Q3 2023 Newpark Resources Inc Earnings Call
Good morning, My name is Todd and I will be your conference operator today.
At this time I would like to welcome everyone to the New Park resources third quarter 2023 earnings Conference call.
Today's call is being recorded and will be available for replay beginning at 12 30 P M. Eastern.
The recording can be accessed by dialing 888 to 191276 for domestic.
Or four zero to 2204949 for international.
All lines are currently muted.
After the prepared remarks, there will be a live question and answer session.
If you would like to ask a question during the Q&A session. Please press star one on your telephone keypad.
If your question has been answered you may remove yourself from the queue at any time by pressing star two.
We do ask that you please pick up your handset for optimal sound quality.
It is now my pleasure to turn the floor over to Rob <unk>, Vice President of Investor Relations and strategy. Please go ahead.
Thank you operator on behalf of the entire team at New Park resources I'd like to welcome you to our third quarter 2023 results conference call.
Leading the call today are Matthew Lanigan, our president and CEO and Gregg Piontek. Our CFO. 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 include.
The risks described in our periodic reports filed with the SEC, except as required by law, we undertake no obligation 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.
Will be a replay of today's call.
We'll be available by webcast within the Investor Relations section of our website at <unk> Dot Com. Please note that the information disclosed on today's call are current as of November one 2023 at the conclusion of our prepared remarks. We are also open the line for questions with that I'd like to turn the call over to our president.
And CEO Matthew Lanigan.
Thank you, Rob and welcome to everyone joining us on today's call I'm pleased to share that our team delivered strong third quarter results, while demonstrating continued execution on our multi year business transformation strategy.
Ongoing commercial growth and operational excellence initiatives across the enterprise contributed to significant year over year growth in net income adjusted EBITDA and free cash flow in the third quarter, putting us on pace for a solid full year performance.
We generated third quarter net income was $7 7 million or nine cents per diluted share on revenues of $198 million.
Industrial solutions revenue improved 12% delivering a 28% improvement in segment adjusted EBITDA, while divestitures and other actions within fluid systems are driving a more focused and profitable business delivering a 12% improvement in segment adjusted EBITDA on 16% less revenue.
On a consolidated basis year over year revenues declined 10%, including the impacts of fluids divestitures, while adjusted EBITDA improved 13% $22 $3 million in the third quarter and adjusted EBITDA margins increased 230 basis points to 11, 2% in the period.
Adjusted EPS came in at nine cents per diluted share increasing 71% from the prior third quarter.
We generated $23 million of free cash flow in the third quarter as we continued to optimize our fluids balance sheet, which provided for a $13 million reduction of debt and a $6 million return of capital to shareholders through continued repurchases of our equity in the open market.
The solid Q3 cash generation brings our year to date free cash flow to $47 million.
I'd now like to provide a progress update on our commercial growth in the third quarter.
Within our industrial solutions segment, we delivered the strongest Q3 revenue on record at $57 million up 12% versus the prior year driven by strong underlying demand across our core end markets continued share gains and ongoing investments in fleet.
Adjusted EBITDA margin increased nearly 440 basis points to 34, 4% in the third quarter as we maintain our focus on sustained profitable growth in the segment.
On a trailing 12 month basis through the third quarter Industrial solutions segment revenue and adjusted EBITDA have increased by 17% and 42% respectively.
As we called out on our Q2 call, we expected rental and service revenues to pull back slightly during the third quarter as the warmer summer months reduce maintenance activities on the transmission grid.
This was somewhat amplified this year with record temperatures and widespread drought conditions across the country. Despite this totally industrial solutions revenue improved 19% quarter over quarter, driven by stronger product sales as we maintained EBITDA within our typical margin range.
Consistent with our stated strategy, we have continued to prioritize investment to support the expansion of our higher margin specialty rental and service offering.
During the third quarter, we invested $3 million in industrial solutions, primarily to expand our rental fleet.
Over the trailing 12 months, we've expanded our rental fleet size by 12% as we've continued to gain share in the multibillion dollar market.
We believe our continued organic investment in fleet expansion will equip us to drive sustained double digit annualized revenue growth as we capitalize on accelerating demand in the utilities and critical infrastructure markets we serve.
Yeah.
We then have fluids segment in the third quarter was highlighted by yet another record performance from our eastern Hemisphere team, which generated $73 million in revenue and represented 52% of the segment revenues, Canada also delivered solid seasonal improvement posting 13% year over year growth in Q3, while our U S operations continues.
Cost control efforts in light of the subdued market activity.
At the same time, we've continued to take steps to harvest cash from the fluids segment, reducing the net assets employed by a further $9 million in the third quarter, including a $13 million reduction in the U S.
For the trailing 12 months, we've reduced our fluids segment net assets by over $110 million or roughly 33%.
Moving now to our progress update on our recent efforts to drive operating cost optimization and efficiency improvements across our global footprint.
