Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newpark Resources Third Quarter 2024 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 877-710-5302 for domestic or 402-220-1605 for International. All lines are currently muted and after the prepared remarks, there will be a live question-and-answer session. [Operator Instructions] It is now my pleasure to turn the floor over to Gregg Piontek, Chief Financial Officer of Newpark Resources. Please go ahead.

Thank you, operator. I'd like to welcome everyone to the Newpark Resources third quarter 2024 conference call. Joining me today is Matthew Lanigan, our President and Chief Executive Officer. Before handing over to Matthew, I'd like to highlight that today's discussion contains forward-looking statements regarding 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 obligation 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 the Investor Relations section of our website at newpark.com. Please note that the information disclosed in today's call is current as of November 8, 2024. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I would like to turn the call over to our President and CEO, Matthew Lanigan.

Thanks, Gregg, and welcome to everyone joining us on today's call. I'll begin with an overview of our Q3 performance followed by an outlook for our Q4 and an update on our strategic priorities entering 2025. The third quarter came in below our expectations, as two notable factors combined to impact our results after a very strong second quarter. While third quarter generally tends to be a seasonally slower period of the year for our business, this year was more pronounced as a few key customers shifted their priorities during the quarter from scheduled transmission projects to renewable generation related projects. This, combined with unusually dry weather conditions in the southern region, limited the need for matting on individual projects. As a result, lower rental project activity, which was particularly acute across the southern markets, together with a softer oil and gas customer activity, negatively impacted rental revenues in the quarter. The quarter was also impacted by an unplanned maintenance event at our Louisiana manufacturing facility that resulted in one of our production lines being offline for approximately six weeks during the period. This timeline included approximately two weeks of delays due to logistical challenges for our third-party technicians caused by Hurricane Francine. The facility has been operating at normal production levels since the start of the fourth quarter. In total, the seasonal pullback in rental revenues and six weeks of facility maintenance impacted third quarter adjusted EBITDA by nearly $5 million. The impact of the facility maintenance including both unabsorbed fixed costs and incremental maintenance expenditures during the six-week shutdown period. As a result, our total third quarter revenue came in at $44 million a decline of 23% versus the year ago period as rental, service and product sales revenues all declined. Including the effects of the pronounced seasonal…

Thanks, Matthew. Building on Matthew's commentary, I'll begin with a discussion of our Q3 results, followed by an update on our outlook for the remainder of 2024 and capital allocation priorities. As highlighted in yesterday's press release, with the sale of Fluid Systems completed, our historical financial statements have been restated to reflect the reclassification of Fluid Systems to discontinued operations and all of my commentary will relate to our continuing operations only. As Matthew touched on, our third quarter revenues came in softer than expected as a pronounced seasonal slowdown in the utility sector activity in the southern region and a pullback in oil and gas led to a decline in rental revenues. Total rental and service revenues declined 11% sequentially and 15% year-over-year to $32 million in the third quarter. Revenues from product sales also pulled back from the record Q2 results coming in at $12 million for the third quarter. On a year-to-date basis, as a result of the headwind of the more pronounced seasonality in Q3, rental revenues are up 1% over prior year, reflecting increased rental volume offset by a modest reduction in pricing. Service revenues were down 21%, while revenues from product sales are up 20% over the prior year. As discussed last quarter, the lower service revenues are attributable to lower service intensity on rental projects in 2024 as compared to last year. By industry, the utility sector contributed 60% of our year-to-date revenues, including nearly 55% of rental and service revenues and roughly two-third of our product sales. In terms of Industrial Solutions operating income, our third quarter was unfavorably impacted by the unplanned downtime event at our manufacturing facility, which provided an estimated $1.3 million unfavorable impact on operating income in the quarter, reflecting a combination of unabsorbed fixed costs and…

