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Newpark Resources Inc  (NYSE:NR)
Q1 2019 Earnings Call
April 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Newpark Resources First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Ken Dennard. Thank you. You may begin.

Ken Dennard -- Managing Partner of Dennard Rupp Gray & Lascar

Thank you operator, and good morning everyone. We appreciate you joining us for the Newpark Resources Conference Call and Webcast to review First Quarter 2019 Results. With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; and Matthew Lanigan, President of the Mats business.

Following my remarks, management will provide a high level commentary on the financial details of the first quarter and outlook before opening the call to Q&A. Before I turn the call over to management, I have a few housekeeping details to run through. There will be a replay of today's call. It will be available by webcast on the Company's website at newpark.com. There'll also be a recorded replay available until May 9, 2019, and information to access that replay is included in yesterday's release.

Please note that the information reported on this call speaks only as of today, April 26, 2019 and therefore, you are advised that time sensitive information may no longer be accurate as of the time of replay, listening or transcript reading. In addition, 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 Newpark's management. However various risks, uncertainties and contingencies could cause Newpark's 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 report from 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 Newpark's website. And now with that behind me, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes. Paul.

Paul L. Howes -- President and Chief Executive Officer

Thank you Ken and good morning to everyone. Although, the market softness in the International contract transitions and fluids had a greater than anticipated impact on first quarter results. We remain encouraged by our operational execution and continued commercial success in new markets. First quarter consolidated revenues were $211 million representing a 15% decline from our strong fourth quarter results. In Fluids, revenues pulled back across all regions resulting in a 10% sequential decline.

In North America, revenues declined 4% sequentially to $116 million reflecting the impact of the softer activity levels in the US and the lack of the typical seasonal improvements in Canada. The decline in US land was partially offset by the start of two deepwater projects in the Gulf of Mexico.

Meanwhile, International revenues declined 21% sequentially primarily reflecting the impact of the contract transitions in Algeria and Brazil and project delays in Eastern Europe as discussed in last quarter's call. Despite sequential margin improvements in our U.S. business. Segment operating income was negatively impacted by the softer revenues as well as the inherent cost inefficiencies that result from the contract transitions and project delays.

In addition, the first quarter included $1.1 million of charges associated with retirement policy modification in employee severance resulting in a 2.4% segment operating margin.

As we look forward to the remainder of 2019, we continue to believe that Q1 will serve as an inflection point with respect to segment revenues and operating margins as we expect both to improve going forward. Aside from Canada, we expect activity to increase from Q1 levels benefiting from the impact of new contract awards and stabilizing commodity price outlook.

I'm pleased to note that our work with Shell Oil was recently expanded to include fluids work for an additional deepwater drill ship in the Gulf of Mexico. This work is expected to begin in the second quarter and continued into early 2020. Internationally, we also received a new award from ENI to provide drilling and completion fluids as well as related services in Italy, covering a three year term. Work under this contract is expected to start in the second quarter and generate $10 million to $15 million of revenue per year.

Turning to the Mats segment, we continue to be pleased with the consistent operational execution from steady progress in our diversification strategy. First quarter revenues were $51 million, as we highlighted in last quarter's call, we anticipated the pullback from the record level of direct sales we enjoyed in Q4, which benefited from high year-end demand. Notwithstanding the sequential decline in revenues the segment delivered 27% operating margin, which benefited from a favorable revenue mix, disciplined cost controls, in our ongoing efforts to focus on opportunities that provide stronger returns particularly given the tie US labor market.

And with that, I'd like to turn the call over to Gregg, to discuss the financial details of the quarter. Gregg ?

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Thanks Paul and good morning everyone. I'll begin by covering the specifics of this segment and consolidated operating results for the quarter followed by an update on our near-term outlook. The fluid system segment generated total revenues of $161 million for the first quarter of 2019, reflecting a 10% sequential decrease and a 9%year-over-year decrease.

In the US, revenues were $103 million down 3% sequentially on a 3% decrease in US rig count. As Paul touched down, we're seeing meaningful progress penetrating the deepwater Gulf of Mexico market, which contributed to a $4 million sequential revenue increase benefiting from the start-up of the shell and field wood projects.

This improvement however was more than offset by market softness impacting US land markets with Oklahoma showing the most significant decline. On a year-over-year basis US revenues have increased 11% from Q1 of 2018, modestly favorable to the 8% improvement in average rig count over the same period.