As outlined in our second quarter call, we've taken decisive actions to reduce the layers of redundancy across our organization, we're building increasingly durable competitive business structure.
While the third quarter included $2 $3 million of costs related to long term incentive plan investments strategic actions and restructuring our underlying corporate office expenses are trending lower reflecting the impact of actions taken over the past two quarters with further reductions expected following the completion of the fluids process.
In addition to these cost reduction efforts. We've also continued to closely examine areas of the business that do not show a path right to their returns exceeding the cost of capital.
Consistent with our discussion last quarter, our exit of Gulf of Mexico, and Chile operations and now effectively completed while the exit of our DAP, yet Australia offshore facilities is expected to be substantially completed in the fourth quarter.
Finally, turning to a discussion about capital allocation priorities, we remain committed to maintaining a well capitalized balance sheet that provides for organic fleet investments to support growing demand within our critical utilities and infrastructure markets and positioning the company to accelerate their growth plans together with the return of capital through share repurchases.
And 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 third quarter, followed by an update on our near term outlook.
Our third quarter was highlighted by solid revenue growth in industrial solutions. The fluids, the EMEA region, and Canada continued margin expansion in.
And strong cash flow generation, providing for further debt reduction and return of capital to shareholders.
Total third quarter revenues exceeded our expectation shared on our previous quarterly call with stronger than expected customer activities within Europe, and Africa, leading to yet another record revenue quarter for our EMEA region in the fluids business.
The industrial solutions segment revenue was $57 million in the third quarter with roughly two thirds coming from rental and service and one third from product sales.
Rental and service revenue was $38 million for the third quarter, a 16% year over year improvement.
Growth in rental and service revenues reflects continued organic growth across most of our served infrastructure markets.
Led by a 21% year over year increase from customers operating within the utility sector.
Direct sales rebounded in line with expectation contributing $19 million for the third quarter.
On a year to date basis rental and service revenues have increased 21% while product sales have increased 13% year over year supported by strong demand from the utility sector.
Industrial solutions segment profitability remained strong in the third quarter as reflected by the segment adjusted EBITDA margin of 34, 4%.
And nearly 440 basis point year over year improvement.
Improved segment margin realization reflects growth in rental and product sales volumes as we maintained pricing discipline, along with improved operating cost leverage across our rental operations.
The fluids systems segment generated revenue of $141 million in the third quarter, representing a decline of 16% versus the prior year period, primarily reflecting the impact of last year's divestitures.
Our third quarter fluids systems results were once again led by the record quarter from our EMEA region.
With our international operations, delivering $74 million of revenues, an improvement of 14% sequentially and 35% year over year.
Our U S operations contributed $50 million of revenues in the third quarter, a 17% sequential and 31% year over year decline.
With the effects of lower U S market activity and our focus on pricing discipline, we continued to drive balance sheet efficiency generating strong cash within the U S operations.
Revenues from Canada, followed the typical seasonal trend, increasing 67% sequentially to $17 million in the third quarter, which reflects a 13% year over year improvement.
Segment, adjusted EBITDA margin improved 180 basis points year over year to 7% in the third quarter.
During the third quarter, we reduced our net assets employed in the fluid systems business by $9 million, including a $13 million reduction in the U S, reflecting the solid progress driving working capital efficiency.
As of the end of the third quarter. The fluids business has nearly $200 million of net working capital consisting primarily of inventory and receivables, which represents roughly 85% of the segments net assets employed.
SG&A expenses increased on both a sequential and year over year basis, primarily reflecting the impact of long term management incentive programs and our strategic planning activities.
Third quarter SG&A expense included a $1 9 million dollar charge for long term management incentives driven by a higher relative total shareholder return projection.
As well as $500000 of strategic planning and M&A cost and $500000 of severance costs.
After consideration of these items, the remaining third quarter SG&A totaled $24 million, including corporate office cost of $6 $4 million.
Interest expense decreased modestly on a sequential basis to $2 million for the third quarter.
Reflecting the effect of lower overall debt balances offset by higher borrowing rates.
<unk> expense was $4 million in the quarter, reflecting a 34% effective tax rate for the quarter and a 35% year to date.
Adjusted EPS was <unk> <unk> per diluted share in the third quarter, a 71% increase from the third quarter last year, reflecting improved profitability within both segments, along with a 6% decline in our shares outstanding.
In terms of cash flow, we generated $23 million of free cash flow in the third quarter, which brings our year to date free cash flow of $47 million, a 74% year to date cash conversion of adjusted EBITDA.
Yeah.
Operating cash flow was $27 million for the third quarter, while $4 million was used to fund our net capex with the majority once again directed toward the expansion of our rental fleet in industrial solutions.
We also used $13 million to reduce debt and $6 million to fund share repurchases.
Let's now turn to our 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 utilities and critical infrastructure spending, which we expect will provided a multiyear tailwind to support our growth plans.
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 position the business for future success.
