Newpark Resources, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Greetings, and welcome to the Newpark Resources’ First Quarter Earnings Conference Call. As a reminder, this conference is being recorded. 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:]

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.

[Paul Howes:]

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.

[A - Gregg Piontek:]

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.

[Paul Howes:]

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 underway 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?

[Operator:]

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

[Daniel Burke:]

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 Paterson:]

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 Piontek:]

Yes. 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 Paterson:]

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:]

Got it, okay. 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 towards 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 Lanigan:]

Yes. 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:]

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 Lanigan:]

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:]

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

[Operator:]

Our next question comes from the line of Marshall Adkins with Raymond James.

[Marshall Adkins:]

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 Lanigan:]

Yes. 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 Paterson:]

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 Lanigan:]

Yes. 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:]

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 Paterson:]

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

[Marshall Adkins:]

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 Paterson:]

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:]

There are no further questions in the queue, I’d like to hand the call back to management for closing remarks.

[Paul Howes:]

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:]

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