NPK International Inc. (NPKI) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Newpark Resources Third Quarter Earnings Call. [Operator Instructions] This conference is being recorded today, Friday, October 25, 2013. At this time, I would like to turn the conference over to Ken Dennard. Please go ahead, sir.

Thanks, Vincent. Good morning, everyone. We appreciate you joining us for the Newpark Resources conference call today to review 2013 third quarter results. Also, I'd like to welcome our Internet participants listening to the call that is being simulcast live over the web. Before I turn the call over to management, I have the normal housekeeping details to run through. For those of you who did not receive the email release yesterday afternoon from me and would like to be added to that list, please call our offices at Dennard Lascar at (713) 529-6600 and provide us your contact information. Or you can email me at the address on the Contact section of the press release. There will be a replay of today's call, and it'll be available by webcast on the company's website at www.newpark.com. Also, there's always a telephonic recorded replay that'll be available through November 8, and that information is in yesterday's release. Please note that the information reported on the call speaks only as of today, October 25, 2013, and therefore you are advised that the information may no longer -- 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 this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of the management of Newpark. However, various risks, uncertainties and contingencies could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the company's 2012 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 being 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 third quarter 2013 conference call. With me today are Bruce Smith, President of our Drilling Fluids business; and Gregg Piontek, our Chief Financial Officer. Following my opening remarks, Bruce will provide an update on our fluids business, and Gregg will discuss the mats and Environmental Services segments 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 third quarter. We are pleased to achieve another record for quarterly revenue as the $286 million represents a new high watermark for the company. Operating income also improved, exceeding $30 million in the third quarter, representing our strongest quarter since 2011. We saw year-over-year gains from many of our business units in the quarter, although we did see the sequential pullback in the international fluid markets that we had anticipated and discussed during our second quarter call. The results in the U.S. fluids business were mixed. Our West Texas region, which includes the Alliance acquisition, continues to gain market share. However, the strong performance in this region was offset by sequential declines in South Texas and Louisiana. Bruce will provide further commentary on these markets. Our Evolution family of products had a strong third quarter, achieving a new quarterly record of $32 million in revenues. We are also nearing completion of the first Evolution well in the Asia Pacific region with very favorable results to date. Now turning to our Mats and Integrated Service business. It was another strong quarter as we achieved a record level of revenue for both mat rentals and for the mats segment as a whole. We are continuing to see strong demand for our rental mats, particularly in the Northeast region, as our rental activity is benefiting from our investment in the fleet expansion. Meanwhile, the testing of our spill containment system is progressing, and we currently have a system deployed with 3 different customers in the Northeast. Interest remains strong, and through our extensive customer trials, we continue to gain valuable information about the system's performance in a variety of adverse conditions, including the extreme heat and cold. Based on the information gathered from each test site, we are continuing to enhance the performance of the system. Although testing and valuation has been a lengthy process, it's critical that we be thorough in this evaluation stage to ensure success when we move forward with the formal commercialization of the product. As mentioned on last quarter's call, although we continue to see strong demand for composite mats, our ability to grow has been limited by our manufacturing capacity. Over the past several quarters, we have been running our production facility at full capacity. After completing an extensive mat market study, I'm pleased to announce a $40 million expansion of our manufacturing facility in Louisiana. We expect the project to be completed early in 2015, and when operational, this investment will nearly double our current capacity and expand our production capabilities. This facility will also include a new product development center. This represents a significant step for our mats business, which we believe will position us for future growth, including the extension and enhancement of our product offering. In addition, this new capacity will allow us to penetrate new markets, both domestically and internationally. Last, I'd like to highlight that the sale process for our Environmental Service business remains on track. The business continues to perform well as we work through the process, and we will keep you informed of any significant developments. With that, let me now turn the call over to Bruce Smith, who will review the performance of our fluids business.

