NPK International Inc. (NPKI) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to Newpark Resources Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you. Mr. Dennard, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review fourth quarter and full year 2017 results. With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; Phil Vollands, President of the Fluids business; and Matthew Lanigan, President of The Mats business. Following my remarks, management will provide a high-level commentary on the financial details of the fourth quarter and outlook before opening the call to Q&A. Before I turn the call to management, I have the normal housekeeping details to run through. There will be a replay of today's call. It will be available by webcast on the company's website at newpark.com. There will also be a recorded replay until February 23rd, and that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, February 09, 2018, 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 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 Newpark's management. 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 annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. The comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP measures are included in the quarterly press release, which can be found on the Newpark website. And with that behind me, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes. Paul?

Thank you, Ken, and good morning everyone. Before I cover the specifics of the fourth quarter, I'd like to take a step back and reflect on the achievements of the recently completed year. First and foremost, I'd like to start with our safety performance. Here at Newpark employee safety is of critical importance to our leadership team and the companies that we serve. 2017 provide a unique challenge to us as we expanded our North American workforce by nearly 80%, which includes the acquisition in our Mats business. Yet despite this challenge, I would like to commend all of our employees for their unwavering commitment to working safely as we again achieved world-class safety performance, with a total recordable incident rate of 0.5. Now for our financial results. We’re extremely pleased with the improvements in both segments in 2017 but also recognize that there's more work to be done. Revenues improved by 59% year-over-year to $748 million for the full year 2017, generating nearly $70 million of EBITDA. Also, we continue to take meaningful steps in the execution of our long-term strategy. In fluids, we remain focused on expanding our offering, further penetrating key IOCs around the world and becoming a recognized global leader in fluids technology. Through our focused approach, we've expanded our North American market share, where we now stand as the number two provider in drilling fluids. The strength of our share position has helped drive more than $200 million of year-over-year revenue growth in North America, which significantly outpaced the rig count improvement. In the international market, we've seen the benefits of our geographical diversification play out over the past few years as we've steadily expanded our international market share and outperformed the broader activity levels. The strength continued in 2017, where we grew our international fluids revenue by 4% despite the contraction on overall market activity. These gains were led by our EMEA region, where revenues improved 7% year-over. We've also been successful in securing new international contracts to support further growth in 2018, including a 3-year contract for drilling and completion fluids with Cairn Energy in India, which started out late in the year, also in Australia, our agreement with Baker Hughes to provide drilling fluids and related services as part of their integrated offering to Woodside for the Greater Enfield project. The development of new technology remains, a core strategic differentiator in our fluids business, both on land and offshore. Our strong market share position in drilling fluids provide us with improved visibility with key customers not only to drive innovation for our drilling fluids systems, but also to introduce adjacent product lines of completion and stimulation chemistries. Our acquisition of PRAGMATIC in 2016 marked our first entry into the stimulation chemical market, while our international and offshore customers are increasingly pulling us into the completion fluids market. Building on this momentum, we've continued to make measured investments in infrastructure and our organization to build out our capabilities to drive expansion into these markets. The expansion of our offering is critical to long-term margin improvement, as we do not believe that the U.S. rig count is going to return to pre-downturn levels. Another element of our new market expansion pertains to the penetration of IOCs in the deepwater Gulf of Mexico. On that front, I'd like to highlight that our industry-leading Port Fourchon deepwater facility became fully operational in 2017, which provided us the opportunity to demonstrate the operational efficiencies of its facility to several customers. While the deepwater market remains depressed, we generated $7 million year-over-year increase in revenues from our Fourchon shore base, as we expanded our relationships with targeted IOCs in the Gulf of Mexico. 