision ofbecoming a leading drilling fluids and well site services company. Afteroutlining these events I will turn the call over to Jim who will review ourquarterly results. I will conclude with a discussion of our market outlook,before opening the call up to Q&A.

With that said, let's take a step back and review where the companystands relative to our previously announced strategy. Earlier this year wecompleted a detailed review of Newpark's operations and established a viablestrategy to move this company forward.

This plan has three main components:

(1) Refocuson and grow our Fluids business;

(2) Improvethe efficiency and expand the scope of services of our Mats and IntegratedServices operation;

(3) Exitthe Environmental Services business, which will allow us to focus our attentionand resources on our Fluids and Mats businesses.

Where do we stand on these initiatives? On growing our fluidssegment we have won several milestone awards to provide our fluids systems tomajor operators, including a three-year deepwater contract for E&I's Gulfof Mexico operations, and a significant fluids contract with Chevron for alarge portion of their U.S.land-based operations.

In addition, we signed a master service agreement with Marathonin the Rockies, and we have completed our first well forthem in Oklahoma.

Internationally, we continue to experience exceptionalgrowth. We have established a solid base of operations in North Africa and the Mediterranean region. I'm happy to report that thefirst trial well in Egypthas been successfully completed and we have now started on the second trialwell.

We have expanded our business into Eastern Europe.We have also established a beachhead in Brazil,where we expect to book our first revenues during the fourth quarter of thisyear. Although we will start off in the land-based market in Brazil,we expect to leverage our position into the country's deepwater market.

With regard to improving our Mats and Integrated Servicessegment we consolidated operations last summer from five separate units intoone and reduced headcount by 15%, thereby improving the cost structure andallowing us to better leverage our market position.

More recently, we sold off our unprofitable Batson Sawmillfacility, which did not fit with our long-term strategy. Our recent acquisitionof SEM Construction not only diversified the geographical reach of thissegment, thus reducing our dependency on the South Louisianarig count, but more importantly is the initial step in expanding the scope ofproducts and services, pushing us towards our vision of becoming a total wellsite service provider to the oil and gas industry.

Finally, on exiting Environmental Services, we placed it onthe selling block earlier this year, and we were pleased last month to announcethat a definitive agreement was reached to sell the business. Closing isexpected by the end of this year. The sale will provide us with $81.5 millionin cash and potentially an additional $8 million from an earnout provision overthe next five years. This transaction will serve to free up resources andcapital which can be deployed in our core Fluids and Mats businesses.

Looking ahead, a critical success factor in executing thisstrategy will be our ability to identify, negotiate, close and integrateacquisitions. We continue to develop and work with a network of banking andother M&A professionals that will help keep the opportunity pipeline full.The key filter in an acquisition process is to be sure that the opportunityaligns with our strategy. We will remain disciplined and steadfast in ourapproach.

In addition to these three key strategic initiatives, wehave also sought to reduce our leverage by improving cash management practices,as well as bring closure to our shareholder litigation issues. We have beensuccessful on both fronts. Over the past 12 months, we have reduced total debtby $63 million, before funding of the $21 million acquisition of SEM.

In terms of our litigation issues, in October we receivedfinal approval from the Federal District Court of a settlement to our derivativeand class-action lawsuits, which brings this litigation to a close.

Given the changes I have outlined, I believe Newpark hasemerged a stronger, more focused and more disciplined company. There is still agreat deal left to do, but I think our accomplishments to date give us a greatdeal of confidence and resolve which will serve us well as we continueexecuting on our strategic plan.

Now turning our attention to the third quarter results.Allow me to make a few broad observations before I turn the call over to Jim toreview the financial and operational results. As you are aware by now, thethird quarter of 2007 was a challenging environment for many oilfield servicefirms with North American operations. Unfavorable weather conditions andprecautionary storm measures in the Gulf of Mexico had anegative impact on our revenue for the quarter. Our deepwater revenue fell from$9.3 million in the second quarter to $4.8 million due to these conditions andthe operators' drilling schedules. In our U.S. Gulf Coast business, the rigcount experienced a year-over-year decline of around 7% and sequentially 4%.

Canadaalso remained weak during the third quarter, as it has been throughout much of 2007. In stark contrast to North America, international and drilling activity remains robust, leadby oil prices that are at historical highs. Under this backdrop, well servicefirms with exposure to overseas markets have shown the greatest growth. Newpark'smost recent results mirror these market dynamics, with weak performance comingout of our North American operations, while our international operationscontinue to post strong gains.

