Q2 2021 Newpark Resources Inc Earnings Call

Greetings and welcome to the New Park Resources second quarter earnings Conference call. At this time, all participants are in a listen only mode.

And question and answer session will follow the formal presentation for.

For anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

A reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ken Dennard. Thank you can you may begin.

Thank you operator, and good morning, everyone. We appreciate you joining us for the New Park Resources Conference call and webcast to review second quarter 2021 results.

Participating from the company on today's call are Paul Howes, New Parks, President and Chief Executive Officer, Gregg Piontek, Chief Financial Officer, David Paterson, President on the fluids business and Matthew Lanigan President on the industrial solutions business and following my remarks management will provide a high level commentary on the.

Financial details of the second quarter results and near term outlook before opening the call for Q&A, but before I turn the call over to management and have a few housekeeping details to run through and there'll be a replay of today's call. It will be available via webcast on the company's website at New Park Dot com so on.

Also being reported telephonic replay available until August 18, 2021, and information on how to access features and yesterday's release.

Please note that the information reported on this call speaks only as of today August for 2021.

And therefore, you are advised that time sensitive information may no longer be accurate of any time of replay listening or transcript reading and in addition, the comments made by management. During this conference call may contain forward looking statements.

And the meaning of the United States Federal Securities laws.

These forward looking statements reflect the current views of new parks management.

However, various risks uncertainties and contingencies could cause <unk> actual results performance or achievements to differ materially from those expressed and the statements made by management on.

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

Understood understand certain of those risks and uncertainties and contingencies.

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

And with that behind me I'd like to turn the call over to new parks, President and CEO, Mr. Paul Howes Paul.

Thanks, Ken and good morning, everyone. Our second quarter results reflect another step forward and our strategy execution as we continue to reshape and position the company for sustainable and profitable growth.

And solid day to revenues improved 1% sequentially to $142 million with a 28% increase and international fluids systems, and a 15% improvement and industrial solutions rental and service revenues offsetting the previously anticipated pullback and industrial solutions.

<unk> sales that we discussed on our prior quarter call.

Second quarter, EBITDA generation was $7 million turning to the specifics other segments. Our industrial solutions business continues to demonstrate the value of our diversification efforts as we expand our presence and the power transmission and other industrial end markets and as anticipated coming off the.

Exceptionally strong first quarter product sales for <unk>.

Segment revenues declined 15% sequentially to $45 million and the second quarter as site access product sales pulled back the $10 million for the quarter.

Partially offsetting the product sales reduction rental and service revenues improved 15% sequentially contributing 33 million of revenue and the second quarter, including a record $25 million contribution from the power transmission and other industrial end markets, reflecting strong performer.

And as both in the United States and in the United Kingdom.

Industrial blending revenues also pulled back that $2 million and the second quarter, reflecting the anticipated impact of product transition with our primary customer.

And with a lower revenue our industrial solutions operating margins declined modestly to 22% and the second quarter generating $15 million of EBITDA.

Reflecting on our first half 2020.1 performance, it's worth highlighting that the power transmission and other industrial end markets contributed $75 million of our site and access solution revenues. This annualized.

<unk> run rate of $150 million represents a 30% improvement over the previous high of $115 million achieved in 2018, illustrating the continued momentum and our market penetration.

Meanwhile, our historical upstream oil and gas and market contributed less than 20% on the first half 2021 segment revenues, reflecting the lower industry activity and our focus on the more stable industrial end markets.

And the fluids systems segment revenues improved 11% sequentially benefiting from project startups and the early phases of recovery within certain international markets. Following the COVID-19 related disruptions that significantly impacted the previous for quarters.

Our international revenues improved 28% sequentially to $35 million and the second quarter benefiting primarily from improvements in Europe and North Africa.

And North America revenues improved modestly to $62 million with a 19% improvement and the U S largely offset by the seasonal pullback in Canada.

Despite the revenue growth and positive earnings contributions from our international businesses. The fluids segment remained below EBITDA breakeven and the second quarter impacted by elevated operating expenses, including employee severance and costs associated with our ongoing inventory rationalization efforts.