2018 is also off to a good start with our new synthetic-based deepwater system Kronos currently being used for the first time by an independent operator in the Gulf of Mexico. In the Mats business, we are extremely pleased with the progress of our diversification efforts, posting revenue growth of 74% year-over-year and returning operating margins back to the 30% level. With revenues of $132 million, 2017 marked the second highest revenue year ever for the division. Building on this positive momentum, we've completed key acquisition in November, which represents our largest acquisition to date. The acquisition of the Well Service Group and the Utility Access Solutions significantly expands our service capabilities across markets. The business combination allows us to provide a complementary bundle of products and services to our customers across geographic regions and targeted industry sectors. As discussed previously, this acquisition is yet another catalyst to accelerate our innovation efforts, significantly expanding our touch points with customers and providing invaluable input to further our product research and development efforts. Investments we made in recent years to expand our manufacturing capacity and to enhance our R&D capabilities continues to provide a solid foundation to support our innovation and market diversification efforts. Also, 2017 benefited from continued expansion in key end markets, including utility transmission and distribution and pipeline maintenance, resulting in approximately two thirds of our revenues coming from non-exploration markets. And finally, I'd like to touch on our balance sheet. Throughout the past two years, protecting our balance sheet has remained our highest priority to this challenging cycle. Over the past 12 months, we’ve maintained our focus on our balance sheet, including the funding of the convertible debt maturity. And as the cycle has now turned, we've expanded our credit facility to ensure that we have sufficient capital availability to support investments in working capital, while also improving our flexibility and reducing our borrowing costs. And despite the funding of the acquisition in the fourth quarter, we ended 2017 with a leverage ratio of roughly 2.3 times our current EBITDA run rate. Now turning to the specifics of the fourth quarter. We're very pleased to report another solid quarter for both businesses with consolidated revenues increasing 1% sequentially to $204 million in the fourth quarter, generating EBITDA of $20 million. Income from continuing operations, which includes a $0.03 per share net benefit from the impact of the U.S. tax reform, offset by fourth quarter M&A expenses, came in at $0.09 per diluted share. Overall, the fourth quarter operational performance is relatively in line with our outlook highlighted on last quarter's call. In fluids, revenues pulled back modestly from the prior quarter. While we're seeing steady improvements in drilling activity over the past few months, the fourth quarter started with some softness in both the U.S. and Canada, driving a 3% sequential decline in average rig count for Q4. In addition, our sequential comparison was unfavorably impacted by elevated third quarter product sales to IOCs in the deepwater Gulf of Mexico which did not expect to reoccur in the fourth quarter. The revenue decline in North America was partially offset by 6% sequential improvement internationally as customer activity levels continue to strengthen the response to the improving outlook for commodity prices. In addition, the fourth quarter benefited from a deepwater well drilled with Petrobras in Brazil using our proprietary DeepDrill water-based fluid system. Despite the modest pullback in overall revenues, the Fluids segment operating margin remained relatively flat, coming in at 5% for the fourth quarter. The Mats business also posted another very strong quarter, which includes a partial quarter contribution from the mid-November acquisition of the Well Service Group and Utility Access Solutions. Total segment revenues were $42 million, including a $9 million contribution from the acquisition. Following the exceptionally strong Q3 results, mat sales pulled back modestly to $12 million in the fourth quarter. Excluding the impact of the acquisition, rental and service activity remained stable. The Mats segment operating margin came in at 23% for the fourth quarter, reflecting the partial quarter impact of the acquisition, including increased depreciation and amortization expense as well as business integration costs. And before turning the call over to Gregg, I'd like to take a moment to comment on the recent settlement of our previously disclosed dispute related to the sale of our Environmental Services business in 2014, which resulted in a $17 million charge to discontinued operations in the fourth quarter. While the outcome of this process is naturally disappointing, reaching a final resolution on the matter was important to eliminate the ongoing distraction for the company and allow us to focus on executing our long-term strategy. The settlement provides a final release of all claims related to the sale of Newpark's Environmental Services business, which we feel is in the best and long-term interest of our shareholders. With that, let me now turn the call over to Gregg Piontek, who will review the detailed financials for the quarter. Gregg?