We anticipate fourth quarter industrial solutions revenue in a range of $54 million to $60 million as Matthew touched on we saw a more pronounced impact from the hot and dry conditions impacting customer activity late in the third quarter with the effects carrying over into early Q4.
However, we've seen a meaningful rebound in project bidding activity over the past month and are currently mobilizing to support multiple large scale rental projects, which we expect will drive a modest sequential improvement in rental and service revenues in the fourth quarter.
Barring any weather related or end of year holiday disruption in customer activities.
Regarding product sales recognizing that Q4 typically provide seasonal strength. We are pleased with the quoting activity to date, which indicates that our fourth quarter product sales could meet or exceed Q3 levels.
Within our fluid systems segment, we anticipate fourth quarter revenue to decline sequentially to a range of $110 million to $120 million, primarily reflecting a pullback from the record quarter in the eastern hemisphere.
Along with declines in the U S and Canada impacted in part by the typical late Q4 seasonal pause in activities.
We anticipate total adjusted EBITDA in the range of $17 million to $21 million and interest expense of nearly $2 million, while the effective tax rate should be roughly 30% for the fourth quarter.
In terms of cash flow, we expect free cash flow generation in the range of $12 million to $20 million in the fourth quarter benefiting from solid EBITDA generation and reductions in net working capital.
Beyond our continued organic growth investments in industrial solutions, we expect our fourth quarter cash generation will be primarily used to further reduce our debt along with return of capital to shareholders through our share repurchase program, providing greater flexibility to accelerate our growth plans.
And with that I'd like to now turn the call back over to Matthew for his concluding remarks.
Thanks, Greg.
As we move into fourth quarter I'm 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 continued to deliver significant year over year growth in revenue EBITDA and margin realization.
With our ongoing expansion in the multibillion dollar global Worksite access market, we remain optimistic about the near term prospects for our business, which has delivered $81 million of trailing 12 months EBITDA through the third quarter.
In fluid systems, the EMEA region continues to deliver significant year over year growth in revenue and strong profitability offsetting the declines in the U S land markets with the segment realizing significant improvement in adjusted margins and reducing net assets employed by $50 million since the start of the year.
I'm immensely proud of our global fluids businesses. They continue to navigate the changing global landscape with a laser focus on safety and exemplary customer service, while improving margins and working capital efficiency.
With respect to the fluid south process, we're pleased with the level of interest from potential acquirers, who recognize the high quality of our industry, leading technical expertise service quality and established customer relationships.
The process is progressing in accordance with our expectations for substantial completion in the first half of 2024.
In addition to funding our industrial solutions growth. We've also continued to strengthen our balance sheet and repurchase shares purchasing out of a 6% of our outstanding shares in the first nine months of the year.
I am humbled by our teams across the organization for their unwavering professionalism and commitment to our customers consistent with the high performance culture, we have developed a 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 we'll open the call for questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
You may remove yourself at any time by pressing star.
Once again, if you would like to ask a question. Please press star one.
Our first question will come from Aaron Spy cello with Craig Hallum. Please go ahead.
Yes, good morning, Mathew and Greg Thanks for taking the questions.
Hey, good morning.
Good morning. So first for me can you just maybe talk about a little how do you think about the tradeoff between growth and volumes and price and margins as you think about investing more in the industrial business given the value proposition there.
Yeah, I'll take that one Aaron Thanks for the question look I think I mean, the way I'd summarize it.
Really if you look at the long run margin profile of the business at an EBITDA level of kind of got.
Low low early thirty's to to high Thirty's EBITDA margin that we have been able to manage as we continue to introduce fleet and expand our footprint and we would we would expect that we're going to be able to continue to do that and manage within that range. So.
Todd: Good morning. My name is Todd and I will be your conference operator today.
Todd: At this time, I would like to welcome everyone to the Newpark Resources 3rd quarter 2023 earnings conference call. Today's call is being recorded and will be available for replay beginning at 12.30 p.m. Eastern. The recording can be accessed by dialing 888-219-1276 or domestic or 402-220-4949 for international. All lines are currently muted.
That seems like a.
Something that we can manage moving forward.
Okay. Thanks, and then maybe just a second can you just talk about any impact you might be seeing from from interest rates on project financing across your end markets.
The impact that might be having on kind of rent versus buy decisions.
Yeah, I'll grab that one again look I think at this point.
Todd: After the prepared remarks, there will be a live question and answer session. If you would like to ask a question during the Q&A session, please press star 1 on your telephone keypad. If your question has been answered, you may remove yourself from the Q at any time by pressing star 2. We do ask that you please pick up your handset for optimal sound quality.
Fair to say, we're really not seeing any.
Any material impact when you when you look at where our large exposures are it's more around that critical infrastructure and resources, which which are not really at this point, indicating any pullback in their cap capex profiles associated with interest rates when it comes to the mix, obviously higher interest rates, we would expect to push the marginal purchases.
