Q3 2020 Newpark Resources Inc Earnings Call
Greetings and welcome to the Newpark resources third quarter earnings Conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host can know what said arts glassware like.
Thank you you may begin.
Thank you operator, and good morning, everyone.
We appreciate you joining us for the Newpark resources conference call and webcast <unk> third quarter 2014 results.
Thirdly, the make up of the Yesterdays call upon <unk> departure, <unk>, Chief Executive Officer, Pete <unk>, Chief Financial Officer.
Matthew Lanigan project, the mats business and they Patterson.
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Hi, Barbara bars manager, who will provide a high level all the jury.
Financial details of the third quarter results and near term outlook.
For opening the call for Q1 right.
And before I turn the call above the normal housekeeping details to run through there'll be a replay of today's call available by webcast on the company's website at Newpark that Tom.
Also be a recorded replay available until November 18th told you 20 of that information was included in yesterday's release. Please note that information reported on this call speaks only as of today.
Fortunately choice.
And therefore, you're advised that time sensitive information no longer be accurate at 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 Newparks management, however, various risks uncertainties and contingencies.
<unk> actual results performance or achievements to be.
Materially from those expressed in statements made by management.
The listener is encouraged to read then they 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.
Comments today May also include certain non-GAAP financial measures additional details and reconciliation to the most directly comparable.
Financial measures arcaded than the quarterly press release, which can be found on Newparks website at.
No that behind me I'd like to turn the call over the parks, President and Chief Executive Officer, and the schoolhouse ball.
Thanks, Ken and good morning, everyone I remain extremely profit or the resilience of our entire organization as we've navigated through the combination of oil and gas industry dislocation as well as the prolonged kobin related headwinds that continue to impact our business.
I didn't get these market headwinds the third quarter is also impacted by the most accurate hurricane season in the last decade, causing repeated work stoppages in the Gulf of Mexico.
In the face of these challenging conditions, we remain focused on executing our strategic play book by pulling their required leverage to maintain positive free cash flow and paying down debt.
While adjusting our infrastructure to address the new market real that reality in our U.S. fluid business.
Free cash flow generation and debt reduction remain our highest priorities and I'm extremely pleased with our performance on this front.
During the third quarter, we generated $15 million the cash from operations and reduced our total debt balance by $34 million as we continue to harvest working capital and repatriate excess cash from our foreign subsidiaries.
Benefiting from the strong cash generation over the past two quarters, we reduced our total outstanding debt by $65 million since the start of the year.
Touching on the specifics of the segment results fluid systems posted third quarter 2020 revenues of $68 million, reflecting a 9% sequential decline.
In contrast to the 35% reduction in U.S. rig count revenue from U.S. land have steadily improved as we progressed through the quarter, increasing 8% sequentially to $30 million.
It's pretty much was driven by our expanding market share and a recovery in customer activity, specifically drilling more wells with fewer rigs.
As we touched on last quarter, our market share on U.S. land has meaningfully expanded in recent months and I'm pleased to highlight that our share has remained above 20% mark throughout the third quarter, achieving a record level for newpark.
In the Gulf of Mexico, the quarter is impacted by the repeated weather related disruptions, which led to revenues declined by nearly 50% to $7 million.
Internationally activities in key markets within the Middle East and North Africa were negatively impacted by greater travel and operational restrictions imposed by local governments in response to a surgeon cobot outbreaks in the third quarter. This led to a 12% sequential reduction in our international fluids.
Rather's.
Also as we announced previously the response to the significant change in the U.S. oil and gas market, we've been working over the past two quarters to reposition our chemical blending facility located in Conroe, Texas to serve more stable markets.
As an update I'm pleased to announce that we completed the installation of our first semi automated packaging line late in the quarter, which allowed us to begin scaling up production of industrial cleaning products as we target leading cleaning product companies.
With a partial quarter of production, we generated nearly 3 million of revenue from cleaning products in the third quarter.
We remain encouraged by our progress in this area, but more work is required to better understand the industrial cleaning products market, including our position in that value chain.
