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Newpark Resources Inc (NYSE:NR)
Q1 2021 Earnings Call
May 6, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Newpark Resources' First Quarter Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Ken Dennard, Investor Relations for Newpark Resources. Thank you, Mr Dennard. You may begin.

Ken Dennard -- Investor Relations

Thank you, operator and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review first quarter 2021 results. Participating from the Company in today's call are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; David Paterson, President of Fluids business; and Matthew Lanigan, President of the Industrial Solutions business. Following my remarks, management will provide a high level commentary on the financial details of the first quarter results and near-term outlook before turning the call over to Q&A. And then before I give the call to management, I have a few housekeeping details to run through. There'll be a replay of today's call and will be available by webcast on the company's website at newpark.com. There also be a telephonic recorded replay available until May 12, 2021 and that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, May 5, 2021 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 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 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 measures are included in the quarterly press release, which can be found on the Newpark 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

Thanks, Ken and good morning, everyone. With underlying fundamentals improving in both segments, I'm pleased with our overall performance in the first quarter, highlighted by the solid performance in the Industrial Solutions segment, growth in Stimulation Chemicals and the strong cash generation in debt reduction. Consolidated revenues improved 9% sequentially to $141 million, while operating income return to positive territory and EBITDA increased to $10.9 million for the first quarter, which included $800,000 loss on the repurchase of convertible bonds. In our Industrial Solutions segment, revenues improved 6% sequentially to $53 million in the first quarter, benefiting from the ongoing recovery in customer activity, most notably from the utility sector. Site and Access Solutions product sales contributed $20 million of revenue in the first quarter, benefiting from pent-up demand from the utility sector following the deferral of customer capital investments in 2020. With the stronger revenue, our Industrial Solutions operating margins improved to 25% in the first quarter. The rebound in our Site and Access Solutions business over the past two quarters is especially noteworthy as it demonstrates the value of our efforts to diversify our business and expand into markets that we believe will benefit from the energy transition.

While revenue and profitability levels in this business have recovered close to 2019 levels. It's important to highlight the significant shift in revenue mix over the past two years, specifically revenues attributable to our expanding presence in the utility sector and other industrial markets, both in the United States and in the United Kingdom, have grown approximately 60% from the 2019 run rate largely offsetting the revenue decline from our historical upstream oil and gas customers. We are also encouraged by our progress in industrial blending as we build upon our early success in this new market and continue to take steps to further integrate our manufacturing operations into the supply chain of our customers laying the foundation for longer-term growth and improved operational efficiency. As anticipated following the ramp-up of production in Q4, our Industrial blending revenues pulled back to $5 million in the first quarter which was impacted by lower demand forecast and product changeovers requiring reconfiguration of our packaging line.

In the Fluids Systems segment, revenues improved 11% sequentially benefiting from the seasonal strength in Canada, the continued recovery of activity on U.S. land and growth in stimulation chemicals despite a decline in the Gulf of Mexico and the negative impact of winter storm Uri. I'm pleased to highlight that our expansion into stimulation chemicals is gaining momentum, contributing $4 million of global revenues in the quarter. In the Gulf of Mexico, the revenue declined and primarily reflects the impact of unanticipated changes in customer drilling plans. Internationally, although we are beginning to see green shoots in key markets, our Fluids revenues were relative flat sequentially as activities in key markets within the EMEA region continue to be impacted by COVID-related travel and operational restrictions imposed by local governments. As a sign of the improving international market activity, we recently secured a five-year award with the National Oil Company in Bahrain valued at approximately $35 million. This award expands our footprint in the strategically important Middle East region with work expected to begin within the next quarter. With a stronger revenue contribution, the Fluids segment move closer to EBITDA breakeven in the first quarter. And while encouraged by the improving market fundamentals, we remain focused on harvesting cash from our working capital while minimizing capital expenditures and reshaping the business for the new market realities. Reflecting on our progress over the past five quarters, the impact of our roofline rationalization and reduction in working capital has been significant with our Fluids Systems' net capital employed down $135 million or 30% since the start of 2020.

