Newpark Resources, Inc.

Greetings and welcome to the New Park Resources fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Denard. Thank you, Mr. Denard. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the New Park Resources conference call and webcast to review fourth quarter and full year 2021 results. Participating from the company in today's call are Paul Howes, New Park's Chief Executive Officer, Greg Piontek, Chief Financial Officer, and Matthew Lanigan, President and Chief Operating Officer. Following my remarks, management will provide a high-level commentary on the financial details of the fourth quarter results and near-term outlook, before opening the call for Q&A. Before I turn the call over to management, I have the normal housekeeping details to run through. There'll be a replay of today's call. It'll be available by webcast on the company's website at newpark.com. There'll also be a recorded replay, telephonically, available until March 4th, 2022. And that information is included in yesterday's release on how to access that. Please note that information reported on this call speaks only as of today, February 18th, 2022, and therefore you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of New Parks Management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies. The comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on New Park's website. And now with that behind me, I'd like to turn the call over to New Park's president and COO, Mr. Matthew Lanigan. Matthew.

Good morning, everyone. Before getting into the specifics of the fourth quarter, I'd like to start today's call with a brief overview of our strategy, which is underpinned by three key priorities. Priority one, reshape the company by transforming our fluids business into a more agile and capital-like model capable of generating cash across commodity cycles while focusing capital allocation into higher returning growth markets. Priority two, leverage our extensive product development and manufacturing experience and credibility to expand our sustainable technology and service solution offerings. And priority number three, a laser focus on operating costs and balance sheet discipline to maintain a flexible overhead structure and fund our growth as we reshape the company. While we continue to execute across all three, prioritizing investment to high returning markets is our primary focus. The impact of our efforts is readily evident in our industrial business's 2021 full year results. Specifically, our industrial solutions business delivered $194 million of revenue and $60 million of EBITDA for the year, with more than 80% of the segment revenues derived from outside our historical EMP markets. The revenue generation from utilities and other industrial markets reflects a record level for New Park and a 10% cumulative annual growth rate when compared to 2018. As we've discussed throughout this past year, we're encouraged by the increasing momentum we are seeing, which positions us well for continued profitable growth for years to come. Key to our industrial growth effort is our U.S. geographic expansion to better serve our growing number of utility customers and contractors. After establishing a beachhead in the southeast region in 2020, we highlighted our first large-scale T&D project in Florida on last quarter's call. Building on this focus, we completed a tuck-in acquisition in December, which strengthens our utility industry customer base and also enhances our footprint in the northeast region. We are now establishing a larger presence in the Mid-Atlantic region to bridge our existing northeast and southeast operations. As another aspect to our industrial growth strategy, we look to expand our manufacturing beyond our core matting product, leveraging our unique technical knowledge base in design, manufacture and product marketing to play a role in the growing circular plastic economy. While we have been successfully recapturing and repurposing select post-industrial materials for some time now, We're in the early stages of the expansion of this effort and will provide updates as we progress. In terms of our efforts to transform our fluids business to a more agile, capital-like model, the past two years have shown clearly that our historical model was not readily adaptable to the reduced activity levels and volatility of the oil and gas markets, particularly in the US. During this time, we've executed continued cost actions to right-size our roofline and overhead structure, And we continue to assess all aspects of the business to create a flexible cost structure capable of generating cash through commodity cycles. With international fluid systems profitability approaching pre-pandemic