Q1 2023 Newpark Resources Earnings Call

Greetings and welcome to the New Park Resources first quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

And as a reminder, this conference is being recorded and it is now my pleasure to introduce to you Ken Dennard.

Thank you Ken 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 first quarter 2023 results.

Dissipate in from the company in today's call are Matthew Lanigan, New Parks, President and Chief Executive Officer, Gregg Piontek, Chief Financial Officer.

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

Before I turn over the call I have a few housekeeping items to run through there'll be a replay of today's call will be available by webcast on the company's website at <unk> Dot com it'll also be a telephonic Lee recorded replay available until May 17, 2023 and that information on how to access is included in.

Yesterday's release.

Please note that information reported on this call speaks only as of today may three 2023, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management. During this conference call may contain forward looking statements within the meaning of the United States Federal Securities laws.

The listener is encouraged to read the annual report on Form 10-K quarterly reports on Form 10-Q, and current reports on form 8-K to understand certain of those risks uncertainties and contingencies.

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

I will now with that behind me I'd like to turn the call over to new parks, President and CEO , Mr. Matthew Lanigan Matthew.

Good morning, everyone.

Our first quarter 2023 continued the momentum from the fourth quarter marked by solid performance, both financially and against our stated initiatives.

Financial performance was highlighted by the strongest Q1 revenue level for our industrial solutions business in our history with $56 million in revenue generating $20 million in EBITDA validating the strength of our offering and the robustness of market demand.

The utilities and industrial end markets contributed nearly 80% of our industrial segment revenues and we are pleased with our progress to silicon for a new park as a leader in the development of sustainable technologies and services supporting the energy transition.

Within fluids Q1 was highlighted by the strongest revenue quarter in our history in the EMEA region and continued solid performance in our Canadian business, along with ongoing progress in our efforts to improve the returns on invested capital.

As expected we saw strong cash flow generation from both businesses, which contributed to a reduction of debt and the return of capital to shareholders via the repurchase of a further 4% of our outstanding shares in the quarter.

Consolidated revenues were $200 million in the first quarter, including $144 million from fluids systems. Following the Q4 divestitures, while the industrial business contributed $56 million.

Adjusted EBITDA was $21 million for the quarter and adjusted EPS improved 28% sequentially to nine cents per diluted share.

Greg will cover more specifics of the financial results in a few moments however, before I hand, the call over to him I wanted to provide an update on our progress against the key priorities highlighted in our February call.

We are pleased with the progress we've made in recent months, taking meaningful steps forward to repositioning our company to organize around the strong growth opportunity in performance of our industrial solutions business, while continuing to monetize investments and reduce the cost and complexity with in our fluids business.

As discussed in February our first priority for 2023 is to drive operating cost optimization and efficiency improvements across every aspect available reliable operational footprint.

Having spent most of 2020 to reshaping our fluids systems division to be a more agile and capital light business. Our efforts in recent months have been primarily focused on overhead cost reductions that were made possible by the divestitures.

We have implemented several changes in recent weeks intended to reduce management layers and simplify our business support activities, particularly within our fluids systems and corporate office organizations.

On that note I'd like to extend my sincere thanks to chip.

Served as our general counsel and Chief compliance officer for the last five years and recently left new box as a part of these cost reduction efforts.

We wish chip every success going forward.

In addition, we have recently shut down our U S stimulation chemicals business, which was unable to demonstrate a path to profitability and we are also in the process of winding down operations in Chile, as well as closing down several nonoperational in subscale entities throughout the EMEA region.

While cost optimization efforts are ongoing our companywide actions today translate to roughly $6 million in annual recurring cost savings with the benefits being realized over the next few quarters.

Looking ahead, we will continue to streamline and drive a heads both in our corporate and divisional level as we work to further simplify our business and moved decision, making closer to our key end markets. While also continuing to take decisive actions to monetize investments and underperforming businesses and evaluate our value enhancing strategic portfolio options.

We believe strongly that simplifying our support cost structure to reflect the increasingly agile environments in which new park operates is critical to ensuring that our businesses can continue to deliver world class products and services and generate acceptable returns.

Our second priority is to focus investment capital on the growth of our specialty rental and services business.

At this point I'm pleased to highlight that in the first quarter, we invested nearly $7 million in industrial solutions, primarily to expand our rental fleet in support of our growth in the utility sector.

