Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Newpark Resources First Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Friday, April 27, 2012. I would now like to turn the conference over to Ken Dennard of DRG&L. Please go ahead.

Thank you, Alicia, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call to review 2012 first quarter results. We'd also like to welcome our internet participants listening in to the call simulcast, obviously, on the Internet. Before I turn the call over to management, I'll run through the normal housekeeping details. For those of you who didn't receive an email of the earnings release yesterday afternoon and would like to be added to the list, please call our office at DRG&L, (713) 529-6600, and we'll put you on that list. Also there will be a replay of today's call. It will be available via webcast on the company's website, which is www.newpark.com. There's also a recorded replay available by phone, which will be available until May 4, and that information for access is in yesterday's news release. Please note that the information reported on this call speaks only as of today, April 27, 2012. And therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening. In addition, comments made by management today of Newpark are that during the 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 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?

Thank you, Ken. Good morning to everyone. We'd like to thank you for joining us today for our first 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 remarks, Bruce will provide an update on our Fluids business and Gregg will discuss Mats and Environmental Services, as well as the consolidated financial results for the first quarter. I will then conclude with a discussion of our market outlook before opening the call for Q&A. Now turning our attention to the first quarter. While we are pleased that our revenues remained strong in the first quarter, we're obviously disappointed by the profitability in our U.S. Drilling Fluids business. North American Drilling Fluids revenues increased 30% from the first quarter of 2011 but were down 2% sequentially due to deterioration in our mid-continent completion services and equipment rental business, reduced activities in dry gas regions of the U.S. and an early spring breakup in Canada. These revenue declines are partially offset by strengthening in several regions, including the Gulf Coast, the Bakken and Eagle Ford Shales along with West Texas and Oklahoma. Our Evolution drilling fluids system continues its solid performance with revenues of $23 million, flat the previous quarter, but up nicely from $9 million a year ago. International drilling fluid revenues increased 22% from the first quarter of 2011, primarily reflecting our strategic entry into the Asia-Pacific market in April of 2011, as well as solid growth in the Europe, Middle East and African region. Our Mats and Integrated Service segment performed very well in the first quarter with revenues up 32% from the first quarter of last year and 4% sequentially to $30.5 million, a new record for this business. The gain was…

Thank you, Paul, and good morning, everyone. In the first quarter, the Fluids systems and Engineering segment generated revenues of $218 million, a 28% increase over last year's first quarter and a 1% sequential decline compared to our fourth quarter of 2011. North American revenues were $161 million, up 30% from last year's first quarter and a sequential 2% decline due to deterioration in our mid-continent completion services and equipment rental business, reduced activity in dry gas regions of the U.S. and an early spring breakup in Canada. In the U.S., we saw solid gains in the Louisiana Gulf Coast, and we continue to see excellent results both year-over-year and sequentially from the oil and liquid-rich plays, such as the Woodford, Eagle Ford, Bakken shales and the Permian Basin. As we stated during last quarter's call, we have been actively migrating to the liquid plays for nearly a year now and expect that drilling in these areas will remain robust as activity in dry gas drilling continues to contract. Because of this, our activity in the Barnett and Haynesville shales continues to decline. And consequently, our revenues in those areas were down 30% sequentially and now make up less than 11% of our North American revenues, a decrease from the 15% we had in the fourth quarter. In the first quarter, sales from Evolution were up $14 million from the first quarter of 2011 to $23 million and flat sequentially. The technology continues to gain acceptance across a broad spectrum of customers and regions. At the end of the first quarter of 2012, Evolution has now been used in over 800 wells. Now moving to our International business. Europe, the Middle East and Africa revenues held steady at $30 million as activity remained stable in Tunisia, Algeria and Romania. There…