With that, let me hand it over to Jim for the third quarterresults.

Jim Braun

Good morning. Before I go through the details of the quarterI want to note that the Environmental Service business is now being recorded asdiscontinued operations. As a result, I will not be talking about its result inany detail, nor its revenues and operating income included in the commentsbelow.

For the third quarter we reported revenues of $153.8million, up 4% from the third quarter of last year. Sequentially, revenues wereup 2.5% from the second quarter of 2007. Income from continuing operations was$7.6 million or $0.08 per diluted share. This compares with third quarter 2006income from continuing operations of $9.7 million or $0.11 per diluted share.

2006 results include $2.5 million in after-tax insurancerecoveries from Hurricanes Katrina and Rita. Excluding these recoveries, incomefrom continuing operations was $7.2 million or $0.08 per diluted share.

Revenues for Fluids Systems and Engineering business in thethird quarter were up 4% to about $130 million as compared to the third quarterof 2006. As was the case in the last quarter, revenues were largely driven byinternational growth. We experienced solid sales growth in our Ava business,where revenues grew 63% to $25.5 million. Our North American Fluids businesssaw revenues fall 4.5% from a year ago.

As mentioned earlier, Gulf Coast revenue was negativelyimpacted by the slowdown in activity. Canadawas also down year over year with 30% fewer rigs working in Canadathan a year ago. An unprofitable quarter in Canadahas been addressed by redeploying resources, reducing headcount, and limitingdiscretionary spending.

Fluids operating margins were 11.9% compared to 13.3% from ayear ago, as adjusted for the insurance recoveries of 2006. Lower operatingmargins were the result of lower revenues in the Gulf Coast, which has relatively highfixed costs and higher day rate transportation and other operating costs.

On a sequential basis, Fluid revenues in the third quarterwere down less than 1%, as a 6% decrease in North American revenue was mostlyoffset by an increase in our Mediterranean business. Within North America, our Central region was a bright spot as revenue grew 18%on higher activity and share gains, but it was not enough to offset the Gulf Coast decline.

Revenues from Eastern Europe of $5.5million in the quarter were particularly noteworthy as we gained new businessin this market. Fluids margins were down about 50 basis points to 11.9%, inpart reflecting the impact of higher day rate transportation costs and pricingpressure in North America.

For Mats and Integrated Services the revenues were $23.8million in the quarter, up 6% from the prior year. Sales of mats increased by$1.9 million, or 33%, as the quarter saw a nice pickup in export sales of ourcomposite mats. Mat rentals and integrated services were down 4% as volume anda weak South Louisiana land rig count worked againstgains in pricing and incremental sales from SEM Construction, the Coloradowell site construction company that we acquired in August.

We had one month worth of revenues from SEM, whichcontributed approximately $1.2 million to the third quarter. Mats' operatingmargins were 19.1% compared with 20.4% a year ago, the slight decline mostlydue to sales mix and fixed costs in South Louisiana. Ona sequential basis, the Mat segment increased 26% due mainly to strength in matsales, which were up $4.2 million, driven by an increase in composite matsales.

Our rental and service business had a sequential gain of 20%due to the incremental SEM sales, about one-third of this gain, partiallyoffset by a 3% decrease in sequential mat rental pricing. We have made solidprogress in diversifying the mats business away from South Louisiana,as revenues from our Northern Louisiana siteconstruction business nearly doubled to $4.1 million for the second quarter.Reducing our dependency on the South Louisiana rig countis a key element of our strategy. Operating margins improved significantly to19.1% from 12.1%, based primarily on the strength of the composite mat sales.

Our G&A expense of $4.6 million was $0.5 million lowerthan both a year ago quarter and Q2 2007. This quarterly run rate is consistentwith our previous guidance of around $4.5 million per quarter in corporateG&A.

Turning to our balance sheet, debt levels remained unchangedfrom the second quarter in spite of the funding of $21 million for SEM. The netresult is we ended the third quarter with total debt of $178 million, $7million in cash, and a long-term debt to capitalization ratio of 32.4%.