We also began production of our new <unk> 800 series Mats, which fully integrates with our existing junior Vice met format and offers a nearly 15% reduction in white, therefore, driving further efficiency in transportation costs and associated carbon emissions without impacting product performance.

As we roll this new product into our rental fleet in the coming months, we're excited to showcase New park once again as the industry innovator for heavy duty composite matting, having the lightest weight product on the market.

Our focus on growing the industrial solutions segment is showing tangible results with Q1 trailing 12 month revenues now at $213 million, which reflects an 11% improvement from the full year 2022 revenues.

With the strong start to the year, we are confident that industrial solutions can deliver mid to upper teens top line growth rate in 2023, while maintaining solid operating margins.

Funding, our continued expansion into the utilities and critical infrastructure markets remains our highest capital and resource priority.

And finally, our third priority is our commitment to maintaining a strong balance sheet and using excess cash generation to reduce debt and return value to our shareholders.

During the first quarter, we generated $23 million of free cash flow, while the wind down of retained assets from last year's Gulf of Mexico divestitures generated a further $7 million of cash.

Our usage of the cash was balanced with $50 million in debt reduction and $15 million of share repurchases.

I'd like to highlight in addition to the $4 4 million shares purchased in Q4, and the $3 4 million shares repurchased in the first quarter. We have also repurchased one 2 million additional shares in April .

Including the Q2 activity, we've now repurchased 10% of our outstanding shares over the past six months, while our net leverage stands below one turn of adjusted EBITDA.

We believe that the combination of funding our industrial solutions growth plans, while balancing our debt reduction and returning value to shareholders via our share repurchase program represents a meaningful opportunity for long term shareholder value creation.

And now I'd like to hand, the call over to Greg to provide more color on the specifics of the financials for the quarter Greg.

Thanks, Matthew and good morning, everyone.

I'll start with the specifics of the segment and consolidated financial results for the quarter before providing an update on our near term outlook.

As Matthew touched on in the first quarter was highlighted by strong performance from industrial solutions, reflecting our continued success penetrating and expanding our presence in the multibillion dollar utility infrastructure market.

As expected following the seasonally strong Q4 result, total industrial solutions revenues pulled back modestly sequentially, but grew 58% year over year with.

With the business posting first quarter revenues of $56 million, the segment's strongest first quarter revenue in our history.

The first quarter once again benefited from the robust demand from utility infrastructure projects impacting both rental and service and direct sales activity.

Following the exceptionally strong Q4 project activity rental and service revenues pulled back somewhat to $36 million in the first quarter.

The Q1 result reflects a 17% improvement year over year, driven by a combination of stronger pricing and increased volume following our fleet expansion investments during 2022.

Product sales contributed $19 million of revenues in the first quarter as the robust demand from the utility sector has improved the quarterly stability in product sales volumes.

As Matthew touched on for the trailing four quarters industrial solutions generated $213 million of revenues, including $162 million of revenue from utilities, and industrial markets and delivered $74 million of adjusted EBITDA, a 35% adjusted EBITDA margin.

Yeah.

Notably we've seen the stability of the segments quarterly revenue profit and cash generation continuing to improve as we expand our presence within the utility sector.

In fluids systems. Following the completion of the previously announced divestitures in the fourth quarter, our focus remains on strengthening our position within key markets, where customers value our differentiated fluids offering.

While continuing to streamline our business support and monetizing working capital in areas that no longer demonstrates a clear pathway to generating sufficient returns.

During the first quarter, we reduced our net capital employed in the fluids systems business by $22 million.

Largely from the ongoing wind down of assets remaining from the divestitures.

The fluids segment generated $144 million of revenues and adjusted EBITDA of $8 $7 million in the first quarter or a 6% adjusted EBITDA margin.

The Excalibur, our divestiture revenues from North America land operations decreased 5% sequentially.

As declines in the U S, including the effects of elevated downhole losses on a number of projects in the prior quarter were partially offset by strong seasonal growth in Canada.

Revenues from international markets improved 2% on a sequential basis as the effect of our wind down of operations in Chile.

It's more than offset by improvement in the EMEA region, which posted its strongest revenue quarter in our history.

The first quarter segment operating margin from ongoing activities was four 7% down from five 3% in the prior quarter, primarily reflecting the effects of lower revenue in U S land.

Notably international pricing has improved in the past quarter. So the effects in Q1 were largely offset by a weaker product sales mix.

As of the end of the first quarter. The fluids business has nearly $220 million of net working capital.