Thanks Paul. And good morning everyone. I'll begin by discussing our operating segments before finishing with our consolidated results. The Fluids Systems segment generated total revenues of $162 million in the fourth quarter of 2017, reflecting a 3% decline from the third quarter but a 46% increase year-over-year. In the U.S., revenues were $90 million, down 8% sequentially, reflecting the impact of a 3% decline in U.S. rig count, along with the impact of elevated product sales into the deepwater Gulf of Mexico in the third quarter, as Paul mentioned. Overall, our revenues in key U.S. land regions trended fairly in line with overall industry activity levels. On a year-over-year basis, U.S. revenues have increased 87% from Q4 2016, significantly outpacing the 56% improvement in average rig count over this period. The relative outperformance was largely driven by an increase in well complexity, which resulted in higher revenue generation per well. In Canada, activity slowed down in the latter half of the fourth quarter as the operators exhausted their 2017 budgets. As a result, we didn't see the typical fourth quarter seasonal improvement as experienced in previous years. Total fourth quarter revenues came in at $14 million, flat to prior-quarter levels and relatively in line with market rig count. On a year-over-year basis, revenues improved by $2 million, also relatively in line with market rig count. Turning to our international regions. Revenues in the Eastern Hemisphere were $49 million in the fourth quarter, reflecting a 4% improvement from Q3. The sequential comparison primarily reflects continuing improvements in customer activity in Romania, Kuwait and India, partially offset by a modest headwind from currency rates. On a year-over-year basis, revenues from the Eastern Hemisphere improved by 8%, as improvements in Romania, Algeria and India were partially offset by declines in Tunisia, Albania and Kuwait. Latin America posted revenues of $11 million in the fourth quarter, up 19% from Q3, reflecting usage of our DeepDrill water-based system by Petrobras on a deepwater well in Brazil. On a year-over-year basis, the Latin America region improved by 40%, primarily reflecting an increase in Petrobras activity. Despite the modest sequential decline in overall segment revenues, the segment operating margin remained relatively unchanged at 5%. Turning to the Mats business. As Paul mentioned, with the completion of the acquisition in mid-November, our fourth quarter results include roughly $9 million of revenues from the acquired business, while the base business contributed $33 million of revenue. Including the acquisition benefit, the Mats segment reported total fourth quarter revenues of $42 million, reflecting a 20% sequential improvement and a 64% improvement year-over-year. Mat sales declined modestly from Q3 to $12 million in the fourth quarter. While the fourth quarter saw the typical seasonal strength with year-end mat orders, the sequential comparison was unfavorably impacted by large Q3 mat sales in the utility sector, as discussed on our last quarter's call. Meanwhile, excluding the acquisition impact, rental and service revenues were relatively flat to prior quarter. From a market mix perspective, we saw a reduction in rental activity from the utility sector following the completion of a large rental project, which was offset by continuing growth in completion operations across multiple basins. Comparing to the fourth quarter of last year, segment revenues improved by $16 million, with a $15 million improvement in rental and service revenues, including the benefit of the recent acquisition, and nearly a $2 million increase in mat sales. With the partial quarter contribution of the acquisition, the segment operating margin came in at 28% for the fourth quarter compared to 31% last quarter and 24% in the fourth quarter of last year. As anticipated, the acquisition reduced our segment operating margin by roughly five percentage points in the fourth quarter. As discussed on last quarter's call, with the acquired business being predominantly focused on site services as opposed to product sales and rentals, the acquisition will drive somewhat of a mix shift towards service revenues, increasing the segment operating income contribution but reducing the overall segment operating margin. Further, as a result of the purchase accounting requirements around PP&E and intangible assets, the acquisition resulted in a $1.3 million increase in depreciation and amortization expense. In addition, our fourth quarter results also included elevated cost to pursue legal actions to enforce our patents in the U.S. Now turning to our consolidated results. Fourth quarter 2017 revenues were $204 million, representing a 1% sequential improvement and a 49% improvement year-over-year. SG&A costs were $29.5 million, reflecting an 8% sequential increase and a 35% increase year-over-year. The fourth quarter includes elevated acquisition-related expenses along with elevated spending related to the patent enforcement efforts in our Mats business, as mentioned a moment ago. Comparing to prior year, the increase is primarily attributable to higher performance-based incentives and an increase in personnel costs to support higher activity levels as well as elevated spending related to M&A and strategic planning efforts as well as legal matters. Total corporate office expenses were $9.3 million in the fourth quarter compared to $9 million in the third quarter and $6.8 million in the prior year. As noted in yesterday's press release, the fourth quarter expenses includes $700,000 of acquisition-related costs, which we do not expect to recur going forward. Comparing to prior year, the $2.5 million increase is primarily attributable to higher performance-based incentives as well as elevated spending related to M&A and strategic planning efforts. Consolidated operating income was $10 million in the fourth quarter, consistent with the third quarter but reflecting a meaningful improvement over the operating loss of $8 million in the fourth quarter of last year, which included $4.6 million of charges associated with asset impairments in Asia-Pacific and the demobilization in Uruguay. Foreign currency losses provided a headwind of $1 million in the fourth quarter, which compares to a loss of $200,000 in the third quarter and a gain of $300,000 in the prior year. The elevated currency losses in the fourth quarter of 2017 are primarily attributable to the weakening of the U.S. dollar during the period. Fourth quarter interest expense netted to $3 million, which compares to $3.6 million in the third quarter and $2.6 million in the fourth quarter of last year. The sequential decline in interest expense is primarily due to a reduction in borrowing costs following our October