Rob Krotee: It is now my pleasure to turn the floor over to Rob Krotee, Vice President of Investor Relations and Strategy. Please go ahead. Thank you, operator.
Two our rental over a purchase but still at this point, we're not seeing any material shifts in our mix from that perspective, but something we're definitely watching moving forward.
Rob Krotee: On behalf of the entire team at Newpark Resources, I would like to welcome you to our 3rd quarter 2023 results conference call. Leading the call today are Matthew Lanigan, our president and CEO and Greg Piantek, our CFO. 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 obligation to update our forward-looking statements.
Alright, Thanks, and then maybe just could you provide an update on your efforts on the recycling side of things maybe.
Maybe an update on the internal capabilities and you know kind of <unk>.
Setting up the supply chain, there customer conversations and just a general update their.
Absolutely yes.
I think the important thing on this one with five years into this program when you really step back step through it we start in 2019 really focusing on the materials science side of recycling recognizing it's not just as simple as throwing some recycled material, India process and being out of maintaining the quality and the structure performance of the product. So we.
Rob Krotee: Our comments on today's calls may also include certain non-GAAP financial measures, additional details and reconciliation to the most directly comparable GAAP financial measures are included in our quarterly earnings release, which can be found on our corporate website.
And into that then we moved into the processing side of it and now as we have done those things under control, we're expanding our supplier relationships and looking for the sources of material there with that reliability and consistent quality. So those things are all moving ahead very well in terms of customer conversations.
Rob Krotee: There will be a replay of today's call and will be available by webcast within the Investor Relations section of our website at newpark.com. Please note that the information disclosed on today's call are current as of November 1st, 2023.
They are evolving as we as we scale. This up more we're going to continue to lean into the fact that this has no economic and societal benefits from the use of recycled versus Virgin materials said really happy with our progress to date, but expect to see that amplify over the coming years.
Rob Krotee: At the conclusion of our prepared remarks, we will also open the line for questions.
Matthew Lanigan: With that, I'd like to turn the call over to our president and CEO, Matthew Lanigan. Thank you, Rob, and welcome to everyone joining us on today's call. I'm pleased to share that our team delivered strong third-quarter results while demonstrating continued execution on our multi-year business transformation strategy. On-going commercial growth and operational excellence initiatives across the enterprise contributed to significant year-over-year growth in their income, adjusted EBITDA and free cash flow in the third quarter, putting us on pace for a solid full-year performance.
Understood. Thanks, and then maybe Greg one question for you on the free cash flow outlook can you just talk about some of the moving pieces. There as we think about <unk> versus <unk> is there any more.
Kind of working capital benefit that you expect from from just some of the actions in fluids over the past year.
Yes, we definitely expect that to continue you look at Q3 versus Q4, obviously Q3 came in strong at.
Toward the high end of our of our expectation. The overall second half look was it remains fairly unchanged in line with with what.
Matthew Lanigan: We generated third-coordinate income of $7.7 million or $0.9 per diluted share on revenues of $198 million. Industrial solutions revenue improved 12% delivering a 28% improvement in segment adjusted EBITDA while divestitures and other actions within fluid systems are driving a more focused and profitable business, delivering a 12% improvement in segment adjusted EBITDA on 16% less revenue. On a consolidated basis, year-over-year revenues declined 10% including the impacts of fluid vestiges, while adjusted EBITDA improved 13% to $22.3 million in the third quarter, and adjusted EBITDA margins increased 230 basis points to 11.2% in the period.
Our view was three months ago, what we did see here in Q3 is with the timing of some of the third quarter Mat sales.
Within industrial we saw an acceleration stronger DSO performance and we see that kind of reverting back to a more typical timing in Q4. So it's really just a shift there Q4 Q3.
And then and then as you know Matthew touched on a little bit here also.
Investment side, we look to continue to accelerate our growth here on the rental side of the business. So we are making investments there and continuing to drive.
Drive production through the plant to be able to support our growth aspirations.
Matthew Lanigan: Adjusted EPS came in at 9 cents per diluted share, increasing 71% from the prior third quarter. We generated $23 million of free cash flow in the third quarter as we continue to optimise our fluid balance sheet, which provided for a $13 million reduction of debt and a $6 million return of capital to share holders through continued repurchases of our equity in the open market. The solid Q3 cash generation brings our year-to-date free cash flow to $47 million.
Got it thanks, Thanks for taking the questions I will turn it over.
Thanks Sarah.
Okay.
Thank you as a reminder, Thats star one to ask a question. Our next question comes from Bill <unk> with Titan capital.
Thank you.
Could you dive into it.
A bit of detail relative to the $5 million that was spent on this strategic planning projects and.
Matthew Lanigan: I'd now like to provide a progress update on our commercial growth in the third quarter. Within our industrial solution segment, we delivered the strongest Q3 revenue on record at $57 million, up 12% versus a prior year, driven by strong underlying demand across our core and markets, continued share gains and ongoing investments in fleet. Adjusted EBITDA margin increased nearly 440 basis points to 34.4% in the third quarter, as we maintain our focus on sustained, profitable growth in the environment.
