Greetings and welcome to the Newpark Resources, First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instruction] 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.

Thank you, operator, and good morning everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review first quarter 2020 results. With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; Matthew Lanigan, President of the Mats Business; and Dave Paterson, President of the Fluids Business. Following my remarks, management will provide a high-level commentary on the financial details of the first quarter results and near-term outlook before opening the call for Q&A. Before I turn the call over to management, I have the normal housekeeping details to run through. There'll be a replay of today's call and will be available by webcast on the company's website at newpark.com. There will also be a recorded replay available until May 20, 2020, and that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, May 6, 2020, 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 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 some of those risks, uncertainties and contingencies including the potential impact of COVID-19. 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. Now, with that behind me, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes, Paul?

Thanks, Ken and good morning, everyone. While our focus remains on the health and safety of our employees, their families and the communities where they live and work, we continue to manage through the impact of the COVID-19 pandemic both here in the U.S. and around the world. Thankfully, here at Newpark, we have only a few confirmed COVID cases among our employees. The vast majority of our employees around the world have been able to continue to service our customers through the pandemic as both of our businesses have been considered essential services. On a related note, we are proud to announce that we have recently joined the fight against COVID-19 leveraging our chemical blending capacity and expertise to help meet the increased need for a variety of disinfectants and cleaning products. After recently obtaining the necessary regulatory approvals from the Food and Drug Administration and the Environmental Protection Agency, production of certain cleaning products is now underway at our Conroe chemical blending plant, which I'll cover more detail in my closing comments. Now turning to the market conditions. The unprecedented collapse of the oil and gas industry created by the coronavirus and the resulting imbalance of supply and demand has caused the price of oil decline to historic lows. As a result, we moved quickly to adjust our cost structure, including headcount reductions and furloughs, temporary salary reductions for the majority of our U.S. employees including executives and the Board of Directors and the suspension of company contributions to our U.S. retirement plan. These are tough decisions but necessary to downsize our cost base to match the current and anticipated decline in activity. Fortunately for Newpark, we have been working diligently over the last several years to reduce our dependency on the U.S. shale market executing strategic actions…

Thanks, Paul, and good morning everyone. I'll begin by covering the specifics of the segment and consolidated operating results for the quarter followed by an update on our near-term outlook. In the Fluids Systems segment, revenues from U.S. land declined to 10% sequentially to $58 million in the first quarter, reflecting a combination of a 4% reduction in U.S. land rig count, a modest softening in market share and a decline in the number of wells drilled per rig with the declines being felt across most U.S. land basins. The softness in U.S. land was partially offset by a stronger contribution from the offshore market as Gulf of Mexico revenues improved to $16 million in the first quarter, reflecting a $3 million sequential increase. In Canada, revenues reflected the typical Q1 seasonal uptick improving to $13 million in the first quarter and $8 million sequential increase. Outside of North America, as we discussed on February's call, due to the timing of activities within key contracts, our international revenues pulled back 12% sequentially to $46 million in the first quarter with operations in the Middle East and Africa showing the largest declines. In addition to the anticipated decline based on project scheduling, our EMEA region also experienced unanticipated COVID related disruptions late in the quarter, most notably in Italy. On a year-over-year basis, our Fluid Systems revenues declined 17% compared to Q1 of 2019. This $28 million decline includes a $39 million reduction in U.S. land revenues offset by $10 million of growth in the Gulf of Mexico, which benefited from our expansion into completion fluids while our international revenues have also increased 4% year-over-year. As discussed on our February call, we initiated action plans in Q4 to right-size our operational footprint and drive a more variable cost structure in the…

Thanks, Greg. As we navigate through these turbulent times in the uncertainty of when the economy will restart, I want to highlight three themes at the heart of the Newpark value proposition that I believe will drive growth opportunities and continue to set us apart. First, we will continue to provide outstanding service to our E&P and non-E&P customers around the world, whether we are providing access solutions to utility companies in North America, our drilling support to our oil and gas companies in the desert of Algeria, or an 8,000ft of water in the Gulf of Mexico, outstanding service quality has always been and will continue to be a hallmark of Newpark. Second, we will continue to focus on growing our Mats business in the energy infrastructure market where utility companies are recognizing our performance advantages, including our positive impact on the environment. And third, we will continue to pursue opportunities for growth in our international Fluids business predominantly in the EMEA region where we expect longer term activity to remain more stable than in the US. Market volatility is not new to Newpark, but certainly the demand destruction created by the COVID pandemic is unprecedented in our industry's history. We at Newpark intend to face the storm head on and emerge a stronger company. Not unlike the 2015-2016 cycle, the current crisis provides an opportunity for us to change the way we do business and reposition ourselves within the marketplace. When the industry rebounds, which it will, we will be able to capitalize on our competitive advantages to drive consistent free cash flow and returns on invested capital. So let me provide details on one example of how we are quickly leveraging our capabilities and response to the unprecedented market changes. Our Conroe chemical blending plant was opened…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Praveen Narra with Raymond James. Please proceed with your question.

