NPK International Inc. (NPKI) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Newpark Resources Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, July 26, 2013. I would now like to turn the call over to Ken Dennard. Please go ahead, sir.

Thanks, Craig, and good morning, everyone. We appreciate you joining us for Newpark Resources conference call to review 2013 second quarter results. We'd also like to welcome our Internet participants as the call is being simulcast over the web. Before I turn the call over to management, I have the normal housekeeping details to run through. If you didn't receive an e-mail of the earnings release yesterday afternoon and like to be added to our distribution list, please call -- my office is at Dennard-Lascar at (713) 529-6600, and we will add you to the distribution list. Also, my e-mail is on the release as well. There will be a replay of today's call and it's available by webcast on the company's website, which is, of course, www.newpark.com. There will also be a recorded replay by phone, which will be available until August 2, 2013, and that information for access is in yesterday's release. Please note the information reported on this call speaks only as of today, July 26, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management today of Newpark 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 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 behind us, let's turn the call over to Newpark's President and CEO, Mr. Paul Howes. Paul?

Thank you, Ken. Good morning to everyone. I would like to thank you for joining us today for our second 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 service 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. Now turning our attention to the second quarter. Overall, I'm pleased with the progress made toward the execution of our long-term strategy. International growth has been a key element of our strategy, and in the second quarter, our fluids business continued to expand, generating total international revenues of $73 million, up 38% year-over-year. Most of the increase came from the Europe, Middle East and Africa region with revenues at all key markets were up. We also saw a strong revenue growth from both our Latin America and Asia-Pacific regions with both regions posting year-over-year growth in excess of 20%. Looking ahead, we have 3 recent international contract awards, including a 5-year contract for land operations with the Kuwait Oil Company, as well as 2 deepwater contracts that we announced last quarter, which will provide plenty of opportunities to continue our international expansion. In North America, the spread facing a 11% year-over-year decline in U.S. rig counts along with the second worst Canadian spring breakup in the last 10 years, our fluids business reported $161 million of revenues in the second quarter, reflecting 8% increase over last year's second quarter. Financial results in the fluids business were impacted negatively by a few challenges in the quarter, including a $1.8 million charge taken in Brazil, which reduced our reported EPS by $0.02 per diluted share. In addition, our Mid-Continent completion service business had another challenging quarter, reporting a $1.6 million sequential decrease in operating income and contributing another $0.01 decline in diluted earnings per share. In the mats business, we are very pleased with the progress and the development of our linerless spill containment system. We have expanded our field testing and currently have 3 spill containment sites in progress with 3 different customers in the Northeast. Based on results of the testing completed today, we're continuing to make enhancements and have now testing the system in both drilling and completion applications. While we are pleased with initial results and customers' interest, it's important to highlight that we are progressing through the field test deliberately and methodically. We are partnering with our customers to carefully evaluate the performance of each site to ensure that they are realizing the full value of this innovative technology. Meanwhile, our recent efforts to expand our mat rental fleet are beginning to provide a meaningful impact. In the second quarter, our total revenues for mat rental and services were $18 million, which represents a 22% sequential improvement, marking our strongest rental quarter in 2 years. This improvement confirms our strategic decision to focus on expanding and diversifying our rental business in order to provide a more stable platform for future growth. In the environmental service business, it was yet another solid quarter, with revenues up 30% from the second quarter of last year. The business continues to perform well, benefiting from increased activity in the Gulf of Mexico. As we announced in May, we have initiated sales process, and to date, we're very pleased with the level of interest. And now, I'd like to turn the call over to Bruce Smith, who will review the performance of our Drilling Fluids business.