levels and our US fluids business benefiting from improving market activity and overhead cost actions, the fluid system segment returned to profitability in the fourth quarter. With industry fundamentals continuing to improve and COVID-related impacts subsiding, we remain encouraged by the signs of the ongoing recovery in oil and gas market activity. While the early beneficiaries in the U.S. land market have been more on the completion and production enhancement side, we're encouraged by the recent increases in drilling activity across our service markets. With the improving activity, a key priority remains their ability to offset raw material and labor cost inflation and recover product margins through necessary price increases. Along with margin improvement, our near-term action plan remains focused on optimising the level of working capital and taking necessary action on underperforming operations. As a part of our ongoing portfolio review discussed on last quarter's call, we highlighted two actions in yesterday's press release that are aligned to our strategic priorities. First, despite our success transitioning our oilfield blending capabilities into the disinfectant and cleaning product market over the past 13 months, In light of competing priorities for financial and human capital allocation, we recently concluded that it's in the best interest of our shareholders to shut down this operation and pursue the sale of our facility and related assets located in Conroe, Texas. The industrial blending business contributed $9 million of revenue in 2021 while incurring a $2 million operating loss and ended the year with $20 million of net capital employed. In addition, We have decided to explore strategic options for our Excalibur mineral grinding business, which supplies ground bayrite and other minerals for our U.S. fluid system operations, as well as third parties in oil and gas and industrial end markets. Following the previously discussed roofline reductions and working capital actions, which have contributed a nearly $100 million reduction in fluids net capital was deployed over the past two years, we see this as another step to driving a capital-light and agile model in our U.S. fluids business. The mineral grinding business contributed total third-party revenues of $36 million in 2021, yielding approximately break-even operating income and ended the year with $47 million of net capital employed, including roughly $25 million of net working capital. We believe these actions will unlock liquidity that can be redeployed to higher returning opportunities. In addition, as we simplify and streamline our operating model, we plan to continue driving efficiencies in our SG&A costs. Meanwhile, on the international side, we continue to progress our efforts in Saudi Arabia, where we intend to contribute our existing in-country business to establish a joint venture company with Taka, as previously announced. We anticipate completing the formation and begin operating under the joint venture arrangement around mid-year, which is a key step to support the evolving local content requirements and expand our presence in this important market. And with that, I'd like to turn my attention to the fourth quarter results. Consolidated revenues increased 18% sequentially to $180 million in the fourth quarter, benefiting from strong growth in both segments. Reported EBITDA for the fourth quarter was $10.5 million, which includes $1.8 million of charges, highlighted in yesterday's press release. Our industrial solutions segment generated $52 million of revenues in the fourth quarter, reflecting an 18% sequential improvement benefiting from the anticipated year-end demand for product sales in the utility sector. Aside from the charges highlighted in yesterday's press release, our industrial solutions operating margin was in line with our expectations, generating $14 million of EBITDA. The fluid system segment revenues also improved 18% sequentially, driven by broad-based growth across most key markets. In North America, revenues improved by 17% sequentially to $83 million, including 21% growth from both US land and Canada. International revenues improved 21% sequentially to $45 million in the fourth quarter, with activities in North Africa driving the majority of the revenue growth. As I touched on a moment ago, the fluid system segment returned to positive operating income benefiting from the revenue improvement and ongoing cost actions and generated $5 million of EBITDA, which included nearly $1 million of restructuring charges, as highlighted in yesterday's press release. And with that, I'll hand the call over to Greg to discuss in more detail the financials for the fourth quarter. Greg?

