Greetings, and welcome to the Newpark Resources Third Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Ken Dennard with Dennard Lascar. Thank you. 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 third quarter 2020 results. Participating from the company in today's call are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; Matthew Lanigan, President of the Mats Business; and David Paterson, President of the Fluids Business. 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. And before I turn the call over, I had the normal housekeeping details to run through. There will be a replay of today's call available by webcast on the company's website at newpark.com. There will also be a recorded replay available until November 18, 2020. And that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, November 4, 2020. And therefore, you're advised that time-sensitive information may no longer be accurate 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 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 direct comparable GAAP financial measures are included in the quarterly press release, which can be found on Newpark's website. And now that behind me, I'd like to turn the call over to Newpark's President and Chief Executive Officer, Mr. Paul Howes. Paul?

Thanks, Ken, and good morning, everyone. I remain extremely proud of the resilience of our entire organization as we've navigated through the combination of the oil and gas industry dislocation as well as the prolonged COVID-related headwinds that continue to impact our business. Adding to these market headwinds, the third quarter was also impacted by the most active hurricane season in the last decade, causing repeated work stoppages in the Gulf of Mexico. In the face of these challenging conditions, we remain focused on executing our strategic playbook by pulling the required levers to maintain positive free cash flow and paying down debt while adjusting our infrastructure to address the new market realities in our U.S. Fluids business. Free cash flow generation and debt reduction remain our highest priorities, and I'm extremely pleased with our performance on this front. During the third quarter, we generated $15 million of cash from operations and reduced our total debt balance by $34 million as we continue to harvest working capital and repatriate excess cash from our foreign subsidiaries. Benefiting from the strong cash generation over the past two quarters, we reduced our total outstanding debt by $65 million since the start of the year. Touching on the specifics of the segment results, Fluid Systems posted third quarter 2020 revenues of $68 million, reflecting a 9% sequential decline. In contrast to the 35% reduction in U.S. rig count, revenues from U.S. land have steadily improved as we progressed through the quarter, increasing 8% sequentially to $30 million. This improvement was driven by our expanding market share and a recovery in customer activity, specifically drilling more wells with fewer rigs. As we touched on last quarter, our market share on U.S. land has meaningfully expanded in recent months, and I'm pleased to highlight that our…

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. In the Fluid Systems segment, as Paul touched on, revenues from U.S. land increased 8% sequentially to $30 million in the third quarter despite the 35% reduction in average rig count, reflecting our expanding market share as well as a rebound in customer spending per rig. The Northeast and Rockies reflected the most notable areas of sequential improvement. Our Gulf of Mexico business had an extremely challenging quarter due to the repeated hurricane shutdowns, leading to a nearly 50% reduction in revenues to $7 million in the third quarter. Industrial cleaning product revenues contributed nearly $3 million in the third quarter, more than tripling the prior quarter. In Canada, revenues declined 36% to $2 million in the third quarter, with the sequential comparison negatively impacted by the timing of customer projects. Outside of North America, as Paul touched on, COVID continued to have a negative impact on customer activity, most notably in the EMEA region, where ongoing restrictions on movements of personnel and products within a number of countries have resulted in significant activity disruptions and project delays. Although the Middle East held up well in the second quarter, we've seen a more notable COVID impact during the third quarter. Total international revenues declined 12% sequentially to $25 million, with operations in the Middle East, contributing the majority of the decline. With the COVID-driven impact, total revenues from the Middle East pulled back 27% to $9 million in the third quarter. On a year-over-year basis, our Fluids Systems revenues declined 56% compared to Q3 of 2019. North American land revenues declined by $64 million or 66%, modestly favorable to the…

Thanks, Gregg. 2020 has certainly been a challenging year that I do not think any of us could have predicted, the combination of a global pandemic, volatile oil and gas prices and historic hurricane season certainly challenged our businesses, but we are optimistic that the worst is now behind us. We also recognize that more work is required to streamline fluids to the new market realities of the oil and gas industry, while at the same time positioning the company to take advantage of opportunities in the energy infrastructure and industrial cleaning product markets. So I'd like to close by summarizing the actions taken as part of the strategic playbook we laid out earlier this year to navigate through these difficult times and position the company for profitable growth and improved returns on invested capital. First, our focus on employee safety, our most important core value, has not wavered in these exceptionally challenging times. We are pleased with our improved 2020 safety performance as well as the limited number of COVID cases within our global employee base. I'd like to thank all of our employees for their dedication to putting safety first in everything we do. Second, we are aggressively managing our balance sheet by harvesting cash from working capital while leveraging our capital-light business model. Since the beginning of the year, we've generated $36 million in free cash flow and reduced our outstanding debt by $65 million, a reduction of nearly 40%. Third, we have been successful in diversifying our revenue streams away from the volatile oil and gas markets, particularly U.S. land, which we believe will ultimately lead to improved stability in cash flows and higher returns on invested capital. In our Mats business, we derive 70% of our revenues from energy infrastructure and other industrial markets, which…

[Operator Instructions]. Our first question comes from the line of George O'Leary with Tudor, Pickering, Holt & Co.

