Newpark Resources, Inc.

Good morning. My name is Jim, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Park Resources second quarter 2024 earnings conference call. Today's call is being recorded and will be available for replay beginning at 1230 p.m. Eastern. The recording can be accessed by dialing 888-219-1263 domestic or 402-220-4943 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 question-and-answer segment, please press star and 1 on your phone. If your question has been answered, you may remove yourself from the queue at any time by pressing star and 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, sir.

Thank you, operator. I'd like to welcome everyone to the Newport Resources second quarter 2024 conference call. Joining me today is Matthew Lanigan, 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 reconciliation 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 on today's call is current as of August 6, 2024. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I'd 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 second quarter results were very pleasing, with a sequential 6% improvement in revenues and a 10% improvement in adjusted EBITDA on a consolidated basis, underpinned by an exceptionally strong revenue contribution from our industrial solutions business, including a record $30 million of product sales in the quarter. We've remained laser-focused on our multi-year business transformation plan during the second quarter as we continue to invest in the growth of our industrial solutions business, which remains the central driver of our long-term value creation strategy. As we've stated on prior calls, we believe that the multi-billion-dollar government programs focused on improving the nation's aging electricity infrastructure, combined with the onshoring of several industry segments and growth in AI data centers, will provide a significant and sustained investment cycle in the electrical grid to support these programs, creating long-term demand for our worksite access solutions. With regards to the fluid sales process, our entire organization has worked tirelessly on all aspects of diligence and separation planning with an eye on a mid-year completion. While our international business continues to operate at a very strong level, contributing more than 70% of the fluid segment's revenues and on pace for a record year in both EBITDA and returns, the natural complexities of the global business are extending the process timeline beyond our target date. While impacting our timing expectations, we remain committed to achieving a resolution to our strategic review process and continue to work diligently to achieve this goal in the third quarter. With that overview, let's take a deeper look at our second quarter performance. On a consolidated basis, second quarter adjusted EBITDA increased 10% sequentially and 18% versus the prior year period. We also delivered both sequential and year-over-year growth in consolidated adjusted EBITDA margin during the quarter, led by the strong performance of our industrial solution segment. Within our industrial solution segment, we delivered $67 million in revenues for the quarter, representing a 36% quarter-over-quarter and 39% year-over-year improvement. The quarter also saw a 12% sequential and 9% year-over-year increase in rental revenues, largely reflecting the benefits of our fleet expansion efforts, although the quarter was again impacted by a small number of key project delays due to permitting issues that we are hopeful will be resolved in Q3. Service revenues pulled back somewhat in the quarter, impacted by rental project mix and project delays. Benefiting from the strong product sales and rental revenues, Industrial Solutions delivered an adjusted EBITDA margin of 37.1% in the second quarter. We also continued to progress the build-out of our Commercial Sales Team and Salesforce Effectiveness Toolkit in the quarter, fully resourcing our national sales coverage models with a targeted focus on key growth accounts moving forward. During the second quarter, we invested a further $5 million in the growth of our Manning fleet, with the majority of that spend focused on our UK fleet expansion, where we see continued strength in critical infrastructure project activity over the several years. The fluid systems segment second quarter performance was generally in line with our expectations discussed on our first quarter call. The second quarter was also highlighted by $22 million of free cash flow, which includes more than $10 million from further efficiencies achieved in fluid systems working capital management, reducing our net leverage 0.3 tons of adjusted EBITDA. And with that, I'll turn the call over to Greg for his prepared remarks. Thanks, Matthew. I'll begin with a summary of our consolidated and segment level results for the second quarter, followed by an update on our outlook for the remainder of 2024. Our second quarter was highlighted by strong revenue growth within our industrial solution segment, including a quarterly record in product sales, contributing to a 6% sequential improvement in consolidated revenues and a 10% sequential improvement in adjusted EBITDA. Free cash flow was also solid in the second quarter, with contributions from both segments. The industrial solution segment revenues was $67 million in the second quarter, reflecting a 36% sequential and 39% year-over-year improvement. Product sales contributed $30 million of revenues in the second quarter, with the majority of those sales to traditional timber mat fleet operators, reflecting a continued shift from wood to composite matting and robust demand for our DuraBase products on utility infrastructure projects. Total rental and service revenues were $36 million for the second quarter. While rental revenue improved 12% sequentially and 9% year-over-year, lower service intensity on rental projects served to offset the rental gains, resulting in a 3% sequential growth and 9% year-over-year decline in rental and service revenues. Benefiting from a strong start to Q2, the second quarter rental fleet utilization improved modestly on a sequential basis, but trailed off as we progressed through the quarter, reflecting the earlier than expected release from multiple large-scale projects, while expected start dates for other planned projects have been delayed. For the first half of 2024, Industrial Solutions revenues are up 11% versus prior year, including a 60% increase from product sales and 5% increase in rental revenues, while service revenues have declined 20%. By industry, the utility sector contributed nearly two-thirds of our segment revenues, including roughly 55% of rental and service revenues and the substantial majority of product sales in the first half of 2024. Comparing to the