Greetings, and welcome to the Newpark Resources 2021 Third Quarter Earnings Conference 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, Ken Dennard..

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review third quarter 2021 results.

Participating from the company in today's call are Paul Howes, Newpark's Chief Executive Officer; Gregg Piontek, Chief Financial Officer; and Matthew Lanigan, President and Chief Operating Officer.

Following my remarks, management will provide a high level commentary on the financial details of the third quarter results and near-term outlook before opening the call for Q&A. Before I turn the call over, I'll have a few housekeeping items to run through.

There'll be a replay of today's call and it will be available via webcast on the company's website at newpark.com. There will also be a recorded replay telephonically available until November 17, 2021, and that information on how to access those feature is in the yesterday's release.

Please note that the information reported on this call speaks only as of today, November 3, 2021, and therefore, you are 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 listeners 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 financial measures are included in the quarterly press release, which can be found on Newpark's website. And now, with all that said, I'd like to turn the call over to Newpark's CEO, Mr. Paul Howes.

Paul?.

Thanks, Ken, and good morning everyone.

Although we face some continued market challenges during the third quarter, including the impact of Hurricane Ida and the lingering COVID related impact on our international operations, we are encouraged by the improving market dynamics in the oil and gas sector and remain focused on ongoing efforts to reshape our U.S. Fluids business.

Our third quarter was highlighted by continued strength in Site and Access Solutions product sales, along with notable progress in our Fluids recovery. Consolidated revenues improved 7% sequentially to $152 million, including 11% improvement in Fluids Systems.

Consolidated third quarter EBITDA generation was $4 million, which includes $4 million of charges associated with Hurricane Ida as well as costs associated was restructuring our U.S. Fluids business. Turning to the specifics of the segment.

The strong performance from our Industrial Solutions business continued in the third quarter demonstrating the value of our diversification efforts as we expand our presence in the power transmission and other industrial end markets.

While the third quarter was impacted by the typical seasonal slowdown in T&D project activity, the seasonal lull was largely offset by a $4 million increase in site access product sales, reflecting the benefit of our expanding presence outside of oil and gas.

With a modestly lower revenue and shift in mix, our Industrial Solutions operating margins declined to 18% in the third quarter, generating $13 million of EBITDA. Through the first three quarters of 2021, we remain very pleased with the momentum we are building, particularly within the multi-billion dollar transmission access market.

Year-to-date, we generated $108 million of site access revenues from the power transmission and other industrial markets, which puts us on a pace for nearly $115 million of revenues for the full year 2021, a 25% improvement from our previous high mark.

This revenue level and growth rate reflects significant progress in our power transmission market penetration, which is a key component of our strategy. Turning to our Fluids Systems. Total segment revenues improved 11% sequentially, primarily driven by strength in the Canadian market, as well as our other international markets.

In North America, revenues improved by 14% sequentially to $71 million, substantially all driven by the Canadian market. U.S. revenues remain in line with prior quarter with modest improvements in land activity offset by a $2 million weather related decline in the Gulf of Mexico.

International revenues improved 6% sequentially to $37 million in the third quarter, with our expansion in Asia Pacific being the primary driver of the improvement while certain areas in the EMEA region continued to be negatively impacted by COVID related restrictions.

Benefitting from the revenue improvement as well as our ongoing efforts to reshape the U.S. Fluids business, the Fluids Systems segment made progress towards a return to positive cash flow generation, however, the improvement was offset by $4 million of third quarter charges as highlighted in yesterday's press release.

As another sign of the international market recovery, I'd like to highlight that we received a five-year award in Albania from Shell Oil, as they look to return to drilling activity in early 2022, which we believe will generate roughly $5 million of revenue per year.

We've had a strong history with Shell in Albania though the upcoming contract reflects their first drilling activity in this country since 2019. And with that, I will hand the call over to Gregg to discuss in more detail the financials for the third quarter.

Gregg?.

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 for the Industrial Solutions segment declined 3% sequentially to $44 million in the third quarter.

The Site and Access Solutions business contributed $42 million of the segment revenues in the third quarter, including $28 million of rental and service revenues and $14 million of product sales.

As discussed on our August call, the third quarter was impacted by the typical seasonal slowdown in T&D project activity, which led to a $5 million decline in rental and service revenues following the strong Q2 result.

