Greetings, and welcome to the Newpark Resources Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard with Dennard Lascar Investor Relations..

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review second quarter 2022 results. Participating from the company in today's call are Matthew Lanigan, Newpark's President and Chief Executive Officer; and Gregg Piontek, Chief Financial Officer.

Following my remarks, management will provide a high-level commentary on the financial details of the second quarter results and near-term outlook before opening the call to Q&A. Before I turn over the call, I have the normal housekeeping items to go over.

There'll be a replay of today's call and it will be available by webcast on the company's website at newpark.com. There will also be a recorded replay available until August 17, 2022, and that information is included in yesterday's news release.

Please note that the information reported on this call speaks only as of today, August 3, 2022, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of replay listening or transcript reading.

In addition, the comments made by management during this conference call 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 and 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 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. Matthew Lanigan.

Matthew?.

Good morning, everyone. Our second quarter performance demonstrated progress in both of our businesses with strong execution and improving market fundamentals contributing to a 10% sequential increase in revenues and continued improvement in EBITDA within our core business activities.

Consolidated revenues were $194 million for the second quarter, delivering adjusted EBITDA of $13.3 million and adjusted earnings per share of $0.01 per share. Our Industrial Solutions segment delivered $49 million of revenues and $15.1 million of EBITDA in the quarter.

The result was especially pleasing given the unseasonably hot and dry conditions in large parts of the U.S. as well as customer labor and supply chain-related issues that caused unplanned delays to a number of domestic and international projects.

Compensating for the reduction in rental and service income, the quarter benefited from $19 million of revenue from product sales, reflecting strong orders from the utility sector as well as the impact of previously discussed deliveries that shifted from Q1 to Q2.

With Q3 orders and robust inquiries to date, we remain confident that we'll see the strength continue in the second half of the year.

During the quarter, we progressed our efforts to expand our participation in the growing circular plastics economy, leveraging our historical investments and R&D capabilities and adaptable manufacturing processes, we are on track to utilize approximately 1 million pounds of recycled and alternate materials in our mat production in 2022.

Importantly, once scale, the use of these materials can provide meaningful economic benefits along with a significant reduction in life cycle greenhouse gas emissions when compared to using traditional virgin materials.

We are very encouraged with our progress and expect that through further refinement and expansion of our supply chain integration and material processing capabilities, we could see this volume expand significantly in the coming years.

This initiative illustrates another clear example of how our focus on scalable innovation at Newpark provides compelling economic and environmental drivers for our customers and shareholders. Turning to the Fluids business, market fundamentals remain supportive for both North America land and our served international markets.

Our Fluid Systems segment delivered $145 million of revenues and $4.3 million of EBITDA in the second quarter. In North America, we delivered double-digit growth in our U.S. land operations that largely offset the seasonal impact of the spring break up in Canada. We also saw sequential revenue growth in the Gulf of Mexico for the quarter.

Although profitability was unfavorably impacted by a combination of incremental costs incurred to meet a tight Deepwater project time line with unrelated customer operational issues ultimately leading the customer to delay and reduce the scope of the planned drilling project and return unused inventory.

As a result, our operating loss in the Gulf of Mexico increased sequentially by roughly $1 million, overshadowing the solid progress we're making in other areas. Based on the customer's current schedule, we expect drilling to resume in Q3, improving our performance as operating expenses return to more typical levels.

Outside of the Gulf of Mexico, we are making progress with our margin improvement efforts in North America as we focus on pricing recovery to offset raw material cost inflation and target customers that place value on our technology, reliability and industry-leading service quality.

Internationally, revenues increased sequentially despite the impact of the strengthening U.S. dollar as we saw the benefits of customer drilling programs commencing in the quarter that have been delayed through the pandemic.

We remain very pleased with the improving outlook for our international fluids business as activity levels build from both the start-up of previously delayed programs and new projects being evaluated in response to the heightened focus on energy security, resulting from the ongoing conflict in Ukraine.

With regards to international tenders, I'm pleased to highlight a few specific meaningful successes in the quarter. First, we were successful in our latest tender with Sonatrach in Algeria.

The 3-year award is valued at approximately $90 million and notably demonstrates the value of our technology portfolio as Sonatrach looks to expand the use of our high-performance water-based systems in the coming years.

Not only does the award maintain meaningful revenues for the next 3 years in this important market but also resets pricing to more appropriately reflect raw material cost inflation, which should provide a lift to profitability beginning in the fourth quarter.

Also in Algeria, our ongoing success with IOCs continues as we secured a $27 million multiyear award with a joint venture of ENI, further reinforcing our leading market position in this country.

