Newpark Resources, Inc.

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Park Resources first quarter 2024 earnings conference call. Today's call is being recorded and will be available for replay beginning at 1230 p.m. Eastern Standard Time. The recording can be accessed by dialing 800-723-6062 for domestic or 402-220-2665 for international. All lines are currently muted, and 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 segment, please press star 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue at any time by pressing star 2. 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 Greg Piontek, Chief Financial Officer of New Park Resources. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to the New Park Resources first quarter 2024 conference call. Joining me today is Matthew Lannigan, our President and Chief Executive Officer. Before handing over to Matthew, I'd like to highlight that today's discussion contains forward-looking statements regarding 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. Our comments on today's call may also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our quarterly earnings release, which can be found on our corporate website. There will be a replay of today's call and it will be available by webcast within the investor relations section of our website at newpark.com. Please note that the information disclosed in today's call is current as of May 3rd, 2024. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I would like to turn the call over to our President and CEO, Matthew Lanigan. Thank you, Greg, and welcome to everyone joining us on today's call. Our first quarter performance was a solid start to the year, one highlighted by both sequential and year-over-year growth in adjusted EBITDA. Industrial Solutions project activity levels accelerated as the first quarter progressed, positioning us for a strong second quarter, consistent with our expectations coming into 2024. At a strategic level, we continue to advance our multi-year business transformation plan during the first quarter, investing in the growth of our industrial solutions business, which remains the central driver of our long-term value creation strategy. For those newer to our story, we've spent the last three years positioning New Park to become a leading pure-place specialty rental business servicing the global worksite access market. Operating the nation's largest fleet of the Jira-based composite matting system, along with our adjacent services, we provide customers with a reliable, all-weather, load-bearing work surface that allows their critical infrastructure construction projects to be undertaken safely and efficiently. In 2023, nearly 60% of our industrial solutions revenues were to customers within the electrical utility infrastructure market. positioning New Park as a leading beneficiary of an ongoing multi-year investment cycle focused on the expansion, hardening and resilience of our electric grid. With multi-billion dollar government programs focused on improving the nation's electricity infrastructure, combined with the onshoring of several industry segments and growth in AI data centers, We see a significant and sustained investment cycle in the electrical grid to support these programs, creating long-term demand for our worksite access solutions. Through our unique vertically integrated model, we design, manufacture, rent, sell and service our Jira-based composite matting solutions. Our rental fleet and world-class manufacturing capabilities allow us to respond quickly to the needs of our customers, making us a responsive and reliable partner for the varying need of the industries and customers we serve. With a service life of around 12 to 15 years, we believe the Durabase system offers a safer, longer-lasting replacement to traditional wooden mats, which currently represent an estimated 75% to 80% of the US market. Continued penetration of traditional timber applications represents a significant opportunity for our business. Beyond our US markets, with over 25 years of setting the standard for composite matting, our products continue to support critical infrastructure projects and our strategic partners around the world. Our Jura-based mats are fully recyclable, not only allowing us to responsibly play our role in the growing circular plastic discussion, but also creating superior unit economics whereby an end-of-life map can be reground and reprocessed back into a new unit that can be placed into an additional 12 to 15-year service life at significantly improved economics compared to its initial manufacturing cycle. It's an exciting time for our business, and we're looking forward to building upon the progress we've made so far. With that overview, let's take a deeper look at our first quarter performance. On a consolidated basis, first quarter adjusted EBITDA increased 31% sequentially and was up modestly versus the prior year period. We also delivered both sequential and year-over-year growth in adjusted EBITDA margins in both our industrial solutions and fluid system businesses during the quarter, primarily driven by a combination of more favourable sales mix and operating cost leverage. Within our industrial solutions segment, following a subdued start to the year, demand conditions accelerated as we moved through the first quarter, putting us on pace for a stronger Q2 performance. Notably, the first quarter rental and service revenues from the utility sector improved on both the sequential and year-over-year