NPK International Inc. (NPKI) Q1 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Newpark Resources First Quarter 2017 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, Brian Feldott, Director of Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review our first quarter 2017 results. With me today are Paul Howes, our President and Chief Executive Officer; Bruce Smith, President of our Fluids Systems business; and Gregg Piontek, our Chief Financial Officer. Following my remarks, Paul will provide a high-level commentary on the first quarter. Bruce will provide an update on our Fluids business, and Gregg will discuss the Mats business, as well as the consolidated financial results for the quarter. Paul will then conclude the discussion before opening the call for Q&A. Before I turn over the call, I have a few housekeeping items to cover. There will be a replay of today’s call, and it will be available by webcast on our website at newpark.com. There will also be a recorded replay available until May 12, 2017, and that information is included in yesterday’s release. Please note that the information reported on this call speaks only as of today, April 28, 2017. And therefore, you’re advised that time-sensitive information may no longer be accurate as of the time of the replay. 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 our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read our 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. And now, with that said, I’d like to turn the call over to our President and CEO, Mr. Paul Howes.

Thank you, Brian and good morning to, everyone. I’m pleased to report that after two very challenging years, 2017 is off to a much improved start. Consolidated revenues came in at a $159 million, reflecting a $22 million sequential improvement and our strongest revenue quarter in nearly two years. The incremental margins were also very strong as operating income improved by $12 million and return to positive territory. In Fluids, revenue gains were once again led by our North American region, where revenues improved by 43% and outperformed the increase in overall rig count. Internationally, Fluids revenues remained relatively flat as a modest decline in the Eastern Hemisphere was largely offset by improvements in Latin America. With the stronger revenue contribution, the Fluid segment returned to profitability in the first quarter posting a 5% operating margin. In the Mats segment, we continue to see the benefits of our efforts to diversify beyond our traditional E&P markets. Rental and service revenues improved by $4 million benefiting from broad based improvements in rental demand across several end user markets and geographical regions. This improvement help offset the anticipated decline in Mats sales following the exceptionally strong fourth quarter. Driven by the elevated rental revenues, the segment operating margin improved to 28% despite the lower top line result. With that, let me now turn the call over to Bruce Smith, who will review the performance of our Fluids business. Bruce?

Thanks, Paul, and good morning. As Paul mentioned a moment ago, we’re very pleased with the Fluids segment return to profitability in the quarter, which is especially encouraging considering that the average U.S. rig count was below 800. The Q1 result highlights the progress we have made over the past two years in streamlining the organization and adjusting our cost structure. Now, turning to the specifics of the quarter. The Fluid Systems segment generated total revenues of $136 million, reflecting a 22% improvement from the fourth quarter and a 38% increase year-over-year. Consistent with last quarter’s theme of strongest sequential improvement again came from North America where revenues increased by 43% sequentially and 70% year-over-year to $85 million. In the U.S., revenues were $66 million, up 37% sequentially, which significantly outpaced the 26% rig count increase. Revenues improved in all U.S. regions benefiting from the continued strengthening and activity levels along with modest improvements in customer well complexity, resulting in an improvement in revenue generation per well. On a year-over-year basis, U.S. revenues improved 76% more than doubling the 35% improvement in average rig count. In Canada, revenues followed the typical seasonal pattern, improving by $8 million over the prior quarter and modestly outpacing the improvement in rig count. On a year-over-year basis, revenues improved by $7 million benefiting from the stronger market conditions and the contributions from the pragmatic acquisition, which has expanded our drilling fluids chemistry and is expanding our presence in completion and stimulation markets. Turning to our international regions, Latin America posted revenues of $9 million in the first quarter, reflecting a $2 million increase from Q4 and a modest improvement compared to prior year. The sequential improvement reflected the impact of stronger Petrobras activity in Brazil, partially offset by customer delays in Chile. On a year-over-year basis, our expansion into Chile along with the currency-related improvement in Brazil were partially offset by $1 million decline in Uruguay following the completion of last year’s deepwater project. Revenues in the Eastern Hemisphere were $42 million in the first quarter reflecting a 6% decline from Q4. The sequential decline is primarily attributable to timing of projects in Rumania and North Africa, partially offset by an increase from the Shell project in Albania. On a year-over-year basis, revenues from the Eastern Hemisphere improved by 5%, driven primarily by growth in Albania and Kuwait, partially offset by the completion of our deepwater Black Sea contract and modest currency headwinds. With the 22% sequential improvement in revenues, the Fluid segment return to profitability for the first time since Q4 of 2014, posting $6.4 million of operating income, which reflects a 5% operating margin. On the technology front, our sales mix remained relatively stable with revenues from new technologies continuing to trend with the overall increase in revenues. As the market improves, we continue to advance discussions with our customers regarding our fluids technologies including the Evolution, Kronos and Fusion systems as customers become increasingly focused on driving operational efficiency in the current commodity price environment. Turning to our near-term outlook, we expect to see revenues pullback modestly from Q1 levels, driven by the impact of spring break up in Canada. We expect the declines in Canada will be somewhat offset by the continued improvements in U.S. revenues as the U.S. rig count is currently running 15% ahead of first quarter levels. Outside of North America, we expect activity levels will remain fairly stable until we see a further recovery in commodity prices. With the lower revenue expectation, we will likely see some decline in our segment margin although the segment should remain above breakeven. And finally, I’d like to comment on Port Fourchon shore based project and our preparations in the deepwater Gulf of Mexico. Consistent with our discussions last quarter, we’ve substantially completed the second phase of our facility investments and our Port Fourchon facility is now fully operational. And while the deepwater market has yet to show signs of recovery, we continue to be encouraged by the expanding dialogue with customers as they invest their time to qualify our facilities, products and people. With the increasing level of [indiscernible] activity now underway, we remain confident in our ability to capture market share in this market. With that, I will now turn the call over to our CFO, Gregg Piontek.