Thank you, Bruce, and good morning, everyone. I would like to begin by first discussing our Mats and Integrated Services and Environmental Services segments, then wrap up with the discussion of our consolidated results. The Mats business reported first quarter revenues of $30.5 million, a 32% increase over the same quarter of last year and a 4% sequential increase. Sales of our composite mats contributed $14.4 million of revenue in the quarter, nearly double our sales from a year ago and a 24% increase from the fourth quarter. Rental and services revenues were $16.1 million, reflecting a 3% increase from the first quarter of last year but now down 9% sequentially. As we noted last quarter, the fourth quarter benefited from a large site preparation project in the Gulf Coast, driving the 9% sequential decline. Rental activities were very strong in the quarter, and we're seeing a good balance of demand across the Northeast, the Gulf Coast and the Rockies, with strong utilization in all those areas. Although we continue to see strong demand in rental utilization overall, we are seeing softening in certain areas driven by seasonality and dry gas pricing. Therefore, we are not expecting near-term revenues or operating margins to remain at the level that we achieved in Q1. The Mats segment had operating income of $14.3 million in the first quarter, up 22% from the first quarter of 2011 and up 23% sequentially. Operating margin in the first quarter was 47%. This compares with 51.1% operating margin in the first quarter of last year and 39.7% operating margin in the fourth quarter. Now turning to the Environmental Services business. Revenues in this segment were $13.3 million, up 46% from a year ago and up 2% sequentially. Once again, we saw solid performance and steady volume in…

Thank you, Gregg. In closing, we had a difficult quarter in our U.S. Fluids and Systems Engineering segment. But as Bruce explained, it's our belief that the U.S. business will recover over the next couple of quarters as we move to push through barite price increases and restructure our completion services and rental business in the mid-continent region. Our international Fluid and Engineering Service segment delivered a solid first quarter and with the recent contract award like the one in offshore Australia, we believe we will continue to see solid growth from our international businesses. In the area of technology, we continue to make inroads in the commercialization of our high-performance, water-based Evolution system. We believe Newpark has become the recognized technology leader in the North American Drilling Fluids market. Our Mats business posted a solid quarter both in terms of revenue and profitability. As we have stated previously, we do not expect to -- we do expect to see some margin compression in the business as it moves in the later part of 2012 and early 2013. Due to seasonality in the business, we expect to see a softening in the rental business in the second quarter. Competitive searching for new customers and a low price of natural gas are creating pricing pressures in the segment. However, we're continuing to work on product enhancements to help us maintain our competitive advantage. The Environmental Service business continued to perform as it's expected to strengthen in its core deepwater market as operators obtain permits to drill in the second half of 2012. Now turning our attention to the North American market. So long as the price of oil stays high, we would expect to see continued movement of rigs out of dry gas regions into the oil and liquid-rich basins, which we are well positioned to handle. However, there may be additional pressure from operators to reduce the cost of services and product that they purchase. We are optimistic concerning the U.S. rig count and do not see any current signs of significant reductions. However, that could change if natural gas fundamental deteriorate further. Operator, we'll now take questions.

[Operator Instructions] Our first question is from the line of Neal Dingmann with SunTrust.

Say, maybe, Paul, for you or Bruce, just wondering if you could give me a little more color. You mentioned about for the raw materials, particularly barite, about trying to maybe improve those margins or pass through the costs. Just wondering what sort of processes and procedures you'll do to -- is that -- make agreements in China yourself or if you could just give us some color on how you plan to do that. And if you see this or the pricing going through, is this a 1-quarter, 4-quarter type of event to regain this?

Neal, there's evidence that would suggest that we may be at the top of the market in terms of the high pricing, and that high pricing is also attracting new suppliers into the markets. So going forward, next quarter or the following quarter probably, but later in the year, we expect some other suppliers coming on to the market will help that situation. During the quarter, as we have mentioned, due to a shortage, we did have to halt some of our third-party sales. We have recently reinstated those as our inventories have got somewhat better. The real problem, as you pointed out, is the significance and the frequency of the price increases we've had. They are becoming so thick and fast, we just haven't been able to catch up with the first increase when the next one comes along. But we were diligently passing it through our customer base and we still are. Obviously, we're trying to speed up how we do that as best we can. We're looking at all areas, all customers by area. And we're trying to find the ones that are using the most barite as it were, and we're trying to hit those first. And there's also time lags in terms of when we do a bid for a customer and we bid a barite price. The program gets submitted. The drilling campaign gets planned. The company gets under way. We drill the well. By the time we do that, that adds several months on to the lag time also, before we can start recouping some of these costs. But I guess, diligently, we're looking at every account, every area, and trying to move the price increases through as quickly as we can.