first half of 2023, rental and service revenues from the utility sector is relatively flat, reflecting the effects of higher rental offset by lower services, while oil and gas, pipelines, and other industries declined. Industrial solutions profitability was strong in the second quarter, with the segment delivering a 37% adjusted EBITDA margin, fairly in line with both prior quarter and the second quarter of 2023. The fluid system segment generated revenue of $112 million in the second quarter. Our Eastern Hemisphere region delivered another near record quarter contributing $66 million or 59% of our total fluid systems revenues in Q2. The second quarter demonstrates a sustained trend of near record performance with revenues fairly in line with both prior quarter and the second quarter of last year. Revenues from Canada decreased 37% sequentially to $13 million in the second quarter, reflecting the seasonality of spring breakup. Notably, this was the highest Q2 revenue posted by our Canada business, reflecting a 28% improvement from the second quarter of last year. Our U.S. operations contributed $33 million of revenues in the second quarter, reflecting a 7% sequential improvement and 46% year-over-year decline. The year-over-year decline is primarily driven by a combination of the continued softness in the U.S. market activity, lower market share, and a decline in average revenue contribution from the RIGS service. Fluid segment adjusted EBITDA margin was 4.6% in the second quarter with the sequential and year-over-year declines driven by the lower revenue levels somewhat offset by the benefits of year-over-year margin improvements from our international business and continued cost efforts within the U.S. business and division overhead. SG&A expenses were $26.4 million in the second quarter, including $8.4 million of corporate office expense, The second quarter 2024 SG&A includes $1.9 million related to the fluid sale, elevated costs associated with long-term performance-based incentive programs linked to the company share price, and an elevated credit loss charge in the international fluid systems business. The sequential and year-over-year increase in SG&A is substantially driven by these second quarter expenses, with the year-over-year comparison somewhat offset by the effects of cost rationalization efforts in the U.S. fluids and the corporate office. Interest expense was $1.8 million for the second quarter, in line with prior quarter, but down modestly on a year-over-year basis, primarily reflecting the effect of lower overall debt balances. Tax expense was $3.3 million in the second quarter, reflecting an effective tax rate of 29%, which includes a favorable impact from previously unbenefited U.S. NOL carry-forwards. Adjusted EPS was 12 cents per diluted share in the second quarter, compared to 10 cents in the first quarter and 8 cents in the second quarter of last year. Operating cash flow was $28 million in the second quarter, including more than $10 million derived from reductions in fluids networking capital, while $6 million was used to fund our net capex, substantially all of which was directed toward industrial solutions matting fleet expansion, as we seek to capitalize on our long-term growth opportunities that Matthew mentioned. We ended the second quarter with total debt of $58 million and cash of $35 million, resulting in net debt of $23 million, a 0.3 times net leverage ratio. Let's now turn to the 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 long-term fundamentals for utilities and critical infrastructure spending, which remains our largest customer market. Our full year 2024 expectations for the industrial solution segment remain unchanged. We continue to forecast 2024 industrial solutions revenues in a range of $230 to $240 million with segment adjusted EBITDA in a range of $80 to $85 million and segment CapEx of $30 to $35 million. While we continue to see robust project bidding activity, The third quarter is typically our softest revenue quarter from a rental and service perspective, as the extreme heat and associated power demand on the grid typically reduce utility transmission maintenance projects. Further, as Matthew touched on, we are continuing to see delays on certain projects associated with permitting and other issues, which provides some uncertainty on our near-term project timing. We expect Q3 total rental and service revenues to reflect modest year-over-year growth including a stronger rental contribution somewhat offset by a lower service intensity. In fluid systems, we expect Q2 to reflect an election point, with Q3 total segment revenues and profitability more in line with Q1 results. Sequentially, we expect Canada to benefit from the seasonal rebound, along with modest improvement in market share within 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 second half 2024 net capital investments will remain dependent upon the longer-term view on rental revenue growth opportunities. Beyond our continued organic growth investments in the rental fleet, 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 upon completion of the fluid sales process. And with that, I'd like to turn the call back over to Matthew for his concluding remarks. Thanks, Greg. Our priorities for 2024 are not unchanged. First is the execution of our plans to grow our leading pure-play specialty rental business through organic expansion of our presence while exploring inorganic opportunities that help us deliver more value and increase revenue density with our growing customer base. Second, we will continue to work diligently to bring closure to the fluids process in the third quarter, while also driving further efficiency improvements across all corners of the organisation, positioning us to realise improved operating leverage. 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 our shareholders. With a modest 0.3 times net leverage and anticipated additional liquidity upon the completion of the fluid process, we are well positioned to advance our capital allocation priorities. We have $50 million remaining on our share repurchase authorisation to support our return of capital program, which we expect to resume following the completion of the fluid sales process. 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.

Gentlemen, thank you. And to our phone audience joining today, if you would like to ask a question, please press star and one on your telephone keypad. Pressing star and one will place your line into a queue, and we'll take your questions one at a time. Also, a reminder that if you're joining us today on a speakerphone, please return to your handset to provide the best audio quality. Also, to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and one. We'll hear first from Aaron Spakala at Craig Hallam.