And I'm less focused on the dollars than I am kind of wondering tests that you are.
In process of evaluating and the implications that that may have over the course of time.
Yes.
Bill that's primarily spend associated with the process on the fluids out of the business. That's that's the vast majority of it.
That's super helpful. Thank you.
Let me.
Let me shift then to the industrial side.
Matthew Lanigan: On a trailing 12-month basis through the third quarter, industrial solution segment revenue and adjusted EBITDA have increased by 17% and 42% respectively. As we called out on our Q2 call, we expected rental and service revenues to pull back slightly during the third quarter, as the warmer summer months reduced maintenance activities on the transmission grid. This was somewhat amplified this year with record temperatures and widespread drought conditions across the country. Despite this, total industrial solutions revenue improved 19% quarter over quarter, driven by stronger product fails, as we maintain EBITDA within our typical margin range.
Side of the business.
Your guidance seems a little bit conservative.
Relative to how we have thought of this business historically, having a strong fourth quarter.
Often times with some pretty big Mat sales.
Et cetera would you would you talk about that level of conservatism or are maybe pragmatism that I'm not fully grasping.
Yeah, Bill I mean, thanks for the question look we were kind of calling it as we see that order book build as Greg said, we're very enthusiastic at the quiet levels, we're getting until as orders are booked and in the bag, we're not going to climb and so.
Matthew Lanigan: Consistent with our stated strategy, we've continued to prioritise investment to support the expansion of our higher margin specialty rental and service offering. During the third quarter, we invested $3 million in industrial solutions, primarily to expand our rental fleet. Over the trailing 12 months, we've expanded our rental fleet size by 12% as we've continued to gain share in the multi-billion dollar market. We believe our continued organic investment in fleet expansion will equip us to drive sustained double-digit annualized revenue growth as we capitalize on accelerating demand in the utilities and critical infrastructure markets we serve.
We are.
That number seems appropriate for what we're saying at this point in time, yes if.
If you go back over the years I think the the.
There's two aspects to Q4 number one is it's typically where we see the seasonal strength in the other item that we've talked about is usually that's pretty late developing as you progressed through the quarter. So you don't have as much visibility as you would prefer but again it just goes back to what we're seeing on the quoting side is is we're encouraged by.
And we'll take it from there.
Okay I'm going to.
I put my own words to what you said.
Essentially.
Matthew Lanigan: Within our fluid segment, the third quarter was highlighted by yet another record performance from our Eastland Hemisphere team, which generated $73 million in revenue and represented 52% of the segment revenues. Canada also delivered a solid seasonal improvement, posting 13% year over year growth in Q3, while our US operations continues cost control efforts in light of the subdued market activity. At the same time, we've continued to take steps to harvest cash from the fluid segment, reducing the net assets employed by a further $9 million in the third quarter, including a $13 million reduction in the US. Over the trailing 12 months, we've reduced our fluid segment net assets by over $110 million, or roughly 33%.
Your guidance is the number that you feel quite confident that you will be able to hit but you do recognize that late in the quarter, which is hard to forecast.
There has historically been.
Many times.
Hum.
Larger.
Sales that have taken place since youre, just not willing to.
Stretch out and assume that those are going to happen this year and every year and in the future.
Yeah, Bill I mean.
The reality is and I think Alan touched on it in his question in the interest rate environment.
And what we're seeing in the larger macro economy here being too bullish would seem a little out of place. So that's why we're calling it the way we see it at this point.
Matthew Lanigan: Moving now to a progress update on our recent efforts to drive operating costs, optimization and efficiency improvements across our global footprint. As outlined in our second quarter call, we've taken decisive actions to reduce the layers of redundancy across our organization where build an increasingly durable competitive business structure. While the third quarter included $2.3 million of costs related to long-term incentive plan adjustments, strategic actions and restructuring, our underlying corporate office expenses are trending lower, reflecting the impact of actions taken over the past two quarters, with further reductions expected following the completion of the fluid process.
Yep makes it makes perfect sense, and then relative to your tax rate being in that 34 35.
Percent range.
Once the fluids business.
Is no longer part of New Park.
Where do you see see that tax rate moving to.
Yes, I think that that low to mid thirty's rate that we're seeing today is heavily influenced by the geographic mix in the fluids business I think as you go forward and look at a business that's much more U S centric, you're probably in the mid to upper twenties range is where this levels out.
Matthew Lanigan: In addition to these cost reduction efforts, we've also continued to closely examine areas of the business that do not show a path rate to their returns exceeding their cost of capital. Consistent with our discussion last quarter, our exit of Gulf of Mexico and Chile operations are now effectively completed, while the exit of our Dampia Australia offshore facilities is expected to be substantially completed in the fourth quarter.
Great. Thank you both and congratulations on another nice quarter.