I'm also pleased to highlight that we were successful in securing a 5-year award for our Cleansorb product line in Saudi Arabia valued at over $20 million where we see further upside potential as our innovative ORCA breaker system gains further acceptance across onshore and offshore fields in the kingdom.

During the quarter, the Fluids team continued to navigate the inflationary pressures and supply chain challenges that persisted across all our global operations.

Raw material cost inflation, the build of inventory for the delayed project in the Gulf of Mexico and required prepayments on barite purchases for our mineral grinding business led to a $20 million increase in our Fluids inventory levels for the quarter.

With the second half deepwater project and ongoing efforts to monetize our excess inventories in the Gulf of Mexico, along with the sale process of our mineral grinding business, we expect inventories will come down meaningfully in the second half of the year. Switching now to our previously discussed Fluids portfolio actions.

We have been very active in our ongoing efforts to identify all opportunities to transform our Fluids business into a more focused and capital-light business model. Specifically, relating to our previously announced divestitures, the sale of our U.S.

mineral grinding business led by PPHB, is progressing well and remains on track for completion before the end of the year.

We've been pleased with the level of interest and believe the strong representation from several non-oilfield strategic buyers further validates our strategy of separating this noncore business unit and freeing up meaningful capital for our shareholders.

In parallel, we are also continuing efforts to monetize excess real estate, including our Conroe, Texas blending facility.

After winding down the Conroe blending operations at the end of Q1, we have been active in marketing the facility and related equipment, but expect the process to take some time given the outlook for interest rates and their impact on real estate valuations.

We recorded an $8 million impairment in the quarter to reduce the assets carrying amount to its recoverable value.

As stated previously, we expect our divestitures to provide meaningful cash generation to reduce our debt levels and provide greater flexibility to accelerate investments in high-returning opportunities while also reengaging in our share repurchase program, returning a portion of cash generation to our shareholders.

And now I'll hand the call over to Gregg to discuss in more detail the financials for the second quarter.

Gregg?.

Thanks, Matthew, and good morning, everyone. I'll start with the specifics of the segment and consolidated financial results for the quarter before providing an update on our near-term outlook.

Overall, aside from the Gulf of Mexico operations and the asset impairment that Matthew discussed, our second quarter operating results were fairly in line with our expectations, reflecting a $1.6 million increase in adjusted EBITDA largely driven by improvements in our Industrial Solutions segment.

Industrial Solutions revenues improved to $49 million in the second quarter with the entire $13 million sequential increase driven by stronger product sales.

On the rental and services side, despite a strong start to the second quarter, revenues were down slightly from Q1, impacted by the exceptionally dry and warm start to the summer in the Southern U.S. as well as unanticipated delays in customer projects associated with various customer labor constraints and supply chain disruptions.

In terms of revenues by end market, the utility sector remains our primary customer base, contributing the majority of rental and service revenues and substantially all of our direct sales, while E&P customers contributed roughly 20% of segment revenues in the quarter.

The Industrial Solutions operating income was $9.8 million for the second quarter, reflecting a 20% operating margin. The operating margin was on the lower end of our expectation, impacted by the softer rental activity late in the quarter as well as cost inflation on both transportation and materials.

Comparing to the second quarter of last year, Industrial Solutions revenues were up $6 million or 13%, with stronger product sales being somewhat offset by an 8% year-over-year decline in rental and service revenues.

This year-over-year decline was primarily driven by the previously discussed shift in customer pricing mix as we've expanded our role within large-scale utility projects. Segment operating income declined $1.5 million from last year, although it should be noted that Q2 of 2021 benefited from a $1 million gain from a legal settlement.

In Fluid Systems, total segment revenues improved 3% sequentially to $145 million in the second quarter despite the seasonal headwind of spring breakup in Canada and the strengthening U.S. dollar. This outpaced our expectation and reflected stronger improvement in U.S. land, along with a shorter than typical breakup period in Canada. Total U.S.

land revenues, which included $12 million of third-party revenues from our mineral grinding business increased 14% sequentially to $78 million, relatively in line with a 13% improvement in market rig count.

In the Gulf of Mexico, revenues increased $5 million sequentially, though as Matthew touched on, fell short of our expectations due to our customers' unexpected change in drilling plans on 2 deepwater drillship projects.

In Canada, the seasonable pullback in drilling activity led to an $11 million or 49% sequential decline in revenues though it's worth noting that the Canadian market activity remained more robust this year as compared to typical spring breakups of past years.

Outside of North America, revenues improved to $49 million in the second quarter with improvements in Asia Pacific and the start-up of the long-awaited project in Cyprus being mostly offset by lower activity in Kuwait and parts of Europe as well as the strengthening U.S. dollar.