convertible notes maturity and the amendment of our asset base credit facility. The year-over-year increase is primarily due to the interest expense associated with the convertible notes issued last December, which contributes $1 million of non-cash expense per quarter. The provision for income taxes for the fourth quarter of 2017 provided a benefit of $2.1 million. As highlighted in yesterday's press release, the fourth quarter provision includes a $3.4 million benefit from our preliminary evaluation of the impact of the U.S. tax reform enacted in December, reflecting a $14 million charge associated with foreign earnings, which was more than offset by a $17 million benefit associated with the revaluation of net deferred tax liabilities in the U.S., adjusting them for the new 21% U.S. tax rate. Adjusting for the tax reform impact, the effective tax rate in the period was 23%. The lower effective tax rate as compared to prior quarter primarily reflects the benefit of utilizing previously unbenefited losses in Brazil. With the completion of our acquisition in November, we issued 3.4 million shares during the quarter, which increased the average share count by 1.7 million shares over Q3. With this change, the average outstanding share count increased to 87 million shares in Q4. Income from continuing operations for the fourth quarter was $0.09 per diluted share compared to $0.03 per diluted share in the pervious quarter and breakeven on a per share basis in the fourth quarter of last year. The fourth quarter of 2017 includes a $0.03 per share net benefit from the impact of the U.S. tax reform, partially offset by acquisition costs, while the fourth quarter of 2016 includes a $0.03 per share net benefit from the impact of the U.S. tax reform, partially offset by acquisition costs, while the fourth quarter of 2016 includes a $0.06 per share net benefit resulting from the restructuring of our Brazil investment, offset by asset impairments and other charges. Now let me discuss our balance sheet and liquidity. During the fourth quarter, operating activities provided cash of $23 million, while investing activities used $49 million including $45 million to fund the November acquisition. With the $45 million investment for the November acquisition, we ended the year with a total debt balance of $160 million, resulting in a total debt to capital ratio of 23% and a net debt to capitalization ratio of 16%. Our debt primarily consists of $100 million of convertible bonds that mature in 2021, along with $82 million of borrowings under our asset base credit facility. Meanwhile, we ended the year with $56 million of cash on hand, substantially, all of which is held by our foreign subsidiaries. Now turning to our near-term operational outlook. In the fluids business, following the modest pullback in Q4, we’ve seen a much stronger start to 2018, particularly in North America. The quarter-to-date average North America rig count is running nearly 10% ahead of Q4 levels. And for January, our total North America revenues tracked modestly ahead of the broader industry benchmark, with Canada being a particular area of strength. In addition, our Gulf of Mexico operation is benefiting from higher customer activity, including our first well being drilled with the Kronos system. Outside of North America, we expect activity levels will remain fairly stable over the near-term as the start up of activity on the Baker Hughes project in offshore Australia will likely be offset by lower revenues from Petrobras following the completion of the DeepDrill well in the fourth quarter. With the higher revenue expectation, we anticipate segment margins will improve modestly beyond the levels seen in the recent quarters. In the Mats business, while we anticipate a pullback in mat sales following the strong performance in Q4, we expect near-term rental and service demand to remain relatively stable. In addition, we’ll see a full quarter contribution from the acquisition, which we expect to provide an additional $7 million to $9 million of revenues in the first quarter relative to Q4 performance. Factoring in the full quarter contribution from the acquisition, partially offset by lower mat sales, we expect Mats segment revenues in Q1 to be in the $45 million to $50 million range, with the largest variable being the timing of mat sales. In this revenue range, we expect operating margins in the low to mid-20s range, again, reflecting the anticipated impact of the higher service revenue contribution as well as the increase in depreciation and amortization expense. We expect corporate office expenses will decline modestly in the near-term as the non-recurring acquisition-related expenses in Q4 will be partially offset by an increase in cost in Q1 to evaluate the impact of the U.S. tax reform. With regard to use of the cash flow, we anticipate our 2018 full year capital expenditures to be in the $20 million to $25 million range, which largely consists of maintenance requirements, along with the modest investments in the growth opportunities. Also, as Paul touched on, we anticipate funding the Environmental Services settlement. It’s important to highlight that $8 million of the settlement will be funded through the release of an escrow account, leaving the remainder of the charge, net of taxes, to be funded through our cash and revolver borrowings. Regarding our working capital needs. While we expect working capital will generally trend with revenue levels, it’s important to highlight that a reduction in receivables remained a key target for cash flow generation. In 2017, receivables increases consumed $74 million of cash, as activity levels rebounded in North America. Coming out of the cycle, our organization was very lean, leading to a slip in DSO performance as activity ramped up quickly. With the continued focus of this area, the trend has turned in Q4, particularly in the U.S., and we plan to remain vigilant in this effort in 2018. Also, we expect that overall, the recent passage of U.S. tax reform will have a net positive impact from a cash flow perspective. Based on our preliminary evaluation, we believe that the cash flow impact of the deemed repatriation provisions of U.S. tax reform will be fairly minimal. Further, the reform opens up the possibility of repatriating excess cash from our foreign subsidiaries back to the U.S. parent company to facilitate reductions in third-party debt. We expect the U.S. tax reform will also help drive a reduction in effective tax rate in 2018. We currently estimate that our effective tax rate will decline to a range of 30% to 35% for the full year 2018, with U.S. profitability now becoming a key driver to reducing our consolidated tax rate going forward. And with that, I would now like to turn the call back over to Paul for his concluding remarks.