In addition, the quarter was impacted by and unfavorable sales mix on U S land, which we expect and normalize going forward.

During the second quarter I'm very pleased to highlight that we wanted to notable fluids contracts, including a 3 year award and Thailand to provide drilling and completion fluids on land, which reflects our first entry into the southeast Asian market.

This contract is expected to provide approximately $25 million of revenue over the 3 year term with work scheduled to begin in the third quarter.

In addition, as part of the latest shell oil tender and the Gulf of Mexico. We were awarded a contract to continue providing drilling fluids reservoir drilling fluids and related services for 2 deepwater Drillships, which we expect will generate approximately $30 million on revenue annually.

And we believe the recent contract awards are a direct result of our continued focus on providing differentiated technology and superior customer service.

As global activity improves and the energy market, we feel we are well positioned to capture our fair share of the value chain. While also continuing to reshape our cost structure to generate profitable growth and provide an acceptable return on capital.

And with that and we'll hand, the call over to Greg to discuss in more detail the financials for the second 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 for the industrial solutions segment declined 15% sequentially to $45 million and the second quarter, which includes a $43 million contribution from the site and access solutions business.

And $2 million from industrial blending.

The sequential decline primarily reflects the anticipated $10 million reduction and product sales. Following the exceptionally strong Q1 performance along with a $3 million decline and industrial blending product sales.

Rental and service revenues improved 15% on a sequential basis coming in at $33 million for the second quarter, which reflects our strongest quarter in nearly 2 years.

The sequential growth was driven by robust demand in both the U S and the United Kingdom with the U S. Benefiting from a few large scale utility projects completed and the second quarter.

As a result of the $8 million decline in revenues and the industrial solutions segment operating income declined by $3 million sequentially to $10 million contributing $15 million of EBITDA and the second quarter.

As highlighted in yesterday's press release. The Q2 result included a $1 million gain associated with the enforcement of our patent rights.

Comparing to the second quarter of last year revenues from the site and access solutions business increased $16 million or 59%.

This increase includes and $11 million or 50% improvement in rental and service revenues, along with a $5 million improvement and product sales.

Looking at the first half 2020, 1 for the industrial solutions business as Paul touched on it's notable that we're continuing to see a significant shift within our segment revenue mix.

More specifically the power transmission and market contributes more than half of our industrial solutions segment revenues, while our historical E&P market activity accounts for less than 20%.

Turning to fluid systems total segment revenues improved by 11% sequentially and $97 million from the second quarter.

Revenues from U S land and increased $10 million or 24% sequentially, reflecting the benefit from the 16% improvement and market rig count along with an increase and market share which stands at roughly 20%.

All U S land regions contributed to the sequential revenue improvement.

Revenues from the Gulf of Mexico declined modestly contributing $8 million and the second quarter.

In Canada revenues, followed the typical seasonal pattern through spring breakup declining 61% sequentially to $5 million and the second quarter.

Outside of North America as Paul noted.

We are beginning to see the early signs of recovery, particularly in Europe, and North Africa International.

Revenues improved $8 million sequentially to $35 million and the second quarter as delayed projects moved forward, although it's worth noting that COVID-19 related restrictions continue to suppress customer activity, particularly in the middle East.

The fluids systems operating loss improved slightly on a sequential basis coming in at $7 million for the second quarter, which includes the $600000 of severance charges and called out in yesterday's press release.

As Paul touched on and while our international fluids business performance was relatively in line with our expectations. Our U S operations were negatively impacted by elevated expenses in the quarter, along with and unfavorable sales mix.

On a year over year basis, our fluids systems revenues increased $22 million for 30%.

U S land revenues increased by $21 million, or 74%, which significantly outpaced the 16% increase in market rig count over this period.

The strong revenue growth, primarily reflects our increased market share and improvements in customer spending per well.

Along with higher barite sales and our continued expansion into stimulation chemicals.

Gulf of Mexico revenues declined $6 million or 44% year over year.

