Q1 2021 Newpark Resources Inc Earnings Call

Okay.

[music].

[noise] greetings and welcome to the New Park resources first quarter earnings Conference call.

And this time all participants on a listen only mode.

Brief question and answer session will follow the formal presentation.

If anyone should require operator assistance and starting to California, whose for Starz you're on your telephone keypad.

As noted on this conference is being recorded it is not my pleasure to introduce your host Ken Dennard Investor Relations for good Park resources. Thank you Mrs and argue may begin.

Thank you operator, and good morning, everyone.

We appreciate you joining us for the New Park Resources Conference call and webcast for reviews first quarter 2021 results.

Participating from the company on today's call for Paul Howes, <unk>, President and Chief Executive Officer.

And PR and Tech Chief Financial Officer, David Paterson, President and fluids business.

And that's the Atlantic and President of the industrial solutions business.

Following my remarks management will provide a high level commentary on the financial details on the first quarter results and near term outlook before turning the call over to Q&A.

And then before I get into called managed when I have a few housekeeping details to run through there'll be a replay of today's call and it'll be available by webcast on the company's website at New Park Dot Com and they'll also be a telephonic reported replay available until May 12, 2021 and that information is included and.

Yesterday's release.

Please note that the information reported on this call speaks only as of today may five 2021 and.

And therefore, you're advised that time sensitive information and no longer be accurate as of the time of any replay listening or transcript reading and.

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.

As for its forward looking statements reflect the current views of new parks management. However, various risks uncertainties and contingencies could cause new parks actual results performance or achievements to differ materially from those expressed and the statements made by management.

The listener is encouraged to read and annual report on form 10-K quarterly reports on form 10-Q, and current reports on form 8-K, so on.

Understand certain of those risks and uncertainties and contingencies.

The comments today May also include certain non-GAAP financial measures additional details and reconciliations for the most directly comparable GAAP measures are included in the quarterly press release, which can be found on the new Park website.

And now with that behind me I'd like to turn the call over to <unk>, President and CEO, Mr. Paul Howes Paul.

Thanks, Ken and good morning, everyone, but underlying fundamentals improving in both segments I'm pleased with our overall performance for the first quarter highlighted by the solid performance and the industrial solutions segment growth and stimulation chemicals, and the strong cash generation and debt reduction.

Consolidated revenues improved 9% sequentially to $141 million operating income returned to positive territory and EBITDA increased to $10 $9 million for the first quarter, which included an $800000 loss on the repurchase of convertible bonds.

And our.

Just real solutions segment revenues improved 6% sequentially to $53 million for the first quarter benefiting from the ongoing recovery and customer activity, most notably from the utility sector.

So I can access solutions product sales contributed $20 million of revenue and the first quarter benefiting from pent up demand for the utility sector. Following the deferral of customer capital investments and 2020.

With a stronger revenue and our industrial solutions operating margin and Prince of 25 per cent and the first quarter.

The rebound and our site and access solutions business over the past two quarters is especially noteworthy as it demonstrates the value of our efforts to diversify our business and expand into markets that we believe will benefit from the energy transition.

While revenue and profitability levels and this business has recovered close to 2019 levels. It's important to highlight the significant shift and revenue mix over the past two years.

Specifically revenue is attributable to our expanding presence and utilities sector and other industrial markets. Both in the United States and the United Kingdom have grown approximately 60% for the 2019 run rate largely offsetting the revenue decline from our historical upstream oil and gas.

Customers.

We are also encouraged by our progress and industrial blending as we build upon our early success and this new market and continue to take steps to further integrate our manufacturing operations into the supply chain of our customers Lane.

Laying the foundation for longer term growth and improved operational efficiency.

As anticipated following the ramp up of production in Q4, our industrial blending revenues pulled back to $5 million and the first quarter, which was impacted by lower demand forecast and product changeovers require reconfiguration of our packaging line.

And the fluids systems segment revenues improved 11% sequentially benefiting from the seasonal strength in Canada, and the continued recovery of activity on U S land and growth and stimulation chemicals, Despite a decline and the Gulf of Mexico, and the negative impact of winter storm Yuri.