Thanks, Gregg. Despite the unexpected challenges in Q3, we are highly encouraged by the strong start to the Q4 and the robust outlook for our customers entering 2025. As previously highlighted, we have continued to invest in our commercial sales force with a targeted focus on key growth regions, markets and accounts that best position us to accelerate our organic growth strategy. We've seen early success with our expanded sales coverage model while making solid inroads with previously underserved opportunities. During the third quarter, we conducted an in-depth customer survey that collected both qualitative and quantitative feedback on their business outlook. Encouragingly, respondents highlighted an improving outlook and an expectation for increases in investment and activity moving into 2025. As market conditions further strengthen, we're confident that Newpark is well positioned to capitalize on this demand, particularly as we demonstrate the unique value proposition of our solutions offering. As we move ahead, our priorities remain unchanged. First is the execution of our plans to grow our leading pure play specialty rental business through organic expansion of our presence, while exploring inorganic opportunities that help us to deliver more value and increased revenue density with our growing customer base. Second, we'll drive further efficiency improvements across all corners of the organization, positioning us to realize improved operating leverage. Finally, we remain committed to a returns focused capital allocation strategy that includes a combination of an internal investment, inorganic growth and return of capital to our shareholders. With total liquidity approaching $100 million, we are well positioned to advance our capital allocation priorities. We have $50 million of share repurchase authorization to support our return of capital program, which we are looking to resume now that the fluid sale process has been completed. 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 partnerships. And with that, we'll open the call for questions.

[Operator Instructions] We'll go first to Aaron Spychalla with Craig Hallum. Please go ahead.

Yes. Good morning, Matthew and Greg. Thanks for taking the questions. Maybe first for me on the project shifts. Can you just maybe quantify the impact of those? And then, how long does that last until those projects come back? And then kind of secondarily, just, can you talk about the guidance kind of for the fourth quarter, just some of the puts and takes there? And then, just overall confidence in that outlook? Sounds like you're pretty confident.

Yes. Thanks, Aaron. On the projects, yes, I guess the best way to put them into context is, they were shifted. For the most part, those projects were shifted from third quarter to a future quarter. So, I think impact on the quarter in the vicinity of $1 million or so within the quarter, thereabouts. And as of this point, we haven't got any line of sight to when they're back on the slate to be carried out, but based on the communications with the customer, there's the projects that need to be done at some point in the future. Hopefully, that answers the first question for you. On fourth quarter, I think as Greg and I both touched on, the spring back at the end of Q3 was strong, and so we are very, very optimistic that, that will continue through the quarter and support our confidence there. Product sales is always a bit of a swing, but what we're seeing here is encouraging to date. So that's really underpinning why we think Q3 was an anomaly for the year, and that we'll be back on track for Q4. If I break it down and look at it, the things we've been focusing on, we've been focusing on rental growth. We feel good that at the end of the year, we'll demonstrate that. By the end of the year, we feel good that our product sales will also demonstrate good growth year-over-year. The thing that we're being focused on is looking at the profitability of our service work. We touched on that last quarter. We don't want to do a lot of activity that doesn't yield a lot for us. And I think that's where you'll see the majority of the pullback in top-line, but not really impacting the bottom-line as much because of the product mix and the fact we've been very focused on our operational efficiency here to make up for it, which is why disappointing to revise the EBITDA guidance down slightly, but we've been managing that as actively as we can. It's really the plant there that we don't feel like we can make up given the length of time left here in the calendar year.

Okay. Yes. Thanks for the color there. And then, yes, on the plant, can you just talk about what work ended up being done there? Is there any other planned maintenance to be aware of? And then just on kind of CapEx and capacity. Can you just kind of remind us what capacity looks like and how you might be thinking about 2025 CapEx given the growth outlook?

Yes. Look, I'll start on the plan for you. Effectively what happened is it was on our original plant, which has been around for a while now. We had known that, our heating system or our hot oil system was in need of some maintenance. Unfortunately, that -- and had planned that in future years. And so unfortunately that came to the four in the quarter. We made the call at that point that, we would not only repair the system, but upgrade it to the quality that we had planned on upgrading it to in future years. And so, we feel good now that we have not only repaired the issue, but increased reliability through a better design of that system moving forward. As it stands now, that was in a future year upgrade maintenance upgrade there, that's now off the table. We've taken care of that this year. So, feeling good about that side of the plant and as we touched on in the call, when we got it back up and running, it's been running well and running smoothly ever since. So, it seems like that worked.