In Canada, revenues were $13 million for the first quarter reflecting a 12% sequential decline largely reflecting a pullback from our Q4 market share gains as the market rig activity improved by 2% sequentially. On a year-over-year basis, Canada revenues declined by 43% which compares to a 32% reduction in industry rig count. Although our market share is relatively line with prior year. Although our market share is relatively inline with prior year. The first quarter 2018 revenues benefited from significant levels of Fluids losses which did not recur this year. Outside of North America revenues from our international regions totaled $44 million in the first quarter, down $12 million from prior quarter levels. As discussed on our fourth quarter call, the sequential revenue decline is largely attributable to the transition to the new contract in Algeria and the conclusion of the Petrobras contract in Brazil which combined contributed $8 million of the sequential revenue decline.

The remainder of the sequential decline is primarily attributable to project delays in Eastern Europe impacted by the weakness in commodity prices at the end of 2018. On a year-over-year basis, revenues from our international regions declined by $18 million largely reflecting the contract transitions in Brazil, Algeria and Kuwait as well as a meaningful decline in Eastern Europe.

As we discussed on last year's call, our Eastern European business had an extremely strong Q1 2018. Benefiting from a large customer project as well as product sales to a large integrated service company in support of their offshore project with Total. With the $17 million sequential decline in revenues. The fluid segment operating income declined to $4 million for the quarter.

As Paul touched on, although we are seeing benefits from our margin improvement efforts in the US. The first quarter operating margin was negatively impacted by the lower revenues as well as an unfavorable revenue mix and inherent cost inefficiencies associated with the contract transitions and project delays in international markets and the slowdown in certain North American markets. Also has highlighted in yesterday's press release. The first quarter included $1.1 million of charges.

Turning to the Mats business, as Paul touched on consistent with our outlook discussed on the fourth quarter call. Total segment revenues were $51 million for the first quarter representing a 27% sequential decline and a 2% improvement year-over-year.

The sequential decline was largely driven by lower direct Mats sales which came in at $8 million for the first quarter. Meanwhile rental and service revenues declined 8% sequentially to $43 million, largely attributable to a decline in service activities in the E&P market, while non-E&P revenues have remained fairly stable.

Comparing to the first quarter of last year, the 2% improvement in revenues includes a $3 million improvement in rental and service. Partially offset by a $2 million decline in direct Mats sales. The 7% year-over-year improvement in rental and service revenues is driven by our ongoing diversification efforts and reflects growth in both E&P and non-E&P markets.

In Mats segment operating margin was 27% for the first quarter compared to 30% for the fourth quarter and 24% for the first quarter of last year. The first quarter operating margin was stronger than anticipated, largely due to a favorable revenue mix, discipline cost controls and as Paul touched on -- focus on operating efficiency and higher returning projects.

Now, turning to our consolidated results. First quarter 2019 revenues were $211 million representing a 15% decrease from prior quarter and a 7% decline year-over-year. SG&A costs were $31 million in the first quarter compared to $30 million in the fourth quarter, and $27 million in the first quarter of last year.

First quarter SG&A includes the $4.5 million of charges associated with the retirement policy modification and employee severance costs. While the fourth quarter included $1.5 million of employee severance charges. Adjusting to these charges, the net reduction in SG&A expense in the first quarter is primarily attributable to lower performance based incentive expense and the benefits of cost optimization efforts, partially offset by higher costs related to strategic planning initiatives.

Total corporate office expenses were $11.7 million in the first quarter, which included $3.4 million charge associated with the retirement policy change. Excluding this charge, corporate expenses were down modestly from the $8.5 million in the fourth quarter and $8.7 million in the first quarter of last year.

Interest expense was $3.7 million for the first quarter compared to $4.2 million in the fourth quarter and $3.3 million in the first quarter of last year. The sequential decrease in interest expense is attributable to the $500,000 charge for additional interest on our convertible bonds as discussed last quarter.

Consistent with prior quarters, the first quarter interest expense includes approximately $1.4 million of non-cash expense, primarily associated with our convertible bonds. The provision for income taxes for the first quarter was $1.8 million reflecting an effective tax rate of 58%, which compares to 32% in the fourth quarter and 30% in the first quarter of 2018.

The elevated tax rate in the first quarter is primarily attributable to certain discrete tax adjustments, which have an exaggerated impact on the quarter's rate due to the relatively low level of pre-tax income in the period.

Net income for the first quarter was $0.01 per diluted share, which includes a $0.03 negative impact from the retirement policy modification and employee severance charges. By comparison, net income for the fourth quarter was $0.11 per diluted share and $0.08 in the first quarter of last year. During the cash flow, following a very strong Q4 in terms of operating cash flow generation. The first quarter cash flows were negatively impacted by the payment of annual cash incentives, as well as a temporary uptick in days sales in receivables. First quarter cash provided by operating activities was $2 million which includes $17 million of cash from operations largely offset by up $15 million net increase in working capital. Cash used in investing activities with $16 million in the quarter with nearly two thirds of our capital expenditures directed to the Mats business.