I'm pleased to highlight that our expansion into stimulation chemicals is gaining momentum contributing $4 million of global revenues for the quarter.

And the Gulf of Mexico, but revenue decline, primarily reflected the impact of unanticipated changes and customer drilling plans.

Internationally, although we're beginning to see green shoots and key markets. Our fluids revenues were relative flat sequentially its activities and key markets within the EMEA region continued to be impacted by COVID-19 related travel and operational restrictions imposed by local governments.

As a sign of improving international market activity. We recently secured a five year award with a national oil company and Bahrain valued at approximately $35 million. This award expands our footprint and the strategically important middle East region with work expected to begin with them and next quarter.

With a stronger revenue contributions of fluids segment, and they're closer to EBITDA breakeven in the first quarter.

And while I'm encouraged by the improving market fundamentals, we remain focused on harvesting cash from our working capital on minimizing capital expenditures and reshaping the business for the new market realities.

Reflecting on our progress over the past five quarters, the impact of a rough line rationalization and reduction in working capital has been significant.

And our fluids systems net capital employed down $135 million or 30% since the start of 2020.

Well. It's also noteworthy is that as we've worked through these unprecedented market challenges our industry, leading capabilities and reputation are gaining increased customer recognition.

As we highlighted previously we took tough spots for customer service quality and both energy point research and Kimberly International Oilfield research customer surveys in 2020, which is a reflection of the quality and the dedication of our entire fluids organization.

Building upon last year's recognition and I'm very pleased to highlight that we were recently recognized once again by energy point research ranking number one and total customer satisfaction across all oilfield service lines.

We are extremely proud of this broad customer recognition of what we call the new parks services advantage, which we believe positions for fluids business to outperform as the market recovers.

And finally I'm pleased to highlight the continued strength and our cash flow generation and debt reduction we.

We generated $27 million for free cash flow on the first quarter, reducing our net debt balance by $25 million.

Our net debt now stands at $38 million, resulting in a net debt to cap ratio of 7%.

And with that I will hand, the call over to Greg to discuss in more detail the financials for the first 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.

Total revenues from the industrial solutions segment increased 6% sequentially to $53 million and the first quarter, primarily attributable to a 14% improvement from the site and access solutions business, which contributed first quarter revenues of $49 million.

The sequential improvement includes a $6 million increase and direct sales activity as we experienced some level of pent up customer demand and the utility sector as COVID-19 delayed infrastructure projects moved forward.

Rental and service revenues were relatively flat on a sequential basis coming in at $29 million for the first quarter with the benefit from the broader recovery and the utility sector and the improving E&P market more than offsetting the.

The elevated activity from hurricane driven repairs that benefited the previous quarter.

For Q1 results reflect the impact of the post COVID-19 resumption of activity across industries and the U S. With the utility sector remains our most significant and market contributing roughly half of our total Q1 rental and service revenue.

Yeah.

As Paul touched on our industrial blending revenues pulled back sequentially from the fourth quarter declining 3 million to $5 million and the first quarter impacted by a lower demand forecast and product changeovers for our primary customers.

Benefiting from the stronger revenue as the industrial solutions segment operating income improved $4 million sequentially to $13 million contributing $18 million of EBITDA and the first quarter.

Comparing to the first quarter of last year revenues from these sites and access solutions business increased to $17 million 54 per cent.

This increase was largely driven by a $16 million improvement and direct sales with COVID-19 uncertainty suppressing prior year sale activity, while the pent up demand provided a benefit to the current quarter.

Rental and service revenues grew 4% year over year substantially all of which was attributable to our United Kingdom operations.

And the U S. While rental and service revenues were relatively flat year over year, it's noteworthy to highlight the strategic shift in end market mix.

With more than 30 per cent growth in our electrical utilities and other industrial end markets substantially offsetting the decline and E&P customer readiness.

Turning to fluids systems total segment revenues improved by 11% sequentially to $88 million and the first quarter.