Thanks, Matthew, and good morning, everyone. I'll begin by covering the specifics of the segment and consolidated financial results for the quarter before providing an update on our near-term outlook. Total revenues for the industrial solution segment improved by $8 million sequentially to $52 million in the fourth quarter. The site and access solutions business contributed $51 million of segment revenues in the fourth quarter, including $29 million of rental and service revenues and $22 million of product sales. Product sales increased $8 million sequentially, benefiting from the anticipated year-end strength in the power transmission sector. In addition, as discussed on November's call, the fourth quarter benefited from a few notable rental projects in the south region and our first large-scale T&D project in Florida, which contributed to the modest improvement in rental and service revenues over Q3, though it is worth noting that the project activity pulled back somewhat around the year-end holidays. The industrial solution segment operating income improved modestly from the prior quarter, contributing $14 million of EBITDA in the fourth quarter. Although the segment benefited from the higher site and access solution revenue contribution, this was largely offset by the impact of raw material inflation combined with a competitive pricing environment, as well as the prior quarter benefit of our industrial blending customer cancellation fees. The fourth quarter result was further impacted by $900,000 of charges, as noted in yesterday's press release. Comparing to the fourth quarter of last year, Revenues from the site and access solutions business increased $8 million, or 20%, substantially all of which is attributable to higher product sales. This increase was offset by a $7 million decline in industrial blending. Looking at the full year 2021 performance for the industrial solutions business, as Matthew touched on, our segment revenue mix has shifted dramatically. with the power transmission end market contributing more than half of our full-year segment revenues, while our historical E&P market activity accounts for less than 20%. Comparing 2021 to 2019, the strong growth achieved in the utilities and other industrial markets has nearly offset the $56 million revenue decline from the E&P market. Now turning to fluid systems, Total segment revenues improved $20 million sequentially to $128 million in the fourth quarter, reflecting broad-based improvements in our global customer activity. Revenues from U.S. land increased 21% sequentially to $62 million, significantly outpacing the 13% improvement in market rig count, reflecting improved revenue per rig, including a benefit from elevated fluids losses. Revenues from the Gulf of Mexico declined by $2 million, contributing $4 million in the fourth quarter, as drill ship mechanical issues caused further delays to customer drilling plans. In Canada, revenues increased 21% sequentially to $17 million in the fourth quarter, meaningfully outpacing the 6% market rig count improvements. It's worth noting that unlike most years, our Canadian operations didn't experience the typical slowdown late in the fourth quarter, as operators largely continued activities through the holidays. Outside of North America, revenues improved 21% sequentially to $45 million in the fourth quarter, with our operations in North Africa being the primary driver of the growth. As Matthew touched on, with the sequential revenue growth in the fourth quarter, our fluid system segment returned to profitability despite incurring $900,000 of charges related to our ongoing restructuring effort. After consideration of both the third and fourth quarter charges highlighted in the press release, the sequential improvement in operating income reflects an incremental margin of roughly 22% on the $20 million revenue increase. Although we continue to see meaningful inflation in our raw materials and transportation costs, we've been largely successful to date in offsetting the impact through pricing actions. On a year-over-year basis, our fluid systems revenues increased $48 million, or 61%. North America land revenues improved by $30 million, benefiting from the recovery in market rig count, while Gulf of Mexico declined by $7 million. International revenues improved $18 million, or 64%, benefiting from new project startups and increased customer activity across most markets as COVID restrictions subside. Corporate office expenses were $9.3 million in the fourth quarter, representing a $1.8 million sequential increase and a $3.4 million increase year-over-year. The sequential increase is primarily attributable to elevated incentive expense, including long-term incentives tied to New Park's three-year share price relative to our peer group, along with elevated legal and professional spending, primarily associated with M&A activity and the restructuring of certain subsidiary legal entities within Europe. Comparing to the fourth quarter of last year, nearly half of the increase is attributable to long-term incentives, with fluctuations in New Park share price performance versus peer group providing a benefit to Q4 of 2020 and a charge to Q4 of 2021. The remainder of the increase is primarily attributable to the elevated M&A and other legal and professional spending, along with higher personnel expenses, including costs associated with the CEO succession. SG&A costs, which include corporate office expenses, were $27 million in the fourth quarter, reflecting a $2.8 million increase from prior quarter and a $6.3 million increase year-over-year. In addition to the corporate office impact, substantially all of the remaining $1 million sequential increase in SG&A is attributable to our non-US fluids business units. Comparing to the fourth quarter of last year, the increase in SG&A at the segment level is primarily attributable to the higher activity and the stronger performance broadly across both segments. Interest expense declined modestly to $2.1 million in the fourth quarter. Following the maturity of our convertible bonds in December, our weighted average cash borrowing rate on outstanding debt is approximately 2%. The fourth quarter includes a $2 million income tax expense, despite reporting a pre-tax loss. We are currently unable to recognize the tax benefits on our US losses, and therefore, the income tax expense primarily reflects taxes on foreign earnings. Our reported net loss in the fourth quarter was $0.04 per share, which compares to a net loss of $0.11 per share