In the Mats segment, despite the continuing impact of cobot across the United States, the United Kingdom revenue, it's improved 5% sequentially in the third quarter to $29 million improvement benefited from a late quarter surge in demand for utility sector, along the Gulf Coast, where we are.
Accordingly.
Electrical infrastructure damaged by the recent hurricanes.
We anticipate that the hurricane related demand will provide a positive impact the Q4 results as work continues repairing damaged utility infrastructure.
While the market conditions were extremely challenging third quarter I'm pleased to note that we feel that both of our business segments had bottomed out and the worst is now behind us as we look forward to the fourth quarter, we are anticipating improvement in operating results across both segments.
And with that I will hand, the call over to Greg to discuss in more detail the financials for the third quarter.
Greg.
Thanks, Paul and good morning, everyone.
I'll begin by covering the specifics of the segment and consolidated financial results for the quarter before providing an update on our near term outlook.
In the food systems segment as Paul touched on revenues from U.S. land increased 8% sequentially to $30 million for the quarter.
Despite the 35% reduction in average rig count, reflecting our expanding market share as well as the rebound in customer spending per rig.
The north Eastern Rockies reflected the most notable areas of sequential improvement.
Our Gulf of Mexico business had an extremely challenging quarter due to the repeated hurricane shutdowns, leading to a nearly 50% reduction in revenue to $7 million in the third quarter.
Industrial cleaning product revenues contributed nearly $3 million in the third quarter more than tripling the prior quarter.
In Canada revenue declined 36% to $2 million in the third quarter with the sequential comparison negatively impacted by the timing of customer projects.
Outside of North America, as Paul touched on Cold and continue to have a negative impact on customer activity, most notably in the EMEA region were ongoing restrictions on movements of personnel and products within a number of countries have resulted in significant activity disruption and project delays.
Although the middle East held up well in the second quarter, we've seen a more notable cobot impact during the third quarter.
Total international revenue declined 12% sequentially to $25 million with operations in the middle East contributing the majority of the decline.
With the colder driven impact total revenues from the middle East hold back 27% to $9 million in the third quarter.
On a year over year basis, our fluid systems revenues declined 56% compared to Q3 of 2019.
North American land revenue declined by $64 million or 66% modestly favorable to the 71% decline in rig count.
Well Gulf of Mexico revenue declined $2 million or 25% year over year as our expanding market share was more than offset by the impact of the 2020 her.
International revenue also declined $21 million or 45% year over year decline.
With decline seen across substantially all markets.
The fluid systems operating loss was $19 million in the third quarter, which included $4.5 million of charges called out in yesterday's press release despite.
Despite realizing a meaningful impact from our cost actions.
The third quarter operating loss was impacted by the $7 million sequential decline in revenue.
Cost inefficiencies driven by the unplanned activity interruptions in the Gulf of Mexico, and the EMEA region, the startup of cleaning products packaging as well as ongoing efforts to draw down excess inventories.
Turning to the mass business total segment revenue increased 5% sequentially to $29 million in third quarter.
Driven by improvements in rental and services as well as product sales.
As Paul mentioned rental and service revenue increased 3% sequentially as the late third quarter surge in demand from the utility sector, along the Gulf Coast was largely offset by a $2 million reduction from BNP markets.
Product sales improved 14% to $6 million for the quarter.
Although we are seeing continued strengthening in quoting and customer planning activity in the utility and industrial markets. Several scheduled utility infrastructure projects in Q3 were delayed due to the prolonged coded related restrictions in many states.
Further it's worth noting that as a result of the utility industry mutual assistance program the.
The Hurricane response cause many utility service providers to redirect their efforts to support the emergency Gulf coast repairs, causing delays in projects that would have otherwise moved ahead.
From an end market perspective, $20 million of our third quarter revenues derived from the energy infrastructure.
Estriol markets, representing roughly 70% of our total segment revenue.
Compared to the third quarter of last year Mat segment revenues declined $22 million or 43% largely reflecting a 12 million dollar decline in MP rental and service and a $9 million decline in direct sales.
Our UK operation has been a particular bright spot year over year.
Delivering more than 20% growth in revenues over 2019.