What's also noteworthy is that as we've worked through these unprecedented market challenges, our industry-leading capabilities and reputation are gaining increased customer recognition. As we highlighted previously, we took top spots for customer service quality in both EnergyPoint Research and Kimberlite International Oilfield Research customer surveys in 2020, which is a reflection of the quality and the dedication of our entire Fluids organization. Building upon last year's recognition, I'm very pleased to highlight that we were recently recognized once again by EnergyPoint Research ranking #1 in total customer satisfaction across all oilfield service lines. We are extremely proud of this broad customer recognition of what we call the Newpark Service Advantage, which we believe positions the Fluids business to outperform as the market recovers. And finally, I'm pleased to highlight the continued strength in our cash flow generation and debt reduction. We generated $27 million of free cash flow in the first quarter, reducing our net debt balance by $25 million. Our net debt now stands at $38 million resulting in a net debt to cap ratio of 7% and with that I will hand the call over to Gregg to discuss in more detail the financials for the first quarter. Gregg?

Gregg S. Piontek -- Senior Vice President & Chief Financial Officer

Thanks, Paul 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 from the Industrial Solutions segment increased 6% sequentially to $53 million in the first quarter, primarily attributable to a 14% improvement from the Site and Access Solutions business, which contributed first quarter revenues of $49 million. The sequential improvement includes a $6 million increase in direct sales activity, as we experienced some level of pent-up customer demand in the utility sector as COVID delayed infrastructure projects moved forward. Rental and service revenues were relatively flat on a sequential basis, coming in at $29 million for the first quarter, with the benefit from the broader recovery in the utility sector and the improving E&P market more than offsetting the elevated activity from Hurricane driven repairs that benefited the previous quarter. The Q1 results reflect the impact of the post-COVID resumption of activity across industries in the U.S. with the utility sector remaining our most significant end-market, contributing roughly half of our total Q1 rental and service revenue. As Paul touched on, our industrial blending revenues pulled back sequentially from the fourth quarter, declining $3 million to $5 million in the first quarter, impacted by a lower demand forecast and product changeovers, for our primary customer.

Benefiting from the stronger revenues, the Industrial Solutions segment operating income improved $4 million sequentially to $13 million, contributing $18 million of EBITDA in the first quarter. Comparing to the first quarter of last year, revenues from these Site and Access Solutions business increased $17 million or 54%. This increase is largely driven by a $16 million improvement in direct sales with COVID uncertainty suppressing prior year sale activity, while the pent-up demand provided a benefit to the current quarter. Rental and service revenues grew 4% year-over-year. Substantially, all of which was attributable to our United Kingdom operations. In the U.S., while rental and service revenues were relatively flat year-over-year, it's noteworthy to highlight the strategic shift in end-market mix, with more than 30% growth in our electrical utilities and other industrial end-markets, substantially offsetting the decline in E&P customer revenues. Turning to Fluids Systems, total segment revenues improved by 11% sequentially to $88 million in the first quarter. Revenues from U.S. land increased $5 million or 15% sequentially, reflecting the benefit of a 28% improvement in market rig count and an uptick in stimulation chemical revenues, which contributed $2 million of revenues in Q1. As Paul mentioned customer work stoppages associated with winter storm Uri negatively impacted our land revenues by nearly $2 million in the quarter. Although our market share remains well above historical levels, we saw our share pulled back slightly in the first quarter from the all-time highs achieved in the second half 2020, primarily driven by the mix of operators returning brings to the market. In terms of regional mix, West and South Texas provided substantially all of the sequential revenue improvement. In the Gulf of Mexico, revenues declined 24% sequentially to $9 million in the first quarter, largely reflecting unanticipated changes in customer drilling plans including the suspension of operations on one drilling rig.