Okay. And then maybe just one follow-up as far as on Evolution, last time -- I think, last quarter, you talked about having a major user, you talked about maybe out in the Rockies a pretty significant well. Bruce, is there any sort of -- or Paul, I mean, any significant sort of things you can point to? Sort of, I don't want to call them catalyst, if you will, but just sort of things to look for down the road. We obviously know it's kind of a lumpy business, and it was nice to see that revenue remains solid there. But just what should we be looking for, for Evolution as you continue to develop that?

Yes. In most regions, it's gaining momentum. We're particularly pleased with some of the work we're currently doing in the Eagle Ford, which could stand us in good stead for the future in that part of the business. We're looking at some of the Tuscaloosa Marine Shale play, which is over in Mississippi, where we might be able to introduce Evolution in the not-too-distant future. So really, all -- most regions are going very well. The complexity of the wells we're using Evolution on are becoming more complex, so very pleased to this point with how it's rolling out.

And one of the things I might comment on as well that in the quarter, we're starting to do some fairly long lateral, some up to 10,000 to 12,000 feet in length. So that's the one area we're starting to see as the extended reach of the laterals, where the higher lubricity, load, torque drag on the drill string is starting to benefit the operators.

Interest in -- one last if I could sneak in, just one from Gregg, maybe any thoughts on forecast for Mats margins going forward.

Well, as I mentioned in my comments, that the 47% that we achieved in the first quarter was pretty much everything hitting on all cylinders. We had the record level of the Mats sales, as well as the utilization being very strong in all the regions. So we do expect that to be downwards somewhere in that 40 range that we were at last quarter. It's not in unrealistic area in the near term.

The next question is from the line of Rob Norfleet with BB&T Capital Markets.

Just a couple of quick questions. I guess, looking at the completion and equipment rental business, you obviously noted the competitive pressures there. Can you talk a little bit about what type of restructuring initiatives that you're going to undertake to try to obviously improve margins in that business? And are you also looking to take any capacity out of the market?

What we're focusing currently is on the cost structure in that business. As the competitors have moved from the Haynesville and the Barnett into the mid-continent region, that competitive pressure obviously has a force down on revenue, and we're trying to now put through the cost structure and shape that for the size of the current business. We're looking at our bidding strategies, and we're also looking at other opportunities for our underutilized assets and moving those to other regions.

Okay. And then I guess another question I just wanted to bring up. We've known about the barite cost obviously being elevated and certainly have been impacting margins to some degree. But it seems like since you reported fourth quarter, obviously, we had a large number of issues that impacted margins this quarter. When did these issues really start becoming prevalent? Were they just really in the last couple of months? Yes, I guess, I'm just trying to understand. In terms of visibility, when you look out in the market, how much of this you kind of saw coming versus really just it happening right in front of you?

Sure, this is Gregg. I'll take that. Yes, as you mentioned, the barite -- the increasing barite cost, we had been talking about for a few quarters now, but what you have is a very long supply chain there in which from first seeing the cost increase to actually moving through your supply chain, through your grinding facilities and actually making its way into your sales activity. So what we saw was -- those cost increases, that we're seeing several months in advance, really worked their way through the system in the latter part of the quarter and that's when it, as Bruce mentioned, came at such a rate where these higher cost shipments were then working their way through and causing the shortcoming there.

And specifically, that was in February and March where we saw those cost escalations hitting us.

Okay, that's fair. And last and I'll get back in the queue. In terms of capital allocation, you obviously talked about your CapEx to research center. With the stock now being below 7 based on where your average purchase price was in Q1, how do you view buyback at this point from a capital allocation standpoint?

Well, there's really no change in our overall long-term view. I mean, we put the $50 million program in place as we had talked about in previous quarter. That's more about maintenance of our capital structure, and we plan to continue executing as planned.

The next question is from the line of Jim Rollyson with Raymond James.