Thank you, Paul. Good morning. In the second quarter, the Fluids Systems and Engineering segment revenues totaled $234 million, a 5% sequential decrease, but a 16% year-over-year increase. As Paul mentioned, this year's spring breakup in Canada was particularly challenging, leading to an 80% sequential decline in revenues. Excluding our Canadian business, the revenues from the rest of the worldwide fluids business was up by $2 million sequentially or 1%. Looking at the regional results. North American revenues totaled $161 million, down 9% sequentially but up 8% over last year's second quarter. As noted, the sequential decline is almost entirely attributable to the spring breakup, which drove a $15 million sequential decline in revenue as the Canadian rig count was down 71% from the prior quarter. Canadian revenues were also down 48% on a year-over-year basis, driven primarily by the timing of the spring breakup as operator shutdown activities earlier this year. In the U.S., revenues were down 1% sequentially to $158 million, which was in line with the flat U.S. rig count. Small decrease came from both south and east Texas which offset revenue gains in the Rockies. On a year-over-year basis, U.S. revenues were up 11% from a year ago, despite the 11% decline in the rig count. This were driven by growth in the Rockies and South Texas. In addition, our Alliance acquisition has been a strong contribution to the West Texas region, which generated $12 million increase in revenues from a year ago, including a $3 million of proppant sales. This revenue gains were partially offset by declines in Oklahoma and third-party barite sales. While we're pleased with the progress of our U.S. Drilling Fluids business over the past year, 1 area that continues to weigh on our U.S. results is our completion fluids and equipment rental business. As we have previously discussed, we experienced a significant increase in competition over the past 6 quarters in the Mid-Continent region in which this business operates. After taking significant actions in late 2012 to rightsize this business, which initially seemed to provide a catalyst for a turnaround, we again experienced disappointing results, generating a $1.1 million operating loss in the second quarter, which is down $1.6 million sequentially. In light of the persistent ongoing difficulties in this business, we have decided to evaluate strategic alternatives. Now moving to our international business. Europe and Middle East and Africa posted a record high revenue quarter, increasing 13% sequentially to $39 million, and reflecting a 54% increase from the second quarter of last year. In the region, we saw sequential revenue increases coming primarily from Italy and Tunisia. Algeria revenues increased modestly, although they still remained below historical levels. As we mentioned during our first quarter call, work in Libya has restarted, although the revenue contribution was not significant in the quarter. On a year-over-year basis, revenues were up in all of our key EMEA markets. In Brazil, revenues were down 10% sequentially but up 24% year-over-year to $22 million. During the second quarter, we identified inconsistencies in the previously reported estimated revenues and profits associated with unbilled sales to Petrobras. As a result, the second quarter includes a $1.8 million charge to adjust for these inconsistencies that had accumulated over the previous 5 quarters. I would like to note that even after adjusting for this, our Brazil business was profitable in 2012. The revenues in the Asia-Pacific region were up 10% sequentially to $11 million and also up 20% year-over-year. As mentioned during the first quarter call, Santos was transitioning to a larger rig and activity resumed in the second quarter once the transition was complete. We saw the benefit of the additional offshore work in the second quarter, despite a sequential decline in onshore activity in the region. As Paul mentioned, our international business units combine to generate $73 million of revenue in second quarter, a 38% year-over-year increase. Our continued international expansion remains a key component of our long-term growth strategy. The consolidated segment reported operating income of $17.7 million in the second quarter, down 22% sequentially and up 31% year-over-year. The operating margin for the segment in the second quarter was 7.6%, down from 9.1% in the first quarter but up from 6.7% a year ago. Despite the continued progress that we've made in improving margins in our U.S. business, our second quarter margins were impacted by the adjustment in Brazil, the loss in the completion fluids business, as well as the spring breakup in Canada. The Brazil charge and the operating loss in the completion service business, combined to reduce our second quarter operating margin from 9% to 7.6%. In addition, Canada spring breakup contributed almost another full point of margin compression in the quarter. As we stated in the past, returning to double-digit margins in 2013 remains our near-term goal. Second quarter revenues from Evolution were $25 million, which was down from the $29 million in the first quarter and $27 million a year ago. The decrease is due to timing issues rather than any real fundamental change in demand. Our largest Evolution customer is currently transitioning between basins. Also, after complaining 2 successful wells in the EMEA region in the first quarter, our customer is currently in an evaluation period. And we expect further Evolution wells to begin in this region later in the year. We also expect to cover first Evolution trial wells drilled in the Asia-Pacific region during the third quarter. Therefore, we expect Evolution revenues to increase in the back half of the year. Looking ahead, we expect North American revenues to improve in third quarter, due primarily to the typical seasonal recovery in Canada. Internationally, we expect to see our revenue decline, particularly with the EMEA region coming off a record high at second quarter. Also, the Asia-Pacific revenues are expected to decrease due to a temporary shutdown of growing activities by one of our key customers following a fatality on a rig site unrelated to Newpark. We will also currently preparing for the 3 new international contracts that we recently announced and expect work under all 3 contracts to begin in late 2013 or early 2014. As I stated, returning to double-digit margins by the end of 2013 remains a key focus for us. And we feel confident that we can achieve this goal, assuming market conditions hold up. Finally, I'd like to highlight that we recently opened the Newpark Technology Center, our new world headquarters, state-of-the art research and training facility. This 106,000 square foot building in Katy, Texas, will house all the major functions of our Drilling Fluids business under 1 roof, enabling more efficient working access to a full range of world-class analytical capabilities. We're extremely proud of this new facility and impact it will have on drive and innovation as we continue our progress as a recognized technology leader in Drilling Fluids. With that, I'll turn the call over to our CFO, Gregg Piontek.

