Newpark Resources, Inc. (NYSE:NR) Q4 2023 Earnings Call Transcript
Newpark Resources, Inc. (NYSE:NR) Q4 2023 Earnings Call Transcript February 22, 2024
Newpark Resources, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Savannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newpark Resources Fourth Quarter and Full Year 2023 Earnings Conference Call. This call is recorded and will be available for replay beginning at 12:30 p.m. Eastern. The recording can be accessed by dialing 800-925-9394 domestic or 402-220-5386 International. All lines are currently muted and after the prepared remarks, there will be a live question-and-answer session. [Operator Instruction] It is now my pleasure to turn the floor over to Gregg Piontek, Senior Vice President and Chief Financial Officer. Please go ahead.
Gregg Piontek: Thank you, operator. I'd like to welcome everyone to the Newpark Resources fourth quarter 2023 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 on today's call is current as of February 22, 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.
Matthew Lanigan: Thank you, Gregg, and welcome to everyone joining us on today's call. I'm pleased to share that the Newpark team continued to execute at a high level in the fourth quarter, maintaining our focus on operational excellence while also advancing our multiyear business transformation strategy. We entered 2023 with very clear priorities: first, a focus on operational efficiencies to drive improvements in returns and consistent free cash flow generation; second, prioritizing investment in the growth of our Industrial Solutions business while evaluating strategic alternatives for our Fluids business; and finally, maintaining a strong balance sheet and returning excess cash generation to our shareholders. I'm pleased to say that in 2023, we delivered on all 3.
Our Industrial Solutions business delivered 12% year-on-year growth in rental and service revenues, which included solid improvements across all major industry sectors, resulting in a 21% increase in segment operating income and a 13% increase in adjusted EBITDA. We continue to strengthen our position within the key utilities transmission market, which is forecasted to grow robustly over the next three years, with an average of more than $30 billion per year projected to be spent annually on transmission line projects, according to recent EEI survey of asset owners. For the full year 2023, within our Fluids business, our divestitures and restructuring actions, along with disciplined balance sheet management and the strong performance of our international businesses contributed to a 15% year-over-year improvement in adjusted EBITDA and a $69 million reduction in the segment's net working capital resulting in the segment's strongest return on net assets since 2018.
Notably, our Eastern Hemisphere delivered 28% year-over-year growth, to a record $257 million of revenues in 2023, while our Canada operations also delivered 12% year-over-year revenue growth. As a result, Newpark delivered $74 million of free cash flow in 2023. We increased our rental fleet by 11% and continued to prioritize capital to the expansion of our rental and service footprint to serve the multibillion-dollar infrastructure markets. We also launched a process to divest our Fluids business and have been working diligently to move that forward. And finally, we reduced our net debt by $54 million and returned $32 million to shareholders through the repurchase of 6.5 million shares. Across the board for full year 2023, we executed against our stated priorities and set the business up for a solid 2024.
Turning now to specifics of the fourth quarter. We generated adjusted net income of $4 million or $0.04 per diluted share on revenues of $168 million. Within Industrial Solutions, while rental revenues remained in line with Q3 levels, late-quarter customer project timing shifts due to non-matting-related supply chain and local permitting issues impacted expected Q4 direct sales deliveries. Combined with reduced service activities, this led to a 19% sequential decline in segment revenues. The segment delivered $17 million of fourth quarter adjusted EBITDA, reflecting a 36% adjusted EBITDA margin, again, highlighting the business' flexibility to maintain strong margins and returns despite mix shifts in revenue sources across quarters. As mentioned in my full year comments, despite quarterly fluctuations, we remain encouraged with the longer-term outlook in our served markets and our ability to continue to penetrate them.
Consistent with our Q3 commentary, the Fluid Systems business revenues declined 14% sequentially, primarily reflecting the anticipated pullback in the EMEA and U.S. regions. On the lower revenues, the segment delivered $5 million of adjusted EBITDA and a 4% adjusted EBITDA margin. Importantly, our Fluids team's disciplined focus on working capital management led to a $25 million fourth quarter reduction in the segment's net working capital, which ended the year at $171 million. With the meaningful reduction in Fluids's working capital, we generated $28 million of free cash flow in the fourth quarter, which provided for a $13 million reduction of debt and a $6 million return of capital to shareholders through continued repurchases of our equity in the open market.
We also invested $9 million of CapEx, primarily reflecting late quarter additions to our rental fleet to support our expanding rental project pipeline. We finished the year with net debt of $36 million and a 0.5x net leverage ratio. And with that, I'll turn the call over to Gregg for his prepared remarks.
Gregg Piontek: Thanks, Matthew. I'll begin my remarks with the summary of our consolidated and segment level results for the fourth quarter, followed by an update on our outlook for 2024. Our fourth quarter was highlighted by strong cash flow generation, which provided for further expansion of our rental fleet, debt reduction and return of capital to shareholders. Total fourth quarter revenues were generally in line with our expectations shared on our previous quarterly call with stronger-than-expected customer activities in international Fluids markets, offsetting lower revenues from U.S. Fluids and lower Industrial Solutions product sales. The Industrial Solutions segment revenue was $46 million in the fourth quarter, with more than 75% coming from rental and service.