If you looked at all the different factors that you mentioned that led to the margin compression on the Fluids side, can you kind of give us a sense, if you have this handy, of maybe how those rank out or just magnitude of the various factors so we can kind of think about as those unwind going forward or the factors that should like barite eventually you catch up on and just kind of -- how do you rank those out in terms of what was the biggest cause of the compression?

Yes, this is Bruce. I'll take that. I think to categorize it, barite was probably 40% of the piece of the issue, the mid-continent completion Fluid and Services business was 25% of the issue and the remaining 35% was the mix and some of the operational cost inefficiencies that we are now looking to resolve. So those would be the big buckets.

Okay, that's helpful. And on the Mats side, I think you gave pretty good color on how you're expecting that to play out going forward. Maybe just a little bit of color on kind of what the breakdown of where your rental fleet stands today, because you've been doing some relocating this -- Marcellus, I would imagine, is seeing some softness because we've seen the rig count falling off with the gas price. But maybe a breakdown of where your fleet stands today between the different geographic regions.

I mean, as we stand today, it's pretty well balanced between the 3 regions: Northeast, the Gulf Coast and the Rockies area, all having about 1/3 of the overall fleet in the U.S. And you're right, the area in the Northeast is one that we're definitely seeing a softening, driven by the low gas pricing. And then, the other one of note is the seasonal demands in the Bakken area where we see a softness.

It's occurring right now.

Yes, which is normal and picks back up later. And then, historically, you've given a breakdown of Fluids revenues kind of by region, even like in your press release. Any chance you can kind of give us that breakdown? I know we got the Evolution number but we haven't really got everything else.

I can give you the quick breakdown. The Europe, Middle East and Africa revenues were $30 million, Brazil was $18.6 million and the Asia Pacific was in just under $9 million.

The next question is from the line of Mike Harrison with First Analysis.

Just wanted to talk a little bit about the ERP system and you mentioned some of the issues you have. What's the timing -- or what do you think the timing is going to be on some of the resolution or fixes that you've put in place? And have you delayed the rollout of other aspects of the ERP system or other order projects associated with that, while you're working through these issues that you come across?

Yes. I will say that there are no other rollouts that are under way until all of the issues get satisfactorily resolved within the U.S. business, that's for certain. But in terms of the timing of it, there's a lot of pieces to it. There's the -- we talked about the retraining and the reengineering of a lot of different areas of the business, and they need varying degrees of work. And so we're attacking it on all fronts but different pieces take differing levels of effort and amounts of time in order to complete. So in terms of the overall process, I would expect to see steady improvement over the next few quarters and before we're really to the point where want to be.

And I wanted to understand on the barite front, if you could just talk a little bit about how you guys are seeing the pricing environment right now. Obviously, you're not the only ones who are dealing with higher raw material costs. And I would think with the rig count where it is, that demand is relatively good. So are you able to sort of get the pricing that you're trying to get? Or are you seeing significant amount to push back or competitive pressures, maybe, that are hurting you?

There are certainly competitive pressures but that's normal in our business. I think we face that all the time. I don't think we're getting a pushback so much from our customers. It's more of just the time that it takes from the time we get the order, as Gregg mentioned, by the time we push it through the system, by the time we fully realize that cost and then we pass that through to the customer. So it's been more one of a lag time issue. And because the cost increases have been so high and so frequent, it's probably going to take us through to the fourth quarter before we successfully manage to push these things through.

And that sort of the -- what I really wanted to get at is you mentioned that the rate of increase kind of accelerated in February and March and you mentioned that the supply chain is several months long. So is it going to be, October, November, December, when we really see the higher cost hit you? Or is that when we really see that the pricing is in place? Just maybe help us understand a little bit more that the timing of this price [indiscernible] dynamic and the headwind on margin.

It's been the timing in terms of passing through those additional costs to our customers. I think we'll see a gradual increase in that as we go through the year. So it's not going to be a swift leap back. I think it's going to be more a gradual climb back throughout the rest of the year.