This decline was largely offset by a $4 million increase in revenues from product sales benefiting from our expanding customer base in the utility sector. Industrial Blending contributed $2 million of the segment revenues in the third quarter in line with prior quarter levels.

As discussed last quarter, although our primary Industrial Blending customer experienced a decline in consumer demand for disinfectants and cleaning products and canceled their orders early in the third quarter, revenues remained flat sequentially largely due to the cancellation fee provisions within our customer contract.

With the modestly lower revenues, the Industrial Solutions segment operating income declined by $2 million sequentially to $8 million, contributing $13 million of EBITDA in the third quarter. As highlighted last quarter, the Q2 results included $1 million gain associated with the enforcement of our patent rights.

Comparing to the third quarter of last year, revenues from the Site and Access Solutions business increased $13 million or 46%. This increase includes an $8 million improvement in product sales, along with a $5 million or 22% improvement in rental and service revenues.

Looking at the year-to-date 2021 performance for the Industrial Solutions business, as Paul touched on we're continuing to see a significant shift within our segment revenue mix.

Through the first three quarters, the power transmission end market contributes more than half of our Industrial Solutions segment revenues, while our historical E&P market activity accounts for less than 20%.

Now turning to Fluids Systems, total segment revenues improved by 11% sequentially to $108 million in the third quarter, primarily driven by improvements in Canada and other international markets. Revenues from U.S.

land increased 4% sequentially to $51 million, reflecting the benefit of the 11% improvement in market rig count as our market share remains relatively stable. Revenues from the Gulf of Mexico declined by $2 million contributing $6 million in the third quarter, largely reflecting the weather related impact on our customers' operations.

In Canada, revenues nearly tripled sequentially to $14 million in the third quarter, meaningfully outpacing the market rig count improvements following the spring breakup.

Outside of North America, although we are seeing continued recovery in customer activity levels, the global surge in the COVID Delta variant caused some delays to customers' plans in certain EMEA markets, hampering the pace of recovery.

International Fluids revenues improved 6% sequentially to $37 million in the third quarter with our ongoing expansion in Asia Pacific being the primary driver of the improvement.

As Paul touched on, with this sequential revenue growth in the third quarter, we saw continued progress in returning the Fluids Systems segment to profitability, although the $4 million of charges related to Hurricane Ida and our ongoing cost actions largely offset the improvements keeping the Fluids Systems reported operating loss flat sequentially at $7 million for the third quarter.

After consideration of both the second and third quarter charges highlighted in the press release, the sequential improvement in operating income reflects an incremental margin of roughly 30% on the $11 million revenue improvement.

Contributing to this improvement, we achieved a modest net improvement in pricing for this quarter while passing on inflationary impact of raw materials and transportation costs. On a year-over-year basis, our Fluids Systems revenues increased $40 million or 59%.

North America land revenues nearly doubled year-over-year, fairly in line with the market rig count, while Gulf of Mexico decreased modestly. International revenues improved $12 million or 47% year-over-year, benefiting from new project startups and the recovery of customer activity in several European markets and Algeria.

SG&A costs were $24 million in the third quarter, which includes $7.5 million of corporate office expenses, reflecting $1 million increase from the prior quarter.

The sequential increase in both SG&A and corporate office expense is primarily attributable to the timing of long-term incentive expense along with the full lifting of salary austerity measures put in place during 2020.

Comparing to the third quarter of last year, SG&A costs increased $3 million, including a $1 million increase in corporate office expense.

The year-over-year increase in SG&A primarily reflects higher personnel costs, including higher incentive expenses in the Industrial Solutions segment and Canada, as well as the $1 million increase in corporate office expense.

Interest expense remained stable at $2.2 million for the third 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 3.25%. The third quarter includes a $2 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 primarily reflects taxes on foreign earnings. Our reported net loss in the third quarter was $0.11 per share, which included $0.04 of charges and compares to a net loss of $0.07 per share in the second quarter.

Reported net loss in the third quarter of last year was $0.26 per share, which also included $0.04 of charges. Turning to third quarter cash flow, cash used in operating activities was $12 million, including $14 million of cash usage associated with a networking capital increase.

Substantially all of the working capital increase is attributable to growth in receivables with the majority in Canada and our international Fluids operations.

