Q2 2023 Newpark Resources Inc Earnings Call

Good morning, My name is Katie and I will be your conference operator today at this time I would like to welcome everyone to the New Park resources second quarter 2023 earnings Conference call.

Today's call is being recorded and will be available for replay beginning at 12 30 P. M. Eastern standard time there.

The recording can be accessed by dialing 893 for three.

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It is now my pleasure to turn the floor over to Rob Croce, Vice President of Investor Relations strategy and corporate development. Please go ahead Sir.

Thank you operator on behalf of the entire team at New Park resources I'd like to welcome you to our second quarter 2023 results Conference call.

Leading the call today are Matthew Lanigan, our president and Chief Executive Officer, and Gregg Piontek, our Chief Financial Officer.

Today's discussion contains forward looking statements about future business and financial expectations actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC except as required.

By law, we undertake no obligations to update our forward looking statements.

Our comments on today's call May also include certain non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP financial measures are included in our quarterly earnings release, which can be found on our corporate website.

There will be a replay of today's call and it will be available by webcast within our Investor Relations section of our website at New Park Dot Com. Please note that the information disclosed on today's call is current as of August 2nd 2023.

At the conclusion of our prepared remarks, we'll open the line for questions with that I'd like to turn over the call to our president and CEO Matthew Lanigan.

Thank you, Rob and welcome to everyone joining us on today's call.

During the second quarter, we continued to execute on our business transformation strategy, demonstrating meaningful progress around our commercial growth operational excellence and capital allocation priorities, while continuing to build an industrial solutions platform equipped to drive long term value creation for our shareholders.

We delivered second quarter net income of $1 $7 million or two cents per diluted share on revenues of $193.3 million with net income improving $9 $5 million on a year over year basis in the period.

Adjusted EBITDA increased 49% year over year to $19 $8 million in the second quarter, while adjusted EBITDA margin increased nearly 400 basis points to 10, 8% in the period.

Adjusted EPS came in at eight cents per diluted share increasing from one cent per diluted share in the prior second quarter.

We generated positive free cash flow and continue to monetize that fluids divestitures in the second quarter, which contributed to a modest reduction of debt and the return of capital to shareholders through continued repurchases of our equity in the open market.

The timing of working capital changes in Q2 also sets up well for a reacceleration of free cash flow generation in Q3 from the collection of receivables.

Let's now begin with a progress update on our commercial growth in the second quarter.

Within our industrial solutions segment, our actions to drive sustained profitable growth have yielded encouraging results.

On a trailing 12 month basis through the second quarter Industrial solutions segment revenue and adjusted EBITDA have increased by 20% and 41% respectively.

Driven by our continued penetration of utility projects improved pricing, along with raw material sourcing and operating cost efficiencies.

Importantly, we continue to have a significant pipeline scheduled rental projects and product sales opportunities, which positions the business well heading into the second half of the year.

Across the industrial solutions business with continued to prioritize investment to support the expansion of our higher margin specialty rental and service offerings.

During the second quarter, we invested $7 million to expand our rental fleet, notably roughly $2 5 million of this investment was related to the deployment of our new Dura base 800 series Mat, which fully integrates with our existing database met format and offers a nearly 15% reduction in weight driving further efficiency in transportation.

Cost and associated carbon emissions without impacting product performance.

We believe our continued organic investment in fleet, what's their best to drive sustained double digit annualized revenue growth as we capitalize on accelerating demand in the utilities and critical infrastructure markets we serve.

Within our fluid segment, the second quarter was highlighted by yet another record performance from our eastern Hemisphere team, which generated 65 million in revenue and surpass the U S. In terms of fluid systems revenue contributions.

At the same time, we've continued to take steps to harvest cash from the fluids segment, reducing our net capital employed by $20 million in the second quarter with reductions coming primarily from the U S.

Moving now to a progress update on our recent efforts to drive operating cost optimization and efficiency improvements across our global footprint.

As outlined in fast cortical we've taken decisive actions to reduce layers of redundancy across their organization, while building an increasingly durable competitive business structure positioned for profitable growth throughout the cycle.

In 2023, we've taken actions to remove $6 million in annualized fixed overhead costs across both corporate and fluids consistent without cost optimization initiatives.

In addition to these cost reduction efforts. We've also continued to closely examine the areas of the business that do not meet the required return thresholds.

During the second quarter, we incurred $5 million in charges related to the substantial completion of our exit of the Gulf of Mexico.