Our leverage situation will improve substantially with thereceipt of proceeds from the Environmental Services sale. Assuming net proceedsof about $81.5 million, our pro forma, long-term debt to cap ratio will becloser to 20%. This strength in our balance sheet should allow us to financefuture acquisitions.

For the quarter, capital expenditures totaled $3.9 millionand depreciation and amortization was $4.9 million. We now project 2007 capitalexpenditures will be between $19 million and $20 million.

With that, I would like to turn the call back to Paul for hisconcluding remarks.

Paul Howes

Thanks, Jim. To restate some of our my earlier comments,conditions in North American markets have been soft, and this is has weighed onour third quarter results. I feel that the Gulf Coast rig count will continue to besoft through the winter. Next year and longer-term the Gulf of Mexico, particularly the deepwater, is expected to be a majorsource of hydrocarbons for the U.S.market. We do believe that there will be solid growth in the Rockies,as the Rockies Express Natural Gas Pipeline becomes operational. We have hadindications from our customers that they will increase drilling activitylevels. We expect this could drive growth not only in our Fluids business, butalso at our new Colorado-based well site construction business.

Internationally, we expect to continue to gain traction in fluids.Our Ava business should continue to see solid gains from North African marketssuch as Egypt, Libya,Tunisian and Algerian. Our entry into and growth in Eastern Europegives us confidence in our competitiveness in this emerging market. We expectto see revenues start to flow from our Brazilian land-based business this year.

In closing, we expect the fourth quarter to be improved fromthe third quarter, and 2008 to be slightly stronger than 2007.

With that, we will now take your questions.

Question-and-AnswerSession

Operator

Your first question comes from Karen David-Green - Oppenheimer.

KarenDavid-Green - Oppenheimer

Thank you and good morning, gentlemen. I just wanted totouch a little bit more upon the redeployment of capital. Any ideas in terms oftimelines once you do actually close on the environmental sale in getting thoseproceeds redeployed? Maybe a low bit more color in terms of what some of theacquisitions are that you guys are looking at.

Jim Braun

With the proceeds coming here at the end of the year, wehave a number of opportunities that we are currently looking at and working inboth businesses, both domestically as well as international. It is alwaysdifficult to predict the exact timing on these, but we would certainly expectto see some things come to fruition in the first half of next year.

KarenDavid-Green - Oppenheimer

Looking at the matting side of the business, could you giveus an idea how much revenue contribution you have from wooden mats versuscomposite? I know you sold your sawmill and inventory levels I believe at theend of last quarter were probably close to 50-50 wood versus composite, but interms of a revenue mixture?

Paul Howes

It was a lot smallerthis quarter, some sales into the Canadian market.

Jim Braun

From a salesprospective most of the mat sales are the composite sales to date. The mats wasonly roughly about $0.5 million, so it is all coming from composites now, andthat is what we're really focusing on.

KarenDavid-Green - Oppenheimer

And inventory levelsright now in terms of the overall wooden versus composite mats?

Jim Braun

It continues to movevery strong to the composite side. We are phasing out and keeping a smallamount of wooden mats, but we continue with our push to have a fleet ofcomposite mats as opposed to wooden mats.

Operator

Your next question comes from John Fitzgerald - RaymondJames.

John Fitzgerald - Raymond James

Good morning. We noticed that this quarter your margin inthe Mats and Services business were up to 19% as opposed to 12% last quarter.Were you guys done with most of your cost-cutting that helped improvementthere? Where do you see the margins going forward in the business?

Paul Howes

We certainly believethat we've got most of our cost-cutting completed. Going forward it is ourbelief, as we start to expand into full portfolio of products around that totalsite preparation model, our target is to start driving this business towards amid-20s in terms of margins.

John Fitzgerald - Raymond James

On the Fluids side, usually you have a seasonal ramp up in Canada.Are you expecting to have the same effects normally percentage-wise as you havein the past?

Jim Braun

One of the thingsthat impacted this quarter, John, is we did not see the traditional recovery inthe third quarter from the second quarter spring break up in Canada. Wecertainly think things will improve eventually in Canada.But it is perhaps a much longer recovery period than what we are used to inlight of the conditions there, the recent passage in the increase in royaltiesas operators try to make sense of what that means to them moving forward.

John Fitzgerald - Raymond James

Would you still see youroperating margins going up maybe a couple hundred basis points or staying flatas opposed to this quarter, in 4Q?