Thank you thanks Bill.
Thank you at this time, we have no further questions in queue I'll turn it back turn the call back to Rob for any closing remarks.
Thanks Scott.
It concludes our call for today should there be any questions or requests. Please reach out to me using our E mail investors at New Park Dot Com and we look forward to hosting you all again on our next quarterly conference call.
Matthew Lanigan: Finally, turning to a discussion of our capital allocation priorities. We remain committed to maintaining a well-capitalised balance sheet that provides for organic fleet investments to support growing demand within our critical utilities and infrastructure markets, and positioning the company to accelerate our growth plans together with the return of capital through Shari Purchases.
Yeah.
Thank you. This does conclude today's call. We appreciate your participation you may disconnect at any time.
Gregg Piontek: And 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 third quarter followed by an update on our near-term outlook. Our third quarter was highlighted by solid revenue growth and industrial solutions, the Fluids EMEA region in Canada, continued margin expansion, and strong cash flow generation, providing for further debt reduction and return of capital to shareholders.
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Gregg Piontek: Total third quarter revenues exceeded our expectations shared on our previous quarterly call, with stronger than expected customer activities within Europe and Africa, leading to yet another record revenue quarter for our EMEA region of the Fluids business. The industrial solution segment revenue was $57 million in the third quarter, with roughly two-thirds coming from rental and service and one-third from product sales. Rental and service revenue was $38 million for the third quarter, a 16-percent year-of-year improvement.
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Gregg Piontek: Growth in rental and service revenues reflects continued organic growth across most of our served infrastructure markets, led by a 21-percent year-over-year increase from customers operating within the utility sector. Direct sales rebounded in line with expectation, contributing $19 million for the third quarter. On a year-to-date basis, rental and service revenues have increased 21-percent while product sales have increased 13-percent year-over-year, supported by strong demand from the utility sector. Industrial solution segment profitability remains strong in the third quarter, as reflected by the segment adjusted EBITDA margin of 34.4%.
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Gregg Piontek: A nearly 440 basis point year-over-year Chairman. Improved segment margin realization reflects growth in rental and product sales volumes, as we maintain price discipline, along with improved operating cost leverage across our rental operations. The fluid system segment generated revenue of $141 million in the third quarter, representing a decline of 16% versus the prior year period, primarily reflecting the impact of last year's divest cheers. Our third quarter fluid systems results were once again led by the record quarter from our EMEA region with our international operations delivering $74 million of revenues and improvement of 14% sequentially and 35% year-over-year.
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Gregg Piontek: Our US operations contributed $50 million of revenues in the third quarter, a 17% sequential and 31% year-over-year decline. With the effects of lower US market activity and our focus on pricing discipline, we continued to drive balance sheet efficiency, generating strong cash within US operations. Revenues from Canada followed the typical seasonal trend, increasing 67% sequentially to $17 million in the third quarter, which reflects a 13% year-over-year improvement. Segment-adjusted EBITDA margins improved 180 basis points year-over-year to 7% in the third quarter.
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Gregg Piontek: During the third quarter, we reduced our net assets employed in the fluid systems business by $9 million including a $13 million reduction in the US, reflecting the solid progress driving working capital efficiency. As of the end of the third quarter, the fluid business has nearly $200 million of networking capital, consisting primarily of inventory and receivables, which represents roughly 85% of the segment's net assets employed. SG&A expenses increased on both a sequential and year-over-year basis, primarily reflecting the impacts of long-term management incentive programs and our strategic planning activities.
Gregg Piontek: Third quarter SG&A expense included a $1.9 million charge for long-term management incentives driven by a higher relative total shareholder return projection, as well as $500,000 of strategic planning and M&A costs and $500,000 of severance costs. After consideration of these items, the remaining third quarter SG&A totaled $24 million, including corporate office costs of $6.4 million. Interest expense decreased modestly on a sequential basis to $2 million for the third quarter, reflecting the effect of lower overall debt balances offset by higher borrowing rates.
Gregg Piontek: Tax expense was $4 million in the quarter, reflecting a 34% effective tax rate for the quarter and a 35% year-to-date. Adjusted EPS was $0.9 per deluded share in the third quarter, a 71% increase from the third quarter last year, reflecting improved profitability within both segments, along with a 6% decline in our shares outstanding. In terms of cash flow, we generated $23 million of free cash flow in the third quarter, which brings our year-to-date free cash flow to $47 million, a 74% year-to-date cash conversion of adjusted EBITDA.
Gregg Piontek: Not. Operating cash flow was $27 million for the third quarter, while $4 million was used to fund our net cap ex, with the majority once again directed toward the expansion of our rental fleet in industrial solutions. We also use $13 million to reduce debt and $6 million to fund share purchases. Let's now turn to our near-term business outlook. Our view on the respective markets and the opportunity remains largely unchanged. For industrial solutions, we continue to see strong fundamentals for utilities and critical infrastructure spending, which we expect will provide a multi-year tailwind to support our growth plans.