The Mats segment operating income declined $1 million sequentially to essentially breakeven generating EBITDA of $5 million in the third quarter.
The third quarter operating results were impacted by the mix of rental and service revenues.
Along with elevated unabsorbed fixed cost in our manufacturing facility.
And cost to mobilize our assets and resources to respond to the hurricane work.
As noted in last quarter's call, we pulled back production within our mass manufacturing facility in the third quarter as part of our inventory and cash management strategy.
Total corporate office expenses were $6.6 million in the third quarter relatively in line with the second quarter on a year over year basis, corporate office expenses declined $3 million, primarily driven by a $1.5 million reduction in personnel costs as well as lower M&A and strategic planning costs.
At unit costs were $21 million in the third quarter down slightly from the second quarter.
On a year over year basis, that's unique cost declined $7 million.
Largely reflecting lower personnel expense strategic planning costs and legal and professional spending.
As Paul discussed, we made meaningful progress in our debt reduction efforts.
As a result of the reduced debt balance interest expense declined 17% to $2.4 million in the third quarter, roughly half of which reflects non cash amortization of facility fees and discounts.
As of the end of the third quarter, the weighted average cash borrowing rate on our outstanding debt was approximately 3%.
The third quarter benefit from income taxes was $4.8 million, which reflects a 17% effective rate for the third quarter and a 15% rate for the first nine months of 2020.
The relatively low tax benefit rate reflects the impact of the geographic composition of our pre tax losses with a tax benefit received in the U.S. losses are partially offset by the tax expense on foreign earnings, which carry a higher rate than the U.S.
Our net loss in the third quarter was 26 cents per share which includes four cents of charges as highlighted in yesterday's press release. This compares to a net loss of 29 cents per share in the second quarter, which included nine cents of charges and a net loss of two cents per share in the third quarter of last year.
For the third quarter cash provided by operating activities was $15 million, which included a $29 million net reduction in working capital.
The continued monetization of working capital benefited from a strong reduction in both inventory and receivables, particularly in the U.S.
Investing activities again had a minimal impact in the quarter.
Illustrating the flexibility of our capital light business model.
It's worth noting that the majority of our capital expenditures support our industrial end market activities, including the deployment of mats into the rental fleet to support the increased demand from the utility sector.
Our cash balance declined $20 million in the third quarter, reflecting our ongoing efforts to repatriate excess cash from our foreign subsidiaries, which combined with our free cash flow generation was used to pay down our U.S. asset based loan facility by $34 million in the quarter.
With the benefit of the debt repayments, our total debt balance declined to $102 million, while our cash balance ended the third quarter at $24 million, resulting in a total debt to capital ratio of 17% and the net debt to capital ratio of 14%.
Our primary debt components include the remaining $67 million of convertible notes due December of next year and $30 million outstanding on our U.S. asset based bank facility, which runs to 2024.
Substantially all of our $24 million of cash on hand reside in our international subsidiaries.
Now turning to our near term outlook.
In fluid with hurricane season, coming to an end and North American land markets continuing to gradually improve.
We expect to see a meaningful improvement in fourth quarter operating results.
The largest change is anticipated within the Gulf of Mexico, where we expect Q4 revenues will return to roughly Q2 levels.
In U.S. land, we're seeing continuing improvements in customer activity with October revenues coming in roughly 5% ahead of the Q3 run rate.
We also expect Canada will rebound.
As the overall market activity levels improved in the seasonally stronger Q4.
In addition, we expect our cleaning products revenues will roughly double Q3 levels benefiting from a full quarter of production.
Looking outside of North America, Although a second wave of Cobiz is currently hitting parts of Europe, the middle East and North Africa.
We currently expect our Q4 revenues will return to roughly Q2 levels.
Benefiting from increased customer activity in North Africa, and eastern Europe, as well as an increase in stimulation chemicals sales into the middle East.
From a margin perspective, we anticipate the impact of the stronger revenue combined with the ongoing cost rationalization efforts should drive the fluids business close to EBITDA breakeven in the fourth quarter and a return to positive EBITDA generation in the first quarter of 2021.