Driven primarily by the changes and customer drilling and completion plans, including a strong contribution from completion fluids in the prior year quarter.

International revenues improved $6 million or 22% year over year benefiting from new project startups and the recovery of customer activity in several European markets and Algeria, while the middle East remains roughly $2 million below prior year levels, reflecting the ongoing COVID-19 challenges.

SG&A costs were $23 million and the second quarter, which includes $6.9 million of corporate office expenses.

<unk>, a $2 million increase from both the prior quarter as well as the second quarter of last year.

The sequential and year over year increase was primarily attributable to higher long term incentive expense.

Including awards tied to a relative share price performance as well as the April 1st restoration of certain austerity measures, including the company matching contributions to our U S retirement plan.

Interest expense decreased modestly to $2.2 million and the second quarter nearly half of which reflects noncash amortization of facility fees and discounts our weighted average cash borrowing rate on our outstanding debt is approximately 3.5%.

The second quarter includes a $400000 income tax expense despite reporting a pretax loss we.

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

Our net loss and the second quarter was <unk> <unk> per share, which compares to a net loss of <unk> <unk> per share and the first quarter and a net loss of 29 per share and the second quarter of last year, which included 9 charges.

Turning to cash flow net working capital changes used $7 million of cash and the second quarter.

As we saw on Dsos return as anticipated to a more typical level from the unusually strong performance achieved in the prior quarter.

With the higher working capital cash used in operating activities was a modest $2 million for the quarter and.

Investing activities again use less and $1 million of cash and the second quarter.

With $2 million of capital investments largely offset by proceeds from sales of used mats from our rental fleet and other underutilized assets.

We ended the second quarter with a total debt balance of $78 million and a cash balance of $35 million, resulting and a modest 14% debt to capital ratio and 8% net debt to capital ratio.

As highlighted in yesterday's press release, we have satisfied the requirements to include $24 million of eligible rental mats and the borrowing availability under our ABL facility, which increases our total ABL availability to $108 million and provide sufficient capacity to fund the $49 million.

Convertible note maturity later this year.

As such the convertible notes are now classified as long term debt and the June 32021 balance sheet.

Now turning to our near term outlook.

As we look ahead, we are encouraged by the improving longer term fundamentals in both business segments.

Though we continue to see significant inflationary pressures on raw materials and transportation.

We are also closely monitoring the evolving situation with the COVID-19 variance around the world.

And the site and access solutions business.

While we are very pleased with the strong growth rate and targeted end markets. We expect the near term market activity in the utility sector will face the typical seasonal slowdown seen in past years and utility companies reduce project activity during the period of high electricity demand associated with the elevated summer temperatures.

Although we are continuing to execute our geographic expansion efforts and we anticipate that Q3 rental and service revenues will return to near Q1 levels.

Looking beyond Q3, we continue to be encouraged by the robust pipeline of opportunities as we execute our growth strategy.

On the product sales side, although it is always difficult to predict the timing of sales activity. We expect revenues will remain relatively in line with Q2 in the near term.

With the fourth quarter expected to benefit from the year and strength in the utility sector.

Meanwhile, revenues from industrial blending are expected to remain fairly limited and the near term.

As our primary customer and this business has recently informed us that they are experiencing a decline and demand for their disinfectants and cleaning products and the wake of the evolving COVID-19 recovery and the U S.

In total we expect Q3 revenues for the industrial solutions segment will pullback modestly to roughly $40 million.

And with the seasonal slowdown and rental project activity as well as our ongoing investments to support our growth strategy, we expect operating margins to decline into the low to mid teens for the third quarter.

Which should reflect the softest quarterly results for the year.

Beyond Q3, we expect both revenues and operating margin will rebound in Q4 benefiting from the year and product sales demand and our ongoing penetration and the power transmission and other industrial markets.

And fluids systems, we continue to expect our international markets will recover through the second half of 2021, ultimately returning to pre COVID-19 levels by the end of the year.

With the lingering effects of Covid, particularly in the Middle East, We expect international revenues will increase by roughly 10% in Q3 with a more pronounced improvement and Q4.