<unk>, primarily of inventory and receivables, which represents roughly 85% of the segments net capital employed.

SG&A expenses increased on both a sequential and year over year basis, primarily reflecting the effects of nearly $1 million of first quarter 2023 spending on strategic planning activities and an organizational design project.

Interest expense declined sequentially, driven by reduced debt levels, but increased year over year, largely reflective of the sharp increase in borrowing rates throughout the second half of 2022.

Tax expense was $2 $1 million in the quarter, reflecting a 27% effective tax rate.

Adjusted EPS improved 28% sequentially to nine cents per diluted share in the first quarter, reflecting both the stronger adjusted net income and the decline in our shares outstanding.

In terms of cash flow, we had a solid start to the year.

Reflecting the benefits of our recent divestitures and the ongoing business transformation.

Free cash flow for the quarter was $23 million, including operating cash flow of $29 million, while using $7 million to fund capital investments the vast majority of which support the expansion of our rental fleet in the utility sector.

As Matthew touched on we used our cash generation in the quarter to fund a $15 million reduction in debt and $15 million of share repurchases.

Reflecting the full impact of the additional April share purchases, our outstanding share count now stands at $85 million down 10% from the 94 million shares outstanding just two quarters ago.

Now turning to our near term operational outlook.

We remain encouraged by the strong fundamentals for utility infrastructure spending, which we expect will provide a multiyear tailwind for our industrial solutions growth.

For fluids, while we're seeing the effects of the lower natural gas prices impacting certain basins in the U S. In the near term we are encouraged by the mid and longer term outlook for the North America and EMEA markets as we continue to rightsize, our cost structure monetize working capital and focus our footprint in key markets that demonstrate.

<unk> ability to generate a sufficient return.

As we look specifically at the second quarter for industrial solutions, we expect rental and service revenues to improve sequentially benefiting from the recent startup of several utility infrastructure projects.

We also continue to see strength in the direct sales opportunity pipeline.

Overall, we expect our industrial solutions segment will show modest year over year improvements in both revenues and EBITDA as compared to the second quarter of last year.

For fluids, we expect revenues to pull back roughly 15% sequentially, reflecting the typical seasonal effect of spring breakup in Canada, and a lower contribution from the U S, which is impacted both by market softness and our ongoing focus on price discipline.

International revenues are expected to remain relatively stable benefiting from the continuing strength in customer activity.

With respect to operating margins, while we expect EMEA to see margins improve sequentially and we begin to see additional benefits from our ongoing cost reduction efforts the impact of the lower revenues.

We will more than offset these benefits, resulting in an operating margin likely in the low single digits prior to any restructuring charges.

Corporate expense is expected to improve modestly in Q2 prior to any restructuring charges as we wrap up our strategic planning projects.

Looking beyond Q2, we expect corporate office spending will decrease further reflecting the completion of our strategic planning work and the effects of roughly $2 million of annual cost savings from actions executed to date.

As we continue to reduce our debt, we expect interest expense to reduce modestly while the effective tax rate will likely remain below 30% fairly in line with Q1.

We expect strong free cash flow generation to continue in the second quarter, primarily benefiting from the anticipated solid EBITDA generation as well as meaningful reductions in working capital primarily in the fluids business as we maintain our focus on improving returns.

We expect our second quarter cash generation will primarily be used to further reduce our debt and fund our growth and growth investments in industrial solutions.

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

Thanks, Greg.

Industrial solutions as our primary profit driver today, and we expect that within the next few quarters. This business will also represent the majority of our invested capital where we believe the strong market fundamentals in the utility and critical infrastructure markets will support a double digit annual growth rate for our industrial business for years to come.

We remain committed to prioritizing capital into our expansion in this division further positioning new box as a scaled specialty rental and infrastructure services company, while reducing our presence and exposure within oil and gas in markets.

We plan to continue strengthening the financial performance of our fluids business, which has consistently been recognized by the industry as a technology and service leader in both conventional oil and gas and GSM O markets.

Optimizing investment in areas of the business that do not have a clear pathway to meeting profitability requirements will remain a priority as we seek to improve returns and the capital deployed in this division.

We believe that by continuing to take meaningful steps to strengthen the financial performance of our fluids segment and reshape our balance sheet, we will be able to generate consistent free cash flow, while improving our returns in that division, which in turn will provide us with more flexibility as we continue to execute industrial growth plans and thoughtfully evaluate.

Each of our strategic portfolio options.