Cash provided by financing activities totaled $12 million largely reflecting the $19 million net increase in bank facility borrowings, partially offset by $5 million used during the quarter to purchase shares under a repurchase program.

As announced last month, we recently amended our asset based loan facility which expanded the revolving loan capacity from $150 million to $200 million increasing our available liquidity, while also reducing applicable borrowing rates, extending the term and relaxing certain covenants. This amendment provides us with greater flexibility to fund the 2021 maturity of our convertible debt and execute on our long term strategy. We ended the quarter with a total debt balance of $182 million and a cash balance of $54 million. Resulting in a total debt to capital ratio of 24% and a net debt to capital ratio of 18%.

Substantially, all of our cash on hand remains within our foreign subsidiaries. Although we plan to continue repatriating excess cash back to the US. Now, turning to our near-term outlook. In the Fluids business, while we expect Canada to experience the seasonality associated with spring breakup, we expect this pullback should be more than offset by improvements in the US and the Eastern Hemisphere.

In the US, we expect land revenues to continue to track fairly closely to the overall market rig count while we expect our deepwater Gulf of Mexico revenues will continue to improve sequentially, benefiting from the continuation of projects started in Q1 and the additional deepwater rig with Shell.

Meanwhile, in the International market with the strengthening commodity price outlook and the new KOC contract now under way, we expect to see our Eastern Hemisphere revenues recover to levels more in line with the previous quarter, despite the continued transition in Algeria. From a Fluid segment operating income perspective, we expect the anticipated rebound in revenues combined with our ongoing margin improvement efforts will drive the segment margin in the near-term back above the mid single digit mark.

In the Mats segment, we continue to focus on expanding our presence in targeted non-E&P end-markets, which we believe will continue to provide improve stability to both segments and consolidated performance over time. Although, the timing of direct sales and project start date is always a bit challenging. We currently expect total Q2 segment revenues to be in the low-to-mid 50s range. Generating and operating margin in the low-to-mid 20's range.

As Paul will discuss further in a moment, we have recently initiated our latest long term strategic plan update. A process that we undertake every three to five years. As a part of this process, we have engaged consultants to assist in the development of our long term strategic plan and we expect to incur approximately $1 million to $2 million in corporate office expense next quarter associated with this effort.

Also, although the recent change in our retirement policy is expected to impact the timing of cost recognition related to future long-term incentive awards, we don't expect this to have a meaningful impact to Q2. Regarding cash flow, we expect the first quarter change in working capital to reverse directions in the second quarter and we also expect capital expenditures to decline somewhat from Q1 levels which should positively impact our free cash flow generation.

Although, the first quarter CapEx and the Mats business was elevated, our full year capital investment expectation remains in the $40 million to $45 million range. We expect the majority of our 2019 investments will support our market diversification and R&D initiatives in the Mats business. As discussed last quarter, we believe the most significant variable in our 2019 CapEx expectation is the timing of investments needed to support the Mats rental business which will continue to flex based on near-term outlook.

Finally, regarding our tax rate, we expect our effective rate will be in the low-to-mid 30's for the remainder of 2019. And with that, I'd like to turn the call back over to Paul for his concluding remarks.

Paul L. Howes -- President and Chief Executive Officer

Thanks Greg. In Summary, while we were not satisfied with the fluids margin in the first quarter, we also recognize that the majority of the transitory issues are now behind us. We continue to be encouraged by the improving commodity price outlook and the broad based impact this is expected to have on activity levels both in North America and internationally.

The latest award with Shell Oil and deepwater Gulf of Mexico is yet another milestone for Newpark. Demonstrating our ability to deliver value added solutions in one of the most challenging drilling environments in the world. We intend to leverage that commercial and technical success with other IOCs operating in the Gulf of Mexico, as we look forward to providing both drilling and completion fluids.

In the near term, in addition to the ongoing margin and capital efficiency improvement efforts, we remain focused on executing the key elements of our total fluids solution strategy. Last quarter, we highlighted that our deepwater completion fluids facility in Louisiana is fully operational. This is a key element of our broader strategy in the Gulf of Mexico, enabling us to now offer drilling and completion fluids, which not only expands the revenue potential in each project, but also provides the value bundle that customers in deepwater markets are seeking.