As well as asset impairments related to the previously discussed decision to wind down our U S stimulation chemicals business along with the recent decision to shutter a dampier facility in Australia.

We expect to incur additional exit related costs as we complete the exit of the Dampier facility in the second half of the year.

On June 20, we issued a press release announcing that new package exploring strategic alternatives for the long term positioning of that fluid systems Division.

While we've made significant progress improving the operating performance of that fluids business. During the last year. We believe that now is the appropriate time to explore synergistic opportunities for the business.

We remain committed to exploring all viable options that are in the best interest of the fluid system business and our shareholders.

We are confident that in pursuing this course of action, we will enhance the competitive positioning of the fluids business and unlock the inherent value in our two divisions for our shareholders. While also positioning our industrial solutions business for accelerated growth transforming you back into a scout industrial rental and service company.

Should we successfully divest the fluids business. We believe this would create opportunity to further simplify our overhead structure and driving meaningful SG&A reduction within the remaining organization.

As a reminder, we do not intend to disclose developments with respect to the progressive era evaluation of any strategic options until such a time as the board of directors has approved a transaction or otherwise deemed disclosure is required or appropriate.

Finally, turning to a discussion of our capital allocation priorities.

We remain committed to maintaining a conservative well capitalized balance sheet, one that prioritizes, maintaining a conservative net leverage profile, while providing for organic fleet investment to support growing demand within our critical utilities and infrastructure markets and positioning the company for accretive acquisitions to accelerate our growth plans together with the return of <unk>.

Capital through share repurchases.

With that I'll turn the call over to Greg for his prepared remarks.

Thanks, Matthew and good morning, everyone.

I'll begin my remarks, with a summary of our consolidated and segment level results for the second quarter, followed by an update on our near term outlook for the business entering the third quarter.

Okay.

Our second quarter results were generally in line with your expectations shared on our first quarter call in May.

Highlighted by solid rental and service revenue growth continued margin expansion and positive cash flow generation.

Continued momentum within our industrial solutions business.

And another record revenue quarter for the EMEA region of our fluids business.

Industrial solutions segment revenues.

Were $48 million in the second quarter with rental and service revenues, representing 83% of segment revenue.

Rental and service revenues was $40 million for the second quarter, a 32% year over year improvement.

Growth in rental and service revenues reflects continued organic growth within our core utility infrastructure markets, which remain healthy.

Yeah.

Product sales activity pulled back to $8 million for the second quarter based on typical quarterly fluctuations and order timing.

The first half 2023 product sales are up 20% year over year supported by strong demand from the utility sector.

Industrial solutions segment profitability remained strong in the second quarter as reflected by the segment adjusted EBITDA margin of 37.7%, a 660 basis point year over year improvement.

Improved segment margin realization reflects growth in higher margin rental volumes and continued price discipline, along with improved operating cost leverage including strong manufacturing and fleet utilization.

The fluids systems segment generated revenue of $135 million in the second quarter, representing a decline of 7% versus the prior year period.

Segment, adjusted EBITDA margin improved 350 basis points to six 5% in the second quarter.

As Matthew touched on the fluids segment incurred a $5 million of charges in the second quarter, primarily associated with the exit of offshore markets and the stimulation chemicals, which impacted GAAP operating margin.

During the second quarter, we reduced our net capital employed in the fluid systems business by $20 million or 8%.

Reflecting the ongoing monetization of receivables inventories and excess PP&E as well as the effect of the asset impairments.

Our international fluids operations delivered $65 million of revenues in the second quarter, reflecting 16% sequential improvement and a 33% year over year growth benefiting from strong customer activity across most of the eastern hemisphere.

Revenues in Canada declined, 46% sequentially, and 8% year over year to $10 million in the second quarter relatively in line with expectations and overall market activity.

Selecting the effects of the seasonal spring breakup as well as the effects of the wildfires on the Canadian market.

U S land revenues declined 13% sequentially and 23% year over year to $60 million.

Reflecting lower market activity and lower market share as we maintain our focus on pricing discipline.

As of the end of the second quarter. The fluids business has a little over $200 million of net working capital consisting primarily of inventory and receivables, which represents roughly 85% of the segments net capital employed.

SG&A expenses increase on both a sequential and a year over year basis, primarily reflecting the costs associated with our second quarter overhead restructuring efforts discussed on our may call as well as our strategic planning activities.

Second quarter SG&A expense included $1 million of severance costs as well as $800000 of strategic planning and M&A costs included in the corporate office expense.