In the mass segment with the benefit of the hurricane driven demand in the U.S. utility sector to start the fourth quarter ongoing strength from our UK business, along with the pickup in customer bidding and planning activity.
We expect Q4 rental and service revenue to improve by roughly 10% from Q3.
Further.
Although visibility to the timing of Mat sales is always a challenge to predict it's worth noting that several of the large utility companies have continued to publicly reconfirmed their commitments to their capital plans.
Consequently.
We believe we will see an uptick in year end demand for product sales.
Potentially doubling the Q3 results.
Combining the RMS with the product sale expectation this sets up for Q4 to be the strongest revenue quarter of the year for the mass business.
From a margin perspective.
The extent of the year end product sales demand will likely determined whether the mass business can return to double digit operating margin in the fourth quarter.
Corporate office spending should remain near the Q3 level.
And we expect the effective tax rate for the remainder of the year to remain relatively in line with the year to date 2020 rate.
With regards to cash flows.
We have made solid progress in monetizing working capital over the past two quarters and see additional opportunities ahead with over $200 million of networking capital remaining on our books.
More specifically international receivables and global inventories remain well above historical levels. So we expect further reductions in excess working capital will continue to provide a tailwind to cash generation in the coming quarters.
Inventories will likely take several quarters to optimize depending on customer activity.
Meanwhile, reflective of our capital light model, we expect limited net capital investments for the foreseeable future with capital deployment, largely targeting industrial end market diversification efforts that provide a clear line of sight to cash flow and EBITDA generation.
As illustrated by our actions over the past two quarters, we are taking prudent steps to maintain positive cash flow with a particular focus on the remaining $67 million convertible note maturity at the end of next year.
We expect that our cash on hand cash generated from operations and the available capacity under our U.S. asset based loan facility will provide sufficient liquidity to support our ongoing operations and satisfying our convertible note maturity.
As we've noted in the past it remains our intention to funded the maturity without accessing public capital markets.
As part of our capital structure management, we are evaluating additional sources of liquidity available to further enhance our capital structure.
Typically we maintain meaningful us real estate as well as assets within our European operations that can be used to create additional liquidity through secured financing or alternative arrangements.
It's also worth noting that with our 30 day average share price recently falling below the NYSE. One dollar listing requirement, we expect to receive notification from the NYSE regarding this noncompliance.
Or the NYSE rules, we will be required to issue a press release, and then have six months to cure the noncompliance.
While we intend to evaluate the various options that are available to regain compliance with the NYSE requirement.
Primary focus remains on driving operational improvements and consistent free cash flow generation as we continue to reshape the company.
And with that I'd like to turn the call back over to Paul for his concluding remarks.
Thanks, Greg.
2020 has certainly been a challenging year that I do not think any of us could have predicted the combination of a global pandemic volatile oil and gas prices and the historic Hurricane season, certainly challenged our businesses, but we are optimistic that the worst is now behind US we also recognize that mark.
Work is required to streamline fluids for the new market realities of the oil and gas industry. While at the same time positioning the company to take advantage of it.
Opportunities in the energy infrastructure and industrial cleaning products markets.
So I'd like to close by summarizing the actions taken as part of the strategic playbook, we laid out earlier this year to navigate through these difficult times and positioned the company for profitable growth and improve returns on invested capital.
First our focus on employee safety, our most important core value has not wavered in these exceptionally challenging times. We are pleased with our improved 2020 safety performance as well as the limited number of coded cases within our global employee base I'd.
I'd like to thank all of our employees for the dedication to putting safety first in everything we do.
Second we.
We are aggressively managed our balance sheet by harvesting cash from working capital, while leveraging our capital light business model since the beginning of the year, we generated $36 million in free cash flow and reduced our outstanding debt by $65 million a reduction of nearly 40%.
Third we have been successful in diversifying our revenue streams away from the volatile oil and gas markets, particularly us land, which we believe will ultimately lead to improved stability in cash flows and higher returns on invested capital.
In our mass business.
Hi, 70% of our revenues from energy infrastructure and other industrial markets, which we believe provide significant growth opportunities as the energy transition gains traction.