While 2018 was the year to establish our presence in deepwater, 2019 is the year to build on our success and as the first quarter demonstrated, we're off to a very good start. Another element of our total fluid solution strategy is the expansion into stimulation chemicals. In the first quarter, we completed a successful trial of our stimulation chemicals with a major operator in the US land business, which we mentioned on the fourth quarter call. With a successful trial, we're finding opportunities to expand discussions with additional potential customers, while we are pleased with the overall level of customer interest, we continue to expect our entry into the stimulation chemicals market to take some time before making any meaningful contribution to our bottom line.

Based on our progress and discussions to date, we remain confident that we will succeed in penetrating this important market by demonstrating our differentiated technology and service capabilities just as we have done in the drilling fluids. Before leaving the fluids segment, I'd like to provide you with a quick update on the progress related to our ongoing search for a permanent leader of that business.

Over the last several months, we have worked diligently to identifying and screening a pool of qualified candidates for this important role. We have been very pleased by the caliber of the candidate pool and we are now advancing through the final stages of the selection process.

In our Mats business, we see opportunities for continued growth as we progress through 2019. We are realizing the benefits of our market diversification strategy, while also continuing to invest in R&D, developing next generation systems and expanding our product offering. And to that point, last quarter we highlighted our modular Aboveground Storage Tank or AST, which demonstrates our innovative approach to solving our customer's challenges related to water storage.

I am proud to announce that we have now deployed our first system with a major operator in the Permian and we are advancing discussions with other customers that are recognizing the value proposition of this innovative solution. Although not expected to be a major source of revenue in 2019, the AST demonstrates our ability to engineer solutions for a wide array of customer applications.

Now, turning our attention to our long term strategic planning initiative that Gregg mentioned a moment ago. As many of you know, strategy has always been an important underpinning of our success. Our business priorities and direction have been grounded in a well defined long-term strategy. Every three to five years, we take a fresh look at our long-term strategy which includes an extensive evaluation of the changing market climate, assessment of our core capabilities and the identifications of risk and opportunities all culminating in a well defined plan that we will execute against over the next three to five years.

Since, our last long-term strategic planning exercises in 2015, we've seen meaningful changes in the market landscape and we've made significant progress in our efforts to strengthen and diversify our Company. With the transformation that is under way at Newpark, we recently initiated our latest strategy update which we anticipate will take approximately six-months to complete. Engaging outside consultants to assist us in assessing our long-term strategy for each of our business segments as well as at the corporate level.

On the Mats side of the business, we will explore opportunities to further expand revenues in our industry verticals, while maintaining returns across the business. In fluids, we will evaluate how the changing oilfield landscape is reshaping the fluids industry as we look to further execute our total fluid solutions strategy.

Our goal at Newpark remains the same. To maximize long term shareholder value by driving growth and consistency and cash flow generation while improving our return on invested capital. I look forward to reporting the results of this long term strategic planning effort, when the process is complete.

With that, I'd like to close the call as always do by thanking our shareholders for investing in us and thanking our employees for their hard work and dedication at Newpark as well as their continued focus on safety.

We will now take your questions. Operator?

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Praveen Narra with Raymond James. Please proceed with your question.

Praveen Narra -- Raymond James Financial Inc. -- Analyst

Good morning, guys.

Paul L. Howes -- President and Chief Executive Officer

Good morning.

Praveen Narra -- Raymond James Financial Inc. -- Analyst

I guess, if we can start on the Fluids side, as it seems like internationally some excess costs. But, I wanted to focus on the US side for a second. You mentioned that US profitability improved sequentially, with that profitability improvement due to the mix shift with the Gulf of Mexico work starting and -- or is there anything else going on there, if you could, can you talk about the discrepancy between the US and International profitability for that business plan?

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Sure, Praveen. It's Gregg, I'll take that one.

Yeah, in terms of the profitability here in Q1, the big drag was the international work and the transition and dislocation that you have which causes some inherent costs dislocation there. Within the US, we had been talking about our cost efforts that we had been taking really in the second half of 2018 and that's where we're starting to see the benefit of that as well as, as you point out, starting to see the benefit of that deepwater work picking up pace and that's providing some natural benefit to it.

The challenge that we had in in the US market was while the rig count was down fairly modestly, you look at that decline and it's very concentrated in one area, in particular Oklahoma, and that's a region that's down 25%, 30% from the fourth quarter levels in terms of the market rig count. So that's another area that cause a bit of dislocation to us in the cost side.

Praveen Narra -- Raymond James Financial Inc. -- Analyst

That's helpful. And then if we just touch on the Mats guidance for a second. You mentioned -- you mentioned 1Q benefiting from a better mix in terms of some services versus rental sales. If we think about the 2Q guidance, is that change just a normalization of those? Or I guess how do we think about what the proper mix between those was and how 1Q compare to what you consider normalized?

