Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newpark Resources Second Quarter 2023 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 12:30 p.m. Eastern Standard Time. The recording can be accessed by dialing (800) 934-3336, domestic, or (402) 220-1148, international. [Operator Instructions] It is now my pleasure to turn the floor over to Rob Krotee, Vice President of Investor Relations, Strategy and Corporate Development. Please go ahead, sir.

Thank you, operator. On behalf of the entire team at Newpark Resources, I'd like to welcome you to our second quarter 2023 results conference call. Leading the call today are Matthew Lanigan, our President and Chief Executive Officer; and Gregg Piontek, our Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligations to update our forward-looking statements. Our comments on today's call may also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our quarterly earnings release, which can be found on our corporate website. There will be a replay of today's call, and it will be available by webcast within our Investor Relations section of our website at newpark.com. Please note that the information disclosed on today's call is current as of August 2, 2023. At the conclusion of our prepared remarks, we'll open the line for questions. With that, I'd like to turn over the call to our President and CEO, Matthew Lanigan.

Thank you, Rob, and welcome to everyone joining us on today's call. During the second quarter, we continued to execute on our business transformation strategy, demonstrating meaningful progress around our commercial growth, operational excellence and capital allocation priorities, while continuing to build an industrial solutions platform equipped to drive long-term value creation for our shareholders. We delivered second quarter net income of $1.7 million or $0.02 per diluted share on revenues of $183.3 million, with net income improving $9.5 million on a year-over-year basis in the period. Adjusted EBITDA increased 49% year-over-year to $19.8 million in the second quarter, while adjusted EBITDA margin increased nearly 400 basis points to 10.8% in the period. Adjusted EPS came in at $0.08 per diluted share, increasing from $0.01 per diluted share in the prior second quarter. We generated positive free cash flow and continued to monetize our Fluids divestitures in the second quarter, which contributed to a modest reduction of debt and the return of capital to shareholders through continued repurchases of our equity in the open market. The timing of working capital changes in Q2 also sets up well for a reacceleration of free cash flow generation in Q3 from the collection of receivables. Let's now begin with the progress update on our commercial growth in the second quarter. Within our Industrial Solutions segment, our actions to drive sustained profitable growth have yielded encouraging results. On a trailing 12-month basis through the second quarter, Industrial Solutions segment revenue and adjusted EBITDA have increased by 20% and 41%, respectively, driven by our continued penetration of utility projects, improved pricing, along with raw material sourcing and operating cost efficiencies. Importantly, we continue to have a significant pipeline of scheduled rental projects and product sales opportunities, which positions the business well heading into the second…

Thanks, Matthew, and good morning, everyone. I'll begin my remarks with a summary of our consolidated and segment level results for the second quarter, followed by an update on our near-term outlook for the business entering the third quarter. Our second quarter results were generally in line with the expectations shared on our first quarter call in May, highlighted by solid rental and service revenue growth, continued margin expansion, positive cash flow generation, continued momentum within our Industrial Solutions business and another record revenue quarter for the EMEA region of our Fluids business. Industrial Solutions segment revenues were $48 million in the second quarter, with rental and service revenues representing 83% of the segment revenue. Rental and service revenue was $40 million for the second quarter, a 32% year-over-year improvement. Growth in rental and service revenues reflects continued organic growth within our core utility infrastructure markets, which remain healthy. Product sales activity pulled back to $8 million for the second quarter based on typical quarterly fluctuations in order timing, though first half 2023 product sales are up 20% year-over-year, supported by strong demand from the utility sector. Industrial Solutions segment profitability remained strong in the second quarter as reflected by the segment adjusted EBITDA margin of 37.7%, a 660 basis point year-over-year improvement. Improved segment margin realization reflects growth in higher-margin rental volumes and continued price discipline, along with improved operating cost leverage, including strong manufacturing and fleet utilization. The Fluids Systems segment generated revenue of $135 million in the second quarter, representing a decline of 7% versus the prior year period. Segment adjusted EBITDA margin improved 350 basis points to 6.5% in the second quarter. As Matthew touched on, the Fluids segment incurred $5 million of charges in the second quarter primarily associated with the exit of offshore markets…