Gregg Piontek: In fluid systems, while the US 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 position the business for future success. We anticipate fourth quarter industrial solutions revenue in a range of $54 to $60 million. As Matthew touched on, we saw a more pronounced impact from the hot and dry conditions, impacting customer activities late in the third quarter, with the effects carrying over into early Q4.
Gregg Piontek: However, we've seen a meaningful rebound in project bidding activity over the past month and are currently mobilizing to support multiple large-scale rental projects, which we expect will drive a modest sequential improvement in rental and service revenues in the fourth quarter, barring any weather-related or end-of-year holiday disruption in customer activities. Regarding product sales, recognizing that Q4 typically provides seasonal strength, we are pleased with the quoting activity to date, which indicates that our fourth quarter product sales could meet or exceed Q3 levels.
Gregg Piontek: Within our fluid system segment, we anticipate fourth quarter revenue to decline sequentially to a range of $110 to $120 million. Primarily reflecting a pullback from the record quarter in the Eastern hemisphere, along with declines in the US and Canada impacted in part by the typical late Q4 seasonal pause in activities. We anticipate total adjusted EBITDA in the range of $17 to $21 million, and interest expense of nearly $2 million, while the effective tax rate should be roughly 30% for the fourth quarter.
Gregg Piontek: In terms of cash flow, we expect free cash flow generation in the range of $12 to $20 million in the fourth quarter, benefiting from solid EBITDA generation and reductions in networking capital. Beyond our continued organic growth investments in industrial solutions, we expect our fourth quarter cash generation will be primarily used to further reduce our debt, along with return of capital to shareholders through our share repurchase program, providing greater flexibility to accelerate our growth plans.
Matthew Lanigan: And with that, I'd like to now turn the callback over to Matthew for his concluding remarks. Thanks, Greg. As we move into fourth quarter, I'm 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 continue to deliver significant year-over-year growth in revenue, EBITDA and margin realisation. With our ongoing expansion, the multi-billion dollar global worksite access market, we remain optimistic about the near-term prospects for our business, which has delivered $81 million of trailing 12-month EBITDA through the third quarter.
Matthew Lanigan: In fluid systems, the EMEA region continues to deliver significant year-over-year growth in revenue and strong profitability offsetting the clients in the US land markets with a segment realising significant improvement in adjusted margins and reducing net asset employed by $50 million since the start of the year. I'm immensely proud about global fluid's businesses. They continue to navigate the changing global landscape with a laser focus on safety and exemplary customer service while improving margins and working capital efficiency.
Matthew Lanigan: With respect to the fluid sale process, we're pleased with the level of interest from potential acquires who recognise the high quality of our industry leading technical expertise, service quality and established customer relationships. The process is progressing in accordance with our expectations for substantial completion in the first half of 2024. In addition to funding our industrial solutions growth, we've also continued to strengthen our balance sheet and repurchase shares, purchasing over 6% of our outstanding shares in the first nine months of the year. I'm humbled by our teams across the organisation for their unwavering professionalism and commitment to our customers consistent with the high performance culture we've developed at New Park.
Matthew Lanigan: 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.
Todd: With that, we'll open the call for questions. At this time, if you would like to ask a question please press star one on your telephone keypad. You may remove yourself at any time by pressing star two. Once again, if you would like to ask a question, please press star one.
Matthew Lanigan: Our first question will come from Aaron Spichala with Craig Hallop. Please go ahead. Yeah, good morning, Matthew and Greg. Thanks for taking the questions. Good morning. So, first for me, can you just maybe talk about a little, how do you think about the trade-off between growth and volumes and kind of price and margins, as you think about investing more in the industrial business, given the value proposition there? Yeah, I'll take that one, Aaron.
Matthew Lanigan: Thanks for the question. Look, I think the way I'd summarise it, really, if you look at the long run margin profile, the business at an EBITDA level, and that we've been able to manage as we continue to introduce, fleet and expand our footprint, and we would expect that we're going to be able to continue to do that and manage within that range. So, that seems like something that we can manage moving forward.
Matthew Lanigan: Okay, thanks. And then, maybe just a second, can you just talk about any impact you might be seeing from interest rates on project financing across your end markets, and any impact that might be having on kind of rent versus buy decisions? Yeah, I'll grab that one again. Look, I think at this point, you know, it's fair to say we're really not seeing any material impact. When you look at where our large exposures are, it's more around that critical infrastructure and resources, which are not really at this point indicating any pullback in their CAPEX profiles associated with interest rates.
Matthew Lanigan: When it comes to the mix, obviously higher interest rates, we would expect to push the marginal purchaser to a rental over a purchase but still at this point where we're not seeing any material shifts in our mix from that perspective, but something we're definitely watching moving forward.