Thank you, Bruce and good morning, everyone. I’ll begin by discussing our Mat business before finishing with our consolidated results. The Mat business reported first quarter revenues of $23 million, which reflects an 11% decline from the fourth quarter and a 42% improvement year-over-year. As Paul mentioned, rental and service revenues improved by $4 million sequentially, which help to offset the $7 million decrease in Mat sales, which we anticipated following the exceptionally strong fourth quarter demand. Total rental and service revenues came in at $19 million for the first quarter, reflecting a 28% increase from the fourth quarter. Exploration markets contributed a $2 million sequential improvement benefiting from the final resolution with the customer related to rental map destroyed on a well site, along with the continued modest recovery in exploration activity. Rentals in non-exploration markets also improved by $2 million sequentially, driven by our continued penetration of the power transmission segment along with weather-related demand and seasonal strength in Europe. With the improvement in the oilfield activity, revenue split between markets is more balanced in the quarter with non-exploration markets contributing a little over half of the total segment revenue. Comparing to the first quarter of last year, segment revenues improved by 42%, including a $2 million increase in Mat sales and a $5 million improvement in rental and service revenues. Segment operating margin came in at 28% for the first quarter compared to 24% last quarter. The sequential margin improvement is driven by a stronger revenue mix, including the elevated level of rental activity in the period. Turning to our near-term outlook, we continue to be encouraged by the steady improvements in drilling activity as well as the market penetration outside of the oilfield. While we expect some pullback from the seasonal strength in Europe and completion of some of the weather-driven projects, overall rental and service revenues are expected to remain stable, driven by the improved diversification resulting from our market expansion efforts. Overall, while this segment is always more challenging to predict, we expect second quarter revenues and operating margins both to be in the low-20 to mid-20s range. Now turning to the consolidated results for the quarter. For the first quarter of 2017, we reported total revenues of $159 million representing a 16% sequential improvement and a 39% improvement year-over-year. SG&A costs were $25.4 million reflecting a 16% sequential increase and 8% increase year-over-year. Total corporate office expenses were $9 million in the first quarter, compared to $6.8 million in the fourth quarter and $7.4 million in the prior year. The sequential increase in both SG&A and the corporate office, primarily reflect higher performance based incentive compensation along with elevated spendings related to legal matters and strategic planning efforts. A year-over-year increase is impacted by these same factors, partially offset by lower salaries and employee severance costs resulting from cost reduction efforts in early 2016. We expect corporate office spending will likely remain elevated in the near-term. Consolidated operating income was $3.7 million in the first quarter compared to an operating loss of $8.2 million in the fourth quarter and a loss of $18.8 million in the first quarter of last year. Foreign currency exchange, netted to a $400,000 loss in the first quarter compared to a $300,000 gain in the fourth quarter and a $500,000 gain in the first quarter of last year. First quarter interest expense netted to $3.2 million, which compares to $2.6 million in the fourth quarter and $2.1 million in the first quarter of last year. As discussed on last quarter’s call, the increase is primarily due to non-cash interest expense associated with the convertible notes issued in December, which contributed $1 million of expense to the first quarter of 2017. The provision for income taxes for the first quarter of 2017 was $1.1 million. The elevated income tax charge relative to pre-tax income primarily reflects the impact of losses in certain foreign jurisdictions for which an income tax benefit is not recorded. Net loss in the first quarter was $0.01 per share comparing to breakeven results during the previous quarter and a net loss of $0.16 per share in the first quarter of last year. As we highlighted on our last call, our fourth quarter included a $0.06 net benefit from restructuring our Brazil investments along with other matters in Australia and Uruguay. Now, let me discuss our balance sheet and liquidity. During the first quarter, operating activities used cash of $11 million including a $23 million increase in receivables associated with the growth in revenue. As the market recovery continues, the aggressive management of working capital remains a focus. That said we expect our investments in working capital will continue to move directionally with revenues. We used $7 million to fund the capital investments in the first quarter including $4 million spent on the Gulf of Mexico deepwater project in the Port Fourchon. For the full-year of 2017, we continue to expect total capital expenditures to be in the $15 million to $20 million range, which includes the Fourchon project. Also as we discussed on last quarter’s call, we completed our filings for the carry back of our 2016 U.S. operating losses, which we expect to provide more than $35 million of cash in the second quarter. As of the end of March, total debt was $157 million substantially all of which relates to our outstanding convertible bonds including the $83 million of bonds that mature in October. No borrowings are currently outstanding under a $90 million credit facility, which is now fully available to us based on recent growth in working capital. We ended the quarter with cash of $70 million, resulting in a total debt-to-capitalization ratio of 23.7% in a net debt-to-capitalization ratio of 14.7%. And now, I’d like to turn the call back over to Paul for his concluding remarks.

