Newpark Resources Q3 2023 Earnings Call Transcript

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November 1, 2023

There are 5 speakers on the call.

Operator

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 Newport 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.

Operator

Eastern. The recording can be accessed by dialing 888-219 1276 for domestic or 402-220-4949 for international.

Speaker 1

York.

Operator

It is now my pleasure to turn the floor over to Rob Crotty, Vice President of Investor Relations and Strategy. Please go

Speaker 2

ahead. Thank you, operator. On behalf of the entire team at Newpark Resources, I'd like to welcome you to our Q3 2023 results conference call. Leading the call today are Matthew Lanigan, our President and CEO and Greg Piontek, our CFO. Today's discussion contains forward looking statements about future business and financial expectations.

Speaker 2

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. Our comments on today's calls 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 the Investor Relations section of our website at newpark.com.

Speaker 2

Please note that the information disclosed on today's call are current as of November 1, 2023. At the conclusion of our prepared remarks, we will also open the line for questions. With that, I'd like to turn the call over to our President and CEO, Matthew Landigen.

Operator

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 multiyear business transformation strategy. Ongoing commercial growth and operational excellence initiatives across enterprise contributed to significant year over year growth in net income, adjusted EBITDA and free cash flow in the 3rd quarter, Fork. Or $0.09 per diluted share on revenues of $198,000,000 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% to $22,300,000 in the 3rd quarter.

Operator

And adjusted EBITDA margins increased 230 basis points to 11.2% in the period. Adjusted EPS came in at $0.09 per diluted share, increasing 71% from the prior Q3. We generated $23,000,000 of free cash flow in the 3rd quarter as we continue to optimize our Fluids balance sheet, which provided for a $13,000,000 reduction of debt and a $6,000,000 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 $47,000,000 I'd now like to provide a progress update on our commercial growth in the Q3. Within our Industrial Solutions segment, we delivered the strongest Q3 revenue on record at $57,000,000 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 3rd quarter as we maintain our focus on sustained profitable growth in the segment.

Operator

On a trailing 12 month basis through the Q3, 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 Q3 Fork. Sales as we maintained EBITDA within our typical margin range. Consistent with our stated strategy, we've continued Fork. Investment to support the expansion of our higher margin specialty rental and service offering.

Operator

During the Q3, we invested $3,000,000 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. Within our Fluids segment, the 3rd quarter was highlighted by yet another record performance from our Eastern Hemisphere team, which generated $73,000,000 in revenue and represented 2% of the segment revenues. Canada also delivered a solid seasonal improvement posting 13% year over year growth in Q3, While our U.

Operator

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 $9,000,000 in the 3rd quarter, including a $13,000,000 reduction in the U. Over the trailing 12 months, we've reduced our Fluids segment net assets by over $110,000,000 or roughly 33%. Moving now to a progress update on our recent efforts to drive operating cost optimization and efficiency improvements across our global footprint.

Operator

As outlined in our Q2 call, we've taken decisive actions to reduce the layers of redundancy across our organization while building increasingly durable competitive business structure. While the Q3 included $2,300,000 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 2 quarters with further reductions expected following the completion of the fluids process. In addition to these cost reduction efforts, we've also continued 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 Dampier Australia offshore facilities is expected to be substantially completed in the Q4.

Operator

Finally, turning to a discussion of our 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 our growth plans together with return of capital through share repurchases. And with that, I'll turn the call over to Greg for his prepared remarks.

Speaker 3

Thanks, Matthew, and good morning, everyone. I'll begin my remarks with a summary of our consolidated and segment level results for the Q3, followed by an update on our near term outlook. Our Q3 was highlighted by solid revenue growth in 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. 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 Solutions segment revenue was $57,000,000 in the 3rd quarter, with roughly 2 thirds coming from rental and service and 1 third from product sales.

Speaker 3

Rental and service revenue was $38,000,000 for the Q3, a 16% year over year improvement. Growth in rental and service revenues reflects continued organic growth Fork. 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 $19,000,000 for the 3rd 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.

Speaker 3

Industrial Solutions segment profitability remained strong in the 3rd quarter 40 basis points year over year improvement. 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 Systems segment generated revenue of $141,000,000 in the 3rd quarter, representing a of 16% versus the prior year period, primarily reflecting the impact of last year's divestitures. Our Q3 Fluid Systems results were once again led by the record quarter from our EMEA region with our International operations delivering $74,000,000 of revenues, an improvement of 14% sequentially and 35% year over year. Our U.