Thank you, Paul. Good morning, everyone. For the third quarter, total revenues in the Fluids Systems and Engineering segment were $233 million, roughly flat sequentially and a 10% year-over-year increase. We did experience the expected sequential revenue declines overseas that we mentioned in our second quarter call. Specifically, there was a decrease in revenue from the EMEA region following the record revenues achieved in the second quarter. There was also a decrease from the Asia Pacific region due primarily to a temporary shutdown by a key customer also highlighted during our prior call. North American revenues totaled $164 million, which was up 2% sequentially and up 9% over last year's third quarter. While the sequential growth was below the increase in North American rig count, the 9% year-over-year growth outperformed the North America rig count, which was down 5% from a year ago. The 2% sequential gain in North America was due to this seasonal recovery in Canada, which drove a $7 million increase over the second quarter. In the U.S., revenues were down by 3% sequentially despite a slight increase in the U.S. rig count for the period. As Paul mentioned, we had mixed results from our U.S. regions. One of the bright spots has been strong performance from our West Texas region, which continues to perform well following the Alliance acquisition. Revenues from that region were up $6 million from the second quarter. However, these gains from West Texas were offset by declines in South Texas, where a combination of rig reductions within our customer base and some lost market share accounted for the declines, along with the completion of 2 significant projects in Louisiana. On a year-over-year basis, North American revenues were up 9% despite a 5% decline in North American rig count. This was again largely the result of strengths from our West Texas region. Revenues from the region were up $16 million year-over-year, which included $4 million in proppant sales. We have been very pleased with Alliance's performance, and its presence in the Permian Basin has been of great benefit to our domestic fluids business. The completion fluids and equipment rental business performed similarly to Q2 with revenues of $3.7 million and a $1.1 million operating loss. As we mentioned during our last call, we had decided to evaluate strategic alternatives and are now planning to exit this business. Earlier this month, we sold a portion of our Mid-Continent assets, and we are currently evaluating offers for the remaining pieces of the business. As part of our continued efforts in the North American fluids business, I'd like to highlight that we've added a new member to our leadership team. We have recently named Phil Vollands as our new President for the North American fluids business, and I would like to formally welcome him to Newpark. Phil has an outstanding track record in global oilfield services, having served in leadership positions at National Oilwell Varco and Weatherford International. We're excited to have his experience and guidance in running the North American fluids business, and I look forward to working with Phil to help drive future growth for Newpark. Turning now to our international business. Revenues from our Europe, Middle East and Africa region were down 11% sequentially to $35 million but increased 25% year-over-year. The sequential decrease was anticipated due to the non-recurring nature of some of the revenues during the second quarter -- the record second quarter. The year-over-year gain was primarily driven by increased activity in Eastern European markets. Meanwhile, activity in our largest market, Algeria, continues to improve. In Brazil, revenues were up 20% sequentially and 23% year-over-year to $27 million. The gains were primarily driven by increasing deepwater activity with Petrobras, along with the benefit of an IOC well in the third quarter. We are also working towards an extension of the Petrobras Lot B contract and hope to have it finalized soon. In the Asia Pacific region, revenues were down 35% sequentially and down 36% year-over-year to $7.2 million for the third quarter due to a temporary shutdown by a key customer as previously mentioned. As a result of the Asia Pacific and EMEA declines, our total international revenue of $69 million was down 5% sequentially but still up 13% year-over-year. Through the first 9 months of 2013, total international revenues were $211 million, reflecting a 23% growth rate over the first 9 months of 2012. The fluids segment reported operating income of $17 million in the third quarter, down 3% sequentially but up 16% year-over-year. Operating margins for the segment in the third quarter were 7.4%, down from 7.6% in the second quarter but up from 7% a year ago. These third quarter results were below our expectations, largely driven by challenges in sections of our U.S. business. In addition to the revenue decline in South Texas and Louisiana, the U.S. margins in the third quarter were further impacted by other factors, including pricing pressure in the wholesale barite business and higher employee medical costs. Overall, the U.S. operations contributed more than a full point of sequential decline in segment margin. The completion services business had a similar impact to both the second and third quarters, providing a 60 basis point decline to the segment margins to both periods. We expect the losses in this business to continue until the exit plan is completed. On a year-over-year basis, our margin improvement was driven by revenue growth and continuing cost reduction initiatives implemented following last year's large-scale transition from gas to oil plays. I would note, however, that while we've generated cost reductions in many areas and are seeing synergies from the Alliance acquisition, these benefits are partially offset by a $2 million increase in depreciation and amortization expense largely attributable to the Alliance acquisition. The higher depreciation and amortization expense reflects nearly a full point reduction to the segment operating margin as compared to the prior year. Third quarter revenues from Evolution were $32 million and, as Paul mentioned, a new record. This compares with $25 million in the second quarter and $29 million from the third quarter of last year. This has mostly been due to strong demand in the U.S., particularly in the West Texas region. We are also pleased with the performance our first Evolution well in the Asia Pacific region as the customer response to the system has been very favorable. As we continue to expand our customer base for our Evolution family of products, we anticipate healthy demand going forward in both the U.S. and the international markets. Looking ahead to the fourth quarter, we expect to see some improvement of the U.S. margins through the recovery of market share and targeted cost reduction efforts in the areas of weakness, along with continued seasonal strengthening in Canada. Internationally, we're expecting some temporary weakness in the EMEA region as a key customer in Eastern Europe is transitioning between contracts. Similarly, our offshore work in Australia is also currently in a period of transition. Looking beyond the fourth quarter, however, we expect we'll see solid international growth into 2014, benefiting from several new contracts, which include our previously announced awards for deepwater work in Brazil and the Black Sea, as well as the Kuwait contract and other recent awards in the Asia Pacific region. With that, I'll now turn the call over to our CFO, Gregg Piontek.