In Canada, revenues nearly doubled sequentially to $13 million in the first quarter, primarily reflecting the seasonal improvement in market activity and increased market share. Outside of North America, revenues were relatively flat sequentially at $28 million as COVID-related restrictions continue to suppress customer activity in the majority of our key markets. The Fluids Systems operating loss was $7 million in the first quarter, reflecting a $13 million sequential improvement from the fourth quarter with the Q4 result, including $11 million of charges primarily related to our exit from Brazil. After consideration of the Q4 charges, the first-quarter results reflect the ongoing recovery in the business with a $2 million reduction in operating loss driven by the improvement in revenues. On a year-over-year basis, our Fluids Systems revenues declined 34%. North American land revenues declined by $20 million or 28%, which is favorable to the 46% decline in market rig count, primarily reflecting the benefit of our increased market share along with the continued expansion into stimulation chemicals. Gulf of Mexico revenues declined $7 million or 44% year-over-year, driven primarily by the changes in customer drilling and completion plans. International revenues declined $18 million or 40% year-over-year with the declines seen across substantially all markets but particularly in Europe and North Africa, which have been significantly impacted by COVID. Turning to the corporate office, total expenses were $5.8 million in the first quarter reflecting a modest improvement from the fourth quarter. On a year-over-year basis, Corporate office expenses declined $1 million primarily driven by a reduction in personnel costs. SG&A costs were $21 million in the first quarter, up modestly from the fourth quarter with an increase in Industrial Solutions, partially offset by reductions in both Fluids Systems and the corporate office.

On a year-over-year basis, SG&A costs declined $4 million with reductions in all groups, largely reflecting lower personnel expense and the benefits from other cost reductions. Interest expense decreased modestly to $2.4 million in the first quarter, nearly half of which reflects non-cash amortization of facility fees and discounts. Our weighted average cash borrowing rate on our outstanding debt is approximately 3.5%. The first quarter includes a $3 million income tax expense despite reporting a pre-tax loss. We are currently unable to recognize the tax benefits on our U.S. losses and therefore the income tax expense in the quarter primarily reflects taxes on foreign earnings. Our net loss in the first quarter was $0.06 per share, which included a $0.01 impact from the loss on the purchase of convertible bonds. This compares to a net loss of $0.20 per share in the fourth quarter, which included $0.12 of charges and a net loss of $0.14 per share in the first quarter of last year, which included $0.02 of charges. Turning to cash flow, cash provided by operating activities was $28 million in the first quarter, which included a $21 million net reduction in working capital. With the stronger commercial activity, our operating cash flow benefited from an increase in accounts payable while we've continued to drive Inventory Reductions. Receivables also provided a benefit to the quarter's cash flow as DSOs declined to unusually low levels. Investing activities used less than $1 million of cash in the first quarter as $9 million of capital investments were largely offset by proceeds from the sales of used Mats from our rental fleet, which is part of our standard commercial offering. Substantially all of the capital investments in the period were deployed in the Industrial Solutions segment, primarily related to upgrading and expanding our site access rental fleet. Benefiting from our free cash flow generation, our total debt balance declined $15 million in the quarter to $72 million.

Following the $18 million of convertible debt repurchases, our primary debt components include the remaining $49 million of convertible notes due in December and $11 million outstanding on our U.S. asset-based bank facility, which runs to 2024. Our cash balance increased $10 million since year-end and in Q1 at $34 million. Substantially, all of which resides in our international subsidiaries. At the end of the quarter, our total debt-to-capital ratio was 13% and net debt to capital ratio was 7% both reflective of our very modest debt burden. Now turning to our near-term outlook. As we look ahead, we are encouraged by the improving fundamentals in both business segments. So we are closely monitoring inflationary pressures on raw materials and transportation, along with a general shortage of labor in the U.S. In the Site and Access Solutions business, while we've seen industrial end market customer activity recover to pre-COVID levels, we expect to see direct sales pulled back from the strong first quarter, as the effect of the pent-up demand on customer purchasing subsides. Rental and service activity remains robust with revenues expected to improve sequentially at a low double-digit growth rate, reflecting the impact of the strong market environment, both in the U.S. and the U.K., as we continue to build on our market share position. Meanwhile, revenues from industrial blending are expected to pull back further in the near term as we transition products. Although we expect blending revenues will ramp up in the second half of the year ultimately surpassing a $10 million quarterly run rate.