After consideration of these two items the remaining second quarter, SG&A totaled $23 $8 million, including corporate office costs of $7 $1 million.

Interest expense held relatively flat sequentially at $2 $1 million for the second quarter, reflecting the net effect of increased borrowing rates offset by lower overall debt balances.

Tax expense was $2 $1 million in the quarter, reflecting a 56% effective tax rate for the quarter and 37% year to date.

Our tax rate in the second quarter was negatively impacted by elevated losses in certain foreign jurisdictions for which we are unable to recognize the benefit.

Adjusted EPS was eight cents per diluted share in the second quarter, a substantial increase from one cent per diluted share in the second quarter of last year, reflecting.

Improved profitability within both segments, along with a 7% decline in our shares outstanding.

In terms of cash flow, we had another solid quarter of generation. Following our exceptionally strong Q1 result, benefiting from the fluids divestitures.

Yeah.

Operating cash flow was $7 million for the second quarter impacted by a $13 million decline in accounts payable as payables naturally decline ahead of receivables as revenues decline.

Free cash flow was slightly positive for the second quarter with another $11 million generated in the quarter from the fluids divestitures.

As Matthew highlighted we used $7 million to fund our net capex with the vast majority once again directed towards the expansion of our rental fleet.

We also used $6 million to reduce debt and $5 million to fund share repurchases.

Let's now turn to the near term business outlook.

Our view on their respective markets and the opportunity remains largely unchanged.

For industrial solutions, we continue to see strong fundamentals for utility and critical infrastructure spending, which we expect will provide a multiyear tailwind to support our growth plan, although the typical summer seasonality and extremely hot and dry weather currently impacting much of the U S has some potential to impact near term.

Jackson as loading on the power grid remains elevated to meet demand.

In fluid systems, while the U S market outlook remains somewhat challenged in the near term we continue to feel confident in the mid and longer term outlook for Canada, and eastern Hemisphere markets as we continue to transform and position the business for future success.

We anticipate third quarter industrial solutions revenue to improve sequentially to a range of $52 million to $58 million, primarily benefiting from the timing of product sales activity, including the effect of Q2 product orders that were delivered in early Q3.

Within our fluid systems segment, we anticipate third quarter revenue to decline sequentially to a range of $120 million to $130 million, primarily reflecting a decline in the U S and a pullback from the record quarter in the eastern hemisphere, partially offset by a seasonal recovery in Canada.

We anticipate total EBITDA in the range of $17 million to $22 million and interest expense of $2 million.

While the effective tax rate should be near the 30% level for the third quarter.

In terms of cash flow, we've seen a solid start to the third quarter with borrowings under our ABL facility declining $8 million in July .

We expect free cash flow generation in the range of 15% to $25 million in the third quarter benefiting from solid EBITDA generation and reductions in net working capital primarily within the U S fluids business.

Beyond our continued organic growth investments in industrial solutions.

We expect our third quarter cash generation to be primarily used to further reduce our debt providing greater flexibility to accelerate our growth plans or return value to shareholders through our share repurchase program.

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

Thanks, Greg.

Throughout the first half of the year I am very pleased with the progress we've made to drive organic commercial growth across the enterprise, while continuing to build a more efficient competitive business.

Industrial solutions, which remains a core platform for growth longer term continue to deliver significant year over year growth in revenue EBITDA and margin realization in the first half of the year.

In fluid systems Eastern Hemisphere delivered significant year over year growth in revenue offsetting declines in North American land market with the segment realizing significant improvement in adjusted margins and reducing net capital employed by over $40 million since the start of the year.

At the same time, we've continued to allocate cash generation towards investment in fleet expansion and share repurchases, while also reducing debt.

While our recent decision to explore strategic alternatives for the fluids business was not taken lightly it does mark a significant milestone towards simplifying our go forward structure and positioning us to unlock value for shareholders.

As we explore future alternatives for the fluids business. It remains a world class operation that continues to benefit from strong execution and market outlook, particularly within our eastern hemisphere and Canadian markets.

To that point in the 2023 drilling fluids supply performance report recently issued by Kimberlite Newpage.

<unk> once again outperformed the leading global fluids providers showcasing the underlying value of the business to our global customers and the strong brand recognition new package built the technology and service excellence.

As we continue to thoughtfully harvest cash from the low returning areas of that business and to redeploy it towards our industrial solutions platform. We are on track to have the net assets of the industrial business exceed those in our fluids business by the end of the third quarter of this year.