Thank you, Bruce, and good morning, everyone. I will begin by discussing the results of our mats business before moving on to Environmental Services and finishing with the discussions for consolidated results. The mats segment reported second quarter revenues of $25 million, a 23% sequential increase but a 15% year-over-year decrease, as we continued our focus on expanding our rental business. Rental revenues were up sharply, posting a 22% sequential gain and 14% year-over-year increase to $18 million, reflecting a strong demand as we continue the expansion of our fleet as we mentioned during the first quarter call. The second quarter results reflect our strongest rental quarter in 2 years with the Northeast region of the U.S. being the primary driver behind both sequential and year-over-year increase. Market share gains in the Northeast region helped drive this region's revenue up 33% year-over-year despite a 14% decline in rig count over the same period. Mats sales were up 28% sequentially to $7.4 million but down 48% from a year ago, reflecting our strategic decision to dedicate mat production to increase the size of our rental fleet. Also, we saw $2 million mat shipment pushed into the third quarter due to flooding problems affecting the Canadian customer. As Paul mentioned, our spill containment system remains on track, and we currently have the system deployed with 3 different customers in the northeast. Customer interest remains strong. We've been encouraged by its performance. As we mentioned during the first quarter call, we're continuing to evaluate the anticipated demand from our rental customers, which may limit mat sales going forward. The mats segment generated an operating margin of 40.7% in the second quarter, which compares to 41.2% margin in the first quarter and a 43.5% margin in the same quarter a year ago. Due in part to the deferred mats sales that I mentioned earlier, we expect stronger mat sales in the third quarter, returning back above the $10 million level. Meanwhile, rental activity should benefit modestly from the continued fleet expansion efforts. Also, as we mentioned on last quarter's call, given the continued strong performance of this business and high level of interest in the spill containment system, we remain optimistic that we can maintain margins near the 40% level in the current environment. Now moving onto the Environmental Services business. For the second quarter of 2013, we reported total revenues of $17 million, an 18% sequential increase and a 30% year-over-year increase. The sequential increase was driven by higher oilfield waste volumes from the Gulf of Mexico. The higher revenues helped push the operating margin to 30.9%, up from 24% in the first quarter and 26.4% in the same quarter a year ago. As the deepwater Gulf continues to show improvement, this business should benefit. Now moving on to our consolidated results. For the second quarter of 2013, we reported total revenues of $277 million, a 2% sequential decrease and a 13% year-over-year increase. SG&A costs were $24.7 million, up 2% sequentially and 24% year-over-year. The year-over-year increase is largely due to increases in personnel and administrative costs related to company growth along with the cost of strategic planning projects. Operating income was $26.9 million, down 5% sequentially and up 9% year-over-year. As Bruce mentioned, the second quarter results included a $1.8 million adjustment related to unbilled sales to Petrobras. Under the process followed with Petrobras, our invoices are not entered into our financial system until they're approved by the customer, which tends to be a lengthy process. Therefore, at any point in time, we have a fairly significant amount of sales activity that is tracked and accrued based on contracts pricing and estimated material costs. In the most recent quarter, we discovered inconsistencies in the estimate used to record these unbilled sales, which have now been adjusted. While not material to any period reported, the cumulative impact of this issue over the previous 5 quarters was $1.8 million or a $0.02 charge to diluted earnings per share. Including the Brazil charge, our reported net income in the second quarter was $15.7 million or $0.17 per diluted share compared to net income of $17.4 million or $0.18 per diluted share during the first quarter and $14.5 million or $0.15 per diluted share in the second quarter a year ago. The second quarter 2013 tax rate was 34%, which is in line with our expectations for this year. Now let me discuss our balance sheet and liquidity position. During the second quarter, operating activities generated cash of almost $29 million. We used $21 million to fund capital expenditures, primarily consisting of construction costs for a new technology center and the expansion of our mat rental fleet. As a result of the elevated capital spending, borrowings under our revolving credit facility increased by $8 million in the quarter. We ended the second quarter with cash of $58 million, predominantly in our forward operations, and a revolving credit facility balance of $78 million. Our total debt at the end of the second quarter was $260 million, resulting in a debt to capitalization ratio of 32%. Due in part to additional capital investments required to prepare for the 2 deepwater contracts and the Middle Eastern contract, we have increased our 2013 capital expenditures expectations and are now looking at a range of $55 million to $65 million. Now I'd like to turn the call back over to Paul for his concluding remarks.