Overall, we expect Q2 revenues of roughly $40 million for the Industrial Solutions segment, with operating margins returning to near the Q4 level. In Fluids Systems, we are starting to see customers in the international markets begin to move forward with project planning and start-ups, including an expanding focus on geothermal drilling, which we think will provide meaningful opportunities over the long term. The recovery of our international business is a key piece of our segment profitability and the pace of recovery remains dependent upon the vaccine rollout and the lifting of local restrictions. Although most international markets remain heavily impacted by COVID, we currently expect our international revenues will improve into the low 30s range in Q2, reflecting a low double-digit sequential growth rate, with further strengthening and recovery back to pre-COVID levels expected by the end of the year. In North America, we expect revenues will remain relatively flat in the second quarter with the continued recovery in the U.S., offsetting the seasonal pullbacks in Canada. From a margin perspective, we anticipate the stronger revenues from the international market and ongoing U.S. recovery should help drive the Fluids business back into positive EBITDA territory in Q2.

Corporate office spending is expected to increase by roughly $1 million from the Q1 level, largely reflecting the timing of long-term incentive expense, along with the lifting of salary austerity measures or non-executive employees. With regard to cash flow, we expect capital expenditures in the near-term will remain fairly limited with investments being heavily focused on growth opportunities within the Industrial Solutions segment that provide clear line of sight to stable cash flow and EBITDA generation. Working capital is likely to increase modestly in the near term. As we've noted over the past several quarters, we plan to utilize our cash on hand and generated from operations, along with the available capacity under our ABL facility to settle the $49 million convertible debt maturity in December. With our ABL facility balance down to $11 million and improving cash generation from operations and repatriations of excess cash from our international subsidiaries, we remain confident that our projected liquidity will be more than sufficient to support our operational needs beyond the convertible bond funding.

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, Gregg. The first quarter marked another step forward in the execution of our long-term strategy. Most notably, the quarter's performance further demonstrates the value of our industrial solutions diversification, a strategic effort that has been under way for several years. With improving market awareness of the unique value proposition that we provide within the multi-billion dollar utilities market, 2021 is off to a strong start. Our Industrial Solutions segment contributed 38% of our first quarter revenues and we intend to continue leaning into this market opportunity going forward. We remain committed to expanding our geographical reach and investing necessary capital, to grow this segment of the company. As the energy transition gains momentum, it's clear that the utility infrastructure across the globe will require significant expansion and upgrade. And we are well positioned to participate in this meaningful growth. In Fluids Systems, we are extremely proud of the progress we've made over the past year to reshape the business, reducing our cost structure, harvesting cash in the balance sheet and reducing our net capital employed, while at the same time improving our market position and enhancing customer satisfaction. But despite the accolades, we recognize that we have an obligation to our shareholders to deliver consistent returns on capital and we acknowledge that there is more work to be done on this front.

Over the past decade, we've made meaningful growth investments in both our infrastructure and capabilities positioning Newpark as a market leader in the fluid space. Yet, we recognize that the market outlook today is dramatically different than it was when these investments were made. As the oil and gas industry normalizes, we will continue to evaluate the performance and outlook of every aspect of our Global Fluids business. We will continue to optimize our working capital investments, rationalize our roofline, including the potential sale of infrastructure and assets that may no longer be needed as we remain firmly committed to delivering an asset light and agile business model, that can generate a sufficient return on invested capital. In terms of cash flow, as we said in the past, we remain committed to a business model that maintains positive free cash flow through all phases of the industry cycle, something we've consistently demonstrated over the past four years. Our capital investment priorities remain focused on funding our Industrial Solutions growth objectives. And finally, I'd like to note that we remain encouraged by the continuing market focus on environmental sustainability, which we see as a meaningful tailwind to our environmentally focused product offerings across each of our businesses. As we've discussed for many years, providing our customers with differentiated technology that works in harmony with the environment has long been part of Newpark's DNA.