in the third quarter and a loss of $0.20 per share in the fourth quarter of last year. All periods were impacted by charges as described in yesterday's press release. During the fourth quarter cash flow, net cash used in operating activities was $17 million, including $35 million of cash usage associated with the increase in receivables, largely reflecting the impact of the revenue growth. Consolidated DSOs remained elevated despite improvements in the international fluids business, driven by the timing of large projects and product sales within the quarter, which impacted our U.S. operations across both segments. Investing activities used net cash of $10 million in the fourth quarter, including $13 million associated with the landscaping acquisition completed in December. with capital investments during the quarter being more than offset by proceeds from the sale of used mats and other surplus equipment. For the full year 2021, investment in the rental fleet totaled $14 million, the majority of which replaced mats sold from our rental fleet as part of our standard commercial model. Consequently, while gross capital expenditures totaled $22 million for the year, our net capital investments were only $6 million. We ended the year with a total debt balance of $115 million and a cash balance of $24 million, resulting in a 20% debt-to-capital ratio and a 16% net debt-to-capital ratio. Our net debt increased by $28 million in the quarter, largely reflective of the elevated receivables as well as the industrial solutions acquisition funding. With the repayment of our convertible debt in December, we ended the year with $87 million outstanding on our US asset-based loan facility and $28 million of other debt, the majority of which is held within our foreign subsidiaries. Now turning to our near-term operational outlook. As we look ahead, although we continue to manage the near-term supply chain challenges and significant inflationary pressures, we are very encouraged by the improving outlook for 2022 and the strength of the longer-term fundamentals across all major energy sectors. In the industrial solution segment, our opportunity pipeline is building, particularly as we expand our geographic coverage in the T&D sector. Following the year-end lull in customer projects, we've seen rental and service activities ramp up in recent weeks, benefiting from the startup of several large-scale T&D projects. We expect sequential growth in rental and service revenues in the high single digit percentage range in Q1. And with the benefit of some longer term projects now underway, we expect to see a similar growth rate in Q2, likely driving our Q2 rental and service revenues to their highest levels since mid 2019. On the product sales side, although there is always a fair amount of quarter to quarter fluctuation based on the timing of customer purchases, We are very encouraged by the record $67 million in product sales achieved in 2021 and the opportunities that we see in 2022. As is typical, we expect a sequential pullback in Q1 following the seasonal year-end strength, which will be further impacted this year by the timing of certain customer shipments sliding to Q2. Overall, reflecting the timing of the product sales activity, we anticipate segment revenues in the high 30s range in Q1, then returning to the mid-40s in Q2. Prior to consideration of any impairments associated with our exit of the Conroe facility, we anticipate margins to remain in the mid to upper teens in Q1, depending on the pace of wind down of industrial blending expenses, then improving to roughly 20% in Q2. In fluid systems, as we look to 2022, we are encouraged by the strengthening of global market dynamics following two years of industry underinvestment. With our return to segment profitability in the fourth quarter, combined with the positive impact from pricing and cost actions, we expect the fluids business will remain profitable prior to consideration of any restructuring related charges. For Q1, we expect to see modest revenue growth for the segment, with benefits of the improving market activity being somewhat offset by a more typical revenue per rig. The primary drivers of the anticipated revenue growth include Canada, where we expect to achieve the strongest quarterly revenue since 2018, as well as continuing strength in Europe and North Africa. Total international revenues are expected to return to the upper 40 million range in Q1, back in line with pre-COVID levels. With the continued recovery in revenues and ongoing cost actions, we expect modest improvements in segment operating income, though the fluids operating margin is expected to remain in the low signal digits. Looking beyond Q1, although Canada will be impacted by the spring breakup in Q2, we expect this impact will be largely offset by the benefits of the strengthening U.S. market activity, as well as the startup of several new projects in the EMEA region, which should keep the fluid segment in positive income territory. First quarter corporate office expense is expected to revert back to levels similar to Q3, as the costs associated with incentive compensation and legal and professional expenses are expected to normalize. Looking beyond Q1, we anticipate our corporate office expense will further reduce in Q2, benefiting from the completion of the CEO succession. Also, it's worth noting that with the December settlement of our convertible bonds, we expect a meaningful step change in interest expense, with net interest expected to run slightly more than $1 million per quarter in the near term. Regarding income tax expense, the near term is expected to remain fairly in line with recent quarters, largely reflecting taxes on foreign earnings. For CapEx, while we anticipate gross expenditures likely in the $20 to $25 million range for 2022, we expect our expenditure level will remain heavily dependent upon revenue-driven opportunities in industrial solutions as we expand our MAP rental fleet to support the T&D and industrial market penetration. Capital investments in the fluids business are expected to remain fairly limited as we continue to drive the capital light model. In terms of free cash flow, we expect positive contribution in the near term, with the first quarter benefiting from expected reductions in receivables. Inventories will likely grow modestly in the near term, as we intend to maintain additional buffer stock in the uncertain supply chain environment. And now with that, I'd like to turn the call over to Paul for his concluding remarks.