Thanks, Gregg. We are very pleased with the continued improvements in our businesses as we maintain our focus on our long-term strategy. While we expect the typical seasonal pullback in Canada this quarter, the continued strengthening in the U.S. market should enable our Fluids segment margin to remain in positive territory. Our deepwater Gulf of Mexico facility upgrade in the Port Fourchon is essentially complete with some additional capital still being spent on employee housing. The continued softness in the deepwater offshore market continues, but we remain optimistic that we will see our first meaningful deepwater revenues in 2017. Meanwhile, as Gregg touched on, our Mats business is benefiting from our continued expansion beyond the oilfield. With the impact of the broad-based improvements in rental demand and the continued benefit of some seasonal wet weather in the southern part of our country, our second quarter is off to a good start. And finally, I’d like to touch on our upcoming leadership changes in the Fluids business. As we announced in February, at the end of the second quarter, Bruce Smith will move into the role of Chief Technology Officer for Fluids, and Phil Vollands will assume the role of President, Fluids Systems. I want to take this opportunity to thank Bruce for leading the Fluids business over the last 17 years. Bruce has done an amazing job taking our Fluids business from a small regional mud company and transforming it into a global leader of fluids technology. As we transitioned, Bruce will continue to play a critical role for us, as we advance our technology and expand our fluids offerings beyond drilling applications. Meanwhile, we look forward to Phil’s continued leadership and contribution as he steps into his new role. With that, we’ll now take your questions. Operator?

Thank you. We will now being the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Johann Rodrigues with Raymond James. Please proceed with your question.

Hi, good morning, guys.

Good morning.

I had a question, regarding the U.S. increase that you’ve been seeing I guess this could probably just the North America in general. What kind of pricing have you all been able to garner with your customers, yet. Have you’ll been able to get much or is that still further out on the horizon?

The pricing is still competitive, but we’re taking opportunities to increase pricing with those customers that are looking to gain savings through driving operational efficiency. So, it’s certainly not across the board yet, but we are taking those opportunities as they arise.