Yes, we did take the opportunity with that Q3 downtime to pull forward some other things that were in there for Q4. So that does help with the Q4 production schedule somewhat. In terms of the utilization of the plants running, we're back here since the start of Q4. We're back at the level that we had been running throughout the full year. We don't disclose our specifics of our manufacturing capacity, but our production level is something below full capacity.

Understood. Yes, then just any kind of early read on CapEx for 2025?

I think much like this year, it's going to be all about the growth in the fleet. Here we had had in the Q3, obviously with a lower utilization, we had subdued additions there as we went through much of the quarter, but we had additions late in the quarter, which was really the surge in the demand that we saw in Q4. So, I think we'll continue with that. I think overall, I would say an expectation as I look out a year is not much different than what we had in 2024. So obviously, as we get into our next year planning and finalize, I would expect we would have a more concise estimate for 2025 in next quarter's call.

Understood. And then just maybe last for me. You've talked about kind of the pipeline growth from the past, mid to high teens. Can you just maybe give us an update there just considering the fleet expansions and what the outlook sounds like as well?

Yes. Aaron, I think encouragingly we're still seeing the same trends. I think quoting activity is strong. I think we've touched on it before. We are seeing some slight elongation in that pipeline between quote and actual project start date, which I think is consistent with what we've been seeing and discussing in prior quarters. But in terms of net volume, it's still encouraging the level of growth that we're seeing quarter-over-quarter, year-over-year.

We'll hear next from Sameer Joshi with H.C. Wainwright. Please go ahead.

Just one quick question on the shift. Can you give some color on what the move towards renewable generation projects from transmission projects entails? Is this a permanent move? Are these projects lost? I know you said that they were postponed, but just would like to understand what it means.

Yes, Sameer, when we went into the quarter, we were on the understanding that the yen customer is going to be prioritizing some transmission work, which is what we put in our forecast during the quarter. During the quarter, they looked at their resourcing and capital allocation and made an election to prioritize the completion or substantial completion of some solar renewable projects that they were working on, which shifted that capital and labor from the transmission project. So, that's obviously the decision they chose to make during the quarter. But again, I would just reiterate that, those projects were mutually exclusive, and that the transmission work is still expected to go ahead. And as I touched on in responding to Aaron's question, at this point, they haven't given us a definitive start date on that, but we know that's the project work that needs to be done.

Understood. So, they were just -- your customers were just reallocating priorities at this point. They will come back to this work later.

That's our understanding.

And I will say, while it was more pronounced this quarter, the shifting of projects, that's not an unusual element. It's something that we regularly see with our customers, as they're looking at their supply chain, their resources, et cetera, and they'll shift their scheduling around.

Understood. And then just on the $18 million in receivables or notes, I should say, is there milestone related repayment or is there a certain cadence for this repayment or is this like a bullet repayment at some future point?

Yes. The majority of it actually relates to the working capital, the final working capital conveyed at closing. And that's a process that now gets finalized here in the next few months. And so, the majority of it you would think would be resolved here, call it, over the next quarter. Beyond that, there is the $5 million note receivable interest-bearing note receivable that's in there. It is a longer-term, but they have the ability to pay it off sooner than that.

Understood. And I think you laid out your capital allocation or -- yes, including organic growth and repurchase. You did also touch on strategic growth. Are you -- do you have a pipeline of potential candidates for acquisition and what areas are you targeting like just the qualitative lay of the land there would help?

Yes. Sameer, I'm not probably going to jump into a lot of detail here. Yes, there's a pipeline of things that we're working on. I will say nothing that I would describe as imminent. So, I think it's important to clarify that, as we build out our thesis of geographic growth priorities, if you will. Again, we're really focused on consolidating ourselves as an access provider here. So, you should expect that, if and when anything happens there, it will be within that kind of swim line.

Understood. And just one sort of accounting balance sheet question. The PP&E number has not changed much. Is this after the divestiture? Just wanted to understand, will this be updated or like how what was included in the PP&E?

No. I think that's more so a reflection that the PP&E really resides on the Industrial Solutions business. I mean, when you look at the large component, we have our manufacturing facility, we have our rental fleet. I talked about the Katy facility and then you had your field equipment. The Fluids business did not have a large PP&E component.