Thanks, Gregg. Throughout the first half of the year, I'm very pleased with the progress we've made to drive organic commercial growth across the enterprise while continuing to build a more efficient, competitive business. Industrial Solutions, which remains our core platform for growth longer term, continued to deliver significant year-over-year growth in revenue, EBITDA and margin realization in the first half of the year. In Fluid Systems, Eastern Hemisphere delivered significant year-over-year growth in revenue, offsetting declines in North American land markets, with the segment realizing significant improvement in adjusted margins and reducing net capital employed by over $40 million since the start of the year. At the same time, we've continued to allocate cash generation towards investment in fleet expansion and share repurchases while also reducing debt. While our recent decision to explore strategic alternatives for the Fluids business was not taken lightly, it does mark a significant milestone towards simplifying our go-forward structure and positioning us to unlock value for shareholders. As we explore future alternatives for the Fluids business, it remains a world-class operation that continues to benefit from strong execution and market outlook, particularly within our Eastern Hemisphere and Canadian markets. To that point, in the 2023 drilling fluid supplier performance report recently issued by Kimberlite, Newpark once again outperformed the leading global fluids providers, showcasing the underlying value of the business to our global customers and the strong brand recognition Newpark has built for technology and service excellence. As we continue to thoughtfully harvest cash from the lower-returning areas of our business and to redeploy it towards our Industrial Solutions platform, we are on track to have the net assets of the industrial business exceed those in our Fluids business by the end of the third quarter of this year, signaling yet another important milestone in our journey to transform from being an oilfield services company to a leading industrial solutions brand. With our continued expansion in the multibillion-dollar global worksite access market, we remain optimistic about near-term growth prospects for our business and anticipate the segment will surpass $80 million of annualized EBITDA in the second half of 2023. I'm exceptionally proud of our teams across the organization for their unwavering professionalism and commitment to our customers, consistent with the high-performance culture we've developed at Newpark. In closing, I want to thank our shareholders for their ongoing support, our employees for their dedication to the business, including their commitment to safety and compliance, and our customers for their ongoing partnership. And with that, I'll open the call for questions.

[Operator Instructions] Our first question will come from Bill Dezellem with Tieton Capital.

I have a group of questions. I'd like to start with the Industrial business. There was a reference in the press release to the service revenues being up 40%. Would you discuss what these services are, please?

Yes, Bill, happy to do so. It's Matthew. Yes, look, the services is sort of a broad bucket that will include the transportation in and out of site. They'll also include any installation and removal of the mats as well as ancillary services that we're being called on to do more of as customers appreciate our service quality and our safety performance. They're asking us when we're on site to broaden the basket of services that we offer, and where we can do that at a value-added benefit to both parties we continue to expand that. I guess you're seeing that with the service revenue growth outpacing rental revenue growth this quarter.

Okay. I'm going to circle back to that, but a couple of questions relative to Fluids. Relative to the strategic alternatives, would you discuss in a bit more detail kind of the review that's taking place and a time line that you might anticipate having some resolution, whatever direction that ends up being?

Yes, sure. I mean, I think with respect to time line, I think this will just follow a typical process there where you'd expect this to be resolved over the next few quarters would be kind of our expectation here, Bill. I might need you to expand on the review process.

So is there really anything under consideration other than an outright sale to another party?

Yes. I think, we've been clear that we're going to be open-minded to whatever opportunities come forward there, Bill. So it's probably a little premature to box ourselves into one line of thinking at this point.

Yes. I think that that's probably what you would consider as the most logical, but ultimately this comes up to value, what creates the greatest value for our shareholders, and that's what will guide our decisions.

Great. That's helpful. And then, if the Fluids business was sold, how do you foresee deploying the cash that would come from that activity?

Well, I think it starts with -- obviously, yes, that would generate a significant amount of cash. Obviously, it builds a lot of dry powder. It gives you some flexibility there to accelerate your growth plans. And I think that's really where that next step is, looking at how do we further accelerate. Obviously, we have a very differentiated product. We're gaining share. We still have a lot of runway with it, but we would naturally explore how can we accelerate that growth rate.

Okay. That actually -- like I said, I wanted to come back to the industrial business, and that might be the perfect segue that, I think it was the third paragraph in the press release, you made the comment: while the composite mat technology and related support solutions remain one of our core value propositions, our vision is to expand the high-margin -- or high-value platform with site and access products, specifically rental solutions, to further embed [ you ] as a Tier 1 supplier and partner into the energy and industrial markets. That phrasing could be interpreted in many different ways. So maybe you could tie in your last comment and try to pull all that together and what it is you're really trying to communicate there? Because I don't want to go the wrong direction with that statement.