As an example of this, we are encouraged by our recent growth in the stimulation chemical space with our transition family of brine tolerant, high viscosity, friction reducer technology, which allows our customers to efficiently complete their shale wells using higher loads of province, while lowering their fresh water consumption. With increasing environmental regulations coming into effect, both here and abroad, we expect this business line to show continued growth in the coming quarters. To learn more about the benefits of our environmentally focused product offerings, we encourage you to read our 2020 sales report, which can be found on our company's website. With that I'd like to close the call, as I always do, by thanking our shareholders for investing in us and thanking our employees for their hard work and dedication to Newpark as well as a continued focus on safety.

We'll now take your questions. Operator?

Questions and Answers:

Operator

Thank you, ladies and gentlemen. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Daniel Burke with Johnson Rice & Company.

Daniel Burke -- Johnson Rice & Company -- Analyst

Let's see, I think on the international Fluids side, Paul, I think I heard you referred to the potential to get back to pre-COVID revenue levels by end of year. I wanted to check on that and affirm that meant sort of high '40s million run rate or just make sure I understood that trajectory a little better sound of constructive.

David A. Paterson -- Corporate Vice President and President of Fluids Systems

Hey, Daniel. This is David Paterson. Yes. International has been subdued the last two quarters, we're starting to see some real -- I'd say increases in activity across the board. I think the tender pipeline is strong, so it certainly positions us to get back to pre-COVID levels. I would say late Q3, Q4. And as you've alluded to that would result in the sort of mid to high 40 ranges as we exit the year.

Gregg S. Piontek -- Senior Vice President & Chief Financial Officer

Yeah, I would just add to that. This is Gregg. The one thing that has been -- the difficulties to predict through all of this has been the COVID implications on these markets, so obviously we maintain a very close eye on that.

David A. Paterson -- Corporate Vice President and President of Fluids Systems

Yes. Danny to that point, I'd just like to make two of it. We look at the Middle East as an area that we expect a lot of growth as we look at the current administration's focus on slowing down the drilling activity here in the U.S. and so the win in Bahrain, I think it's a very strong statement in terms of our capabilities in that part of the world.

Daniel Burke -- Johnson Rice & Company -- Analyst

Got it, OK. No, that's a helpful sign post for the model. And then on maybe to pivot then to, I guess the Mats side of the business, again, with all caveats around COVID impacts potentially lingering, nice to hear a guide toward double-digit growth in Q2. Is there anything that would impede the thought that growth could continue at that type of trajectory in the second half of the year?

Matthew S. Lanigan -- Corporate Vice President and President of Industrial Solutions

Yeah, I'll answer that one Daniel, it's Matthew. Look, I think, based on what we're seeing right now with closing activity domestically and large infrastructure projects internationally, particularly in the U.K. where there are substantial long-term investments being made by the government that is, there is nothing really on the right now that would suggest that things are going to slow down materially, so we're quite encouraged.

Daniel Burke -- Johnson Rice & Company -- Analyst

Okay, got it. And then I guess maybe just to finish up with one, the working capital harvest in Q1 is certainly impressive. Don't want to get wrong footed here though, I'd imagine maybe there is some room for you guys to give back a little in working capital here in the near term. Any considerations, I'll keep this question maybe specific to the near quarter here in Q2, that we should think about regarding working cap.

Matthew S. Lanigan -- Corporate Vice President and President of Industrial Solutions

No, you hit it spot on. Yeah, we did have a very strong quarter, really the outliner there is on the DSO side, very, very strong quarter. We expect that to normalize, rough order of magnitude, our receivables came in nearly $10 million below what is kind of a normalized level. So yeah, I would expect to get back there.

Daniel Burke -- Johnson Rice & Company -- Analyst

Okay. All right, guys. I'll leave it there.