Thanks, Gregg. 2017 was a year in which we saw our company emerge from one of the longest downturns in the history of the oil and gas industry, and I'm pleased to say that we emerged stronger and better positioned to compete on a global basis, having made significant progress in several fronts in both of our businesses. In our Mats business, we closed on a key acquisition, which expands our capabilities and service offering related to environmental protection while also expanding our U.S. geographical footprint. Meanwhile, we continue to expand and enhance our intellectual property portfolio with the award of seven new patents, including continuations. With a continued push into non-E&P markets, we're also improving the stability of segment revenues but also driving a rebound in the utilization of the manufacturing assets. And with the recent acquisition, we expect 2018 to start off on an annualized run rate of nearly $200 million, which would be a record level of revenue for the Mats business. In our fluids business, we saw our market share position in the U.S. increase, surpassing Schlumberger as the second largest provider of drilling fluids. This represents a major milestone in our U.S. drilling fluids business as we enter 2018. As we look ahead, we recognize the need to continue to drive our fluid margin back to double digits. To do that, we must continue to focus on growth on several fronts, including continued expansion of market share North American land; further penetration of international markets with key IOCs; share gains in the deepwater Gulf of Mexico; and the expansion of our product line offering into adjacent completions and stimulation chemistries to further leverage our global footprint and customer relationships. And lastly, I'd like to mention the dedication of our employees and the relentless pursuit of excellence when it comes to taking care of our customers and working safely. With that, we'll now take your questions. Operator?