Thanks, Greg. With this being my last earnings call, I'd like to leave you with a few parting thoughts. First and foremost, as I leave New Park, I take comfort in the fact that we have a strong team who will continue the journey to reshape the company and drive it to higher levels of performance over the coming years. With a strong balance sheet and improving market dynamics, the company is well positioned to drive profitable growth in both business segments. Second, I'd like to reaffirm our unwavering commitment to safety, and to providing our customers across the energy sectors with products that work in harmony with the environment, a long-standing hallmark of New Park. As the world transitions to cleaner energy sources over the coming decades, New Park stands ready to provide sustainable products and services to help meet the world's energy needs in a responsible manner. And with that, I'd like to close, as I've done for the past 16 years, by thanking our shareholders for investing in us and thanking our employees for their hard work and their continued focus on safety. We'll now take your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the start keys. One moment while we poll for questions. Our first question comes from the line of Daniel Burke with Jason Johnson Rice. You may proceed with your question.

Hey, good morning guys.

Morning.

Let's see, maybe a couple in the Matt's business. Hey Matt, in your prepared comments you talked a little bit about looking to expand manufacturing beyond core matting. And I don't know if you're ready to expound on that or if it's a stay tuned and that's as far as you want to go, but I was curious about that and was that specifically related to your follow-up comment about repurposing and recycling or is it sort of two related but separate initiatives?

Yeah, thanks for the question there. It is the latter. I think we have been working hard over the last few years to perfect post-industrial material usage in our fleet products and as we as we look to expand that going forward, I think that'll play a larger part. And then obviously an extension to that, which we are very early stages of, is when we look at our manufacturing capability, it does allow us to capture a really wide range of that post-industrial material that we would then look to for avenues in other markets beyond matting. But I think as you touched on, it is early days and we'll keep you up to speed as we move forward with that.

Okay, that's helpful. And then maybe one on the outlook for Matt's here. I appreciate kind of the forward look into the second quarter. You know, Matt's sale is hard to predict, but it looks like there will be a decent deceleration first half of 22 versus the tempo of 21 and even kind of second half of 20. Anything in particular going on there? Again, I know it's a market where visibility is almost necessarily limited, but is there any sort of structural change underpinning that?

No, none that we've seen. I think as Greg touched on, we're seeing some timing slip, particularly in some international markets that are pushing out of Q1 into Q2. But beyond that, I think we're seeing the typical kind of project flow and just balance of the timings of when customers need it for their projects versus their autodates.

Okay, got it. All right, and then I guess from the service and rental side, you pick up some benefit from working with or from the new acquisition, so that'll be reflected on the service and rental side. Fair enough. Maybe one on the proposed or the thought of exiting the mineral grinding business. I guess I just wanted to understand how that would work. Would you be willing to make throughput commitments to a buyer? How does this impact how you think about your supply chain?

Yeah, obviously one of the key considerations is making sure that as part of this where we're protecting our businesses, particularly kind of in the Gulf Coast region there and backing that up with supply agreements. So that'll be part of the consideration as we move through the process.

Yeah, I think the bigger issue here is just as you look at the scale of the operation and contrasted with what has happened in the U.S. oil field, you don't have a volume requirement that is appropriate for that size of investment.

Understood. Understood. Okay. All right, guys. Well, look, I'll leave it there for now, but thank you for the time. Thank you.

Thank you. Our next question comes from the line of Bill DeZellum with Titan Capital. You may proceed with your question.

Thank you. Let's start with the drill ship's mechanical issue, if we could please. Is that corrected? And if so, when will or when did drilling begin?

Yeah, thanks, Bill. Yes, that is corrected. And we're expecting sometime in sort of February for normal activities to return.

And is that the beginning of long-term usage of that drill ship, or is this simply a single well program?

No, it's longer term than that, but what I will say is the schedules are subject to change by the customer. We know that this project would carry through Q1 and into Q2, and then beyond that point, it is a function of their plans, which as we've seen in the past, they do change.

Thank you. And then I know you characterized sequential growth in the North American fluids market or North American fluids business in Q1 versus Q4. I'm hoping maybe you would be able to tie in the run rate that you're seeing in the first six weeks of the first quarter relative to that $128 million, and ultimately what I'm trying to understand here is the degree that a ramp is necessary in the second half of the quarter to meet that versus already really embedded in the numbers.

I guess the way I would frame it up is what we're seeing in the early part of the quarter, the first six weeks of the quarter, is not inconsistent with the run rate that we've framed up here for the quarter. Does that answer your question? That was broadly loose. What can I tighten up on there?

Are you seeing basically, is your business mirroring the rig count, essentially, that you are just seeing a ramp as the quarter goes on? Is that essentially the way to think about it?

I think it's fair to say we are seeing an increasing level of activity. Now, one of the things that you have to also consider when you look at that sequential comp, though, is, as we had highlighted, the revenue generation on a per-rig basis was elevated in Q4. and that provides a little bit of offset, and I think that kind of balances out somewhat on the Q1, but obviously the uptick in activity, that sets up well for Q2 and beyond.

Right. Okay, thank you. And then one additional question. The M&A expenses that you highlighted for Q4, would you talk in a little more detail about what those were targeted towards, et cetera, and In as much detail as you can, please.

Sure. It's really regarding the two transactions that we had noted publicly, the acquisition that we did in the math business, which was completed in December, and then also the continued progress on the JV in Saudi Arabia.

Great. Thank you both. And, Paul, good luck in the next chapter of life here.

Thanks, Bill. It's been a great time with this company.

This concludes our question and answer session. I would now like to turn the call over to management for any final comments.

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

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