Signaling yet another important milestone in our journey to transform from being an oilfield services company to a leading industrial solutions brand.

With our continued expansion in the multibillion dollar global website access market, we remain optimistic about near term growth prospects for our business and anticipate the segment will surpassed $80 million of annualized EBITDA in the second half of 2023.

I'm exceptionally proud of our teams across the organization for their unwavering professionalism and commitment to our customers consistent with the high performance culture with developed at New Park.

In closing I want to thank our shareholders for their ongoing support.

Our employees for their dedication to the business, including their commitment to safety and compliance and our customers for their ongoing partnership.

And with that I'll open the call for questions.

Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone Humira.

You may remove yourself from the queue at any time by pressing star two.

Once again that is star one if you would like to ask a question.

We will pause for a moment to allow questions to queue.

Thank you. Our first question will come from Bill <unk> with Titan Capital. Your line is now open.

Okay. Thank you I have a group of questions that I'd like to start with the industrial.

Business there was a reference in the press release to the service revenues being up 40% would you discuss what these services are please.

Yeah, Bill happy to do so it's Matthew Yeah look the services as a sort of broad bucket that will include the transportation in and out of stock also include any installation and removal of the Max as well as ancillary services that where we're being called on to do more of a as customers appreciate al Al service.

Quality and our safety performance, they're asking a swimmer onsite to broaden the basket of services that we offer and where we can do that at a value added a benefit to both parties. We continue to expand that I guess, you're seeing that with the with the service revenue growth outpacing rental revenue growth this quarter.

Okay.

I'm going to circle back to that but a couple of questions relative to our fluids.

Relative to the.

To the strategic alternatives would you discuss in a bit more detail kind of the review that's that's taking place in a timeline that you might anticipate having some resolution whatever direction that ends up being.

Yeah sure I mean, I think with respect to timeline.

I think this will just follow a typical process there where you would expect this to be resolved over the next few quarters.

It would be kind of our expectation here bill.

I might need you to expand on the review process.

So is there is there really anything under consideration other than.

Than an outright sale to another party.

Yes, I think we've been clear that we're going to be open minded to to whatever opportunities come come forward. There bill. So it's probably a little premature to box ourselves into one line of thinking at this point yeah.

Think that that's.

Probably what you would consider as the most most logical but ultimately this comes up to value what creates the greatest value for our shareholders and that's what will guide our decisions.

Great. That's helpful. Thank you both for that and then and then it's the fluids business was sold how do you foresee deploying the cash that would that would come from that activity.

Well I think it starts with obviously yet that would.

Generate a significant amount of cash obviously it builds a lot of dry powder. It gives you some flexibility there to it.

Celebrate.

Your growth plans and I think that's really where that next step is looking at how do we further accelerate obviously, we have a very differentiated product, where we're gaining share we still have a lot of runway.

With it but we would naturally explore how can we accelerate that growth rate.

Okay that that actually I want like I said I wanted to come back to the to the industrial business and that might be the perfect segue.

And I think it was in the third paragraph in the press release you.

You made the comment well the composite mat technology and related support solutions remain one of our core value propositions R.

Our vision is to expand our high margin.

Our high value platform, the site and access products, specifically rental solutions to further embed.

You as a tier one.

The supplier and partner into the energy and industrial markets.

Got it.

Freezing could be interpreted many different ways. So maybe you could tie in.

Your last comment.

And tried to pull all that together and.

What it is you're really trying to communicate there because I don't want to go the wrong direction with the with that statement.

Thanks, Bill I'll answer that question look there's really two parts of it like firstly as we look out and say that the market dynamics going on right now they've been very supportive to long term growth and demand you know be it through the grid modernization and renewable tie ins or general maintenance to support electrification efforts, we we feel like continue.

<unk> to invest an athlete and the geographic expansion of our rental and service offering.

To be where that growth is and where our customers want us to be as our number one priority. There I think we've touched on that in the past their expansions in the north East and South East over recent quarters is starting to.

To show the benefits of that focus.

Secondarily to that is as we continue to and I touched on this early as we continue to demonstrate a strong reliability and safety performance onsite. We're often asked to provide additional services, while we're on the right away the way our customers and whether these are value added and we can get the appropriate.

She had benefit between ourselves and the customers, where we're doing more of it and these are things like storm water prevention solution planning sort of other ride of why kind of a maintenance activities. They are asked to perform that provide that little bit extra there. So the more we do that the more we are embed ourselves as a trusted partner with that cost.