Good morning, guys. I want to start on the cost initiatives and how we should think about how those are being enacted and how much more we should expect to see? When we think about what's taking place today and then what may take place down the road, is it looking at each individual facility and ensuring that that facility is cash flow or EBITDA positive and then cutting there or is it saying, okay, well we expect this market to be this size and therefore we will cut our scale to that eventual size willing to take on some period of EBITDA or free cash flow negative periods?

Sure. So this is Gregg. I'll start and then kind of hand it over to David. I think -- I think it's important to highlight as we look at the cost initiatives -- is really targeted on the most impacted markets, which here is the US as we kind of talked about here. The international markets we expect beyond COVID to be much more stable, the Mats business much more stable. So we're really talking about the US Fluids business. The cost cutting that we have taken to date has really been kind of keeping pace with the activity coming down. And that's one of the keys to it is moving very quickly on that, but we recognize as we go forward here, you're going to have markets that have different long-term outlooks than prior cycle 2016. And that's where we get into what I described a little bit on the call or -- in my earlier comments regarding some structural changes that we'll need to evaluate; detailed financials of the quarter. okay, this is no longer expected to be a market of this size, how do we restructure. David, you want to add to that?

Yes. Good morning, Praveen. When I look at the Fluids business, Praveen, I look at three geographical pillars. And when I look at these pillars today, there's different dynamics in each of them. US land is dropping. And if you look at US land today, it looks very similar to what it looked like in May 2016. Now, we expect a further softening in the rig count, so we will be taken further actions in US land to structure for that rig count at the end of Q2 and early Q3. Gulf of Mexico looks very resilient. We have good exposure with the IOC customers with diversified into the completion of Fluids space. So we see steady activity with the majors in the Gulf of Mexico. The biggest uncertainty we have is in the international markets. The rigs have been impacted internationally -- have been impacted because of the COVID situation rather than the economic or oil price factors. So we will see, probably we'll have a better visibility in the international markets in Q2. So the big focus for us is really US land and building a scalable structure that we've talked about in prior calls on that.

Yes, and proving to your point, our goal is to address all regions that would be negative EBITDA or cash and so to right-size the business and what we're looking at is basically whether it's Euro firm or other firms' rig counts could be as low to 240 to 250 and all of our financial modeling is around hitting those kind of levels and right-sizing the operations and not bleeding cash in the US.

All right. And that's really important for us to hear, very happy to hear that you guys were committed to free cash flow positive cycle through the downturn and say 1Q was important to us. I guess when we think about -- you guys are obviously variablizing cost structure significantly. Can we be sufficiently variable so that, and I know any given quarter can be lumpy, but any -- over any meaningful period of time, but we should still be EBITDA positive?

I think that's a tough one to call and because this market is moving so fast and we have not only the rigs dropping off, you also have COVID disruption etc, you take a step back and you look at the longer-term view and, as Paul mentioned, that focus on making sure that we can maintain cash flow positive, but in the interim periods, as you've seen in the past when we're taking cost out, the pace at which you can take it out in the legs, you can't necessarily say that you can maintain it all the way through, but that's what you're focused on getting to within --

That's our goal and there is always that lead lag and how fast the rock is dropping, right, how quickly we can tear out the expenses. But we're committed to doing that, but it's tough to commit to the periods right now.

Right. If I could ask one more just on working capital, you guys don't seem terribly concerned on the collectability of receivables. But we've seen a significant pain, particularly of US, of your US customer base on the E&P side. Can you give us a little bit more color on that and how we should be thinking about that collectability and how that translates into working capital benefit for 2020 or any way to interpret that further?