And I think – I think, with the Fluids business as we’ve emphasized in the past, pricing is not a big lever whether you’re growing or the market is in a decline with it being largely a variable cost business, a consumable products business and service. You don’t see the large swings that you see in pricing like you do with your equipment rentals and that type of equipment where it’s a fixed investment.

Right. I was just thinking that there might have been something due to the high incrementals that you’ve seen in the first quarter...

Yeah. There was a modest uplift from it, but it’s a relatively small piece of the equation.

Right. And then, within the mix shift that you’ve been seeing within Fluids, is that anything that could be sustainable going forward or is that likely to reverse course as we move throughout the year? Can you just help to explain that a little bit and what the impact on margins within the mix shift and fluids could potentially...

Yeah. We .. Go ahead, sorry finish the question.

No, go ahead.

Yeah. So, as we see quarter-to-quarter, there is always some mix swings one way or another. What we saw this quarter as we highlighted our sales mix, the product mix within our sales was particularly strong, we would expect that to soften a little bit going forward, just it was nothing out of the usual range, but it was on the strong end. And so that’s part of the reason as Bruce touched on in terms of a little bit softer margin profile that we would expect in the second quarter, that’s a little bit of what works into that is – is an expectation that, that would shift back, but nothing really out of the ordinary.

Our next question comes from the line of Neal Dingmann with SunTrust. Please proceed with your question.

Good morning, gentlemen. Bruce, question for [indiscernible]. Bruce, you guys historically and have continued to do a great job of lining-up these international projects, which you know the lead time is significantly longer than some of the U.S. I guess my question is based on, given the nice rebound you’ve seen that you commented on Paul that we’ve seen in the U.S., are your efforts just the same international? And then, going forward, should we assume we could potentially see some of these large international projects hit, as well as the U.S. continue to turnaround?

I think in the international market place, the real driver is the commodity pricing and until that changes say some degree upwards, I think we’re going to see a fairly stable international market. But from our perspective, of course, we’re being on tenders all the time and we don’t know obviously that kind of those. But we’re actively seeking more business in the international market place.

Yes. Another thought is that certainly as we continued to raise our game as an international player in deepwater, I would say that over the last kind of 30 to 60 days, we are seeing more requests, more tender activity in the international market. So seems to be some uplift occurring, maybe not necessarily driven by commodities, but more driven by our penetration into deepwater activities.

So, Paul is that mostly deepwater or is it fair to say with you, Bruce is it just sort of spread out – is there particular international market or two that you’re really focusing or you see some rebound or is it more just sort of broad based?

It’s more broad based across the international regions.

Okay. And then just lastly, you haven’t said as much recently, but again I still think there’s a lot of potential upside with Evolution, if you or Bruce could just comment on what you see for it either remaining this year or in the 2018.

Yes, the Evolution is still performing well and as our revenues are increasing, the Evolution component of that increases, it’s remaining fairly consistent. In the international marketplace as we’ve discussed previously, the timeframe taken to get new contracts and get new technologies moved into new contracts is a little more challenging than it is here in North America. But we’re really focusing not just on Evolution now, we’re focusing really on extending all of technology offerings. So, things like Fusion, Kronos in the future and so on. So, we are focused more on an overall technology offering now.

I would – another thought to is that we’ve worked really hard to try to maintain pricing discipline too in these, that we would call value-added technologies. So, the kind of incremental margins that we’ve seen in Evolution continue to hold. We certainly like to see that the larger percentage of our total revenue and we believe as we start working through the end of 2017 and into 2018, customers are going to continue to try to focus on improving efficiency and lowering their total cost. And that’s where kind of our new technology suite with its evolution Kronos or Fusion play.

Our next question comes from the line of Stephen Gengaro with Loop Capital Markets. Please proceed with your question.

Thank you. Good morning, gentlemen. Two questions. One, just to start with – on the Fluids side again, when you look at the incremental rise in operating income and if you look at in dollar terms, how much of that is driven by the U.S. market, I mean, it seems like international was flattish, I mean, what I’m getting at is, sort of the strength of incrementals on the U.S. business. So, if you could help us understand that?