basis, which was offset by declines in revenues from pipeline and oil and gas sectors. Industrial Solutions adjusted EBITDA margin increased 150 basis points versus the prior year to 36.8% in the first quarter, as volume and improved operating leverage offset lower blended pricing. As we've stated on prior calls, we continue to pursue an increased number of larger scale, longer duration infrastructure projects. These longer-term projects can create a more stable base of revenue and enhance return on investment, but also tend to carry a pricing structure below that of shorter-term rental projects. In support of our growth strategy, we're actively building out our US commercial sales teams, expanding coverage in targeted Midwest and West Coast markets, while also continuing our investment in rental fleet expansion. During the first quarter, we invested $12 million in the growth of our Madding fleet, given the strengthening customer demand drivers I referred to earlier. While this capital investment led to an anticipated negative free cash generation in the first quarter, we see a return to positive free cash in the second quarter and for full year 2024. Within our fluid segment, our first quarter performance benefited from a combination of strong international demand along with improved pricing and continued cost actions, which together can of adjusted EBITDA margin expansion year over year. Our segment revenues from international operations increased 19% versus the prior year, supported by strong growth from our eastern hemisphere and Canadian operations. With that, I'll turn the call over to Craig for his prepared remarks. Thanks, Matthew, and good morning, everyone. I'll begin my remarks with the summary of our consolidated and segment-level results for the first quarter. Columbine update. on our outlook for 2024. Our first quarter was highlighted by a 31% sequential improvement in adjusted EBITDA, driven by strong profitability within our industrial solutions segment and the international fluids business units. Consolidated first quarter revenues improved 1% sequentially, generally in line with our expectations shared on our previous quarterly call. The industrial solution segment revenue was $49 million in the first quarter, down at 12% on a year-over-year basis due primarily to the timing of product sales, but up 5% on a sequential basis. This result was generally in line with our expectations as we anticipate customer activity and project timing to ramp up through the year. Total rental and service revenues were $35 million for the first quarter, down slightly on both the sequential and year-over-year basis. As Matthew touched on, rental project activity steadily improved through the first quarter, leading to a 5% sequential improvement in rental revenues, though our mix of less service-intensive projects led to a sequential decline in service revenues. The first quarter rental fleet utilization improved modestly on a sequential basis, though our Q1 exit rate was meaningfully stronger than the full quarter average, which positions us for a strong sequential improvement into Q2. By industry, the utility sector contributed nearly 60% of rental and service revenues for the quarter, delivering growth on both a year-over-year and sequential basis, while oil and gas, pipeline, and other industries declined. First quarter product sales were $14 million, a meaningful sequential improvement, though below prior year levels due to project timing issues. Our rental and service revenues contributed more than 70% of our first quarter segment revenues in line with the 2023 mix of rental and service versus product sale revenues. Industrial solutions profitability was strong in the first quarter. with the segment delivering a 36.8% adjusted EBITDA margin up 150 basis points from last year due primarily to a more favorable mix and operating leverage. The fluid system segment generated revenues of $120 million in the first quarter, with our international business units delivering solid growth on both a year-over-year and sequential basis. Our Eastern Hemisphere region contributed $68 million, or 57% of our total fluid systems of revenues in Q1. The first quarter results reflected improvement of 8% sequentially and 24% year-over-year, with the year-over-year improvement driven by broad-based improvements from several markets within Europe, the Middle East, and Asia Pacific. Revenues from Canada increased 1% sequentially to $21 million in the first quarter, which reflects a 10% year-over-year improvement. Our US operations contributed $30 million of revenues in the first quarter, reflecting a 17% sequential and 56% year-over-year decline. The year-over-year and sequential declines are primarily driven by a combination of the continued softening of the U.S. market activity and the lower market share, as well as a notable decline in the average revenue contribution from the rigged service. With the effects of the U.S. market softness, we are maintaining our focus on pricing and expense discipline, along with balance sheet efficiency. Fluid segment adjusted EBITDA margin improved 120 basis points year-over-year to 7.2% in the first quarter, benefiting from the higher revenue from our international business and continued cost efforts in the U.S. SG&A expenses were $24.3 million in the first quarter, including $7.9 million of corporate office expense. The first quarter of 2024 includes $2.3 million related to the fluid sale process, while first quarter of 2023 included nearly $1 