An impressive job whittling away at that net debt balance throughout the year. You took quite a chunk out of the balance. And Gregg, you spoke to this a little bit during your prepared remarks, but just, strategically, how do you think about incremental cash generation from here? And at what point in time as you look at those kind of strategic alternatives for dealing with the rest of the residual exchangeable notes at the end of 2021, at what point in time do you think you might have to pull the trigger on dealing with those? I'm sure you want to get ahead of it, but you are generating free cash flow. So you have some time. Your balance sheet is in a good position. So how do you just weigh those options? And how are you guys thinking about that?

Yes. I think you kind of hit on the key points there in terms of -- it starts with what we're doing to create capacity on our ABL. And as we had talked about, we see that as the primary vehicle to fund the -- convert maturity next year. Obviously, we've made great progress here in the recent quarters. In this quarter, taking it down by $34 million. Now we got a little bit below $30 million as of the end of the quarter. That's a very big first step. As we look at the path from this point forward, I think it starts with 2 things. First of all, continuing to work down the working capital balance. We talked about the working capital that does remain. We look at the excess receivables. We got $10 million or so excess there. On the inventory side, you probably have at current activity levels more like a 20% to 30% of excess inventory, which we know will take several quarters to work off. And so that's the primary focus there to create additional cash flow. In addition, as we talked about with where we see the business going, we have a pretty clear line of sight to getting that Fluids business back to positive EBITDA, which means we're back in positive EBITDA generation overall as a company. And those are your key pieces. So that -- you put all that together, and that positions us to fund it without the need for anything else. Having said that, as we had pointed out, I -- we are continuing to evaluate other options that are there. As we talked about, we've got assets that are there. We will continue to look at those things, but there are no levers that we see that we need to pull on that.

Okay. Great. That's helpful. And then actually, a good segue, as you talked a little bit about line of sight to Fluids EBITDA getting back into positive territory. The competitive landscape continues to evolve in the North America onshore fluids business. In particular, you guys are taking share in the Gulf of Mexico. It seems like international is going to grow in the fourth quarter. I wonder if you could talk about incremental margins and where those sit today with all the cost pieces moving around. And then the -- given the growth in those different buckets, North America onshore, international and Gulf of Mexico, maybe frame the incremental margins for each of those different pieces of business and how we might think of those and then just -- not to roll another question to an already long question, but on the industrial cleaning products side, how do those margins match up with kind of the legacy oil and gas business?

Okay. So I will start it. So in terms of the Fluids margin progression, as you look to see -- you look at the cost actions, this was a bit of a sloppy quarter in terms of some of the charges, the inefficiencies, the work stoppages that we had talked about that caused some additional cost of -- I call it, $1 million or so of costs that we would not expect to recur here in Q4. So when you normalize for those things, you look at our -- as compared to our historical range that we've always talked about of 20% to 30% is kind of your normal incremental range. We're outperforming that as we take costs out of it. Our decremental margins have been on the lower end in the teens when you normalize. Now when you look ahead in Q4 and what we've characterized here, we're -- that frames up for something actually a little north of -- in the 30s here in terms of incremental margin. And again, that is reflective of kind of those continued efforts that are going on in the business to take cost out while the revenue does rebound. In terms of the Fluids...

Yes, the cleaning products, let me take that. So obviously, we're very pleased right now with the growth in the cleaning products area, ramping up the $3 million. We expect that to grow closer to $6 million in the fourth quarter. In terms of margins, I think as you say, what -- how do they compare historically to kind of the oilfield margins and what we've seen in drilling fluids. I think they are certainly at that level, maybe slightly higher. But currently, we're not there because we've got a lot of operational efficiencies. We installed our first semi-automated packaging line, and we still have quite a bit of labor on that. And as you can imagine, just give you an example, I mean, in some days, we're bottling 30,000 gallons, producing the product, inserting a dip tube into it, capping it, labeling it, boxing it. And just the material handling of handling 30,000 jugs a day creates a lot of inefficiencies. So we're starting to streamline that process. And over the next kind of couple of quarters, we expect to get there. The other thing we want to be able to do, too, is look at continued diversification of that revenue stream. We're working for one very large consumer product company that's well known in the space. But we believe that the asset currently is configured in a way that can address that market, but there's more work to be done.

[Operator Instructions]. Our next question comes from the line of Matthew Dhane with Tieton Capital Management.

Great. I was hoping to discuss your market share gains in the U.S. land market to date. What are the further opportunities there? I know there's a lot of industry rationalization going on and opportunities around that? Can you just discuss that generally and what that means for you?

Yes, Matt. This is David Paterson. We've had very good progress this year in increasing our market share on U.S. land. And really, I put it down to our performance, and I put it down to the focus that we bring to the business. I think the customers see it. It certainly drives cost savings. I think it reduces NPT on their wells. And I think that's been a key lever to drive market share gains. We've also benefited a little bit. Some of the our competitors and the bigger competitors have dropped out. And that's contributed some market share gains, but I put most of it down to performance. And the customers really see that. We see the differentiation that you heard, yes.

Yes. The external data point on it -- this is Paul -- is the recent Kimberlite report, which shows that our customer service ratings or rankings is the highest in the industry, better than all the 3 largest service companies. So again, I think what David is deploying is the Newpark service advantage is what we coin it, and we're doing a much better job of servicing our customers in these very challenging times.

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

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

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.