Operating income for the Fluids Systems segment remained in positive territory but declined sequentially by $2.9 million due to the anticipated seasonable pullback in Canada, along with an incremental $1 million operating loss from the Gulf of Mexico.

Despite facing the sustained impacts of input cost inflation, the profitability and returns in our U.S. land business have continued to take positive steps forward.

Internationally, while we are encouraged by our ability to secure price increases for some of our customers, we continue to absorb raw material cost inflation on certain long-term contracts where customer pricing is fixed providing a headwind in the quarter of roughly 1 point to our Fluids segment margin.

On a year-over-year basis, our Fluid Systems revenues increased $48 million or 50%. North America land revenues improved by $35 million or 64%, benefiting from the recovery in market rig count and Canadian market share gains, while Gulf of Mexico was essentially flat to last year.

International revenues improved $13 million or 37%, benefiting from broad-based improvements in customer activity across most EMEA and Asia Pacific markets partially offset by a $5 million reduction resulting from the stronger U.S. dollar.

As disclosed in yesterday's press release, following the recent exit of the Industrial Blending business, we've separated this business from the Industrial Solutions segment for all periods reported.

The second quarter loss from the Industrial Blending segment was $8.9 million, including a $7.9 million noncash impairment charge as well as other costs related to the exit and ongoing process to sell these assets.

Corporate office expenses decreased to $7.5 million for the second quarter but came in modestly higher than anticipated primarily due to a $600,000 increase to the accrual for long-term incentives tied to our 3-year share price performance relative to our peer group.

Considering the elevated long-term incentive expense, the remaining corporate expense was $6.9 million for the second quarter, in line with our expectations. SG&A expenses for the quarter decreased slightly sequentially and were up $1.4 million year-over-year with the increase from last year primarily reflecting higher personnel and incentive costs.

SG&A as a percentage of sales improved to 12.5% in Q2 as compared to 13.8% in Q1 and 16.2% in the second quarter of last year.

Interest expense increased sequentially to $1.6 million in the second quarter, with the increase reflecting the write-off of capitalized loan fees resulting from our recent ABL facility amendment, along with the impact of increased benchmark borrowing rates and increased borrowings.

Despite reporting a $7.3 million pretax loss for the second quarter, the quarter's tax provision reflects a $500,000 expense as we were unable to record a tax benefit associated with the industrial blending impairment charge. Our adjusted EPS for the quarter was $0.01 per diluted share as described in yesterday's press release.

Turning to cash flow, while the Industrial Solutions segment continues to generate consistent positive cash flows, the tightening fluid supply chain resulted in meaningful cash usage in the quarter. Operating activities used cash of $26 million in the second quarter, primarily reflecting an increase in working capital.

Inventories used $24 million of cash reflecting ongoing inflation on raw material costs, activity-driven increases and increased vendor prepayments on purchases as well as higher levels of contingency stocks to ensure our ability to deliver for our customers as drilling activity recovers. Our U.S.

mineral grinding business and Gulf of Mexico operations contributed $10 million of the sequential increase in inventories. With the higher revenue level, receivables also used $11 million of cash in the quarter, though the sharp increase in site access product sales helped drive a 7-day improvement in our consolidated DSOs.

Investing activities were limited in the second quarter using net cash of less than $1 million. We ended the quarter with a total debt balance of $144 million and a net debt balance of $124 million. Now turning to our near-term operational outlook.

As we look ahead, although we are closely monitoring the evolving economic landscape, we feel the strong fundamentals in both our oil and gas and utilities markets positions us well as we head into the second half of the year.

In the Industrial Solutions segment, although Q3 is typically impacted by the seasonal slowdown in T&D project activity, we anticipate that our geographic expansion in the utility sector including the contribution from our acquisition in the Northeast late last year, will largely offset the seasonality.

Overall, we expect segment revenues and operating income will remain close to Q2 levels with third quarter direct sales activity remaining robust.

Looking beyond this quarter, we expect the fourth quarter to strengthen from Q3 levels, benefiting from the typical seasonal strength in the utility sector including the recovery in T&D project activity as well as the elevated fourth quarter demand for product sales.

In Fluid Systems, the longer-term outlook continues to strengthen within our core markets in North America land and EMEA, particularly given the impact of global geopolitical events, which is driving many countries to reevaluate their energy dependencies.

Consequently, we are seeing an elevated level of planning in several areas within the EMEA region, which provides expanded opportunities for growth in both traditional energy sources and increasingly in the geothermal space, as we look ahead into 2023.

Focusing on the near-term outlook, we expect the Fluids segment to take another step forward in both revenues and profitability in Q3 led by activity increases in the international business units and the seasonal rebound in Canada.