Thank you, Bruce, and good morning, everyone. I'll begin by discussing the results of our Mats and Integrated Business before moving on to the Environmental Services and finishing with a discussion of our consolidated results. The Mats and Integrated Services segment had an excellent third quarter, reporting $35.1 million in revenues, up 38% sequentially and up slightly from the same quarter a year ago. As Paul mentioned, this represents a new record for the mats segment. Rental revenues were up 5% sequentially and up 30% year-over-year to $18.9 million. This quarter's rental revenue represents a new high mark for us, exceeding our previous high of $18.6 million achieved during the second quarter of 2011 despite the fact that the Northeast market is much more competitive today than it was in 2011. We continue to benefit from our rental fleet expansion and are gaining market share, particularly in the Northeast U.S. region. Mat sales more than doubled sequentially to $16 million but were still down 21% year-over-year from the record mat sales we achieved last year of $21 million, which, you may recall, included an unusually large sale for an infrastructure project in the utility industry. The mat segment generated a strong operating margin of 43.7% as compared to 40.7% in the second quarter and 45.6% a year ago. For the fourth quarter, we expect rental activity to continue to benefit modestly from the fleet expansion effort. Mat sales should post another strong quarter, although we do not expect it to be at the same level as Q3. Now moving on to our Environmental Services business. Rentals in this segment were $17.6 million, up 2% sequentially and up 34% year-over-year. Gains were driven by increases in offshore activity in the U.S. Gulf Coast. Operating margins were 26.5%, which was down from 30.9% in the second quarter of 2013 and up from 23.6% in the third quarter a year ago. The sequential drop was due to higher transportation expenses as well as elevated operating expenses associated with the sale process, which remains ongoing. Now moving on to our consolidated results. For the third quarter of 2013, total consolidated revenues were $286 million, a 3% sequential increase and a 10% year-over-year increase. Operating income was $30.3 million in the third quarter, up 13% sequentially and up 5% year-over-year. Net income in the third quarter was $18.8 million or $0.20 per diluted share, as compared to $15.7 million or $0.17 per diluted share in the second quarter of 2013, and $18.7 million or $0.20 per diluted share, in the third quarter last year. SG&A costs were $25.4 million, up 3% sequentially and up 22% year-over-year. The year-over-year increase is primarily attributable to increases in personnel and administrative costs related to company growth, costs associated with strategic planning projects and higher employee medical costs, as Bruce mentioned. The third quarter included $1 million of foreign exchange losses, up from $0.5 million in the prior quarter and $200,000 in the third quarter of last year. The higher exchange losses are primarily driven by the strengthening U.S. dollar in recent months as our foreign subsidiaries purchased some of their materials in U.S. dollars. This currency strengthening also had a modest negative impact on our fluids margins in the quarter. Similar to last year, the third quarter 2013 tax rate was below 30%, benefiting from increased tax deductions as we finalized our previous year's U.S. tax filings during the quarter. With the benefit of the higher deductions, our full year tax rate is now anticipated to be approximately 33%. Now let me discuss our cash and liquidity position. The third quarter was a very strong cash flow quarter with operating activities generating cash of $52 million, including $20 million associated with reductions in accounts receivable. We used $15 million to fund capital expenditures, which included our recently opened Technology Center and the continued expansion of our mat rental fleet. We paid our revolving credit facility down by $31 million in the quarter and used $2 million to repurchase shares under our current share repurchase authorization. Our cash balances increased by $11 million in the third quarter, ending at $69 million, predominantly in our foreign operations and a revolving credit facility balance of $47 million. Our total debt at the end of the third quarter was $232 million, resulting in a debt-to-total capitalization ratio of 29%. Due in part to capital expenditures required for our mat manufacturing expansion, we have increased our 2013 capital expenditure range upward by $10 million to a $65 million to $75 million range. For the first 9 months of 2013, we have spent about $53 million in CapEx. Now I'd like to turn the call back over to Paul for his concluding remarks.