Revenue from U S land and increased $5 million or 15% sequentially, reflecting the benefit on a 28% improvement and market rig count and an uptick and stimulation chemical revenues, which contributed 2 million net revenues in Q1.

As Paul mentioned customer work stoppages and associated with winter storm, Yuri negatively impacted our land revenues by nearly $2 million in the quarter.

Although our market share remains well above historical levels, we saw our share pullback slightly and the first quarter from the all time highs achieved and the second half of 2020 for.

Primarily driven by the mix of operators, returning and brings to the market.

In terms of regional mix West and South, Texas provided substantially all of the sequential revenue improvement.

And the Gulf of Mexico revenues declined 24% sequentially to $9 million and the first quarter.

Largely reflecting unanticipated changes in customer drilling plans, including the suspension of operations on one drilling rig.

And Canada revenue nearly doubled sequentially to $13 million and the first quarter.

Primarily reflecting the seasonal improvement in market activity and increased market share.

Yeah.

Outside of North America revenues were relatively flat sequentially at $28 million as COVID-19 related restrictions continue to suppress and customer activity and the majority of our key markets.

The fluids systems operating loss was $7 million and the first quarter, reflecting a $13 million sequential improvement from the fourth quarter with the Q4 result, including $11 million of charges, primarily related to our exit from Brazil.

After consideration of the Q4 charges the first quarter results reflect the ongoing recovery and the business with a $2 million reduction and operating losses, driven by the improvement in revenues.

On a year over year basis, our fluids systems revenue declined 34 per cent.

North American land revenues declined by $20 million or 28 per cent, which is favorable to the 46 per cent decline and market and rig count primarily reflecting the benefit of our increased market share along with the continued expansion into stimulation chemicals.

Gulf of Mexico revenues declined $7 million or 44% year over year, driven primarily by the changes and customer drilling and completion plans.

International revenue declined $18 million or 40% year over year with the decline seen across substantially all markets, but particularly in Europe, and North Africa, which had been significantly impacted by COVID-19.

Turning to the corporate office total expenses were $5 $8 million and the first quarter, reflecting a modest improvement from the fourth quarter.

And on a year over year basis, corporate office expenses declined $1 million, primarily driven by a reduction in personnel costs.

SG&A costs were $21 million and the first quarter.

Honestly from the fourth quarter with an increase and industrial solutions, partially offset by reductions in both fluids systems and the corporate office.

On a year over year basis, SG&A costs declined $4 million with reductions in all groups, largely reflecting lower personnel expense and the benefits from other cost reductions.

Interest expense decreased modestly to $2 $4 million and the first quarter.

Half of which reflects noncash amortization of facility fees and discounts.

Our weighted average cash borrowing rate on our outstanding debt is approximately three five per cent.

The first quarter includes a $3 million of income tax expense, despite reporting a pretax loss.

We are currently unable to recognize the tax benefit on our U S losses, and therefore, the income tax expense and the quarter, primarily reflects taxes on foreign earnings.

Our net losses in the first quarter was <unk> <unk> per share, which included a 1% impact from the loss on the purchase and convertible bonds.

This compares to a net loss of <unk> 20 per share and the fourth quarter, which included 12 cents of charges.

And a net one off and <unk> 14 per share and the first quarter of last year, which included two types of charges.

Turning to cash flow cash provided by operating activities was $28 million and the first quarter, which included a $21 million net reduction in working capital.

With the stronger commercial activity, our operating cash flow benefited from an increase in accounts payable while we've continued to drive inventory reductions.

Receivables also provided a benefit for the quarter's cash flow as dsos declined to unusually low levels.

Investing activities used less and $1 million of cash and the first quarter and $9 million of capital investments were largely offset by proceeds from the sales of used mats from our rental fleet, which is part of our standard commercial offering.

Substantially all of the capital investments and the period were deployed and the industrial solutions segment, primarily related to upgrading and expanding our site access rental fleet.

Yeah.

Benefiting from our free cash flow generation, our total debt balance declined $15 million and the quarter to $72 million.