We'll hear next from Gerry Sweeney with ROTH Capital. Please go ahead.

Good morning, Matt and Greg. Thanks for taking my call. I'm going to start with the easiest, shortest question first. Plant downtime for repair work. Sounds as though that didn't impact revenue, but it was just unabsorbed overhead, is that fair…

Unabsorbed overhead and repair costs, yes.

Yes, you had some maintenance in there, yes, maintenance expenses, but yes, didn't impact our lives.

Got it. That's right. Getting into some meter questions. So obviously political landscape has changed this week on a bigger level than maybe some people anticipate. I'm just curious as to what this, if you have any thoughts on what this does to the business, right? Because we have traditional T&D repair replacement, but I think there's even a portion of your business connecting some solar related projects. Some of those may be in crosshairs with funding et cetera. That's what we're hearing. But I'm just curious, if you had some puts takes, positives, negatives on what's going on?

Yes. I mean, we probably know the same as you on that one, Gerry. I think the macro trend I think is bipartisan in terms of needing to upgrade their reliability and expand the electrical grid. Renewables have always been on the economic spectrum a little more touchy there. I think what's interesting is most of those projects are in red states, and so to the extent that politics is going to play a role, there will obviously be some sort of adjudication going on there. Look, we see this as a net neutral to positive on a political side at this point.

That's what I was leaning towards, but I was just curious on that front. And then, here, I apologize, it's been a long week. Also, maybe just roadmap, you kind of touched upon it, the fluids business, the divestiture that was huge undertaking. As we go forward, it's reinvestment organic growth. I think we have some rebranding MSCI code changes. Just road map, what are the short-term sort of opportunities you see this continue to sort of transition? And when should we keep an eye out for that?

Yes, I mean, I think you touched on what I'll call the logistical items there and we're hoping to have them largely wrapped up here in Q4, Gerry. So that will complete all of those. And then, I mean, in terms of the roadmap, as we've called out, we still see the opportunity for more regional organic expansion. I'd say that would be the priority of our focus where we think we can accelerate that through a buy versus build scenario, we'll be very open to considering that. And then just with the amount of activity that we see through the next few years, that will largely underpin the confidence in leaning into fleet expansion and growing through that mechanism. So hopefully that answered your question.

And I think the one task that's a parallel path item that you didn't mention was the, our efforts on the operational efficiency in driving that. And I think of all of them that's probably the longer tail item. Again, we have to work through some transition services. We have a cost structure that we have to adjust, but it's going to take us some quarters to get there. So, I think that's really a '25 effort that will span.

We'll hear next from Alex Rygiel with B. Riley. Please go ahead.

A couple of questions here. First, what is the market value of the Katy facility?

That's a great question. We don't have a clear market value on it. So, the best reference point I can give you is the book value.

So, does that mean that, it's not an option for sale at some point?

No, I think it would be. I think we just haven't gone to the effort of getting a market valuation on it, but I can quote you. I think what we're being focusing on is diversifying the rental base in there, making that the multi-tenant facility, finding a tenant that values some of the more technical aspects of that building in the laboratory, and then optimizing the office component of it, really just setting that up as a better-looking rental asset for somebody that values that space, if you will.

Fair enough. And then, the working capital true-up at the Fluids divestiture, how much was that again and when might that play out?

Again, that process is something that should play out here over the next couple of months. And that is, call it, the low teens of that number is made up or represents the working capital.

Helpful. And then when you talk about the pro forma the election being neutral to positive, is that, sort of negative on renewables, neutral on transmission and positive in oil and gas? Is that how you think about that?

Yes. I mean, I think that's the case. I just don't know yet how negative it would be on renewables. You would hope that, that's going to be based on economics rather than politics. And as, in most of those renewable projects are in red states, I think hopefully that's the result we would see. But yes, we think generally on traditional fuels, this would be a net positive. The transmission, we don't see any change in that. I think that's a bipartisan effort, so we would expect that to continue. And then, on some of the technologies that have more marginal economics, we would expect kind of market forces to dictate that.