Thanks, Gregg. We are very pleased with the company's record level of revenues and our strongest operating income quarter in nearly 2 years. However, we still have work to do in improving our drilling fluid margins and reaching the goal of double digits. We expect our international drilling fluids business to continue growing, and despite some transitory issues that will impact the fourth quarter, it's our belief that 2014 will be another strong year based on previously announced contract awards. The increasing success of our water-based family of products, both in the U.S. and abroad, remains one of our key growth drivers. Having recently introduced Evolution into the EMEA region and now the Asia Pacific region, we believe the benefits of this technology will become more apparent to a greater number of operators, which should help drive adoption of Evolution into more drilling programs. And with the recent addition of our new Technology Center, we expect to drive continued enhancement of our existing systems along with the development of new products. The mats business is performing extremely well. As demand in the Northeast has been healthy, margins remain above 40%, and the spill containment system is progressing through its testing. And with the planned expansion approved, we can expect to see this business grow and expand its geographic reach, both domestically and internationally. As is the case in our fluids business, innovation in mats, such as the spill containment system, enables Newpark to differentiate its product line from that of our competitors' and help our customers to work cleaner, faster and smarter as we provide matting solutions that reduce costs, protect the environment and provide a high degree of value for our customers. With that, we will now take your questions. Operator?

[Operator Instructions] Our first question comes from line of Jim Rollyson with Raymond James. James M. Rollyson - Raymond James & Associates, Inc., Research Division: Paul, when you think about -- or let's start with the drag that the completions and rentals business -- I think it was $1.1 million. What kind of impact is that going to have in 4Q given that you sold part of it and you're working on selling the rest? And where I'm trying to go with this is, when we think about short-term, fourth quarter, it sounds like North American side will be getting a little bit better on the fluids business x that completions and rentals business, and international may be getting a little bit worse until you get into contracts next year. I'm trying to figure out maybe where margins are trending in 4Q before hopefully they start improving in 2014.

Yes. I mean, I don't know necessarily if we'll see any real margin compression in the fourth quarter. On the completion services business, obviously we've taken some preliminary action there. We still have some more work to do. But I'd maybe pass it off to Gregg for any further comments on the...

Yes. I mean, my expectation would be that the completion services business would -- until we get the exit complete, it would continue to run at a similar level as what we've been experiencing the past 2 quarters on it.

Yes, I wouldn't expect it to be any more than what it has or where it was in the third quarter.

And as far as the rest of your question, yes, I would expect some improvements in the U.S. business. Yes, the foreign operations, as Bruce had touched on, a little bit softer expectation in the fourth quarter due to the transition. But the big piece of the business is obviously the U.S. So net-net, you put those together, and I would expect upward.

Upward on the model.

Upward from the third -- from where we were in the third quarter. James M. Rollyson - Raymond James & Associates, Inc., Research Division: Perfect. That's helpful. And then just with respect to your new North American fluids head, I'm kind of curious to hear your thoughts on what his direction is going to be. Is it just generally maintaining and growing the North American markets so Bruce can focus on the international opportunities or specifically pushing Evolution to the markets or focused on deepwater Gulf? Just maybe a little thought in terms of why you hired the guy and what his tasks are going to be?

Yes, you hit on all the key points there. You got them all right. Phil certainly is going to help us grow our business in the North American market, which will allow me to spend a little more time focused on the international piece of the business. And we're very pleased he's on board with us, and he's only come in a few weeks ago, but he's already in the middle of things and we're expecting things to improve going forward and the company to expand going forward.

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

You had expected the decline in revenues from Q2 levels in Europe, Middle East, Africa as well as Asia Pacific. But it sounded on the last call like you weren't expecting that to negatively impact margins that much. So what happened in those regions that you did see them act as a drag on margins? And it sounds like maybe the margin weakens a little bit further in Q4. Can you just talk about the dynamics there?