I'm enormously proud of our business units and have dedicated staff and I remain optimistic about the year ahead.

And with that I'd like to close by thanking our shareholders for investing in us and thanking our employees for their hard work and their continued focus on compliance and safety.

We will now take your questions operator.

Thank you Sir we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.

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

And the first question comes from the line of Bill <unk> with Titan Capital. Please proceed with your question.

Thank you Oh, let me start if I could with the mats business.

Last quarter, you said that pricing had improved for mats and thankfully he made reference to that again not hearing your opening remarks would you discuss that.

The pricing dynamic that you're experiencing.

And how you see this playing out for the remainder of the year.

Sure Bill it's Greg.

So the pricing dynamic over the past year, we've seen kind of steadily improve as we went through the back half of the year I think that's that's really a reflection of kind of the robust demand that demand dynamics that you have in the marketplace.

As we have noted in Q4 that was a extremely strong quarter in terms of.

It was very high utilization.

Some some call out work that was at particularly higher prices that benefited we didn't see that pull back somewhat.

Kind of modestly here as we went into Q1, which was very much what we expected I think as you look at it today and you look at it going forward, we see it as fairly stable.

And is there.

Anything that you can do either with innovation with the mats or service that will move pricing up further or really would should we anticipate.

Any margin expansion that you would have to be a function of efficiencies as far as that business becomes larger.

Yes, Bill. This is Matthew look I think I think on the overall pricing, it's going to be more of a mix related issue in terms of where that where we're putting the product down geographically and what the specifics of the particular contracts that or.

Projects that were working on.

Beyond that I think you're spot on I think it's gonna be transportation efficiencies, obviously longer term as we introduce more of the lighter white map into into the fleet, we're going to get a lift in transportation efficiency from that but I think when you think of pricing, it's going to be more project related in terms of.

In terms of that that lever and then the rest will come from operational efficiency.

Great.

That's helpful and and then I think you called out that the U K was a bit slower with them at a matte revenues would you talk through that in a M and the dynamics that you're seeing and in that part of the world.

Yes.

UK has been actually relatively stable over the past few quarters, Yeah, I look at Q3 Q4 and into Q1, it's been a pretty consistent contributor now that is a fairly small piece of the business.

Mid mid to upper single digits in terms of the percentage of revenue that comes from the UK.

Got it.

I can either go back in the queue or I've got a couple more questions that I'll hit you with if you will.

I'll I'll keep going keep her own.

Okay. So the.

Fluids business you had the facility exit costs does that tie back to our to the businesses that you referenced that you exited the stimulation chemical and closing down Chile or is there something more.

To that.

For the most part the costs that we incurred in the first quarter you do have a certain piece of severance and such that that went along with the organizational changes stimulation chemical et cetera, but the lion's share of it was actually Gulf of Mexico related.

And that's just kind of a follow on wind down.

Of.

That facility here following the Q4 divestiture transaction.

Okay. Thank you and so there was not a lot of cost to exit the either a stimulation chemicals or Kelly.

Correct.

Thank you and then.

I think.

But there's also a reference to efforts to flatten the fluids organization would you would you talk through that please.

Yeah sure I'll address that one I think as we look at the business and the way things are playing out here in terms of the.

Some of the some of the layers that we've added on on the corporate overhead structure to manage product lines.

Stimulation being one of them that we're now kind of exiting not saying a pathway to acceptable returns there and starting to think of the business more regionally than with a kind of global I ever saw it moving decision, making decision making closer to the customers.

And kind of looking at potential efficiencies between divisions and eliminating layers, that's really where we're looking to drive that level of efficiency.

Really as you look at the simplifying the business streamlining the overall operation that has a knock on effect not only at kind of that division level, but then the corporate overhead as well because youre just organizing differently.

Okay. That's that's helpful and then I believe that the.

The corporate expenses included some consulting costs, which are with her reasonably meaningful.

In the past when we have seen you all spend.

Larger amounts on consultants.

There were some reasonably meaningful outcome is that came from that what's your.

And not not too happy to disclose too much too early I mean, not that I would be opposed but.

Would you please kind of walk us through well.

What the dollars are being spent on.

And what.

What outcomes that you're driving towards with those are those consulting efforts.

Yeah. Thanks, Bill Yeah, I think Youre right. If you look at it sort of every four years roughly.

If you go back in history, we have looked to kind of refresh and re validate our strategy.

And we hadn't done that since 19 so.

We took we took the decision to do another look at it here in first quarter, what I will say is every.