Yes. I’ll take that one. First of all, when you’re doing your comps to Q4, I think, you do have to normalize for a couple of things that we had talked about on last quarter. We had the charges in Australia and Uruguay. In addition to that, if you recall, we had noted that we had some expenses, the timing of expenses in Q4 had certain things hit, that added a couple million of expenses to the quarter. So – but, backing all that out, you’re right, it’s still a relatively strong incremental comparison, it is largely U.S. driven the rest of the world is has been relatively flat, pretty modest changes there.

Okay. And then as you went forward there, beyond obviously the seasonality that you’re seeing in the second quarter, that kind of, these types of incrementals are maybe on the high side, but in the realm of reality?

Yes.

Sort of high 20s to low 30s is not unreasonable?

Yes, so, actually first let me clarify something just like I said it’s largely U.S., North America, Canada was a key piece of this as well. So, North America, but yes, if we still go back to that normal incremental margin range is in that, call it, high 20s to 30 mark, when you go beyond that, it is a strong mix, more technology et cetera that is generally the driver for improvements beyond that point.

Great. And then just one follow-up related to the Mats business. On the exploration side of the business, where you’ve seen improvement, are there specific basins that are driving that for you right now in the U.S.?

Yes. Generally speaking again you go back historically on this business and that Northeast has been the key market for us, and it continues to be a very key market though. But I will say that we are seeing pretty much uptick across the Board in the Gulf region, and in other basins as well to a smaller extent.

Great, and I’ll squeeze one more again on the Mats. Do you guys do much around I forget this around pipeline construction and do any of these potential approvals and how does that play in to that business?

Yes certainly we, pipeline – we’ve talked about power transmission, pipeline is the segment we look at. So, it certainly is in our field of view, though I don’t think it was a major contributor to the first quarter.

Yes, definitely one of the markets that we’re pursuing though.

Our next question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed with your question.

Thank you. I’d like to have you share a little bit about Port Fourchon and the qualifications that your deepwater customers or prospective customers are doing. Is that just in general that these qualifications are taking place with the anticipation of work at some point in the next many years or do they have specific wells that they know or feel that they know that they’re going to be drilling in maybe at an undetermined time but they’re really asking or wanting to get you qualified for specific activity that they have planned?

It’s a bit of both, there are certainly specific wells that customers are gearing towards. The evaluation, each company has its own sort of testing protocol, some are more demanding than other, so we’re at different stages of acceptance with different customers that all testing has gone extremely well to this point. And we’re very close to being accredited by numerous companies, some of which are aiming at specific wells.

Yes. So you might – Bill, you might see certain IOCs that if they have got a particular field, where they got higher temperature requirements, they might look at the chemistry being adjusted slightly. And so you just start moving down that process with your customers and they start asking for small incremental adjustments, certainly is encouraging from our perspective.

So, when you mentioned earlier in the call that you anticipate deepwater Gulf of Mexico revenues in the – in this year, that’s not just one well and you’re referring to. It sounds like there could be multiple wells from multiple customers, is that fair perspective?

It’s probably pretty mature, Bill, to go that far, but we’re certainly encouraged by the level of attention that we’re getting from multiple IOCs, time will tell. We’ll start one well at a time and we are going up in market share in the Gulf of Mexico.

Yes, I mean, I think, it again goes back to the fact that the amount of time that they are investing in qualifying us, they wanted to be doing that unless there was an intensionary desire to use this down the road, but the one thing that’s difficult to predict is the timing of these various projects. We have seen things continue to slide out in the Gulf over the past several quarters, and that’s what makes it tough to predict the timing of these.

Great. Thank you. I actually would like to try to get another question and relative to the outside of the U.S. interest that, Paul, I think you mentioned that you’ve seen in the last 60 days to 90 days, would you talk in a little more detail about what you’re seeing there and why you think that this year you’ve seen that uptick in interest?

Well, I think, to some degree I think IOCs, they haven’t been doing a lot of drilling in some of these international markets, they’re looking to come back and drill some additional wells. I think in this timeframe, we’re starting to gain more credibility for the large IOCs that we are a viable deepwater player, we have the technology, we have the people, we have the facilities. And so we’re getting more requests to respond to tenders, I think because of the core competencies that we’ve been building over the last 10 years.

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

We’d like to thank you once again for joining us on the call and for your interest in Newpark and look forward to talking to you again next quarter. Bye.

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.