Thank you. We will now be conduct a question-and-answer session. [Operator Instructions] Our first question is from Stephen Gengaro with Loop Capital Markets. Please proceed with your question.

Thank you. Good morning, gentleman. I guess, my first question, when you look at your fluids revenue, specifically in the U.S. market, in 2015 and 2016, it kind of mirrored almost identically the declines in the average U.S. rig count. And in 2017, it was up dramatically more, right up about 130% versus like 70% increase in the rig count. Can you help us kind of understand the pieces of that outperformance? Was it market share? Was it price? Was it deepwater project? Can you help triangulate that a little bit as we think about it going forward?

Sure. Thanks, Steve. And it’s Phil Vollands here. Through the downturn, we did steadily grow market share and that continued through 2017. But what we saw in 2017 was the customers actually started to drill more challenging wells with longer laterals. And so there’s somewhat of a correlation between the well complexity and the amount of product that’s required downhole for things like lost circulation, and so on. We’ve continued to keep the foot on the gas with regards to new technology developments through the downturn, and so we started to yield benefits and results from that in 2017.

And as we look into the next 12-month period, do you think that outperformance versus the rig count continues?

I’m looking to…

I mean, it sounds like it has in January, so…

Yes. Look, this is Gregg, I’ll kind of touch on that. You look at this overall trend here. As it did come down through the cycle, we see that reduction in spend per well, and that went to the overall trend of them trying to minimize – the customers trying to minimize their investments as well. As Phil touched on, you’re seeing that reverse. And really, the question of whether you see that continues is really a question about the drilling efficiency. How many wells are they drilling per rig? And then really, it’s how much footage are they drilling per well, because that footage is really a key driver there in terms of our revenue generation.

Okay. Now that’s helpful. Thank you.

Our next question is from James West with Evercore ISI. Please proceed with your question.

Good morning, guys. This is Blake on for James. Just a quick question on the completion fluids business. You mentioned that was a source of growth in the U.S. specifically. Can you just frame for us what the contribution is currently as a part, I guess, of U.S. fluid revenues? What inning you guys are in terms of growing that business to ultimately where you want to get it? And then qualitatively, what kind of impact will it have on the fluids margins business as a whole?

Yes. We’re just in the first inning on the completion fluids business. We’re really trying to build out some of the organizational infrastructure. So there’s no comment to be made on margins at this point or even revenue. So as a business that we’re seeing kind of a pull as we talked about internationally and with our customers being asked to bid on tenders, historically, there’s always been a mini bundle internationally with drilling fluid, drilling and completion fluids. And so we’re preparing for future growth with the organization at this time.

Yes. The one area that we’ve – that we are seeing a contribution has been from the contract in India with Cairn, and that was the one that started up here in recent quarters.

Okay, got it. And then just one more clarification. The market share, when you comment on market share, is that based on rig count? Or is that based on volumes?

Yes, it’s based on rig count.

Okay, thanks guys.

Our next question is from Bill Dezellem with Tieton Capital Management. Please proceed with your question.

Thank you. Would you please discuss a little further your comments about being pulled further into completion fluids business and particularly, outside the U.S.? So I guess, there are really two parts to that question: one is the broader completion fluids, but the second is why outside the U.S. and not in the U.S. and what prognosis is there in the States.

Yes, this is not unusual, to see in longer contracts a bundling of drilling and completion fluids. And we see more of those sorts of contracts overseas, and so we’ve met those terms. And we’re starting to be more intentional here in the U.S. as we engage more and more with IOCs. That population is asking us to be more involved in this area.

So taking that a step further, is – are the completion fluids something that you would expect to be bundled with virtually all of your international contracts?

No, no, Bill. It’ll be selective obviously. In the case of India, we’ve had that opportunity. And we’ve been doing completion fluid in the international market, mostly in the EMEA region, for the last four or five years. It hasn’t been significant, and as Phil mentioned, we’re starting to ramp up that activity, adding more technical resources to that product line.

And I think Phil used the correct term there. We’re being a little more intentional here with our driven expansion into those areas.

Thank you.