Thanks, Gregg. Overall, we are pleased with our continued success in implementing our strategy on a global basis. Our international Drilling Fluids business continues to expand with revenues growing 38% year-over-year, including a record revenue quarter in our EMEA region. We expect to see continued revenue growth in international business as new contracts start up in late 2013 or early 2014. Over the last several quarters, we made steady progress and improvements in margins for our Drilling Fluids business. And although in this quarter, our margins were sideways a bit, we fully anticipate regaining the momentum in the second half of this year. Another key driver of our strategy is the continued rollout of new fluid technology around the world. As Bruce discussed, we are now expecting to start drilling our first Evolution well in the Asia Pacific region during the third quarter, after a very successful introduction into the EMEA region with a major IOC. In addition, we are starting to see the benefits of our new fluid technology center. Just recently, we hosted a meeting with a large national oil company, where we discussed their future drilling programs and the benefit of our technology. We expect to be announcing the grand opening event for the facility in the near future. Our mats business continues to execute on its growth strategy, deploying additional mats into the rental fleet during the quarter. Similar to Drilling Fluids, our mat business is becoming a technology leader in the market segment by developing and deploying its new spill containment system, which utilizes our patented DURA BASE mats system. Although we still have work to do in these spill containment system, we are pleased with the progress to date and the customer feedback we are receiving from the test sites. In addition, we are extremely pleased with the growth in the Northeast region, where revenues grew more than 30% year-over-year, despite the rig count falling by nearly 15% in this region. This is a testament to the value of the technology we're providing our customers. It's clear that our customers see DURA BASE mats as integral part of the drilling program in the Northeast region. Lastly, the environmental service business continues to deliver excellent results. We'd expect these future performance track with activity levels in the Gulf of Mexico. With that, we will now take your questions. Operator?

[Operator Instructions] And our first question does come from the line of Jim Rollyson with Raymond James. James M. Rollyson - Raymond James & Associates, Inc., Research Division: Paul, I guess, first question just on going back to mats. Good -- great quarter in that regard there from a revenue standpoint. And certainly the margins continue to hold up, which is great. Maybe talk a little bit about this spill containment system in terms of you said you got 3 customers out there now, and it's gaining attraction to other folks. What do you think the opportunity set might look like for that? And maybe equally as important, how does that subset of your business there or that marketing approach affect margin? Does that allow you to help keep margins up? Because for the longest time, you guys were worried about competition dragging margins down and it's actually held up very well, so just maybe a little bit of color on around how that proceeds going forward.

Sure. Absolutely. Yes, and we've said this maybe in a prior call that the spill containment system is kind of a system solution to preventing pollution on the site and containing any possible spills. So our approach would be to -- that we think it could hold margins, stabilize margins and prevent erosion. Probably premature to say that's going to be the case, but that's our expectation. In terms of future demand, we have seen a lot of strong interest from customers. The most recent site that we've laid, we've actually removed the liner from the site. So we're sitting on the bare ground now with the mats completely sealed. And the other thing I'd like to comment on is the fact that, as we said in earlier calls too, we're trying to develop a new market segment, and not just in the drilling side but also in the completion side, and we have had 1 full site in the completion market segment as well, so... James M. Rollyson - Raymond James & Associates, Inc., Research Division: That's great. And then as a follow-up, going back to the fluids side of things, obviously, margin had a couple of challenges at Brazil, right? Adjustment factor and then the completion side. Margins going back to double digits, is that something that the new contracts starting up late this year going into next year? Do those initially this help or hurt your margins? And how do you get back there, especially just given the kind of issues you're facing with the completions part of your business?

This is Bruce, I'll take that one. The new contract certainly will help, but it's not going to affect the margin rise in the third and fourth quarter. We expect that in the third quarter and fourth quarter to get back closer to where we were first quarter and drive to the double digits, regardless of the new contracts that are coming later in the year or early next year.

And the other thing that I would say too on the completion services business, as we mentioned, we are pursuing or evaluating strategic alternatives to that business, and we'll make those decisions as we move through the end of the year.

And our next question does come from the line of Neal Dingmann with SunTrust.

Paul for you or Bruce. Just wondering, you did mention in a great update on Evolution as far as international, just want to hear your thoughts. I know there were some different things coming out in the U.S. that we're supposed to look for in Evolution as far as some people using it out West and some different instances or different types of circumstances you're going to use it. Bruce, could you just comment overall on the growth you've seen U.S. as far as current customers and new customers, and then regionally speaking as well?

Yes. In the U.S., it continues to gain traction in all areas. West in the Permian area, it's gaining more traction now that it's had in the past. So we're beginning to make some significant progress there. Our customer base continues to grow, I believe we're 170 customers now that have used this system. And we are approaching 1,900 wells now with this system in the U.S. so all milestones there. We drilled 8.5 million lateral feet. So it's caught a significant step forward in the U.S. as we've gone through last year and the beginning of this year. So we're very pleased really with where Evolution is and how it's being rolled out, the acceptance of it from the customers both in the U.S. and internationally, although international were barely stages there but they're really very pleased with the way things are going on the Evolution side.