The one thing Bruce did mention, Mike, was that the cost -- the ore cost coming out of China, we think that, that's plateaued. We're starting to see some dip in the costs coming down out of China. And so we expect that to stabilize and hopefully maybe even decline as we get throughout the end of the year. We'll have to wait and see. But again, another thing that the Drilling Fluids organization is doing is looking at securing alternative sources at lower costs. But it's going to be in smaller quantities because China still probably controls about 60% to 70% of the worldwide barite market.

The next question is from the line of Doug Garber with Dahlman Rose & Company.

I wanted to ask a little bit about the International business. It seems like most of the concerns on the margins this quarter were from the domestic business. Can you give us an update on just the different geomarkets, Brazil, Asia Pac and the Middle East, meaning Canada just kind of -- are you guys seeing margin improvement and price improvements there like some of the -- your larger competitors are talking about in the international markets?

The pressures are there. However, the contracts tend to be longer term there and moneys are committed significantly upfront of drilling campaigns. So we tend not to see the short-term swings so much in those areas as we do here in the U.S.

Yes. I mean, overall, the -- each of those areas are -- were, I would say, relatively stable to the prior quarter, up slightly.

Yes, modestly up in the international markets.

Okay. And when did those kind of legacy contracts roll over in the international markets, where we can potentially see margins on the aggregate level be impacted by the international strength?

I think they'd [indiscernible] the situation on those contracts there at different points in time, different lengths and different countries. Bruce, I don't think we have any contracts that are coming up. We're signing new contracts in Algeria, which is our largest country in that part of the world. So don't see anything on the near-term horizon, Bruce, but you may want to comment further on that.

No, I think you've categorized it correctly [indiscernible].

Yes. I mean, the one that obviously we're probably most pleased about was the new contract we won in -- down in Australia offshore there. So that was a nice contract win for us. It was a multiple-year contract.

And just one more quick question for Gregg on the, I guess, the ERP costs or I guess the corporate and other -- the line item. It was a little elevated this quarter. Do you have a roadmap on when you kind of -- on that for the rest of the year?

That kind of goes hand in hand with these efforts that we're talking about. A lot of these incremental resources that we have are to support the reengineering and retraining of the folks within the operations. So as we make progress in that area, we'll see the support costs also go down over time. And so those costs are -- I mentioned the nearly $2 million of costs. And those costs are really split between the Drilling Fluids unit and as you know, the corporate line is the other area where that shows up.

The next question is from the line of Michael Marino with Stephens Inc.

Just wanted to get some more clarification on the barite cost. And I guess what I'm struggling to understand here is, does the impact on margins of the barite cost issue get worse before it gets better? Or have we seen the worst of kind of the impact?

We think we've seen the worst. There is evidence that suggests that we are at top of the market on the high price side. So we're hopeful that we've seen the worst at this point.

But in terms of the lag and the flow-through into the P&L, you think you've seen the worst?

Yes. I mean, in terms of the cost increases that we have seen coming through, we are now, basically, working through the highest cost shipments that we have purchased. But on the cost side, we've seen the top.

Okay. Okay, okay, that's helpful. And then, as a follow-up, the third-party sales issue, is that kind of the first component of the margin issue that bounces back?

Yes. As Bruce had mentioned, that was a situation in which we had to temporarily restrict our third-party sales in order to protect our own internal consumption needs. And that's based on the supply levels that you have site by site and so that was a situation that we faced late in the first quarter that we worked through.

Yes, we've turned those sales back on now.

Okay, okay. And then finally, on the completion services business, could you give us some color on how big that is? And maybe how are the margins in that business compared to the rest of the business? And I guess, I'm just trying to figure out, obviously, it's apparently higher-margin stuff and moves around a lot quicker. But I'm trying to understand kind of the potential impact going forward, if it gets worse or if it stabilizes. Just kind of put some color around the relative size of that business, maybe.

Yes. It's a relatively small piece of the business. I mean, the revenues are only in the 5% as we stand today after the declines, 5% of the total segment revenues. In terms of the margin profile, what's different about this business is it is, with it being a service and rental business, you have that fixed cost structure. You have the equipment and the personnel in place. So much like we see in the Mats Rental business, in which you got some pretty dramatic swings in your operating margins, based on your utilization of your assets, you have the similar dynamic here, in which the decline in margin really flows through.