In fluid. We also believe that continued expansion of our international business predominantly in the eastern Hemisphere will provide future stability as it has in prior cycles.
Over the last 12 months, we have secured several new contracts in the EMEA region that should add incremental revenue once the cobot headwind ultimately subside.
And as I touched on earlier, we're now successfully repositioned, our conroe, Texas oilfield chemicals blending site to an industrial and consumer cleaning products facility, providing a path forward. The further diversification outside of the oil and gas markets.
Before we've taken aggressive actions to rightsize, our fluids business, particularly in the us and as we touched on last quarter's call. We have now reduced our fluid systems EBITDA breakeven point to roughly 350 million of annualized revenue.
But more opportunity exists to further optimize our footprint driving efficiencies in our operations. While also harvesting additional working capital from the balance sheet, most notably inventory.
These efforts will not be completed within a quarter or two rather it will be a continuing process as the market evolves over the coming year.
Furthermore, I'd like to note that as we reduced our net capital deployed in fluid, we remain very selective and future investments in the U.S. oilfield sector. This should enable the fluids business to more efficiently navigate market volatility and deliver stronger cash flow generation and improve returns on invested capital.
Through future industry cycles in.
In closing I'd like to take a moment to speak about SG something has long been part of our DNA at Newpark and a subject that is becoming of increasing importance around the world.
Over the past decade, we've prided ourselves on offering products that help our customers across all industries improves the sustainability other operations.
For examples of this you need to look no further than our flagship products, including our fully side.
Dura base matting system, which has been in the market for over 20 years and can pay primarily with old growth timber mass.
Or our evolution water based drilling fluid system launched in 2010, which provides customers with a number of environmental benefits over traditional diesel fuel based products.
Through these product offerings and our larger SG program, we continue to reduce our environmental impact, while helping our customers reach their environmental goals.
For more information regarding the benefits of our environmentally focused product offerings and other facets of our Yestwoyou program. We encourage you to visit our website and select sustainability from the landing page.
With that I'd like to close the call as always do by thanking our shareholders for investing us and thanking our employees for their hard work and dedication newpark as well as a continued focus on safety.
Well now take your questions operator.
Thank you ladies and gentlemen at this time, we will be conducting the question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation Paul Let me take your line is in the question queue.
You May press Star two if you would like to remove your question from the Q4 participants using speaker equipment.
You may have to pick up your handset before pressing the star case.
Our first question comes from the line of George O'leary with Tudor Pickering, Holt and company. Please proceed with your question.
Good morning, guys.
Good morning Rich.
And impressive job when going away at that net debt balance throughout the year, you quite a chunk out of the out of the balance and Greg you spoke to this a little bit during your prepared remarks, but just.
Strategically how do you think about incremental cash generation from here and at what point in time as you look at those kind of strategic alternatives for dealing with the rest of the residual exchangeable notes being 2021.
One point in time do you think you might have to pull the trigger on on dealing with does I'm sure you want to get ahead of it but you are generating free cash flow. So you have some time to balance sheets and again positions us agents weigh those options and how are you guys thinking about that.
Yeah, I think you kind of hit on the key point there in terms of you.
You know it starts with what we're doing to create capacity on the radio and we had talked about we see that as the primary vehicle too.
To fund the convert maturity next year.
Lastly, we've made great progress here in the recent quarters and this quarter, taking it down by 34 million now got a little bit below 30 million as of the end of the quarter. That's a very big first step.
As we look at the path from this point forward I think it starts with two things first of all continuing to to work down the working capital balances and we talked about the working capital that does remain we look at the excess receivables, we got 10 million or so access there on the inventory side, you're probably have it at current.
Activity levels more like a 20 to 30 of excess inventory, which we know will take several quarters to work off and so that's the primary focus there to create additional cash flow in.
In addition, as we talked about with where we see the business going we have pretty clear line of sight to getting that fluids business back to positive EBITDA, which means we're back in positive EBITDA generation overall as a company and those are your key pieces. So that you put all that together and that positions us to fund it without the need for anything else, having said that.