million for strategic planning activities. Despite the elevated project expenses in 2024, total SG&A is down $1.1 million year over year, primarily reflecting the effects of cost rationalization efforts in the US fluids and corporate office. Interest expense was $1.8 million in the first quarter, down modestly on both the sequential and year-over-year basis, primarily reflecting the effect of lower overall debt balances. Tax expense was $2.8 million in the first quarter, reflecting an effective tax rate of 28%, which includes a favorable impact from previously unbenefited U.S. NOL carry-forwards. Adjusted EPS was $0.10 per diluted share in the first quarter compared to $0.04 in the fourth quarter and $0.09 in the first quarter last year. Operating cash flow was $12 million for the first quarter, including the effects of our annual employee incentive program payouts while $13 million was used to fund our net capex, substantially all of which was directed toward the industrial solutions matting fleet expansion as we seek to capitalize on the growth opportunities and strengthening demand conditions. We ended the first quarter with total debt of $77 million and cash of $38 million, resulting in net debt of $40 million, a 0.5 times net leverage ratio. Let's now turn to our business outlook. As before, we remain highly constructive on the multi-year demand outlook for both businesses. Within industrial solutions, we continue to see strong fundamentals for utilities and critical infrastructure spending, which remains our largest customer market. Our full year 2024 expectation for the industrial solution segment remains unchanged. We continue to forecast 2024 industrial solutions revenues in the $230 to $240 million range, with segment adjusted EBITDA in a range of $80 to $85 million, and segment CapEx of $30 to $35 million. In terms of near-term outlook, we've seen a strong start to the second quarter, both in rental project and product sales activity, and combined with our current pipeline and quoting levels, we anticipate industrial solutions to deliver total year-over-year revenue growth of 15% to 20% in Q2. In fluid systems, while the U.S. market outlook remains somewhat challenged, our Eastern Hemisphere and Canada business units, which contributed 75% of the segment's revenue in Q1, continue to perform at a high level. Overall, we expect Q2 fluid systems revenues to be 15% to 20% lower on a year-over-year basis, primarily reflecting lower activity in the U.S. At the lower level, we expect segment-adjusted EBITDA margins in the low to mid-single digits, as the effects of the lower volume are largely offset by improved pricing and the effects of overhead reductions in the U.S. In terms of capital allocation priorities, our view remains relatively unchanged as we continue to prioritize investments into the organic growth of our rental fleet. We expect our 2024 net capital investments will remain dependent upon our projected rental revenue growth rate. Beyond our continued organic investments in industrial solutions, we expect our free cash flow generation this year will be primarily used to build liquidity for inorganic growth opportunities or through a return of capital to shareholders through our programmatic share repurchase program following the completion of our fluid strategic review process. And with that, I'd like to turn the call back over to Matthew for his concluding remarks. Thanks, Greg. As we look at the remainder of 2024, our priorities are clear. First, we will continue to execute our plans to become a leading pure-place specialty rental business serving the global worksite access market as we build upon our leading position with the Durabase composite matting system. At an organic level, we intend to continue prioritising capital investment in the growth of our rental fleet, which historically has generated cash returns in excess of 25%. During the first quarter, 95% of our total capital was directed towards the industrial solution segment. Second, we will continue to drive further efficiency improvements across all corners of the organisation, positioning us to realise improved operating leverage. During the first quarter of 2024, we continue to take actions to streamline our overhead structure across both segments and the corporate office, generating approximately $3 million in annual cost savings. Finally, we remain committed to a returns-focused capital allocation strategy that includes a combination of internal investment, inorganic growth and return of capital to shareholders. In February, we increased our remaining share repurchase authorisation to $50 million to support our return of capital program. While the first quarter included annual employee incentive program payouts and investments in rental fleets that reduced free cash flow generation, we expect to be free cash flow positive for the duration of 2024, positioning us to advance our capital allocation priorities. Turning briefly to our fluids business strategic review, we continue to work diligently to evaluate alternatives and we remain focused on having the process substantially completed by mid-year 2024. 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.

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad now. You may remove yourself from the queue at any time by pressing star 2. And once again, that is star and 1 if you'd like to ask a question. We'll pause for just a moment to allow questions to queue. And we do have our first question from Aaron Srichala with Craig Hallam.