Every dollar that we spent was really just kind of looking at further growth opportunities on the industrial side of the business.

Part of it re validating our existing strategic assumptions part of it looking for Adjacencies really really looking at the exploration of core competencies beyond the rental and service business and how we may add some additional revenue streams on that side of the business. So you're right I'm not going to go into too much detail as to what that was on this call.

<unk>, but.

It's fair to say, we're going to continue to distill. This work as we lock that into our longer term strategic growth plans.

Great. Thank you.

We'll look forward to hearing more about that about that later.

And then finally.

Sure.

How much more are you anticipating that there will be in terms of.

Restructuring cost.

Cetera.

So maybe not dollars as much as as timing are we essentially done here in the second quarter or will there still be more to go after after this.

Yes.

That's a tough one to answer I will say that I think the big pieces.

That we had in front of US were completed by will say that it is an ongoing effort.

As Matthew had described and it is a function is as the business evolves and changes and simplifies each each step you take.

You look at how what the knock on effects of that is to your overall overhead structure and is that another opportunity to simplify.

I just kind of look at it simply when you look at our overall SG&A run rate, we've called out and that 12 12 plus.

<unk> percentage and that's that's a number.

That will continue to evaluate as the business evolves, how do we get that lower but I don't necessarily have a firm target or an end date of when that is.

Okay. That's helpful I am going to kind of.

Push a little further on that so for example, Chile.

That was not a not.

A region or a business line.

That I was familiar with are there more opportunities like that that maybe are those of us on the outside you know haven't been particularly focused on that may have opportunities to streamline further.

I don't have a path to a to a solid ROI or are those really now.

Few and far between.

Uh huh.

Okay, I think I would say there is more opportunity, but when you look at this where we find it particularly challenging reached.

Reached the economic hurdles.

Our subscale markets I think Chile is a great example of that it was.

It was a.

A relatively small.

Market it was generating in the area of $5 million of revenues.

Annually and so we do have a large footprint internationally. There are a number of those markets that are pretty small.

And so.

<unk>, one market like that and it doesn't necessarily change the picture, but the more steps you take in addressing those markets that don't have a clear pathway to generate a sufficient return and you shrink your footprint. Okay. Now you are talking about something that does have the knock on effect of your overheads and your corporate oversight so not sure if thats helpful. But.

But that's kind of how we're looking at it.

Understood I think I think I understood anyhow, so what you're saying is if you were to take more actions like that and there could be then a domino effect that that would then.

Free up the opportunity to simplify the organization.

Further up from her pumps further up from from some of those smaller small markets.

I think Thats fair.

Great. Thanks, Thank you both for allowing all the questions all right no problem. Thanks, great Great questions Bill This is Ken.

We always get emails.

Prior to the call Here's one Greg two that came through as much of the improvement you experienced during the quarter was due to strong demand and favorable pricing in the utility and industrial sectors as well as your EMEA markets in the fluids business.

Do you expect the question is do you expect the fundamentals in those markets to continue improving or at least hold at current levels and how sustainable is elevated spending.

In the electric utilities infrastructure space just to combine them.

The first one the fundamentals I think we're continuing to be encouraged in the I'll start with the oil and gas first in the EMEA in the EMEA region. I think we've worked hard on on repricing a lot of those contracts and we're getting the margin expansion that we needed off the back of the kind of supply chain inflation issues that we saw through <unk>.

Last year.

So off the back of that and with a with a stable kind of.

Demand there, we see that sort of being sustained which is which is encouraging and then on the utility side I think as we've touched on it before with a very stable historical.

<unk> spend in that space within the infrastructure investment in the jobs Act et cetera, giving more stimulus to that we see that being sustained for a few years to come which I think we also touched on in the call.

Great.

So about.

Did you get the second one which is sustainable yes, we wanted to hit on.

Any other.

Additions for you guys.

Oh builds back Bill, let's open the call back to Bill.

Yeah.

I have one additional question that relative to Capex and just thinking about free cash flow this year.

I think capex last year was $28 million or somewhere in that neighborhood. How are you thinking about 'twenty three is not a full year basis.

95% of our Capex was in the industrial solutions business.

So similar to what we've seen in recent years I would I would expect you'll see the vast majority of that spend will be in industrial solutions and supporting that growth.

Great. Thank you.

Yes.

Congratulations again on a great quarter.

Thank you thanks Bill appreciate it.

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

Okay.

[music].

No.