Following the $18 million of convertible debt repurchases. Our primary debt components include the remaining $49 million on convertible notes due in December and $11 million outstanding on our U S asset base and facility, which ones for 2024.

Our cash balance increased $10 million since a year and ending Q1 at $34 million.

All of which resides and our international subsidiaries.

At the end of the quarter for total debt to capital ratio was 13% and net debt to capital ratio was 7% both reflective of our very modest debt.

Now turning to our near term outlook.

As we look ahead, we are encouraged by the improving fundamentals in both business segments that we are closely monitoring and inflationary pressures on raw materials and transportation.

Along with a general shortage of labor and the U S.

And the site and access solutions business, while we've seen industrial end market customer activity recovered to pre COVID-19 levels, we expect to see direct sales pulled back from the strong first quarter and the effect of the pent up demand and customer purchasing and subsides.

Rental and service activity remains robust with revenue is expected to improve sequentially and a low double digit growth rate, reflecting the impact of the strong market environment. Both on the U S and the U K as we continue to build on our market share position.

Meanwhile, revenues from industrial blending are expected to pull back further and the near term as we transition products, although we expect and blending revenues will ramp up and the second half of the year ultimately, surpassing a $10 million quarterly run rate.

Yeah.

Overall, we expect Q2 revenues of roughly $40 million for the industrial solutions segment with operating margins returning to near the Q4 level.

And fluids systems, we're starting to see customers and the international markets begin to move forward with project planning and start ups, including and expanding focus on geothermal drilling, which we think will provide meaningful opportunities over the long term.

The recovery of our international business is a key piece of our segment profitability and the pace of recovery remains dependent upon the vaccine rollout and the lifting of local restrictions.

Although most international markets remains heavily impacted by COVID-19. We currently expect our international revenue will improve in the low thirty's range and Q2, reflecting a low double digit sequential growth rate.

With further strengthening and recovered back to pre COVID-19 levels expected by the end of the year.

In North America, we expect revenue will remain relatively flat and the second quarter with the continued recovery in the U S. Offsetting the seasonal pullback in Canada.

From a margin perspective, we anticipate a stronger revenues from the international market and ongoing U S recovery should help drive the fluids business back into positive EBITDA territory in Q2.

Corporate office spending is expected to increase by roughly $1 million and the Q1 level largely reflecting the timing of long term and incentive expense along with the lifting of salary austerity measures for non executive employees.

With regards to cash flow, we expect capital expenditures and the near term will remain fairly limited with investments being heavily focused on growth opportunities within the industrial solutions segment that provides clear line of sight for stable cash flow and EBITDA generation.

Working capital is likely to increase modestly and the near term.

As we've noted over the past several quarters, we plan to utilize our cash on hand and generated from operations along with the available capacity under our ABL facility to settle the $49 million convertible debt maturity in December.

With our ABL facility balance down to $11 million and improving cash generation from operations and repatriation of excess cash from our international subsidiaries. We remain confident that our projected liquidity will be more than sufficient to support our operational needs beyond the convertible bond and funding.

And with that I'd like to turn the call back over to Paul for his concluding remarks.

Thanks, Greg and the first quarter marked another step forward and the execution of our long term strategy, most notably for quarters performance further demonstrates the value of our industrial solutions diversification and a strategic effort that has been underway for several years with.

And with improving market awareness of the unique value proposition that we provide within the multi billion dollar utilities market 2021 is off to a strong start.

Our industrial solutions segment contributed 38% of our first quarter revenues and we intend to continue and leaning into this market opportunity going forward.

We remain committed to expanding our geographical reach and investing and necessary capital to grow this segment other company.

And as the energy transition gains momentum, it's clear that the utility infrastructure across the globe will require significant expansion and upgrade and we are well positioned to participate and it's meaningful growth.

And fluids systems, we are extremely proud of the progress we've made over the past year to reshape the business, reducing our cost structure harvesting cash on the balance sheet and reducing our net capital employed while at the same time, improving our market position and enhancing customer satisfaction.