As we have pointed out right. We are continuing to evaluate other options that are there as weve talked about weve got at assets that are there.
We will continue to look at those things, but there are no levers that we see that we need to pull on that.
Okay, great that's.
Thats helpful. And then actually a good segue is as you talked a little bit about line of sight to fluids EBITDA again back into positive territory.
The competitive landscape continues to evolve in the North America onshore fluids business in particular, you guys are.
Taking share in the Gulf of Mexico.
In the international going to grow in the fourth quarter I Wonder if you could talk about it.
Incremental margins and where those sit today will it cost pieces moving around and then.
HM.
Given that the growth in those different buckets, North America onshore international and Gulf of Mexico, maybe frame.
The incremental margins for each of the different pieces of business and how we might think it does and then just.
So we're rolling out our questions and very long question, but on the industrial cleaning products side, how do those margins match up with kind of the legacy oil and gas business.
Okay. So I will start it. So you know in terms of the fluids margin progression as you look to see if you look at the cost actions. This was a bit of a sloppy quarter in terms of some of the charges. The inefficiencies. The work stoppages that we had we had talked about that caused some additional cost of I call it a million or so on.
HM.
Cost that we would not expect to recur here in Q4, so when you normalize for those things you look at our as compared to our historical range that we've always talked about 20% to 30% just kind of your normal incremental range. We're outperforming that as we take costs out it would or decremental margins have been on the.
Lower and the team we normalize now when you look at the end of Q4 and what we've characterized here were that frames up for something actually little north of in the Thirtys here in terms of incremental margin and again, that's that is reflective of kind of those continued efforts that are going on in the business to take cost out while the revenue does.
Bye.
In terms of the flu yeah, yeah, the cleaning products, let me take that so obviously, we're very pleased right now with the growth in the cleaning products area ramping up to $3 million.
We expect that to grow closer to $6 million in the fourth quarter.
In terms of margins I think as you say what are the how to compare stoically to kind of the oilfield margins and we've seen it in drilling fluids I think they are certainly at that level, maybe slightly higher but currently we're not there because we get a lot of operational efficiencies.
We installed our first semi automated packaging line and we still have quite a bit of labor on that and as you can imagine just give you. An example, I mean in some days were bottling 30000 gallons producing the product inserting a debt tube into a capping it labeling it boxing it in just the material handling.
Laying of handling 30000.
Just a day rates a lot of inefficiencies so over starting to streamline that process and over the next kind of couple of quarters, we expect to get there.
The other thing we want to be able to do to look at continued diversification that revenue stream. We're working to one very large consumer product company that is well known in the space, but we believe that the asset currently configured in a way that can address that market.
But there's more work to be done.
Great. Thank you guys very much for the color.
Uh huh.
Correct.
As a reminder, ladies and gentlemen, what is star one to ask your questions. Our next question comes from the line of Messing with Titan Capital Management. Please proceed with your question.
Great. Thank you.
Hoping to discuss your market share gain in the land market could be.
A little bit further opportunities there and while there is a lot of the two rationalization going on them.
To begin with.
Tomorrow.
Yeah.
Hey, good morning, David Paterson.
We've had good progress this year in producing that margin should on U.S. London.
Really you might put it down to performance can be done to the focus that we bring to the business I think the customer she it.
Certainly drives cost savings I think it reduces MPT, all new wells and I think that's been a key lever to drive market share gains.
We've also benefited a little bit 72 answers indicated competitors have dropped out and that's complicated some market share gains, but I could just get down to performance.
You know the test, which we see that we see to differentiation in new.
Yeah, the external data point on it. This fall is the recent kimberlite report, which shows that our customer service ratings. Our rankings is the highest in the industry better than all the three largest service company. So again I think you know what David's deploying is the Newpark service advantages, what we coined it and were.
Doing a much better job of servicing our customers in these very challenging times.
Okay.
Okay. That's helpful. Thank you.
You bet.
This concludes our question and answer session I'd like to hand, the call back to management for closing remarks.
All right. Thank you once again for joining us on the call and for your interest in Newpark resources, and we look forward to talking to you again next quarter.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.