We also expect to see improvement from the Gulf of Mexico as the previously delayed project moves forward assuming no further weather-related or other disruptions to customer plans. Overall, we expect to see mid-single-digit percentage growth in revenues despite the headwinds from the strengthening U.S.

dollar with broad-based revenue growth expected in Europe, the Middle East, Asia Pacific and the seasonal rebound in Canada. With the revenue improvement, we expect the Fluids operating margin should surpass Q1 levels.

With respect to the exited industrial blending business, we expect to carry roughly $400,000 of expense per quarter, primarily consisting of property taxes, insurance and remaining depreciation and until the Conroe facility and assets are ultimately sold.

Regarding corporate office expenses, third quarter spending should come in below the $7 million mark as we focus on streamlining our cost structure in line with the evolving business.

We anticipate interest expense will increase closer to $2 million for the third quarter, primarily reflecting higher borrowing rates, while the tax rate will likely remain in the mid-30s range for the remainder of 2022.

For CapEx, our full year expectation is relatively unchanged with gross expenditures in the $20 million to $25 million range for 2022, roughly 80% of which is directed to Industrial Solutions.

Quarterly investment levels will remain heavily dependent upon revenue-driven opportunities as we expand the mat rental fleet to support our T&D and industrial market growth.

In terms of cash flow, while the first half of the year has been impacted by the increase in working capital associated with the strong revenue growth as well as the challenging supply chain environment, we expect the ongoing improvement in business performance to generate positive operating cash flow in the third quarter.

In addition, we expect our announced divestitures as well as efforts to optimize investments in the deepwater Gulf of Mexico, provide line of sight to more than $70 million of cash generation in the coming months, providing additional liquidity to reduce our debt, redeploy into value-creating opportunities, including investments in strategic growth markets or return to shareholders through share repurchases.

And with that, I'd like to turn the call back over to Matthew for his concluding remarks..

Thanks, Gregg. Q2 results demonstrated progress in the execution of our 3 key strategic priorities. Our Fluids team delivered double-digit revenue growth in the U.S. and won a number of key contract awards that position the business well for the second half and beyond.

While the business is approaching the highest levels of working capital efficiency, it has seen in several years, the persistent raw material cost inflation is impacting their cash generation and all efforts are focused on passing through the necessary pricing actions to expand margins and achieve acceptable value for our products and services.

Our successes domestically and the renewal of some key international contracts in the second half will work to help achieve this goal. Importantly, the value that our Fluids team brings to our customers is continuing to be recognized across the industry.

During the quarter, we were once again recognized by Energy Point Research and Kimberlite Oilfield research in their annual customer satisfaction surveys demonstrating that we are clearly setting the standard for service quality and customer value in the fluids space.

As we continue to reshape our Fluids business, our divestitures remain a key priority to reduce our capital burden, and we are committed to taking actions on every aspect of our operations that do not show a pathway to acceptable returns.

The key area of focus in the near term will be on our deepwater Gulf of Mexico investments, where we have been unable to generate a consistent acceptable return. As a result, we're exploring a range of options to optimize our capital deployment in this market, which includes more than $25 million in net working capital.

We see this as another step in driving a capital-light and agile business model for our fluids business. Our Industrial business continues to perform well with stronger operating margins in the quarter despite facing the headwinds from weather and supply chain-related delays to a number of rental and service projects.

While T&D project activity in Q3 is always lighter due to peak summer loading on the electrical grid necessitating a pause in projects, we're encouraged by the building project pipeline later in the quarter and are engaging with key customers to pass through the persistent impacts of elevated labor and transportation costs.

Our direct sales pipeline remains robust for the second half, and we are pleased with the customer's continued acknowledgment of the 20-plus years of proven reliability and performance of our DURA-BASE products.

As current global events are demonstrating, a responsible energy transition will require significant multitrillion dollar investments in both oil and gas and renewable power generation and transmission projects to meet the world's energy needs which place each of Newpark's businesses in large-scale, long-term markets that operate at both ends of the energy spectrum.

Achieving a responsible transition will require investment in innovative, lower emission solutions that challenge traditional technology and methodologies.

Newpark's long history of developing and commercializing such technologies will continue to enable each of our businesses to differentiate and capture significant share in their respective markets.

As we progress our strategy, we are focused on creating pathways that enable both our industrial and fluids businesses to achieve the scale required to independently thrive in their served markets. We recognize that this journey will take time as we evaluate all viable opportunities.

However, we are encouraged by the building momentum and robust market fundamentals, which we believe create additional scale enhancing opportunities for each of our businesses. And with that, I'd like to close by thanking our shareholders for investing in us and thanking our employees for their hard work and their continued focus on safety.

We'll now take your questions.

Operator?.

Operator:.

All right. 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..

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