Great. And then, Bruce, if you can continue, you mentioned on reliance, it seems like you saw a nice pickup in West Texas, especially on the proppant side. I know for a while I think maybe you and Paul maybe considered about selling the proppant side of this. Wanted your thoughts on that business, both -- any plans to either grow it or look to divest that, monetize it and then just, how that business has grown since you bought it?

It was actually a little soft in the second quarter, but that goes along with frac-ing. Frac-ing has been a little bit down in the second quarter. We expect the proppant sales to be a little better in Q3 than they were in Q2. And we really haven't made any final judgment yet us as to about we may or not do with that business going forward, but we're still evaluating as we get -- gain new information and new insight into that.

Okay. And then last one, if I could, just on the U.S. fluids overall. I know for the area there was some things that hurt just the overall fluids business margins. But just wondering, in just U.S., just the pure fluids business, as we continue to see longer and more well -- #1, more wells drilled, and then, again, longer reach type wells, are you continuing to see just the expansion there? And just wondering on market share, what you're seeing.

All of the above, actually. So there's not one element. But I will say that on Q2, it was sort of disguised with the other issues that we had in the quarter but the U.S. business did quite well and compared to Q1, was very positive.

Yes, I mean, as you look at the impact with a couple of issues that we had highlighted, as Bruce had mentioned, the completion service business was a drag on it. But between that and Brazil, that took us down from a 9% margin on the business for the quarter. And that also included a fairly healthy hit from Canada. So you back that out and you see what the rest of the underlying business did and it was showing nice continued progression upward.

And in the U.S. market specifically, we saw margins improvement in the U.S. market as well.

And the next question does come from the line of George O'Leary with Tudor, Pickering & Holt. George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Quick question just on the prepared comments. There was commentary around international revenues potentially decline a bit in the back half. Does that put some pressure on the margin progression moving upwards just given the international margins are typically a little bit better than what you see in North America?

This is Gregg, I'll take that. Not really. As we have noted, the EMEA region had a very strong revenue quarter. Some of it was types of product sales that we see as a little more nonrecurring and therefore don't expect that to come through. But in terms of that having any -- putting any more significant margin pressure, we really don't see that. George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: All right. That's helpful. And then looking at the mats segment, acknowledging you guys did put up very good margins. But I would have expected margins to maybe move higher sequentially, given the incremental rentals that you guys had and the higher-margin nature of that business going forward as rentals gain share within that business, do you expect margins to creep higher from the current level? And then maybe, what was the driver of margins not moving up sequentially? Is that just ramping capacity to grow margins going forward?

Sure. I guess first of all, I'll start by highlighting a bit the margin profile in this business, we're starting from a very strong point, running at the 40% range. In terms of the rental growth not providing more lift, we also have to recognize that we are investing more into the business. We are expanding the rental fleet. So you're adding cost to the business as well. So that's why you don't often see a higher incremental flow-through of those revenues. And as we had mentioned, based on what we see in this business, we -- our expectation is that we can maintain in that 40% range, based on the current market condition, as we grow out the fleet.

And I think it's worth noting too that in that business, and our strongest region is the Northeast, we've seen a 15% reduction in rig count and are still holding 40% margin. So we're very pleased by the efforts of the team there.

And our next question does come from the line of Mike Harrison with First Analysis.

Just kind of tagging along the last question. If you're investing for growth in the mats business, I guess I would think that most of that is capitalized as you build out the rentals fleet. Are there key investors that are going in, in terms of personnel or are there sales or marketing infrastructure that we should keep in mind?

Yes, there are some of both and that's the other element that goes along with. That's obviously as you're investing in the mat fleet itself, those are capital investments that you're making. But also the costs, there are some OpEx costs that go along with developing a new system, as well as, as you mentioned, the sales and marketing efforts that you do have to build up, if you look to expand the business beyond its existing market.

And we have been expanding our market efforts to again, be able to quantify the total value of this technology it's bringing to the marketplace. The other thing too is that our plant's located in Louisiana, so producing new mats and then taking them to the Northeast, we got to truck them up there. We don't immediately deploy them, so we've got additional transportation expenses as well.

Got you. And then on the Evolution business. One of the issues there a you were first rolling it out, was just kind of figuring out from a marketing perspective whether you were pricing it correctly in order to capture some of the value that you're providing while still making it attractive in terms of the value proposition for the customer. Can you talk a little bit about how the pricing and the value proposition maybe has changed over the past couple of years with Evolution? Are you at a point now where you're happy with the value that you're capturing? And is it fair to assume that Evolution growth would be a mix driver of higher margins over time?