But despite the accolades we've recognized that we have and the obligation to our shareholders to deliver consistent returns on capital and weighted.

And I only said theres more work to be done on this front.

Over the past decade, we've made meaningful growth investments and both our infrastructure and capabilities positioning New park as a market leader and the fluids space.

Yet we recognize that the market outlook today is dramatically different than it was when these investments were made and.

And the oil and gas industry normalizes, we will continue to evaluate the performance and outlook of every aspect of our global fluids business.

We will continue to optimize our working capital and vessel rationalize our rough line, including the potential sale of infrastructure and assets that may no longer be needed as we remain firmly committed to delivering and asset light and agile business model that can generate a sufficient return on invested capital.

In terms of cash flow as we said in the past we remain committed to a business model that maintains positive free cash flow through all phases of the industry cycle, something we've consistently demonstrated over the past for years.

Our capital investment priorities remain focused on funding our industrial solutions growth objectives.

And finally, I'd like to notice and we remain encouraged by the continuing market focus on environmental sustainability, which we see as a meaningful tailwind for our environmentally focused product offerings across each of our businesses.

As we've discussed for many years, providing our customers with differentiated technology that works and harmony with the environment has long been part of new parks DNA.

As an example of this we are encouraged by our recent growth and the stimulation chemical space with our transition family of brine tolerant hybrids, Scott City friction reducer technology, which allows our customers to efficiently complete their shale wells using higher loads of profits while lowering their.

Freshwater consumption.

With increasing environmental regulations coming into effect for both here and abroad. We expect this business line to show continued growth and the coming quarters.

To learn more about the benefits of our environmentally focused product offerings. We encourage you to read our 2020 SaaS very report, which can be found on our company's website.

With that I'd like to close the call as I always do I think our shareholders for investing in us and thanking our employees for their hard work and dedication and new park as well as a continued focus on safety.

We'll now take your questions on.

Operator.

Thank you, ladies and gentlemen at this time and will be conducting a question and that takes us and.

And if you'd like to ask you. A question you May press star one on your telephone keypad.

Information and tone will indicate your line is and the question to.

You May press star two if he would like.

Well move your questions on the Q4.

For participants using speaker equipment, and labor and that started to pick up your handset before pressing the star T.

Our first question comes from the line of Daniel Burke with Johnson Rice and company. Please proceed with your question.

Hey, good morning, guys.

And.

Let's see I think.

On the international fluids side, Paul I think I heard you referred to the potential to get back to pre COVID-19 revenue levels by end of year, one and wanted to I wanted to check on that and affirm that and that sort of a high forty's million run rate or just make sure I understood a stood that trajectory a little better sounded constructive.

And Daniel demand and this is David Provost and.

Yeah, and so international has been subdued the last two quarters, we're starting to see some real increases in utility across the board and I think the tender to tender pipeline is strong and so it's certainly through attrition and says to get back to pre COVID-19 levels and.

Have you seen that Q3 Q4.

And you've alluded to that would result in sort of mid to high 40 wages as we exited the year.

Yeah, I would just add to that this is Greg you know the one thing that has been the difficulties to predict through all of this has been the COVID-19 implications on on these markets. So obviously, we maintain a very close eye on that day on these other point I'd just like to make two is that you know we look at the middle East is and area that we expect a lot of growth as we look at that.

Current administration's focus on slowing down on the drilling activity here and the U S and so the win and Bahrain I think it was a very strong stay.

Statement in terms of our capabilities and that part of the world.

Got it okay no. That's it that's a helpful signposts for the model and then Oh, maybe to pivot and too I guess that the mats side of the business.

And again with what I'll caveat surround COVID-19 impacts potentially lingering.

Nice to hear a guide towards double digit growth and Q2 is there anything that would impede the thought that growth could continue at that type of trajectory and the second half of the year.

Yeah, I'll answer that one day, it's Matthew look I think based on what we're seeing right now with quoting activity domestically and large infrastructure projects internationally, particularly in the U K, where there are substantial long term investments being made by the government that is there.