Jim Braun

We made the comments in the conference call was the factthat Canadaactually lost money in the quarter. We have taken steps to improve that. Ifwe're able to recover in Canadawe should improve overall operating margins anywhere in the range of 50 basispoints to the total Drilling Fluids business.

Paul Howes

Our objective longer termwith that business is to get it consistently running at 15%.

Operator

Your next question comes from Vijay Singh - Janco Partners.

Vijay Singh - Janco Partners

I think the marginquestions have been answered. I just wanted to reconcile your free cash flowwith your debt levels, including the SEM transaction of $21 million. The cashwent up sequentially $4 million and $21 million spent in SEM, yet the debt isthe same. If you can Jim, help me reconcile the $34 million in free cash flowwith the numbers in the balance sheet.

Jim Braun

The cash from operations for the quarter was about $26million. We had the $21 million for the SEM acquisition, as well as roughly the$3 million or $4 million in capital expenditures getting the two fairly closewith very little debt change.

Vijay Singh - Janco Partners

The tax rates werelittle bit lower, what should we build in terms of tax rates going forward? Itwas lower by about 1%.

Jim Braun

I think going forward for the year and for next year a 35%to 36% tax rate is good for modeling.

Operator

Your next question comes from John Flanagan - First AnalysisSecurities.

John Flanagan - First Analysis Securities

On the composite matsales are you producing them with the intent of growing sales?

Paul Howes

Yes, we are. When we came into the year we had a significantamount of inventory of composite mats and we had been idling production. Wehave now started running production again. We are running production for twothings. One, to continue to fill our rental fleet as we move away from wood inNorth America, but then also to build some moderate level inventories for salesoverseas.

John Flanagan - First Analysis Securities

Is that mainly in Europe?

Paul Howes

It is mostly in countries in Africa, Indiaand then the Far East.

John Flanagan - First Analysis Securities

In the North Africa market are these also customers for some fluids?

Paul Howes

All of our currentrevenue in the North African market is for fluids. We do not have any mat salesin North Africa.

John Flanagan - First Analysis Securities

So they may be going to West Africaor some other place?

Paul Howes

That is correct.

Operator

Your next question comes from Rob Young - William Smith.

Rob Young - William Smith

What type of marketshare does SEM Construction have in the Piceance Basin region?

Paul Howes

That is a goodquestion. I don't know that we've have calculated market share there in thePiceance specifically. All I can add in terms of color though is that we feelthat they are one of the larger providers of services to Piceance.

Rob Young - William Smith

Who do you guysprimarily compete with in the Piceance Basin region, or who would theyprimarily compete with?

Paul Howes

In the Mats andIntegrated Services business?

Rob Young - William Smith

No, I apologize. Inthe SEM Construction business?

Paul Howes

Okay. It is going tothe other smaller businesses, kind of mom-and-pop activities.

Operator

Your next question comes from Karen David-Green -Oppenheimer.

KarenDavid-Green - Oppenheimer

I wanted to touch alittle bit more on the contribution from a revenue perspective that you had in Eastern Europe, the $5.5 million. Is that the first revenue that you haveseen from Eastern Europe? Could just you tell us whatareas you are working in that market, maybe what you're looking for in terms offuture contributions?

Jim Braun

Karen, we have had some sales into the Eastern Europeanmarket in the past, not as meaningful obviously as we have had here. We'retalking some of the countries around the Hungary,Romania area.

KarenDavid-Green - Oppenheimer

Is that moreland-based work then?

Paul Howes

Yes, it is.

KarenDavid-Green - Oppenheimer

Then in terms of Brazil,you mentioned revenue contribution in the fourth quarter. Can you give us anyidea of what kind of numbers we could be expecting?

Jim Braun

Karen, in terms of the fourth quarter we are looking around$0.5 million. But I think more importantly, and what we have been workingtowards in Brazilis we will be submitting our bid for some work in the offshore market forPetrobras. So as we have described before, our goal is to demonstrate our saleson land, get invited to the party, and put our bid forth to Petrobras. Thatprocess will happen in the first quarter of next year.

Operator

I will now turn theconference back over to management for any closing remarks. Please go ahead.

Ken Dennard

We would like to thank you all once again for joining us onthis call and for your interest in Newpark Resources. We look forward to talkingto you again after the conclusion of our fourth quarter. Good bye and have agreat day.

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