Certainly, we look at this all the time. And it's quite different in different areas. For example, the 2 wells that we recently did for a major IOC in the EMEA region. Those wells are significantly more expensive to drill. So we would try and drive a better value on those wells for us, as well as we are saving, cost saving that time. Similarly, in all other areas, there's a mathematical formula that works for everyone. So we do try and drive it based upon where we are, what we're doing.

Yes. One of the things, as we've been out there now for a couple of years. So the marketplace and the customers are starting to see the value and believe in the value. Right? And we've been successful in getting a couple of papers co-authored by major customers as well that are out there. So once the marketplace starts to see the value and they're starting to believe in the technology, then we need to be looking at a time to start moving pricing up by regions, if we can, to really try to extrapolate its total value for our shareholders because certainly, we have not seen any reduction in the value we've been providing to our customers. In fact, the value equation we continue to bring new and unique value to our customers. So the performance is continuing to increase in the evolutionary as well.

And then I'll just add, to address your last question, Mike, that the overall margin profile of Evolution does continue to be at a premium versus our traditional work. And yes, to the extent that we can continue to grow that, that is part of the margin improvement equation.

And our next question does come from the line of Michael Marino with Stephens Inc.

I wanted to try to look out a little bit further and look at -- because you guys laid out a roadmap on how to get back to double-digit margins in the fluidd business. But if I look out into next year where you got the international, couple of international projects ramping up, starting, I mean, should we think of those as margin accretive in 2014? Or there some kind of startup costs and things like that, that maybe it's more revenue than just kind of incremental margins?

I think that's a 2014 event and the margin certainly will be accretive to what we have now. And some of it is deepwater, which is obviously, demands higher technology look from us, higher technology support from us. And we get a premium for providing that technology and service.

Yes, the one that would be an exception to that is Kuwait Oil contract was on land. You would see some modest expense increases in the first quarter to ramp up some of these contracts but as you get into them, we would expect them to be accretive to margins.

Okay. That's helpful. And then as a follow-up, just kind of digging deeper in Brazil. Historically, the margins there have been, I think, well below average. But maybe you got a contract renewing there. I guess help me understand, I mean, how should we think about Brazil from a margin standpoint on a go forward basis, given all the moving parts and kind of the choppiness historically there?

Sure, this is Gregg, I'll take that. The one thing that is important to highlight with Brazil is, there is a fairly healthy piece, roughly a third of the revenues is solid control, which is through a partner. So it's important to remember that we've got about a third of that revenue there is basically a pass-through. Very minimal margin on. So the business as a whole, it's, where obviously -- we're not yet where we want to be where it was profitable in 2012 in the single digits. Obviously, after this adjustment that we had made lower but still profitable. So the key there to continuing to move that margin upward is really continuing to grow the business, expand on the base that we have, the cost, IOC work and then continuing to expand that.

Yes, just a couple of thoughts on Brazil. First, our goal has been with Petrobras to be -- that's kind of a base loading for that business, for that region. And we said, our goal there is to break even and make some money with Petrobras. You're never going to make a lot of money with Petrobras, I don't think anybody does. The key is a lot of the IOC activities and certainly the new win with the Total deepwater contract helps, along with other major and supermajors that there've been down there running. So there's certainly a lot of opportunity to improve margins, as some of those ICs going more into a development mode. The other important aspect to Brazil is this strategic impact to deepwater. We have a significant number of rigs that we run in deepwater in Brazil. That help us achieve that contract to the Black Sea. And eventually, we believe it will help us penetrate the Gulf of Mexico as well.

And our next question does come from the line of Georg Venturatos with Johnson Rice. Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: I just wanted to touch on the fluid side of the business and follow on the previous question. Obviously, internationally, seeing the revenue growth there. Just curious how margins are holding up in those regions, how you see those progressing, typically in relation to the U.S. margins. Obviously we've seen those higher. Can you just speak on that a little bit?

Yes, this is Bruce, I'll take that. The margins generally in our international business are somewhat higher than we've experienced here in North America. That's always been the case, and I don't see that changing as we drive the international business forward. I see more of the same.

Yes, in fact, I mean if you look at the kind of the structure of the market domestically and internationally, domestically, here in the U.S., there's a lot of competition, a lot of drilling fluids companies. As you move to the international markets, there's really only 4 players there. And so, we feel there's lots of opportunities for future growth there. Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division: Okay, great. And then just to touch on the deepwater side, obviously, the Total contract and the IOC contract in the Black Sea. Could you maybe talk about -- has this prompted any additional conversations and kind of the benefits of this longer-term for additional awards?

Well, we certainly have a deepwater strategy that we roll out throughout our company. And we're in the process of doing that. And as Paul has mentioned, the work that we have in Brazil has been really key to some other things we're achieving now in deepwater. And the plan is obviously to lever that success we're having to other parts of the world, which we're doing. We'll try to speed that up as much as we can, of course. But it certainly gives us great amount of credibility, and it's a key part of our strategy as we roll out our deepwater expertise.