And there's nothing really on the right on it would suggest but things began to slow down materially and so when we bought and cars.

Okay got it and then I guess, maybe just to finish up with one of.

The working capital harvest and in Q1 certainly impressive.

You don't Wanna get wrong footed here, though I'd imagine maybe there is some room for you guys to give back a little on working capital here in the and the near term and any any considerations I'll keep this question maybe specific to the near quarter here and in Q2 that we should think about regarding working cap.

No you hit it spot on.

Yeah, we did have a very strong quarter really be the outlier. There is on the DSO side very very strong quarter, we expect that to normalize a rough order of magnitude.

Our receivables came in nearly $10 million below what is kind of a normalized level. So yeah, I would expect to get back there.

Okay.

Great guys I'll leave it there thank you.

Thanks.

Yeah.

As a reminder, its star one to ask a question.

Yes.

Our next question comes from Marshall Adkins with Raymond James. Please proceed with your question.

I'm back sorry, guys.

Marcia and it's great to hear your voice and Mark.

Yeah, a couple of quick questions right. You you you talked about the supply chain could you elaborate on issues that you may be facing there, whether it's resin or our barite or or or flavor on what you're also.

Mentioned.

A little bit about that it seems like every one and the world is experiencing supply chain issues I just wanted to get your take on what you guys are saying.

Yeah, and Marshall, It's Matthew I'll take it from the I guess and matting. So I'd first look on it.

And anything with thing as resin price inflation.

You know I think I didn't give them the first.

And the first quarter were up over 40% and that area. The other the other issues and starting to play out is as growth returns and she's attracting labor back to the market and I think a lot of people are riding out and stimulus checks before they rejoin the workforce.

That would be the other area for us.

And good morning, David potash and Salt and the fluids perspective, you know what.

With the sudden jump in oil price is definitely driven inflation and their supply chain Ocean freight is a big contributor ocean freight rates are up probably 20% to 30% dig and impact and international business on the North America business.

So C and cost inflation and raw materials for our products, mainly on the oil derivatives, but we are seeing it on on polymers as well and even in the U S. We're starting to see some trucking inflation and interest.

Domestic routes yeah. So I think as as you stated Marshall.

And what we're seeing is is I think pretty consistent with what's very broadly being seen by everyone in the market.

Right and and and just maybe a quick follow up for it.

Your ability to pass on those prices on it I assume again since it's happened not just in our industry, but every industry is fairly good.

Good day pass on those those price.

Price increases yeah, that's what we're working on right now absolutely.

Alright, one last quick one for me Gulf of Mexico Wells on the mid sixties, that's obviously.

A big deal gas looks pretty good you know intuitively that you would think that that's going to lead to pick up and the Gulf.

But offsetting that you kind of you have and administration, that's kind of anti oil and gas out there. So.

Give me your outlook for for the Gulf and what you see how you see that evolving and giving them. The forces that are acting upon and that market.

Okay and this is David again.

Yes.

Q1 was quite slow.

And it's quite slow across the boards and.

Great.

Stable, while it makes me feel closer to get to the Gulf of Mexico longevity of a lot with the rig contractors and long contracts and.

Fire and smoke it works for them.

And the Gulf of Mexico, So I think that that's a strong commitment to the tune of Gulf of Mexico, Inc.

And we're starting to see some of the independents getting back to activity.

How else can you shake out at for year on year.

Sales of the evolution I think it's early and the ear Marshall.

And how do we see that.

I think the Dallas is going to remain steady.

And three in <unk> 2021 and.

I know, there's some other projects queuing up and enrolling so I'm still I'm still pinpoint on on the Gulf of Mexico, and we're obviously watching the dynamics very closely given some of the favorable.

Wednesday.

Got it. Thank you all appreciate it.

Thanks Marshall.

Once again and it is star one to ask a question.

There are no further questions and they kill and like they haven't gone back for management for closing remarks.

Alright, well. Thank you once again for joining us on the call and for your interest and New Park and we look forward to talking to you again next quarter.

Yeah.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

Disconnect your lines at this time and have a wonderful day.