So really it.

It's really an organic play to your strengths kind of approach at this point bill So hopefully that answers the question.

Okay. That's a great starting point, so really that that comment was intended to talk about the organic opportunities and then I think Greg you were saying relative to the significant cash that would be generated yes. The fluid business was sold.

That that would be an opportunity for acquisition focus would you talk maybe how.

Okay.

One area is the acquisitions would likely be appropriate and most value added in terms of bolting on to a delay in current industrial.

<unk> segment, and how that would look overtime, maybe what you're trying to create their with time.

Yeah Bill.

I'm kind of jumping look I, you know I think that the most near term focus would be to continue to grow scaling what we do we see ourselves as still a low market share where you know consolidation in that space in an area that we understand what the margin profile that we like.

With proven execution would remain our primary focus in the near term.

Beyond that I think it's a little premature to talk about exactly what that shape my take.

But obviously, we'd be very mindful to the to making sure that anything we do is accretive to the strong performance that where we have been demonstrating and yeah just to kind of round that out obviously, we have a we have a.

Very disruptive product, how can we accelerate the growth rate with that product.

But as Matthew touches on it's got to be accretive and if not well then your best use of cash is to ultimately return of capital to shareholders, but.

We think there's a lot to explore here.

Great. Thank you both.

Thank you thanks Bill.

Thank you once again that is star one if you would like to ask a question. We are now holding again. Please press star one at this time to join the queue.

And this does conclude.

We do have a follow up from Bill <unk>. Your line is now open.

Alright, I actually I'll I'll ask at least one more here. So there was the referenced in the press release two to.

$2 8 million dollar charge to exit additional fluid operations.

Was that the Australia operations that you.

Referenced in your opening remarks.

Yes. So you had two pieces to it you did have Australia in there and then the other one was there was a charge associated with the steam stimulation chemical exit that we had talked about on the may call.

And again, that's just kind of goes back to what we had been saying of continuing.

Continuing to evaluate areas of the business that are underperforming and lack of clear path and taking the necessary actions.

Great and then.

A couple more here so.

You had $11 million.

Cash benefit.

From the fluid divestitures.

What does that come from.

That was primarily the rundown of the the the collections associated with the Gulf of Mexico.

If you recall.

Part of that we are allowed for the sale of our inventory over a few quarters and so it was the monetization of that primarily.

Ah Okay. That's that's helpful and then.

Lastly, he industrial.

Revenues were flat sequentially, but the operating income grew $3 million sequentially was that mix or was there something else that was leading to that yeah.

Stellar operating income performance.

Yeah, you know and as I'd mentioned in my My comments you know you do have a few pieces to it.

On a year over year basis pricing was stronger than it was a year ago.

The other thing that you are seeing some benefits of raw material costs are improving from a year ago and also just the overall operating cost leverage that you're getting as you grow at.

At the manufacturing level at the field operational level et cetera. So it was kind of a combination of all those factors.

And Greg some of those factors you just mentioned were versus a year ago and I was really focused specifically on <unk>.

Q1.

Got it I'm sorry, so on Q2 versus Q1, you actually you do have some of those same factors that are in there. The one thing that was that kind of comes out of that equation Q to Q1 is really the pricing.

Side of it on the rental side was fairly flat, but you know we we mentioned the service element service margins now that does fluctuate period to period that was stronger in Q2 than it was in Q1.

So, but other than that it's pretty it's pretty much the same.

And then to what degree does the mix of <unk>.

Sales.

Mat sales.

Skew our margins.

It doesn't really skew it significantly because you know when you think about it.

What what is the what are the bigger driver is when you have big mix shifts between rental and service because when you look at our margins.

Of the three lines rental is the strongest you have the sales that are in the middle and service tends to be at the lowest Dan you put rns together and the incremental profit margin profile of the rns work is typically fairly in line with the direct sales activity. So it doesn't really skew it significantly.

Great. Thank you both again alright.

Alright, thank you.

Thank you. This concludes today's question and answer session I will now turn the program back over to Mr. Kroeker for any additional or closing remarks.

Thanks, Katie that that'll conclude our call for today, we look forward to hosting everybody on our third quarter conference call, but in the meantime, if anybody should have any questions or requests. Please don't hesitate and reaching out to me using our email investors at New Park Dot com.

Thank you ladies and gentlemen. This concludes today's event you may now disconnect.

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