While partially driven by the improving revenues in these regions, much of the receivable increase is reflective of elevated DSOs driven by the timing of activity within the quarter, which we expect will normalize next quarter.

Investing activities used $6 million of cash in the third quarter, substantially all of which reflects Mats and rental fleet additions in preparation for fourth quarter rental projects.

It's worth noting that through the first three quarters of 2021, investments in the rental fleet totaled $13 million, the majority of which replaces Mats sold from the rental fleet as part of our standard commercial offering.

Consequently, while gross capital expenditures totaled $19 million year-to-date, our net capital investments are only $7 million. We ended the third quarter with a total debt balance of $94 million and cash balance of $31 million resulting in a modest 17% debt-to-capital ratio and 12% net debt to capital ratio.

Our net debt increased by $20 million in the quarter, largely reflective of the elevated receivables as well as the additional capital investments to support our Industrial Solutions growth efforts. Our increase in debt was fairly balanced between the U.S. and international loan facilities.

We also purchased $10 million of our outstanding convertible bonds in the open market during the quarter, resulting in a small loss on extinguishment of debt. We ended the third quarter with $24 million outstanding on our U.S.

asset based loan facility and after providing for the $39 million convertible bond maturity next month, we have $42 million of remaining availability. Now turning to our near-term operational outlook.

As we look ahead, we remain encouraged by the strength in the longer-term fundamentals across all major energy sectors though we continue to see significant inflationary pressures on raw materials, transportation, and labor costs, as well as increasing lead time requirements for many purchases.

In the Site and Access Solutions business, we've experienced a meaningful recovery in rental projects in recent weeks, following the seasonally soft Q3. We have several power transmission projects now underway, including our first large scale project in Florida following last year's expansion into the Southeast U.S. market.

In addition to the stronger rental and service activity, we expect the fourth quarter to benefit from the typical year end strength for product sales into the power transmission sector. Meanwhile, revenues from industrial blending are expected to remain limited in the near term, as we look to replace the disinfectant sales volume.

In total, we expect Q4 Industrial Solutions segment revenues of roughly $50 million with the level of year end demand for product sales, being the greatest variable. At that revenue level, we expect segment operating margin to remain relatively stable to Q3 primarily impacted by the following factors.

First, the significant surge in raw material costs for Mats combined with the competitive pricing environment. Second, a change in the mix of rental projects with lower pricing on a few of the larger scale, longer duration projects major energy sectors, and third, the lack of near-term industrial blending production volume.

With the anticipated Q4 performance, the Industrial Solutions segment is expected to deliver more than $190 million of revenues for the full year 2021, just shy of our 2019 result, while also generating more than $60 million of full year EBITDA.

This comparison to 2019 highlights the successful transformation in this segment as the strong revenue growth in the power transmission and other industrial end markets is expected to substantially offset the more than $50 million decline in annual revenue derived from the E&P sector as compared to 2019.

In Fluids Systems, we anticipate most regions will continue to strengthen in the near term, benefiting from the strong commodity prices and the gradual easing of COVID-related restrictions around the world. In North America, we expect revenues will remain relatively stable with improvements in U.S.

land, mostly offset by the typical holiday driven slowdown in December. Although we previously anticipated a meaningful improvement in the Gulf of Mexico activity in the fourth quarter, due to the startup of a second drillship with Shell, recent changes in Shell’s plans for this drillship have now pushed this activity by several quarters.

Internationally, while the COVID Delta variant surge has tempered the pace of recovery, we expect international revenues to improve by a mid-teens percentage in Q4 benefiting primarily from higher customer activity in Africa with continued international recovery expected into early 2022.

In total, we anticipate our Fluids segment revenues to grow by a mid single digit percentage in Q4.

And although the change in Shell activity in the Gulf of Mexico provides an unfavorable headwind, we expect Fluids segment operating income will be roughly breakeven for the fourth quarter prior to the cost of any further restructuring, including a solid earnings contribution from our international operations along with improvements in the U.S.

Looking beyond Q4 with the improving outlook for the oil and gas sector and particularly benefiting from our meaningful international presence combined with the impacts of our ongoing actions to reshape our U.S. operations.