In addition, we expect to see strong quarter over quarter growth and North America, and Q3 led by a robust recovery and Canada from the seasonal trough and the continued improvements and U S land.

And the Gulf of Mexico, We expect Q3 revenues will remain fairly in line with the second quarter as of Q3 startup on the second deepwater drillship will likely offset the decline in completion fluids products, which are excluded from the recent contract award.

In total we anticipate our fluids segment revenues will grow by a low teens percentage in Q3, which should bring the segment closer to breakeven operating income for the quarter with a return to positive income expected in Q4.

With regard to Capex, we expect expenditures in the near term will remain fairly limited with investments focused on growth opportunities within the industrial solutions segment.

Corporate office expense is expected to increase by roughly $1 million from the Q2 level largely reflecting the timing of long term performance based incentive expense.

Along with the full lifting of salary austerity measures put in place during 2020.

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

Thanks, Greg overall I am pleased with the continuing progress we've made and the second quarter. Looking ahead, there are obvious ongoing market hurdles to navigate including meaningful cost inflation as well as the elevated uncertainty regarding the impact of the COVID-19 variance around the world.

With that said, we remain encouraged by the longer term market fundamentals and all other key industries that we serve which we believe provides the opportunity for sustainable and profitable growth over the long term.

Further with our very modest debt level and.

And our capital like fluids business model, we are well positioned to fund growth objectives and generate strong free cash flow over the long term.

Our key priorities remain unchanged, beginning with our expansion and diversification of the industrial solutions business.

As we continue to execute on our strategy, we're very pleased with the growing market awareness of the unique value proposition that we provide within the multibillion dollar power transmission market.

Benefiting from our strong utility sector growth, our industrial solutions segment contributed 35% of our first half revenues, while consistently generating strong profitability and returns and expanding this business remains our highest priority, including expansion of our geographical reach and investing in the necessary.

Capital to support our targeted growth plans.

On the industrial blending operations, although we are disappointed by the shift and outlook that our primary customer is seeing and the demand for disinfectants and cleaning products. It's important to highlight that we view this reduction and near term demand as it typical challenge for our new business over.

Over the past year, the surge and cleaning product demand associated with the fight against Covid provided us an opportunity to quickly penetrate the industrial blending market and showcase our agility and capabilities.

During a period of extreme emergency our ability to move quickly execute every facet of the manufacturing process and deliver quality and consistent products was met with extremely high praise from our customers.

Our near term priority for this business remains unchanged to capitalize upon our proven capabilities to build a diversified industrial and specialty chemical blending business.

And fluids systems, we are proud of the efforts of our global team and reshaping the business, while maintaining the highest quality of service for our customers inter.

Internationally for the worst of Covid, hopefully behind US we feel we are well positioned to benefit from what many expect to be a robust multi year growth cycle.

And important to note debt prior to Covid, our international operations and maintained a long history of stable and profitable performance.

And despite the challenges of the past 18 months, we've continued to build upon our global relationships expanding in key markets, where we expect to play a meaningful role going forward.

We've also added to our extensive resume and geothermal drilling a small but growing area that we believe we will see a tailwind and the energy transition.

We expect our international fluids growth will outpace north American market and the years to come and driven primarily by our extensive geographical footprint and the EMEA region and our expanding presence in Asia Pacific.

And the U S fluids business other market outlook continues to strengthen and we're taking further actions to scale the business for what we expect to remain a structurally smaller market and the future and.

In addition, with a U S oil and gas industry now benefiting from stronger commodity prices. Our near term focus also includes driving the much needed price increases.

We expect both of our cost and pricing actions on U S. Land will continue through the second half of the year as we strive to generate consistent cash flow and acceptable return on invested capital.

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

We'll now take your questions on.

Operator.

Thank you we will now be conducting a question and answer session if.

And if you would like to ask a question. Please press star and 1 on your telephone and keeping the confirmation tone will indicate your line is and the question in queue.

You may price, starting soon and if you'd like to remove your question from the queue for.

Participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star keys.

1 moment, please while we poll for questions.

Yeah.

And our first question is from Daniel Burke with Johnson Rice and company LLC. Please proceed with your question Yeah.

Yeah, Hey, guys good morning.

Let's see maybe maybe on the fluids side.

You referenced unfavorable sales mix and the U S market can you help me better understand that impact and our ongoing inventory rationalization that that makes sense, but use the word ongoing what's what's the duration of that program I would imagine it is helpful to topline and obviously less so to.

Bottomline, but but help me understand the interplay of those dynamics on the U S side.

Hey, Good morning. This is David Paterson on on the first point on the product mix.

Q2, we saw obviously on an unusually high amount of liquid oil based mud and the product mix significantly higher than we would traditionally expect we see that normalizing into Q3, there was a lot of.

Total of operations with downhole losses for that inflated the consumption of the liquid mud and not as a negative impact on the margins yes.

And I would add to that and that's that's particularly Commoditized area and then I think.

Adding to that you you just have our ongoing efforts to rationalize our excess inventories we've talked about that and the past. This is an area that's going to take several quarters to bleed off and we're just continuing to work through that so you have not only the the sale of that excess inventory, which negatively impacts the overall margin and you have.

Additional cost transportation and those sorts of things that factor into it as well so it hits you on a number of fronts, but ultimately what youre doing is working on your working capital down Youre monetizing the asset and then and then holding and at that level going forward.

Got it that's helpful and then Greg maybe maybe just to revisit the fluids margin guidance I think you'd framed on the margin guidance in terms of Op Inc.

Since the EBITDA breakeven bogey has been out there before.

And is breakeven EBITDA possible in fluids in Q3 or is that also a a queue for ambition, assuming I heard the guidance correctly, yes.

Yes overall.

Mentioned, we with the topline growth, we get closer to that op income breakeven level and then back into positive territory in Q4.

Recognizing there are.

And the various issues that we're navigating the challenges that we're navigating.

We would expect that topline growth to be enough to get us to EBITDA positive here in Q3.

Okay and then.

Maybe another question just spanning both segments are no surprise to hear references of course took.

Cost inflation, but I mean, any way to kind of address where where cost inflation is most acute raw materials I assume is where you'll see it on both sides of the business and you know.

And what you can do to mitigate that what what discussions are like in terms of passing through those escalators.

And your customer base.

Yes.

Take that first and then I'll have the 2 operating presence comment a little bit on that but clearly on the raw materials side, that's where we're seeing it but then also on transportation.

And that's the other area, where we're seeing inflationary costs, so but more specific to the business as Matthew on the industrial solutions, Yes, Dan Youll look I think it's most acute and our business on the on the product sales side with raw material price increases this substantial on a year over year basis, we we can manage that through discussions with Paul.

And on that pricing where possible. They otherwise we could do it is look at ultimate Chemistries and the gain and the construction of the met to help dampen that down. So we have a couple of lasers that we can look at there but.

And still still a reasonably strong headwind at this point.

Yeah, Don Hussein and fluids, so very strong headwind, we're seeing pressures across the supply chain given the hike and oil price a lot of our products are oil derivatives. So there's been a sharp increase in base oils et cetera for a cost container shortages and also having having a significant headwind for the business and also Paul.

A big part of for water based mud supply chain and there's been a lot of pressure on raw materials on polymers. We've already started on and proactive on I would say meaningful conversations with our customers to pass that on our teams are very focused on doing that today and also we're looking at how do we diversify the supply chain going forward and the.

Future, so a lot of proactive actions happening and fluids to mitigate against these headwinds.

Okay.

Debt.

That's helpful. I'll I'll Cram, 1 last 1 and guys on a on the on the mats side and of course, a specific to utilities and to an extent or power transmission and and industrial.

Imagine those those customers as opposed to oil and gas customers have better visibility into sort of they're there they're longer dated plans.

And so.

And I wouldn't even call it a hiccup, but you've got the seasonal.

Dip here in Q3, 'twenty, 1, but as you look to 2022.