Okay. And I mean, has that business maybe seen worst too? And were you caught a little bit flat-footed the last couple of quarters there? And now you can kind of stabilize and hopefully improve. Or is it kind of flat now here?

We think it's flattened out now. I don't think we were caught unaware. We certainly were aware of that other assets we're moving in from the Haynesville and the Barnett as they went down. So we certainly were aware of it. It just happened very quickly, and we didn't have time to react to it. But we are reacting to it now. And we're going to start building that business, say, back up the way.

The next question is from the line of Mike Harrison with First Analysis.

Just a couple of additional ones. Any update on kind of what you're seeing in terms of deepwater activity, drilling activity in the Gulf of Mexico? Are you seeing an increase in bidding or actual work that you're doing out there?

Really, we're not seeing a dramatic change. There's a lot of activity going on that was almost the pre-Macondo in a way, that's still going on. But in terms of permits and new drilling, we're not seeing any significant increase at this time, but we expect that to gain momentum as the year goes on.

And then, what were the revenues in Canada in Q1? And can you maybe walk through for how the normal seasonality works in that business? And I know that's been a very strong market for you. So are you still expecting to see, I mean, year-over-year higher activity during the summer months? Or is that sort of gone until we get to the colder weather again?

Sure. Michael, I'll take the first part of the question and then hand off to Bruce. But in terms of their first quarter, I just want to remind that the fourth quarter -- the third and fourth quarter of last year were very, very strong for that business historically. And in the fourth quarter, they had nearly $24 million of revenues due in part to the early spring breakup that really caused things to drop off in March. Their first quarter revenues declines to under $19 million. So they were down $5 million in revenues quarter-over-quarter.

Yes, the first quarter can be lengthy or short, just purely depending upon the time of the breakup. The breakup began a little bit earlier this year. Hence, the revenues tail off towards the end of the quarter. The second quarter, of course, in Canada is always the time when things really slow down, simply because the road bands are on and rigs and materials can't move. But coming back out of the breakup, whenever that occurs, we expect to get back to a very strong position in Canada and grow the business during the third and fourth quarters, back to the high levels we saw at the end of last year.

All right. And then last question I had is maybe more of a strategic one for Paul. Just on the Mats business, you've talked in the past about expanding the rental model into some international markets. Is that something you're still investigating? And what maybe is the timing of that?

Yes. Mike, we do continue to investigate the international markets. As you know, we've talked previously about Eastern European shale plays as a possibility. We've been spending some time there to truly try to understand the operators and what their rate of growth might be in that region. And then the other places that we think that there's a natural benefit for our product line is down in Eastern Australia in Queensland, with the Gladstone LNG project. So we're still looking at those but we're off the end of this year or early next year before we would really do anything meaningful there.

And our final question is from the line of Chris Enright with Weeden & Co.

Just a couple of quick follow-up questions. Going back to the completion services business, given the competitive pressure and obviously, you're small scale, has there been any discussion around potentially exiting the business? Does it make sense for Newpark at this point?

We're always looking strategically at our portfolio but certainly at this time, there is no -- has been no decision made in that area.

Okay. And last question, most things have been answered at this point. But now that you've given the Canadian breakdown, had a decline there, had a decline in completion services, decline in barite sales, it seems like a pretty nice increase in the core U.S. Drilling Fluids business on a -- from a revenue perspective. I'm not talking about margin. Overall, do you think you gained any share there? Is that a fair assessment, first of all?

I think we remained flat in terms of market share.

Yes. There's been -- there was some rig growth. We worked with the Baker Hughes rig count. So there's been some growth in rig count so -- but relatively flat in market share, maybe a slight improvement basin by basin.

This does conclude the question-and-answer session. I will turn it back over to Mr. Howes for any closing remarks.

Thank you for joining us today in the call and for your interest in Newpark Resources. We look forward to talking with you again after the conclusion of our second quarter. Thank you very much.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.