Matthew Lanigan: All right, thanks. And then, you know, maybe just could you provide an update on, you know, your efforts on the recycling side of things, you know, maybe an update on internal capabilities and, you know, kind of setting up the supply chain there, customer conversations and just a general update there. Absolutely, look, I think the important thing on this, when we have five years into this program, when you really step out, step through it, you know, we started in 2018 really focusing on the material side of recycling, recognizing it's not just as simple as throwing some recycled material into your process and being able to maintain the quality and the structure performance of the product.
Matthew Lanigan: So we leaned into that, then we moved into the processing side of it and now as we've got those things under control, we're expanding our supply relationships, looking for the sources of material there with reliability and consistent quality. So those things are all moving ahead very well in terms of customer conversations. They're evolving as we as we scale this up more, we're going to continue to lean into the fact that this has, you know, economic and societal benefits. It's from the use of recycled versus the virgin material.
Matthew Lanigan: So we're really happy with our progress that I would expect to see that amplify over the coming years.
Gregg Piontek: Understood, thanks. And then, you know, maybe Greg, one question for you on the free cash flow. Look, can you just talk about some of the moving pieces there as we think about, you know, 4Q versus 3Q, is there any more, you know, kind of working capital benefit that you expect from, from to some of the actions and fluids over the past year. Yeah, yeah, we definitely expect that to continue. You look at Q3 versus Q4.
Gregg Piontek: Obviously, Q3 came in strong toward the high end of our expectation. The overall second half look was, it remains fairly unchanged in line with what our view was three months ago. What we did see here in Q3 is with the timing of some of the third quarter mat sales within industrial. We saw an acceleration, you know, stronger DSL performance. And we see that kind of reverting back to a more typical timing in Q4.
Gregg Piontek: So it's really just a shift there Q4 to Q3. And then, and then as you know, Matthew touched on a little bit here also, you know, investment side, you know, we look to continue to accelerate our growth here on the rental side of the business. So we are making investments there and continuing to drive production through the plant to be able to support our growth aspirations.
Gregg Piontek: Got it.
Gregg Piontek: Thanks. Thanks for taking the questions.
Todd: I will turn it over. All right. Thanks there. Thanks. Thank you, Arthur Reminder. That's Star One to ask a question.
Bill Dezellem: Our next question comes from Bill Dezellem with Titan Capital. Thank you.
Gregg Piontek: Would you dive into a bit of detail relative to the half a million dollars it was spent on this strategic planning projects and unless focused on the dollars, then I am kind of what it is that you are in process of evaluating and the implications that that may have over the course of time. Yeah, Bill, that's primarily spend associated with the process on the fluids out of the business. That's the vast majority of it. That's super simple.
Bill Dezellem: Thank you.
Bill Dezellem: Let me shift then to the industrial side of the business. Your guidance seems a little bit conservative relative to how we have thought of this business historically having a strong fourth quarter, oftentimes with some pretty big math sales, et cetera. Would you talk about that level of conservatism or maybe pragmatism that I'm not fully grasping? Yeah, Bill, thanks for the question. Look, we're kind of calling it as we see that audible build.
Bill Dezellem: As Gregg said, we're enthusiastic at the quote levels we're getting until as orders are booked and in the bag, we're not going to claim them. That number seems appropriate for what was saying at this point in time. Yeah, and if you go back over the years, I think there's two aspects to queue for. Number one is it's typically where we see the seasonal strength and the other item that we've talked about is usually that's pretty late developing as you progress to the quarter, so you don't have as much visibility as you prefer. But again, it just goes back to what we're seeing on the quoting side is we're encouraged by and we'll take it from there.
Matthew Lanigan: Okay, I'm going to put my own words to what you said. The essentially your guidance is the number that you feel quite confident that you will be able to hit, but you do recognize that late in the quarter, which is hard to forecast, there has historically been many times some larger sales that have taken place, but you're just not willing to stretch out and assume that those are going to happen this year and every year in the future.
Matthew Lanigan: Yeah, Bill, I think the reality is, and I think Aaron touched on his question in the interest rate environment and what was saying in the larger macro economy here, being too bullish would seem a little out of place. That's why we're calling out the way we see it at this point.
Bill Dezellem: Yep, makes perfect sense.
Gregg Piontek: And then relative to your tax rate being in that 34, 35% range, once the fluids business is no longer part of new part, where do you see that tax rate moving to? Yeah, I think that low to mid-30s rate that we're seeing today is heavily influenced by the geographic mix and the fluid business. I think as you go forward and look at a business that's much more US-centric, you're probably in the mid to upper 20s range is where this levels out.
Bill Dezellem: Thank you both and congratulations on another nice quarter. Thank you.
Rob Krotee: At this time we have no further questions in queue. I'll turn the call back to Rob for any closing remarks. Thanks, Scott.
Rob Krotee: That concludes our call for today. Should there be any questions or requests? Please call again on our next quarterly conference call. Thank you.
Todd: This does conclude today's call. We appreciate your participation. You may discuss at any time.
Todd: [inaudible]