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Yeah, Gregg again. In terms of the mix favorability that Paul had touched on a little bit of that is intentional. We talked about specifically focusing on some of the areas of higher returns and therefore pulling back on some of the service activities. But even within that you also have some natural variation within your product sales and rental activities that changed the profitability profile. And on that side, the quarter was a little bit stronger than it typically is and we expect that will normalize a little bit more here in Q2, and that's part of the story as to why we expect the margin profile to pull back a little bit from what the Q1 result was.

Praveen Narra -- Raymond James Financial Inc. -- Analyst

Okay. If I could squeeze one more in just on Brazil. In terms of Brazil, there's a contract award for one of your peers. So, I guess, I was curious on to how you think about the cost you guys are holding down there and just the outlook for that (Multiple Speakers) that region?

Paul L. Howes -- President and Chief Executive Officer

Yeah, as we roll off the Petrobras contract, we right size the organization down there but maintained an operational presence for the deepwater work, as you know, we've done, probably a majority of the deepwater drilling there with Petrobras and a lot of the IOCs. We see more opportunities there, obviously, the Shell oil contract award to one of our peers, it happened, but there's a lot more opportunities out there for us as well.

Praveen Narra -- Raymond James Financial Inc. -- Analyst

Okay. Thank you very much guys.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Matt Dhane with Tieton Capital Management. Please proceed with your question.

Matthew Dhane -- Tieton Capital Management -- Analyst

Thank you. I was hoping you could discuss how you're viewing the international opportunities today and put it maybe in reference to how they're lining up compared to six-months ago. That will be helpful.

Paul L. Howes -- President and Chief Executive Officer

Okay. Sure. International opportunities versus six-months ago. We certainly are seeing a lot of tender activity. I would say a lot of that is concentrated in the Middle East, right now, its a fairly strong area with lot of tendering. We are seeing more tendering, I would say also in the deepwater offshore Brazil market. Those seem to be the two stronger global regions. Gregg, any?

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Yeah. I guess, I would -- your question about how that frames up versus six-months ago. You know as we progressed through 2018, where we were seeing this continued strengthening inactivity the pullback in the commodity price at the end of '18 caused a lot of that to delay. There was definitely some reservations from operators as we progressed in the early '19 and now what we're seeing is them begin to pick up pace and resume back to kind of how things were looking before that pullback.

Matthew Dhane -- Tieton Capital Management -- Analyst

And then on Shell, you won the new rig and can you remind me are you on two rigs now or is that the third rig that you're going to be on?

Paul L. Howes -- President and Chief Executive Officer

Yeah. We're currently operating on two rigs and we expect the third rig to start in the quarter.

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Yeah, the three projects are in (Multiple Speakers) holdings.

Paul L. Howes -- President and Chief Executive Officer

That's the pretty major move for our corporation, right, when you're in one of the most challenging drilling environments in the world and going head-to-head with the largest integrated service company. And really it's gotten down to the fact that our technology is truly differentiated and our service quality is at par or better. So, we're very pleased with our traction in the Gulf of Mexico. And again our hope there is to be able to leverage that with other IOC's operating there.

Matthew Dhane -- Tieton Capital Management -- Analyst

And I'd assume the other IOCs obviously have noticed what you won with Shell. I mean have you seen conversations really pick up in tenor and in seriousness here recently there?

Paul L. Howes -- President and Chief Executive Officer

Yeah, I would say that the way the Gulf is structured in the way it's structured a lot of the other IOCs are partners on those shell wells so they're getting all the technical data as we speak and as we're drilling and I would say that there's been ongoing communication with all the major IOCs in the deepwater, concerning our Kronos technology.

Matthew Dhane -- Tieton Capital Management -- Analyst

Great. Thanks for the help and congrats on the new Shell.

Paul L. Howes -- President and Chief Executive Officer

Great. Thank you. Appreciate it.

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Thank you. Appreciate it.

Operator

Thank you. (Operator Instructions) Thank you. We have completed our question-and-answer session. I'll turn -- now turn the floor back to management for any final comments.

Paul L. Howes -- President and Chief Executive Officer

All right. Thank you once again for joining us on the call and for your interest in Newpark Resources. We look forward to talking to you again after the next quarter.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 33 minutes

Call participants:

Ken Dennard -- Managing Partner of Dennard Rupp Gray & Lascar

Paul L. Howes -- President and Chief Executive Officer

Gregg Piontek -- Senior Vice President and Chief Financial Officer

Praveen Narra -- Raymond James Financial Inc. -- Analyst

Matthew Dhane -- Tieton Capital Management -- Analyst

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