Thanks, Bill. I'll answer that question. Look, there's really two parts of it. Firstly, as we look out and see the market dynamics going on right now, they're being very supportive to long-term growth in demand, be it through the grid modernization, renewable tie-ins or general maintenance to support electrification efforts. We feel like continuing to invest in our fleet and the geographic expansion of our rental and service offering to be where that growth is and where our customers want us to be is our #1 priority there. I think we've touched on that in the past. Our expansions in the Northeast and Southeast over recent quarters are starting to show the benefits of that focus. Secondarily to that is, as we continue to -- and I touched on this earlier -- as we continue to demonstrate our strong reliability and safety performance on site, we're often asked to provide additional services, while we're on the right-of-way, by our customers. And where these are value added, and we can get the appropriate shared benefit between ourselves and the customers, we're doing more of it. And these are things like storm water prevention, pollution planning, sort of other right-of-way kind of maintenance activities that were asked to perform that provide that little bit extra there. So the more we do that, the more we embed ourselves as a trusted partner with our customers. So really, it's really an organic play to your strength kind of approach at this point, Bill. So hopefully, that answers the question.

Okay. No, that's a great starting point. So really, that comment was intended to talk about the organic opportunities. And then, I think, Gregg, you were saying, relative to the significant cash that would be generated if the fluid business was sold, that that would be an opportunity for acquisition focus. Would you talk maybe how -- what areas the acquisitions would likely be appropriate and most value-added in terms of bolting on to the [ incurrent ] Industrial segment and how that would look over time, maybe what you're trying to create there with time?

Yes. Bill, I'll kind of jump in. Look, I think that the most near-term focus would be to continue to grow scale in what we do. We see ourselves as still a low market share, where consolidation in that space, in an area that we understand, with the margin profile that we like, with proven execution, would remain our primary focus in the near term. Beyond that, I think it's a little premature to talk about exactly what that shape may take, but obviously we'd be very mindful to the -- to making sure that anything we do is accretive to the strong performance that we've been demonstrating.

Yes. And yes, just to kind of round that out, obviously, we have a very disruptive product, how can we accelerate the growth rate with that product. But as Matthew touches on, it's got to be accretive. And if not, well then your best use of cash is to ultimately return of capital to shareholders, but we think there's a lot to explore here.

[Operator Instructions] We do have a follow-up from Bill Dezellem.

All right. Actually, I'll ask at least one more here. So there was the reference in the press release to a $2.8 million charge to exit additional fluid operations. Was that the Australia operations that you referenced in the opening remarks?

So you had two pieces to it. You did have Australia in there, and then the other one was there was a charge associated with the stimulation chemical exit that we had talked about on the May call. And again, that just kind of goes back to what we had been saying of continuing to evaluate areas of the business that are underperforming and lack a clear path and taking the necessary actions.

Great. And then a couple more here. So you had $11 million of cash benefit from the fluid divestitures. What did -- what did that come from?

That was primarily the rundown of the collections associated with the Gulf of Mexico exit. If you recall, part of that we allowed for the sale of our inventory over a few quarters, and so it was the monetization of that primarily.

Okay. That's helpful. And then lastly, the Industrial revenues were flat sequentially, but the operating income grew $3 million sequentially. Was that mix, or was there something else that was leading to that stellar operating income performance?

Yes, as mentioned in my comments, you do have a few pieces to it. On a year-over-year basis, pricing was stronger than it was a year ago. The other thing that you are seeing some benefits of, raw material costs are improving from a year ago, and also just the overall operating cost leverage that you're getting as you grow at the manufacturing level, at the field operational level, et cetera. So it was kind of a combination of all those factors.

And Gregg, some of those factors you just mentioned were versus a year ago, and I was really focused specifically on Q2 versus Q1.

Got it. Sorry. So on Q2 versus Q1, actually, you do have some of those same factors that are in there. The one thing that kind of comes out of that equation, Q2/Q1, is really the pricing side of it on the rental side was fairly flat. But if we mentioned the service element, service margins, now that does fluctuate period-to-period. That was stronger in Q2 than it was in Q1. So -- but other than that, it's pretty much the same.

And then to what degree does the mix of sales, mat sales, skew the margins?

It doesn't really skew it significantly, because when you think about it on -- what is a bigger driver is when you have big mix shifts between rental and service. Because when you look at our margins of the three lines, rental is the strongest. You have the sales that are in the middle and service tends to be at the lowest end. You put R&S together and the incremental margin profile of the R&S work is typically fairly in line with the direct sales activity. So it doesn't really skew it significantly.

This concludes today's question-and-answer session. I'll now turn the program back over to Mr. Krotee for any additional or closing remarks.

Thanks, Katie. That will conclude our call for today. We look forward to hosting everybody on our third quarter conference call. But in the meantime, if anybody should have any questions or requests, please don't hesitate in reaching out to me using our e-mail, investors@newpark.com.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.