In Q3, we did hit a few headwinds that we didn't foresee. The declines in South Texas and Louisiana was a part of that. The pricing pressure of barites was part of that and the increase in the medical costs. So all of those things were headwinds we hadn't foreseen in Q3. But we do expect to see an improvement back from Q3 during Q4.

Yes, and in terms of specifically the international, yes, you're correct. We were anticipating the decline in revenues. What made the decline in margin a little bit worse in those regions was the foreign exchange that I touched on earlier. The strengthening U.S. dollar hurt both our Asia Pacific region as well as Latin America region a little bit there. But all in, the big driver of our margin decline was really the U.S. Those -- the decline that we saw in those international markets really was offset by Canada strengthening.

All right. And if I could just follow up on that. We're hearing that some operators on the U.S. fluids side, that operators are starting to look at their suppliers, look for ways to reduce costs, maybe put some additional work out for bid. Are you seeing some pricing pressure like that? And if so, do you think that dynamic is going to continue for a couple more quarters or longer term than that?

I don't think we're seeing any really pricing pressure. What tends to happen, some customers drop rigs due to -- towards year end just due to budgetary considerations. The bidding on projects and on rigs is a continuous process and goes on all the time. During that bidding process, you retain some rigs that you previously had. Sometimes you win some, sometimes you lose a couple. So at any moment in time, you can be neutral or up or down a little bit, and that's consistent with the normal process. So really, we're not seeing any pricing pressure response.

Yes, we're not seeing any real changes there. I mean, some of the -- Bruce had mentioned some of the -- we lost some market share in South Texas. Part of that was our own on pushing price increases. And so you -- we're trying to find that tipping point. But we're not seeing any real increase in price pressure from our customers with the exception, as we mentioned earlier, of the barite. We're seeing some pricing pressure on barite.

Our next question comes from the line of Jeff Spittel with Clarkson Capital Management..

Maybe if we could start off with the fluids business, just kind of an update on the project timetables here. My notes have the Campos Basin well starting to kick off in the fourth quarter as well as the Black Sea, and then the Kuwaiti stuff more starting to contribute early next year. Is that still pretty consistent with your expectations?

Yes, yes. Yes, that's pretty consistent. The Black Sea, probably first quarter. The Petrobras piece is ongoing really as '14 continues. They'll ramp up slightly as things continue. Kuwait could be second quarter.

Yes, and I think the Total contract in Brazil is probably a first quarter...

. It's a first quarter event for right now, that's correct.

All right. And then maybe turning to West Texas. It sounds like you're having some good success there. Could you speak maybe to what the primary drivers are? Is it more share gains? Are you seeing maybe some share gains result from a kickoff of some of the horizontal programs? Maybe just a little more flavor around that.

'01 . We're seeing share gains, certainly, in the region. Evolution is playing very well there, which is a big differentiator that we have that our competition does not have. Historically, the Permian Basin area is probably 80% simple water-based systems. So it's not a big stretch for the operators there to see the value proposition in a higher-quality, water-based systems. So Evolution is playing well into that environment, and we expect that to continue.

And certainly, the other comment would be we are seeing more operators going horizontal in drilling laterals where our Evolution system has an advantage, I believe, over current systems.

Our next question is from the line of Neal Dingmann with SunTrust.

Paul, for you or Bruce, just sort of following on that last question. As far as on the Evolution, I know there's obviously great optimists as far as potentially markets for that internationally. You mentioned last time both offshore and onshore. Maybe Bruce could talk a little bit about just how you're seeing potential applications there, I mean, both internationally onshore and offshore, as well as maybe in the Gulf.

It's probably best that if I answer that, talking about Evolution itself because Evolution, itself, has evolved from a system that was designed sort of for one specific application. And it's now grown into a suite of products and systems that give the technology a life and a growth potential far beyond the initial design of the system. So because of that, I think you can play in many different areas geographically as well as multi-conditions.

Yes, the -- we don't see any limitations in terms of the international reach of the technology on land. Your comments about offshore in the Gulf of Mexico, certainly over a longer period of time, our hope would be to develop an Evolution-type system for deployment in offshore and deepwater. But that's much further out.

Okay. And then just a follow-up as far as just on pertaining to margins, kind of 2 questions there. First, looking just at mats margins, are you seeing much in the way of -- for a while, it seemed like there was increased competition. Now it seems like because of, Paul, some of the areas in development that you all are going, including now this new facility, is it fair to say maybe you're not seeing as much competition? Or you just have a superior product? And then that's sort of my question as far as the mat margins. And then over on the fluid margins, I'm just wondering if you're seeing competitive pressures, either international or domestic, continuing to place some pressure on margins there?