Yes, and I think it's fair to say, since a lot of the success we've had in Brazil in some of these new contracts, we've had other IOC's that work in deepwater ask us to present to them our capabilities and what we're doing around the world. So yes, there's definitely more traction developing.

And our next question does come from the line of Robert Norfleet with BB&T. Basil M. Jones - BB&T Capital Markets, Research Division: This is actually Basil Jones, on for Rob. Just to tack onto that last question, the deepwater work in Black Sea and then with Total in Brazil. Is there any indication from those operators since the first quarter on how many wells they're looking at doing? And what the opportunities to that might be on this?

They really don't specify. They normally just give a range of wells. We may have drilled from 1 to 7 wells or 1 to 4 wells or whatever. But that's subject to change and their desire, and so at this moment in time, we really don't know how many wells might or might not be drilled under the contracts. Basil M. Jones - BB&T Capital Markets, Research Division: Okay. That's fair. And then last question. You mentioned last quarter as well that some of the revenue impact from the rental fleet additions and the spill containment might be delayed a little bit. Do you have any idea, any more visibility in when we could expect us to some of that top line impact? I mean, it looks like some of the rental growth is starting to creep through revenue lines but maybe in terms of spill containment and when the 2 might couple together and see a lift to the top line in that?

Sure, this is Gregg. Well, in terms of the top line lift, obviously the second quarter with the expansion of the fleet we're already seeing the benefits of that. We had a very strong sequential growth. So based on the continued demand for our products, as we expand out the fleet, we expect to see a corollary impact on the revenues. In terms of the spill containment specifically, that's where it gets back to the comments that Paul had made. We've expanded our testing now on 3 sites with 3 different customers. But that said, it's still a very methodical approach that we're following. Each of these wells can take 60 to 90 days to complete and then go through your evaluation period, partnering with your customers, get the feedback, et cetera, and then moving forward. So we've got a bit to go yet in terms of that.

I mean, it is building momentum. But the thing to remember I think foremost into this business that we are capacity constrained, right? My plant is running essentially 24 hours a day, 7 days a week. And so, we've had to slow down sales of mats to move that into the rental fleet. And obviously, you take a revenue hit when you're doing that. I think for this business want to see the next big jump, a significant jump in revenue is when we talked some about when we might have to invest in new manufacturing capacity. And that's something we currently are evaluating.

Our next question does come from the line of Ryan Fitzgibbon with Global Hunter Securities.

First question relates to a couple of your international contracts. On the Petrobras fluids contract, where do you view as a risk for not being extended at year-end? And then secondly, on the Kuwait contract disclosure in the quarter, how should we view that ramping up in Q4 this year in the first half of 2014?

On the Petrobras contract, we're in discussions now of course, with respect to the renewal. I don't see anything at this moment in time that's going to stop that renewal process. We're going down the road and expect some time in September probably to finalize that. So at the moment, we're seeing nothing there that's different from what we're doing today. And in terms of Kuwait, we have to do some work in Kuwait to get ready for the business in 2014. We'll have to build a small plant, but it's not a very significant cost at this moment in time. So we don't expect to see any huge impact in the cost side of things ramping up for this business.

And I would also highlight on the Kuwait, the dollar value associated with that contract -- within the context of our total division is not real large, $75 million over a 5-year period. But what's more important there is just the strategic step there of entering into the Middle East.

Yes. So we would expect maybe some modest revenue in 2014. I would not expect anything in '13, Bruce, from what we are currently seeing. But Gregg's point well taken. Bruce's been very successful in the team in that part the world. And we get our foothold in the Arabian Peninsula and Kuwait. And obviously then, we'll continue to look step out to additional countries.

Okay. That's helpful. And then second question is in the release, I know you talked about this in the press, you got some efforts underway to rationalize your cost basis. Can you talk about maybe where you are in that initiative, what you've seen so far in cost savings and maybe what's left at this point?

Well, in terms of our rationalizing the cost structure, it's -- quite frankly, it's a process that never ends. We did have, last year, after we went through the change in the U.S., we had a fair amount of cost inefficiencies that we had talked about that were really in an area of overall personnel, as well as facility costs after we have the shift in the regions that we continue to work through. So the margin improvements that we've seen over the past year are largely attributable to the progress that we've made on all fronts, in addition to supply chain and driving supply chain cost reductions. So in terms of where we are and how much further we have to go, like I said, I see it as a continual effort and it's just kind of the way we run our business.

And our next question does come from the line of Doug Dyer with Heartland Advisors.