Speaker 3

S. Operations contributed $50,000,000 of revenues in the 3rd 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 continue to drive balance sheet efficiency, generating strong cash within U.

Speaker 3

S. Operations. Revenues from Canada followed the typical seasonal trend increasing 67% sequentially to $17,000,000 in the 3rd quarter, which 13% year over year improvement. Segment adjusted EBITDA margin improved 180 basis points year over year to 7% in the Q3. During the Q3, we reduced our net assets employed in the Fluid Systems business by 9,000,000 including a $13,000,000 reduction in the U.

Speaker 3

S, reflecting the solid progress driving working capital efficiency. As of the end of the Q3, the Fluids business has nearly $200,000,000 of networking capital consisting primarily of inventory and receivables, which represents roughly 85% of the segment's net assets employed. SG and 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. 3rd quarter SG and A expense included a $1,900,000 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 and A costs and $500,000 of severance costs. After consideration of these items, the remaining Q3 SG and A totaled $24,000,000 including corporate office costs of $6,400,000 Interest expense decreased modestly on a sequential basis to $2,000,000 for the 3rd quarter, Reflecting the effect of lower overall debt balances offset by higher borrowing rates.

Speaker 3

Tax expense was $4,000,000 in the quarter, reflecting a 30 percent effective tax rate for the quarter and a 35% year to date. Adjusted EPS was $0.09 per diluted share in the 3rd quarter, a 71% increase from the Q3 last year, reflecting improved profitability within both segments along with a 6% decline in our shares outstanding. In terms of cash flow, we generated $23,000,000 of free cash flow in the 3rd quarter, which brings our year to date free cash flow $47,000,000 a 74% year to date cash conversion of adjusted EBITDA. Operating cash flow was $27,000,000 for the 3rd quarter, while $4,000,000 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 $13,000,000 to reduce debt and 6 $1,000,000 to fund share repurchases.

Speaker 3

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 Fork. Critical infrastructure spending, which we expect will provide a multiyear tailwind

Operator

to support our growth plans.

Speaker 3

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 4th quarter Real Solutions revenue in a range of $54,000,000 to $60,000,000 As Matthew touched on, we saw a more pronounced impact from the hot and dry conditions impacting customer activity late in Q3 with the effects carrying over into early Q4. However, we've seen a meaningful rebound in project bidding Fork.

Speaker 3

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 Q4, 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 4th quarter product sales Fork sequentially to a range of $110,000,000 to $120,000,000 primarily reflecting a pullback from the record quarter in the 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 $17,000,000 to $21,000,000 and interest expense of nearly $2,000,000 while the effective X-ray should be roughly 30% for the Q4.

Speaker 3

In terms of cash flow, we expect free cash flow generation in the range of $12,000,000 to $20,000,000 in the 4th quarter benefiting from solid EBITDA generation and reductions in networking capital. Beyond our continued organic growth investments in Industrial Solutions, we expect our 4th 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.

Operator

Thanks, Greg. As we move into Q4, 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 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 $81,000,000 of trailing 12 month EBITDA through the Q3. In Fluid Systems, the EMEA region continues to deliver significant year over year growth revenue and strong profitability offsetting the declines in the U.

Operator

S. Land markets with the segment realizing significant improvement in adjusted margins and

Speaker 4

Fork.

Operator

Business as 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 sale process, we're pleased with the level of interest from potential acquirers who recognize the high quality of our industry leading technical Peace, Service Quality and Established Customer Relationships. The process is progressing in accordance with our expectations for substantial completion in the first half of twenty C24. 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 1st 9 months of the year. I'm humbled by our teams across the organization for their unwavering professionalism and commitment to our customers consistent with the high performance culture we've developed at Newpark.

Operator

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. Our first question will come from Aaron Spychalla with Craig Hallum. Please go ahead.

Speaker 4

Yeah. Good morning, Matthew and Greg. Thanks for taking the questions.

Speaker 3

Hey. Good morning. Good

Speaker 4

morning. So, first for me, can you just maybe talk about a little, How do you think about the trade off between growth in volumes and kind of price and margins as you think about investing more in the industrial business given the value proposition there?