Yes. Let me take the mats piece and then I'll ask Bruce to handle drilling fluids. So on the mats side, competition is still very difficult, very tough at times. But I think what's becoming more apparent is that we do truly have a differentiated product that we're able to sustain margins, continue to take market share, right, in a market, at least in Pennsylvania, that's been declining. So we feel very good about where that business is positioned. As I mentioned, we did a pretty extensive market study around the mat market, and that gave us more confidence to move forward and to invest $40 million in a new facility.

And while there's no shortage of competition in the area, I think our ability to maintain the margins at that -- such a high mark, in the 40s range, is a testament to the differentiation of the product.

On the drilling fluids side, the -- there's always a competitive nature to the business wherever we are. But our focus really is on the driving of new technology, in Evolution in particular, and other things that we'll be rolling out, other technologies we'll be rolling out. And that really takes away the competitive pricing piece of the business because that's the differentiator. That's where we need to be. So we're handling that piece of it by the rollout of technologies that provide our customers with a value.

One thing that's interesting, Bruce, on Evolution, as an example, I think about initially when we launched Evolution, it was salt sensitive. You couldn't run it in salt formations. Today, we now have a system, an Evolution system, that runs in brines. And so that's just an example, as Bruce was saying, this continued rollout of new technology that allows us to differentiate our fluid technology from what the other people really are selling, are oil-based muds and so -- which is purely a commodity. So I think Bruce and his team has done a great job in that area.

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

I'll be the fourth or fifth person to ask about fluid margins, but doing the kind of dumb-guy math, I'm getting to 8%, which is somewhat your guidance for Q4. Can you walk us through the road map as to how you get to double digits maybe in the first half of '14?

Well, I guess I'll take a first shot at that and then Bruce can add any color. Obviously, portions of the decline that we had in the current quarter, you see as more temporary items. Obviously, we have the 60 basis points coming from completion services. Okay, that gets you back to an 8% mark. The medical costs hit us. That was roughly 30 basis points that came from that side of it. And that happens -- comes from time to time. As you have self-insured programs, you wouldn't expect that high run rate to continue. It was an unusually high quarter in terms of our medical claims that we had to cover. The rest of it really comes down to getting cost synergies out of the business. And here, we had a headwind in the quarter, again, as Bruce had mentioned, a fairly significant decline in a couple of key markets. And there again, you have your typical situation with your infrastructure that you have.

Most of our -- if you look at the fluids business across-the-board, most of the areas are performing well, and there was just a couple of areas that declined quarter-over-quarter. So obviously, the immediate focus are on those, say, few weak areas. And we'll work very quickly to regain the market share that we lost in those areas. As Paul mentioned, some of it was self-inflicted. We tried to get better pricing perhaps too aggressively, but we'll get that back. And then we're going -- and now are doing -- right now rightsizing the cost structure of those few areas to reflect the current level of the activity in those areas.

And the other thing I would say, the question around getting back to double digits second half of '14, certainly the additional international work contracts we talked about expect to act as a -- some buoyancy as well in those areas.

Okay, that's helpful. Second question is on the Environmental Services sales. Is that something you think could potentially close by year end? And can you bracket what you think use of proceeds may be, whether that's buying back stock, obviously helping to fund the fluids -- excuse me, the mats expansion? But anything else you're looking at in the market right now?

Yes, I mean, certainly, it would help to have a definitive agreement signed by the end of the year, whether it'll close or not. We'd like to, but time will tell there. Certainly, as you can imagine with an environmental business, it takes time to run through the due diligence. So we'll wait and see on that. As it relates to proceeds, certainly we believe we've got a lot of opportunities for capital growth in terms of new business opportunities. We talked about the mats facility, the $40 million. We continue to increase the mat rental fleet, which takes additional capital. The international contracts that Bruce has talked about, we'll be building new facilities in the Black Sea, possibly expanding operations in Brazil. So we've got a lot of growth ahead of us that capital can be used for. Certainly, on the share repurchase, that's something that should be a standard part of any company on a maintenance basis. Gregg, would you like to add to that?

Yes, I would just add that the share repurchase, while it's always part of the mix, it is secondary to funding our internal growth opportunities. So that's always a primary. To the extent that we have the ability to, though, we supplement it with a program.