Is there any reason why.

You all shouldn't continue to enjoy some pretty good structural growth in that business.

Yeah, Danielle it's Matthew again look I think at a macro theme that is that youre absolutely correct there.

Obviously timing of.

That variance and supply chain issues that are caused by that wheel.

On the utilities and not going to start projects and tight grids, Dan and to lift that all their ducks lined up with all of the components they need for that so and.

Permits in place et cetera, et cetera, but as a macro thing and you're absolutely correct. It is just going to be around any variability that COVID-19 throws that way and so you'll get 22 or 23, certainly the whole energy transition, there's not sufficient capacity and the electrical grid across this country to put a lot of evs on it and so the macro trends.

And I'd, just 22, but 'twenty 3 and we feel that they're very solid long term trends and this sector.

Got it okay, guys I'll leave it there for now thank you for the time.

Thank you Susan.

Yes.

And our next question is from them.

Lynwood paint and capital management. Please proceed with your question.

And thank you I have 2 questions first of all would you remind us last quarter.

Capex it was a much larger what was that designated for and did we understand correctly adhere to day, you said that the level of Capex and the Q2 was more normal going forward.

Yes. This is Greg yes.

Yes, so in terms of the Capex that we had in Q1 heavily concentrated in the mass business and particularly supporting.

And the rental fleet.

And a lot of debt was to meet the demands I mentioned a couple of large scale projects here in Q2 that was the reason for those additions obviously as things have now.

Slowed down those large projects have completed we're going into the season, that's naturally a little bit softer we don't see a need for any meaningful capex here in the near term and so we would expect it to be.

Very limited.

Thank you and then what would you.

Give us an update please on the completion and stimulation.

We would penetration efforts.

Okay. So on Bill good morning, David <unk> here.

From a <unk> perspective, we had a pretty solid quarter actually globally.

We actually were involved and fracking more stages and we did in Q1, which was a strong quarter revenues were down slightly but I think we did a very nice job, both expanding our customer footprint and and west, Texas, but also expanding our geographical footprint on U S lawn and picking up some work and the northeast which was a first.

I think we also continued to demonstrate some excellent performance with their new Transocean series of <unk>. These are designed to be used and produced water applications. So some very good ESG benefits associated with that and reducing the amount of fresh water and.

Just completed a successful trial with a large independent customer and the Delaware. So I think very pleased to see the traction that we're getting with that also our business and spin, although still quite small and continues to gain traction and the middle East and actually we had our first sales in continental Europe. So over.

I think steady progress made their completion fluids globally.

Continues to be our infant and integral part of our integrated fluids off route.

We were not awarded the completion fluids contract and the Gulf of Mexico.

And but we were awarded a second deepwater rig very pleased to get the second deepwater rig because this has been designated.

For the exploration work rig for shell and.

Probably drilling the most challenging wells that we see and the Gulf of Mexico. So I think is really testament to the trust and our team of technology underperformance of what we're doing and the Gulf of Mexico.

David That's really helpful. Let me take that 1 step further if I, if I may coming back to the stimulation chemicals.

What is it about the characteristics of your offering that's leading to this this success and and multiple multiple regions.

I think it's the you know we have a tailored offering build rates. So we're staying very close to our customers.

On the technology, where we really differentiate is and the produced water.

On applications, where and avoiding the use of freshwater because <unk> performed extremely well in terms of current capacity.

And the and the brine plays obviously with ESG pressures ramping up on the U S land and globally. This is a key property, where we actually are and a very strong competitive position and the market building.

<unk> on the high volume friction Reducers and so that allows you then to <unk>.

High viscosity friction reducer allows you then to get more of the Frac sand up into the well and frac more efficiently with produced water. So it has tremendous ESG benefits youre starting to see some regions thinking about moving away from freshwater so it gives us kind of a tailwind on on our product.

And we feel very good about.

Great. Thank you all for the commentary.

And as needed and we have this does concludes today's question and answer session.

And therefore, I would like to turn the floor back over to management for closing remarks.

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

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

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