Operator

Yes. I'll take that one, Aaron. Thanks for the question. Look, I think

Speaker 3

I mean, the way I'd summarize it, Really, if

Speaker 2

you look at the long run margin profile of

Operator

the business and an EBITDA level, we've kind of got low early 30s to high 30s EBITDA margin 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.

Speaker 4

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

Operator

your end markets and any impact that might

Speaker 4

be having on across your end markets and any impact that might be having on kind of rent versus buy decisions?

Operator

Yes, I'll grab that one again. Look, I think At this point, 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 Fork. Critical Infrastructure and Resources, which are not really at this point indicating any pullback in their CapEx profiles associated with interest rates. 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, we're not seeing any material shifts in our mix from that perspective, but something we're definitely watching moving forward.

Speaker 4

All right, thanks. And then maybe just could you provide an update Your efforts on the recycling side of things, maybe an update on internal capabilities and kind of setting up the supply chain there, customer conversations and just a general update there.

Operator

Absolutely. Look, I think the important thing on this one, we're 5 years into this program when you really step through it. We started in 2018 really focusing on the material science 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 structural performance of the product. 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 supplier relationships, looking for the sources of material there with reliability and consistent quality.

Operator

So those things are all moving ahead very well. In terms of customer conversations, they're evolving. As we scale this up more, we're going to continue to lean into the fact that this has economic and societal benefits from the use of recycled versus the virgin material. So we're really happy with our progress today, but expect to see that amplify over the coming years.

Speaker 4

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 4Q versus 3Q. Is there any more kind of working capital benefit that you expect from just some of the actions in Fluids over the past year?

Speaker 3

Yes. We definitely expect that to continue. You look at Q3 versus Q4, 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 3 months ago. What we did see here in Q3 is with the timing of some of the 3rd quarter mat sales, drill.

Speaker 3

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 shift there Q4 to Q3. And then as Matthew touched on a little bit here also on Fork. 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.

Speaker 4

Got it. Thanks. Thanks for taking

Operator

the questions. I will turn it over.

Speaker 3

Thanks, Aaron. Thanks.

Operator

Thank you. Our next question comes from Bill Dezellem with Tieton Capital.

Speaker 1

Thank you. Would you dive into a bit of detail relative to the $500,000 that was spent on this strategic planning projects and I'm less focused on the dollars than I am. What it is that you are in process of evaluating and the implications that that may have over the course of time.

Speaker 3

Yes. That Bill, that's primarily spend associated with the process on the fluids side of the business. That's the vast majority of it.

Operator

That's super simple. Thank you.

Speaker 1

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 Q4, oftentimes with some pretty big MAP sales, etcetera. Would you talk about that level of conservatism or maybe pragmatism that I'm not fully grasping?

Operator

Yes, Bill, I mean, thanks for the question. Look, we're kind of calling it as we see that order book build. As Greg said, we're Enthusiastic at the quote levels we're getting and until those orders are booked and in the bag, we're not going to claim them. So we That number seems appropriate for what we're seeing at this point in time.

Speaker 3

Yes. And if you go back over the years, I think There's 2 aspects to Q4. Number 1 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 through the quarter. So you don't have as much visibility as you prefer. But again, it just Back to what we're seeing on the quoting side is we're encouraged by, and we'll take it from there.

Speaker 1

Okay. I'm going to put my own words to what you said that 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.

Operator

Yes. Bill, I mean,

Speaker 3

I think the reality is and I think Aaron touched on it in his question in the interest rate environment And what we're seeing

Operator

in the larger macro economy here, being too bullish would seem a little out of place. So that's why we're calling out the way we see it at this point.

Speaker 1

Yes, makes perfect sense. And then relative to your tax rate being in that 34%, 35% range, Once the Fluids business is no longer part of Newpark, where do you see that tax rate moving to?

Speaker 3

Yes, I think that low to mid-30s 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 20s range is where this levels out.

Speaker 1

Great. Thank you both and congratulations on another nice quarter.

Speaker 3

Thank you. Thanks, Bill.

Operator

Thank you. At this time, we have no further questions in queue. I'll turn the call back to Rob for any closing remarks.

Speaker 2

Thanks, Scott. That concludes our call for today. Should there be any questions or requests, Please reach out to me using our email investorsnewpark.com and we look forward to hosting you all again on our next quarterly conference call.

Operator

Thank you. This does conclude today's call. We appreciate your participation. You may disconnect at any time.

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Earnings Conference Call
Newpark Resources Q3 2023
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