Our next question is from the line of George O'Leary with Tudor, Pickering, Holt. George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: So looking at the strong mats margins this quarter, which surprised me to the upside somewhat, where do you think mats margins end up Q4? I mean, just thinking about it qualitatively maybe, are they biased flat, up, down? Because they certainly were impressive this quarter.

Yes, you're absolutely right. It was a very strong quarter. The high revenue definitely helped things. Near term, you look at where we've been running over the past several quarters, and you see it's bouncing right around that 40-ish level. And I don't see anything changing in the near term. George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay, that's helpful. And then sticking with mats, looking at the capacity expansion that you guys are planning to do by 2015, is there any incremental color you could provide on what -- how much capacity that adds or, on a percentage basis, how many more mats that means you can sell, you can rent? Just a little more color on the capacity expansions and what that means for you guys longer term.

Yes, certainly. And as I had mentioned, it roughly doubles our capacity. So it's about a 100% increase in our existing capacity. And as we do every quarter as we're in the business, we look at how much we want to move into the rental fleet versus how much we want to move into the sales market. Once that facility becomes operational, we're going to really work diligently to continue to expand our geographical reach into the international markets, and we'd like to be able to develop a rental fleet in the international segment. So right now, I couldn't comment necessarily on how much we're going to put into the sales versus rental, but it's roughly a 100% increase in capacity.

Yes, and I would just add to it. Paul had commented on the extensive market study that we've done. And as we look at this opportunity to expand the capacity, what we saw is a lot of opportunity not only in the existing markets but also for extensions of the product offering, getting into new markets, new industries, other applications. So there's a lot of opportunities to pursue in those areas as well.

Our next question is from the line of Robert Norfleet with BB&T Capital Markets. Ashby W. Price - BB&T Capital Markets, Research Division: This is Ashby Price on for Rob. As a follow-up to the competitive environment in mats, we have long assumed that the high-margin nature of the business would drive completion and ultimately result in lower margins. Yet you appear to be able to maintain margins north of 40%. What's allowing you to continue to get price in this market? Is it a lack of additional supply or the additional features that you are coming up with like new spill containment vessels? And secondly, how should we see margins in this segment over the next 2 years?

Yes. The -- certainly, as we mentioned earlier, the competitive environment is always alive and well in the Northeast region. And the way we've been able to maintain pricing is, again, through the basic value that our DURA BASE mat is providing, the differentiation. I think, obviously, spill containment is a piece of that as customers are waiting in line to start deploying some of that system. We're not ready yet for commercial launch of that product, but we've made a lot of great progress. so I think that plays to it some. And we continue to look at other features of the mats as well to continue to expand the system offering. As it relates to margins, going out the next couple of years, hard to say at this point. Obviously, we feel pretty comfortable around the 40-ish margins today. But as we bring on additional capacity, look at some new market segments, there could be things like pipeline, utility infrastructure, et cetera, you may see some softening long term but still in that high 30s, we hope, 40s margin.

Yes. And, I mean, as we've talked about many times in the past, obviously with the performance of this business it, no question, attracts a high level of competition, and we're continuing to see that and I would expect it to continue. Longer term, you'd expect that basic economic principles kind of come into play. And it would erode margins to some extent over the long term, but in the near term, we're still continuing to see the differentiation of our product is what's driving the -- us to maintain the high level of performance.

Yes, and we don't believe that bringing on the additional capacity is going to have a direct influence in driving down our margins. And one of the things that we're seeing even within the current oil patch is that the demand request from the completion side is increasing, so -- which is a new market segment typically on the drilling side. So we believe we'll see stronger demand on completions as we move through the next couple of years as well.

Our next question comes from the line of Marc Bianchi with Cowen & Company.

Question on the Kuwait oil contract. It sounds like that pushed to the right a little bit. Could you talk a little bit about maybe the expectation for the ramp there and if there's any risk to having some unabsorbed costs as you start to pick up that new contract?

The delay in the Kuwait contract, I'm not sure I could quantify it as a delay. The Kuwaiti Oil Company just moved very slowly. And we've been talking with them since the contract was awarded as to how quickly and how much we ramp up and at what point we ramp up. And all indications we're seeing at the moment is that we will be beginning that contract and we'll begin to consume product on that contract sometime in the second quarter. We're building our facilities as we speak that are required for that area, and that takes a few months to get in place. So we're on track for the second quarter, I think.