Yes, I think there is a couple of things to point out, part of it is your customer base and you have to remind yourself that on a global level, we have -- roughly 40% of our revenues in the Fluids business is coming from IOCs and NOCs, so that obviously has a very different picture to it on a credit-risk perspective. U.S., there is no question, it's a challenging environment, we do have the ability to secure our receivables through leaned etcetera. I think history is the best guide to see how that plays out. We went through a very challenging time in 2016. And when you look back at our debt -- bad debt experience during that period of time, it was not, it was -- really didn't change from our historical experience. So there was no significant elevation to the bad debt.

Yes. Just speaking about the quality of receivables. This is Paul. We're not bashful about placing liquidity on the wells. And quite honestly, most unconventional wells produce and we're part of the construction process of those wells, so that's what we've used in prior cycles and we will continue to do in this cycle to ensure that the quality of receivables or what are necessary to generate that free cash flow that we've talked about.

Very helpful, thank you very much guys.

[Operator Instructions] Our next question comes from the line of George O'Leary with Tudor Pickering Holt & Company. Please proceed with your question.

Good morning, guys. Adding on to one of Praveen's questions. So I think about Fluids and Mats from that near-term versus the second half of the year decremental margin standpoint, it sounds like near-term decrementals are probably going to be a little bit harsher than they historically are or they are in a normal environment. And then, you would expect the margin pressure to kind of update in the back half of the year, I wonder if you could talk about one, is that the right way to think about it and then two, how that differs between the Fluids business and the Mats business?

Sure. So taking one by one, on the Fluids side, as we've seen historically, our decremental margins have been -- historically they ran in that 20% to 30% range, with incremental decremental margins that is your natural flow-through that you would expect to see in the near-term absent more structural cost reductions and that's where, as David went into in a little more detail, what we're looking at doing there. Obviously, we're taking the actions and have taken the actions to date that have really been keeping pace with that but we recognize that to improve on that we have to take some more structural actions into the point. Those will take a few quarters here before we would see that work out. On the Mats side of the business, there is not anything really structurally changing the business, I mean obviously there was a high decremental coming up, because that was the Mat sales and that was in a typical range of what we usually see. There is a question of when the revenue picks up again and that is a COVID question more than anything, of when our customers start to get a comfort level with the economic outlook and therefore continue with their projects and their purchases. When that happens, we would expect that the incremental margins from that revenue would be in the typical ranges that we've seen historically.

Okay, that's very helpful and then, you guys provided some good helpful color around kind of the balance sheet and the leverage in your ability to deal with that. I wonder if you could just speak to -- as you generate incremental free cash flow as we progress through 2020 and blow down some of that working capital and as you kind of resize the business, is the first priority for that cash to continue to whittle away at the debt balance at a discount? Is there any desire to just kind of cold cash on the balance sheet? How do you think about uses of that free cash flow generation or where you're first and second priorities might be?

Yes, I think obviously it's a balance, right? You have to -- you want to continue to build your liquidity and so as you do take the working capital down that enhances your liquidity position, that's important to be able to continue to fund your operations. But there is no question, we also have our eye on that December 2021 maturity and we want to make sure that we are in a position to settle back while also funding the operation. So, I mean, all to say it, immediately when we collect cash is going to reduce our bank revolver. And so that's reducing our overall debt and enhancing our liquidity.

Okay, great. And I'll just sneak one more in, if I could. If you think about international onshore markets to offshore color, especially with respect to the Gulf of Mexico, was helpful framing, that international onshore markets for that Fluids business, any pockets of relative resilience in the areas, any Geo markets where you're seeing more pronounced pressure internationally, but onshore?

Hey George, it's David Paterson. The Middle East remains the most resilient, right, the challenge we have in the Middle East is the travel restrictions impacting ability to crew change, get people to the well sites etcetera, but we've worked through that very well. I'm very proud of how the team has handled that, they've been away for extended periods of time from their families and we really haven't missed a beat. But it is extremely challenging. I expect the Middle East to remain strong and remain resilient. Activity continues fairly steadily, around Europe there's a lot of rigs being shut down because of the COVID situation ability to move people and products and move rigs between countries. So I think there's a lot more uncertainty there, but, you know, once the dust clears in the air and the visibility improves, I'm fairly optimistic of a return to some meaningful activity. I think North Africa probably is where there's a bigger question mark in terms of activity but, again, it's a very dynamic picture. The picture changes probably twice a day. I think it will be probably a month or before we have some clarity on the resumption of, you know, key activity in that part of the world.

Great, thank you, guys, very much for the color.

You bet, George.

This concludes our question-and-answer session. I'd like to hand it back to management for closing remarks.

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.

Thank you.

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.