Operator

[Operator Instructions] Our next question comes from the line of Marshall Adkins with Raymond James.

Marshall Adkins -- Raymond James -- Analyst

Couple of quick questions. You talked about the supply chain. Could you elaborate on issues that you may be facing there, whether it's resiner or bariter, LIBOR, which you also mentioned, talk a little bit about that. It seems like everyone in the world is experiencing supply chain issues, I just wanted to get your take on what you guys are seeing.

Matthew S. Lanigan -- Corporate Vice President and President of Industrial Solutions

Yeah. Marshall, it's Matthew, I'll take it from the I guess the matting side first. Look a little primary thing we're seeing is resin price inflation. I think in the first quarter, we were up over 40% in that area. The other issue that starting to play out as growth returns is attracting LIBOR back to the market. I think a lot of people are writing out the stimulus checks before they rejoin the workforce. So that would be the other area for us.

David A. Paterson -- Corporate Vice President and President of Fluids Systems

And Marshall. Good morning, David Paterson. So from the Fluids perspective with the sudden jump in oil price is definitely driven inflation in our supply chain, ocean freight is a big contributor. Ocean freight rates are up probably 20% to 30%, bigger impact in the international business than the North America business. We're also seeing cost inflation in raw materials for our products, mainly on the oil derivatives that we are seeing it on our polymers as well. And even in the U.S., we're starting to see some tracking Inflation in the domestic routes.

Matthew S. Lanigan -- Corporate Vice President and President of Industrial Solutions

Yeah. So I think as you stated. Marshall, it's what we're seeing is I think pretty consistent with what's very broadly being seen by everyone in the market.

Marshall Adkins -- Raymond James -- Analyst

Right. And this maybe quick follow-up to that, your ability to pass on those prices. I assume again since it's happened, not just in our industry, but every industry is fairly good to pass on those price increases.

David A. Paterson -- Corporate Vice President and President of Fluids Systems

Yeah, so we're working on right now absolutely.

Marshall Adkins -- Raymond James -- Analyst

All right. One last quick one from me. Gulf of Mexico, oils in the mid '60s, that's obviously a big deal, gas looks pretty good. Intuitively that you would think that's going to lead to pickup in the Gulf, but offsetting that you kind of we have an administration that's going to anti-oil and gas out there. So give me you all's outlook for the goals and what you see -- how do you see that evolving giving the forces that are acting upon that market?.

David A. Paterson -- Corporate Vice President and President of Fluids Systems

Hey Marshall, this is David again. I think the Gulf is -- Q1 was quite slow, I think that was quite slow across the boards. The rig count is stable. What makes me feel positive with the Gulf of Mexico is the longevity of a lot of the rig contracts. There are some long contracts on the higher end floater work that exists in the Gulf of Mexico. So I think that's a strong commitment to the Gulf of Mexico, and we're starting to see some of the independents getting back to activity. How that's going to shake out for year-on-year type of activity evolution. I think it's early in the year, Marshall, on how we see that, but I think the Gulf is going to remain steady through 2021 and I know there are some other projects queuing up down the road. So I'm still I'm still quite buoyant on the Gulf of Mexico. But we're obviously watching the dynamics very closely given some of the federal winds that are blowing.

Operator

[Operator Instructions] There are no further questions in the queue, I'd like to hand the call back to management for closing remarks.

Paul L. Howes -- President and Chief Executive Officer

All right, well thank you once again for joining us on the call and for your interest in Newpark and we look forward to talking to you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Ken Dennard -- Investor Relations

Paul L. Howes -- President and Chief Executive Officer

Gregg S. Piontek -- Senior Vice President & Chief Financial Officer

David A. Paterson -- Corporate Vice President and President of Fluids Systems

Matthew S. Lanigan -- Corporate Vice President and President of Industrial Solutions

Daniel Burke -- Johnson Rice & Company -- Analyst

Marshall Adkins -- Raymond James -- Analyst

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