And is it something that's immediately -- so when it starts going in -- sometime in the second quarter, is it immediately profitable? Or is there going to be a lag between when you ultimately cross the threshold of profitability as volumes ramp, per se?

Volumes will ramp. You'll start with 1 rig, 2 rigs then 3 rigs and 4 rigs and so on. So it will certainly start ramping up from the beginning of the contract. So I expect we'll get to a profitable picture there quite quickly once the operations begin.

But within the grand scheme of things, I would also emphasize that the size of that contract and operation, I wouldn't expect it to have a significant impact on margins one way or another.

Yes, until you get out to the end of 2014, into that fourth quarter.

Yes.

And again, NOCs have their own time frame as they move forward. So we're just thrilled to have the opportunity to be in that part of the world. We're going to be using Kuwait then as kind of a launching platform into other parts of the Arabian Peninsula, as we mentioned previously, places like Qatar, Oman. And that's the -- so that will be building as we go through the next couple of years as well.

Fantastic. That's a big market to be entering. That's great.

Yes, we're excited to be there.

Just one more on the mat business. Bumping up against kind of full capacity here, curious what the rental utilization is and how much more room there is to kind of increase utilization on the rental side. And I'm just trying to think about what the potential growth is in '14 if you're sort of bumping up against the manufacturing utilization levels right now.

Yes, we don't report on the -- our specific utilization levels. What I would say is where we have been, utilization has been strong. I don't see a whole lot of upward potential from where we're currently at.

We continue -- I mean, some of the -- obviously, the plant's running 24 hours a day. We're moving some of those into sales and then also continue to add to the rental fleet as we're working here in the fourth quarter.

Our next question is from the line of Doug Dyer with Heartland Advisors.

Just to the kind of continue with the capacity for mats, is the Louisiana expansion ramp-up enough? Even if we're doubling into 2015, is that enough? And then also, with regard to the $40 million that you'll be spending there, how much has already been spent?

Yes, in terms of the capacity roughly increasing to 100%, will that be enough in 2015? Yes, absolutely. And then the amount of money that we'll be spending in this quarter, I think, is roughly $10 million. And so, obviously, we're kickstarting that project pretty hard and hope to have that operational in the first quarter of '15.

Yes, the doubling of the production capacity, obviously that's a very significant step. If we reach a point where we're struggling with that being enough, well, that's a -- that would be good problem to be in.

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

I wanted to continue down the spill containment path. Would you kind of share with us your thoughts now for formal commercialization and how that interrelates with the timing of the new facility coming on, I mean, especially in light of the fact that you are renting? So each time you produce a mat, that can be rented over and over.

As it relates -- I'll take the last part of your question first, specifically about the spill containment system and how that influenced the -- our investment decisions on building a new capacity. It obviously was a piece of it, but it was not the driving force in terms of the new capacity. As Gregg had mentioned, we have other new market segments that we see we can move mats into domestically, and also believe that the international market will be expanding and creating more opportunities there. So it really wasn't tied to that. In terms of the launch of the system itself, as we've been moving through the third quarter, one of the things that you can imagine, it's a pretty complex system to seal a surface of that size. And in the autumn time frame where you have the very cold nights and in the daytime, in the sun, you got the heat, and that thermal expansion and contraction, one of the things that we've been fine-tuning is the seal design. And so we continue to do that. We'll run that through the winter season coming up, and then probably look at the second or third quarter from a launch perspective.

And then the Environmental Services business, revenues really seem to be quite strong with that business. And to what degree has that allowed you to, essentially, increase pricing as -- and I'm talking about the sale of the business, where the bids end up drifting upwards because of the strength of the business?

Yes, I can't comment on the price of the -- what pricing may be involved in the acquisition. But certainly, we are very pleased with the increase in revenue in the business. We're the market leader. So naturally, as the Gulf of Mexico, be it inland marshes, the shelf and deepwater, continues to grow, that business will naturally benefit from that.

And at this time, I'm showing no further questions. I'd like to turn the conference back to management for any closing remarks.

Thank you. I'd like to thank you once again for joining us on this call and for your interest in Newpark Resources. We look forward to talking with you again after the conclusion of the fourth quarter. Have a great day.

Thank you, sir. Ladies and gentlemen, this does conclude the Newpark Resources third quarter earnings call. Thank you very much for your participation. You may now disconnect.