Once the environmental business is sold, what are the allocations of that capital that you would be looking at, taking into account the need to expand net capacity, share repurchases, things like that? How would you see reallocating that capital?

Sure, this is Gregg. Initially, our first priority is growing our existing business, is growing the fluids business, growing the mats business. As Paul mentioned, on the mats business is where we have the larger near-term decision as we're continuing to produce mats, run our plant at capacity and we're gauging the long-term demand for the rental business. So that's obviously 1 option. There's various opportunities to continue to grow our Drilling Fluids business, especially as we're looking to expand it internationally. Share repurchase, that always comes into play. That's always part of the evaluation. But that is done based on your availability after first looking at your internal investment needs.

All right. And one more quick question. Are there any updates with regard to potential regulations coming out of Pennsylvania that could help your business?

We said, interesting in both our environment in the mats business, as well as in Drilling Fluids, anytime there is movement in environmental regulation that creates wind at our back both for Evolution and for our spill containment system. So any new regulations that would come forward, I think would help the business certainly. But we're not -- I'm not aware of anything in Pennsylvania right now that would be meaningful in that regard.

And our next question does come from the line of Bill Dezellem with Tieton Capital Management.

A group of questions. First of all, the Alliance acquisition, would you please provide us an update as to the integration and any relevant points there?

This is Bruce, I'll take that. The integration is actually going very, very well. Really, they have been a terrific add to our business in that area. So we're very pleased with the way things are going. They adopted the evolution technology [ph] very quickly. They understand the value of it. They're passing that message to their customers that came with the acquisition. So all in all, very pleased with that integration.

And then specifically, with in terms of integration cost, we did have some cost in the first quarter, some modest cost in the first quarter as we integrated the business in, but those largely dissipated in the second quarter and as we completed that process.

Roughly 80%, 90% through the integration. We have a few little things, but we've made a lot of progress.

And I guess continuing relative to Alliance, the U.S. Fluids business, I think, you said, was up 11% on an 11% decline in the rig count. How much impact did Alliance have on that positive 11% number? So I guess, what I'm trying to do is get a true apples-to-apples, how much you were up relative to the 11% decline in rig count?

Yes, as Bruce had mentioned, keep in mind the Alliance business is not standalone, it's embedded within our West region. And as Bruce had mentioned, the West region is up $12 million year-over-year. So that is the lion's share of the year-over-year increase. But again, that's against the backdrop of a 11% rig decline, so...

And as we move forward, there'll be a -- that's going to continue to be a little tougher to try to segregate how much of it is the alliance revenue because we had a pretty sizable business in West Texas to begin with, and we have fully integrated those businesses into 1 unit.

[Operator Instructions] And our next question is a follow-up question from the line of Mike Harrison with First Analysis.

Just going back to the completion services business, you've talked in the past about the need to bundle services there in order to be able to compete better. Is that still your view of how to best compete in that business? And if so, is one of the strategic alternatives that you're potentially looking at, could that involve adding some additional capabilities for that business and going forward, with a bigger completion services business?

This is Bruce, I'll take that one. This business has several distinct product lines. So we're going to look and evaluate each of the product lines as quickly as we can, and we'll activate whatever the correct strategic option is, either for the whole or for the individual pieces. It's a fairly simple service business, so I don't see anything right now that would lead me to suggest that we're going to build upon what we have there.

Yes. One of the -- I mean, in terms of valuating strategic options that is not doubling down and adding more.

Got it. And then just in terms of the fluids business and some of the margin pressure you're seeing, is anything there that could -- could that be attributed to the Oracle rollout? And can you maybe just remind us overall where you are in the Oracle rollout process, when we should start to see benefits from that?

Just real quick, we're not seeing margin pressure in the U.S. outside the completion fluids. Actually, the U.S. Drilling Fluids margins went up in the quarter, okay? Modestly, but they went up. So we're not under margin pressure. Gregg will head with Oracle.

Yes. I mean, in terms of where we are at with it, it's still just in the U.S. and has not moved internationally, that cost is really -- now stable. We don't -- last year, we had some incremental cost associated with the retraining, et cetera. And that's all done and behind us. The benefits -- we're on the front end of starting to see the benefits of it, in terms of better information availability, that's some of what helping with some of the cost actions that are being taken throughout the business. But we're still -- when you look at the landscape of a system like this, I mean, quite honestly, where is the instancy [ph] of it? And it's a process where you adjust to build over the years and continue to focus on that improvement.

And at this time, there are no further questions. I would like to turn the call back over to management for any closing comments.

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

Thank you very much. Ladies and gentlemen, that will conclude the conference for today. If you would like to listen to a replay of this conference, you may do so by dialing (303) 590-3030. You will need to enter the access code of 4627648. We do thank you for your participation on today's call. You may now disconnect your lines.