We'll turn now to Bill Dezellem with Tieton Capital. Please go ahead.

Yes. Just to be clear on one of your answers to the last questions, working capital true-up, so that is a check that you would anticipate or cash that you would anticipate receiving from the buyer. Is that correct?

Correct.

And so, sometime in the next couple of quarters, we should expect low teens millions showing up in your bank account?

That's correct.

Okay, great. Thank you. And then, a couple of additional questions. First of all, would you dial in a little deeper into the surge in activity here in October?

Yes. I think what we're seeing, the most of the pullback in Q3, Bill, was in the South. I think what we're seeing literally almost at the end of the quarter was a resumption of activity in that region. So, a lot of projects kicking off there that required matting. Also, it's seen modestly -- the hurricane impacts that we're seeing in those affected areas have also played a part. So, I think it's just broad-based that Q3 was a pretty unusual seasonal pullback in the south. And then late September, early October, we've seen a reversion to what we see as more normal, but with some strong projects in there that are now confident in Q4.

All right. Thank you. And then relative to the plant, what was the -- you spent $9.5 million on CapEx this quarter, how much of that was excess that was not originally planned for Q3?

Yes, I mean overall that's a tough one to answer because the big piece within CapEx and the same case this quarter was the mats additions to the fleet. And there again you're flexing it based upon what you see the demand, the near-term demand in the project. So that's the piece that I didn't expect to spend at that level.

But in terms of plant, Bill, I'd say it's kind of less than a million that I would say was sort of unforecast if you will, if that was the question.

Right. That's what I was beating at. But I think it's something more interesting than the question, which was that you see demand picking up enough that led to you spending extra CapEx on building new mats?

Yes, deploying mats into the fleet, and again, as you came through September, as we had talked about with the swift rebound and the level of project activity in October, we deployed the additional mats to support that October and that's as we had touched on October was a record volume month for us.

Okay, great. And then, you gave guidance for the year, which essentially just allows us to do a little math for revenue and EBITDA for the quarter. And if I'm doing that math correctly, your EBITDA margin in the Q4 is going to be greater than the Q2 and the Q2 was a very strong quarter for you.

Yes, I think that makes sense and the reason why is you got a mix issue. The very strong mix in Q4, as we mentioned with rental being your highest incremental margin stream, that's what drives that higher margin expectation. And if you look back historically, I'll just point to one reference point Q4 of 2022 was a quarter where similarly we had very strong rental in that period and we had very strong margins as well.

Great. Thank you. And then one additional question, if I may. You talked about one of your priorities being organic regional expansion, and I don't think I fully understand what it takes to expand regionally. I mean, I could be kind of loose with my comments and say, gosh, all you need to do is hire a semi, throw some mats on the truck and send them off to the hinterland wherever the new customer is at while they rent them. But I suspect there's something more to it than that. Would you talk through the practical activities of expanding regionally?

Absolutely. And I think we kind of have Bill, when you look at where focused on our sales force expansion first. Now when you move into these regions, it's important that you have trust and confidence in your counterpart. So, you tend to we tend to go in there first with our regional sales footprint, start to build the relationships, then start slowly in terms of developing confidence with our counterparties there in terms of our ability to safely and efficiently fulfill on their project requirements. And then once you've proved that out, typically those projects will increase in scale and complexity and that's when we move more assets more permanently into those markets or that project location. So just moving the math there, maybe helps with your transportation logistics when you get the work, but you need to do the pre-work there to prove yourself out.

And where are you at with the regional sales people? Is that part of the work that you're in progress on now?

Yes. I think last quarter, we touched on that we'd fully built out our national sales footprint there. So, we achieved sort of people in market last quarter. Now, we're just ramping up on the core and efforts, the core and planning, the various pieces of the execution of that, Bill. So, we feel good about our footprint. Now it's just kind of starting to see the results of that play through.

Ladies and gentlemen, as there are no further questions standing by at this time, I'd like to turn the floor back over to the management team for any additional or closing comments.

All right. Thanks for joining us on our call today and should you have any questions or requests, please contact us at investorsnewpark.com. We look forward to hosting you again next quarter. Thanks.

Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time and have a wonderful rest of your day.