[Operator Instructions] We have a follow-up question from Stephen Gengaro with Loop Capital Markets. Please proceed.

Thanks. Actually, two housekeeping things, then another question. But the charge on the corporate side in the quarter, the $700,000, that was in the corporate other line in the operating profit breakdown by segment, is that right?

That – it was in the corporate expense, correct.

Great, okay, okay. And as we look ahead any just quick depreciation guidance?

Well, the main driver that you have here is the contribution here on the – with the Well Services acquisition. In total, that acquisition is adding, call it, $7 million or so of depreciation and amortization on an annualized basis. We saw small piece of that here in the fourth quarter as we had about six weeks or so of them that contributed $1.3 million. And so that is the major change that we see here going forward.

Okay, great. That’s helpful. And then just back to that sort of the core businesses. The – on the Mat side of the business, and you gave some color on the first quarter already, but as you look out, and obviously, absent the mat sales piece, which is lumpy, but as you look out, how do you see that playing out relative to underlying activity levels?

Yes, it’s Matthew. I’ll take that one, Stephen. Look, I think it’s sort of great. And as you’ve correctly sort of identified the net, the puts and takes on mat sales, we’re seeing the diversification efforts for both the acquisition and prior to acquisition, we’ve put a lot of effort on start to make that look a little more stable than perhaps it’s been historically. So I think relative to a Gregg’s commentary around Q1 that seems to be a fairly stable run rate.

Okay. Great. Thank you.

Our next question is from Ken Sill with SunTrust Robinson Humphrey. Please proceed with your question.

Congratulations on being number two in drilling fluids in the U.S.

Thank you.

I’m curious, internationally, I mean, Baker’s kind of gotten out of the U.S. fluids business. It sounds like you’re doing the same internationally. Has there been any change in the competitive landscape besides that? Are there any other people besides you trying to fill in for the market share that Baker is giving up outside of Halliburton and Schlumberger?

No, I’d characterize it as fairly consistent internationally.

Yes, we – historically, that’s been Halliburton, Schlumberger, Baker Hughes and Newpark. And as you correctly stated, Baker’s pulled out a lot of the, not just the international regions, but also the North American market. That really leaves the three of us playing predominantly in the international sector.

Okay. And so obviously, the implication that is when international activity starts recovering, that should see a nice uptick for you guys. Am I correct in thinking that international margins are better than North American margins or are they pretty much in line?

Yes, this is Gregg. As far as that margin differential, historically, we have seen our international margins are stronger. There’s a couple of key factors there. One is it’s obviously – as you just pointed out, it’s a less competitive market relative to the North American market. But the other key difference there is in the international market, you tend to have longer-term contracts, therefore, much more stability, therefore, your cost, your operating cost efficiencies are much easier to drive than in the variable North America environment.

Okay, great. Thank you.

Thank you.

Our next question is from James West with Evercore ISI. Please proceed with your question.

Thanks for allowing me to jump back in here. Just looking at the CapEx guidance that you gave and all the EBITDA that we expect to generate based on the annualized 4Q run rate, your leverage situation is improving substantially and quickly. What do you see in addition to growing your businesses, both domestically and internationally, as part of your capital allocation strategy moving forward?

Sure. It’s Gregg. I’ll start on that one. I mean, initially here, as we look at 2018, as you point out, while our debt – our leverage levels are coming down, I think we still have a little further to go in terms of continuing to rebuild that balance sheet coming out of the cycle. As far as the CapEx allocation, it’s been more weighted towards the growth on the mats side of the business more recently. And as we look at it going forward, I would expect to see that trend continue. However, we’re also continuing to pursue international opportunities in the fluids business, so you may have some growth capital that would need to be invested to support any of those contracts.

Yes. Then the other thing I’d just add to that, Gregg, too is as we look into expand into these adjacent product lines, whether it’s completion or stimulation, we may see some capital investments there and some infrastructure.

Okay, thanks.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the floor back over to management for closing comments.

All right. Thanks again for joining us on the call, and we look forward to giving you an update after the first quarter.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines, and have a wonderful day.