We expect revenue growth in 2022 will continue to deliver solid incremental margins and drive further improvements in Fluids profitability. Corporate office expense is expected to remain fairly flat in the near term, then decline modestly in the first quarter and beyond.

Also with the December 1 maturity of our remaining $39 million of convertible bonds, we expect interest expense to step down modestly in Q4, then level off at roughly $1 million of quarterly interest expense in 2022.

With the sequential improvements in both segments and the modest decline in interest, we expect consolidated pre-tax income to be roughly breakeven for Q4 prior to restructuring charges.

With regard to CapEx, we expect expenditures in the near term will remain fairly limited with investments focused on growth opportunities within the Industrial Solutions segment. Total net CapEx for the full year 2021 is likely to come in around $10 million.

It's also worth noting that as we look beyond the repayment of our upcoming convertible bond maturity in December, in addition to funding the expansion of our Industrial Solutions business and working capital needs of the business, we will look to resume returning value to shareholders in 2022 through purchases of outstanding stock under our existing share purchase program.

And with that, I'd like to turn the call back over to Paul..

Thanks, Gregg. I'd like to take a moment to elaborate on my recently announced decision to retire as CEO of Newpark. I have also decided that upon my retirement, I will resign as a Member of the Board. As I reflect on my 15 years as the company's President and CEO, I'm extremely proud of all we have accomplished and the unique culture we have created.

While there is never a perfect time to retire, I believe the time is right, having turned 65 earlier this year and with the executive leadership team in place to continue on Newpark's journey.

I'd now like to hand the call over to Matthew Lanigan, who was recently promoted to President and Chief Operating Officer, and will ultimately succeed me as CEO upon my retirement. As many of you know, Matthew has been with Newpark since 2016, where he led the transformation and diversification of our Industrial Solutions business.

I'm confident that Matthew, along with the rest of the Newpark leadership team, will do an outstanding job building upon the platform we have all worked to create and deliver long-term value for our shareholders. So with that, I'd like to turn the call over to Matthew for his concluding remarks.

Matthew?.

Thanks, Paul. It's an honor to have been selected as Newpark's CEO upon Paul's retirement. I've had the good fortune to work very closely with him over these last five years and appreciate the profound impact he has had at Newpark including the establishment of a culture with unwavering commitment to safety, compliance and operational excellence.

Equally, I feel very fortunate to be surrounded by an exceptionally strong senior leadership and employee teams, all of whom who are committed to our core values and driving our long-term strategy across the business.

As I look to step into the role of CEO in the coming months, I wanted to provide a few thoughts regarding Newpark's focus going forward.

As Paul touched on in his opening remarks, while we have made meaningful strides in addressing the structural changes in some of our served markets, we have more to do in those areas to generate more stable cash flow and strong returns for our shareholders.

Consistent with our long-term planning process and as highlighted in the past, we'd continue to work closely with the management team along with our Board of Directors to evaluate various alternatives to generate value for our shareholders.

With ongoing support from outside financial and other advisers, we have continuously reviewed our portfolio during this unprecedented oil and gas market downturn and assessed necessary adjustments in course.

These reviews are focused on evaluating changes in the outlook of our served markets and customer priorities while identifying opportunities for value-creating options in our portfolio as well as placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability.

We remain encouraged by the progress we are making in the Industrial Solutions segment and our International Fluids business. However, we recognize that the U.S. and Gulf of Mexico oil and gas markets are facing prolonged headwinds, necessitating consideration of broader structural changes to transform this business for the new market realities.

Regarding our ongoing focus on innovation, we must continue to deploy our industry leading sustainable products and services into markets where we uniquely meet the needs of our customers and generate acceptable returns.

Newpark is no stranger to taking the lead in developing solutions that provide meaningful impact to our customers' environmental footprint as well as providing industry-leading service to support them. This focus, which goes back well over a decade, will continue to guide our investments in product and service development.

We will also remain focused on our unyielding commitment to safety and to acting in a manner consistent with Newpark's core values. Nothing is more important than keeping our employees, customers and other stakeholders safe and being a company that is trusted to always do the right thing from a values and compliance perspective.

I look forward to sharing more about Newpark's strategy and key priorities on future calls. With that, I'd like to close by thanking our shareholders for investing in us and thanking our employees for their hard work and dedication to Newpark as well as their continued focus on safety. We'll now take your questions.

Operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Daniel Burke with Johnson Rice..

Yes, good morning guys..

Good morning..

Hi, Daniel..

I guess, first off, Paul, I wish you well in your pending retirement. I wanted to make sure to point that out. So congrats on transitioning..

Thank you..

Let's see. Look, I know Matt referred to it at the end of the call as well, but Paul, in your initial comments, you talked about ongoing efforts to reshape the U.S. Fluids business, and you guys maybe alluded to the potential for some additional restructuring charges.

Can you just catch us up with maybe what are the currently ongoing efforts? I recognize that this is – this continues to be a work-in-progress. But I wanted to see if we could get any insights there into what you guys are executing on..

Yes, I'll let Matthew answer that question..

Yes. Thanks, Daniel. I think there's a couple of elements to it that we've been working on, one of which we spoke about previous quarter, which is rationalizing inventories and making sure that they were right sized for the go-forward market structure. We've also been looking at sort of streamlining the organization particularly in the U.S.

and Gulf of Mexico for the ongoing structurally smaller markets that we've received there. So that's the main thrust of it at this point..

Got it. Okay. And then as the – I guess as the power transmission, industrial market, site access business has become more and more relevant core to the company, it sounds like you all have pretty good momentum here in Q4 on the rental side as well as the sales side.

So just wondered if I could elicit any early comments or thoughts on the outlook for 2022. Any headwinds to be aware of? Any tailwinds to be aware of? Those types of comments would be helpful..

Yes. Look, I think if you look at a macro level, similar to our Q3 story, there is a lot of investment being put towards grid particularly domestically in terms of both hardening the grid from a resilience point of view from ongoing extreme weather events as well as a large renewables tie-in requirement.

So I think from a macro theme, that would be your tailwind and large requirements for access to get those projects up and running. If I have to – if I had to highlight a tailwind, I still think as we play through some of the supply chain issues that we're seeing in terms....

Headwind..

Sorry, headwind in terms of supply chain issues we're seeing are things that we're looking at, as I touched on last time, a lot of utilities are not going to access or start their projects until they have all of the equipment items lined up.

So that appears to be something that they're working through effectively but something that, particularly with the issues in China at the moment, we're just keeping an eye on..

Yes. And really just adding to that on the supply chain side, you have not only the materials that they need, but you also have a labor market that you're dealing with. So I think that's probably as we look out over the next several months, those are probably the factors that are going to be the biggest drivers of the headwind..

Got it. And then maybe just one last one. Gregg, you noted that following the convert maturity, you guys are looking at a pivot and could look at some share repurchasing.

I mean I guess just trying to understand the magnitude, timing, I assume that, I guess, my initial conclusion would be that would be where you would direct sort of 2022 free cash flow.

Or would you be willing to maybe effectively utilize the balance sheet to make share purchases that are greater than the free cash flow generation you might produce?.

Yes. I think the way to frame that up is utilization of free cash flow generation. Obviously, our debt level is very modest, and we're comfortable with it in that place. But as we look forward and with the improving outlooks in both the oil and gas as well as in the power transmission sectors, you see the outlook for additional free cash flow.

The other element that comes into it also is what capital investments are we going to need to make in order to support that growth as we saw this quarter with the investments in the mat fleet.

So that's obviously the highest priority is making sure that you're investing in your growth plans for the business, but we definitely want to work share repurchases and get back into that cycle here with some portion of our free cash flow in 2022..

Okay. All right. Great. That’s good to hear. Thank you guys. I appreciate the time this morning..

Thank you, Daniel..

Thank you, Daniel..

Your next question, Bill Dezellem with Tieton Capital..

Thank you.

Specific to the increase in inventory for the mat rentals or the CapEx for the mat rentals, is that for the Florida project that you referenced? Or is it E&P? Would you characterize kind of where that investment is targeted?.

Yes. Sure, Bill. At a macro level, that investment was all into the T&D space rather than E&P. And I think there were a portion of that build that went to Florida as well as other projects that were starting up particularly in the Southeast..

And so it is primarily or entirely for the T&D business rather than the E&P side?.

Absolutely. I think it's been several years since we've made any fleet investments into the E&P space..

Great. Thank you..

This concludes today's teleconference. I will now turn the floor over to management for closing remarks..

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

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