Rental and service revenues were $36 million for the fourth quarter, an 11% year-over-year decline. As we highlighted on our November call, customer activity in early Q4 was impacted by more pronounced hot and dry weather conditions, but we saw a steady improvement throughout the quarter and ended the year with much stronger rental utilization. This is a very different dynamic than we faced in the prior year, as the fourth quarter of 2022 was exceptionally robust, benefiting from strength in utility infrastructure project activity combined with the benefit of favorable weather conditions, which drove rental fleet utilization above typical levels. Direct sales, which tend to fluctuate based on timing of customer projects, declined $7 million year-over-year to $11 million for the fourth quarter as multiple customer project delays shifted the timing of expected sales into 2024.
Further, the historical pattern of elevated Q4 purchases from utility customers didn't manifest this year as these customers utilized the remaining capital budgets to fulfill other needs. On a full year basis, rental and service revenues have increased 12%, reflecting growth across all major sectors, while product sales were down slightly. Industrial Solutions segment profitability remained strong in the fourth quarter as reflected by the segment adjusted EBITDA margin of 36%. The Fluid Systems segment generated revenue of $121 million in the fourth quarter, representing a decline of 28% versus the prior year period, with a $44 million decline in U.S. land and $20 million impact from last year's divestitures, partially offset by an $18 million increase from international operations.
Our Eastern Hemisphere contributed $63 million or 52% of our total Fluid Systems revenues in Q4. The fourth quarter result reflects a sequential decline from the record Q3 results, primarily driven by the anticipated reductions in the Congo and several European markets, somewhat offset by the restart of activity in Cypress and an increase in the APAC region. On a year-over-year basis, our Eastern Hemisphere revenues improved 19%. Revenues from Canada increased 21% sequentially to $21 million in the fourth quarter, which reflects a 74% year-over-year improvement. Our U.S. operations contributed $37 million of revenue in the fourth quarter. Excluding the divestitures, this reflects a 26% sequential and 54% year-over-year decline. The sequential decline was primarily driven by the continued softening in the U.S. market activity, as well as a notable decline in the average revenue contribution from the rig service.
With the effects of the U.S. market softness, we are maintaining our focus on pricing discipline and balance sheet efficiency, resulting in strong cash from U.S. operations. Segment adjusted EBITDA margin was 3.9% in the fourth quarter. As Matthew touched on, we reduced our net working capital in the Fluid Systems business by $25 million in the fourth quarter, including a $14 million reduction in the U.S., reflecting the solid progress driving working capital efficiency. As of the end of the year, the Fluid Systems business has $171 million of net working capital, consisting primarily of receivables and inventory, which represents more than 80% of the segment's net assets employed. SG&A expenses were $23.3 million in the fourth quarter of 2023, including $6 million of corporate office expense.
The decreases in SG&A and corporate office spending on both a sequential and year-over-year basis is primarily driven by the impacts of short-term and long-term performance-based incentive programs. Interest expense decreased modestly on a sequential basis to $1.9 million for the fourth quarter, reflecting the effect of the lower overall debt balances. Tax expense was $2.4 million in the fourth quarter as we were not able to recognize a tax benefit from the $3.5 million of impairment charges. The effective tax rate was 39% year-to-date. Adjusted EPS was $0.04 per diluted share in the fourth quarter, compared to $0.07 in the fourth quarter of last year, reflecting the effects of lower profitability, partially offset by a 7% decline in our diluted shares outstanding.
Operating cash flow was $36 million for the fourth quarter, while $8 million was used to fund our net CapEx, with the majority once again directed for the expansion of our Industrial Solutions rental fleet. We also used $13 million to reduce debt and $6 million to fund share repurchases. As a result of stronger-than-anticipated international receivable collections near the end of the year, our cash balance increased $10 million in the fourth quarter. We generated $28 million of free cash flow in the fourth quarter, bringing our full year free cash flow to $74 million, a 93% full year cash conversion of adjusted EBITDA. Let's now turn to the business outlook. Our view on the respective markets and the opportunity remains largely unchanged. For Industrial Solutions, we continue to see strong fundamentals for utility and critical infrastructure spending, which we expect will provide a multiyear tailwind to support our growth plan.
In terms of our Q1 outlook, we expect modest sequential growth in rental and service revenues. And while we are pleased with the robust pipeline of opportunities on product sales, the timing of customer projects remains dependent upon permitting, supply chain and other factors. For the full year 2024, we anticipate total Industrial Solutions revenues in the $230 million to $240 million range and Industrial Solutions adjusted EBITDA of $80 million to $85 million, with segment CapEx of $30 million to $35 million. In Fluid Systems, while the U.S. market outlook remains somewhat challenged in the near term, our Eastern Hemisphere and Canada business units, which contributed roughly 70% of the segment's revenue in Q4, continued to perform at a high level.
Overall, we expect Fluid Systems revenue to improve modestly on a sequential basis in the first quarter, with international growth somewhat offset by continued U.S. softness. At this revenue level, we expect segment adjusted EBITDA margins to improve toward the mid-single digits, benefiting from international operations. We anticipate corporate office expense will remain fairly in line with our 2023 exit rate for the foreseeable future, as we continue to advance the strategic process for the Fluids segment. Meanwhile, we expect interest expense and tax rates to remain fairly in line with current levels until we conclude the Fluids process. In terms of capital allocations, we expect our 2024 net capital investments will remain dependent upon our projected rental revenue growth rate.
Beyond our continued organic growth investments in Industrial Solutions, we expect our 2024 cash generation will be primarily used to build liquidity for inorganic growth opportunities following the Fluids divestiture or return of capital to shareholders through our programmatic share repurchase program. And with that, I'd like to turn the call back over to Matthew for his concluding remarks.
Matthew Lanigan: Thanks, Gregg. As we leave 2023 and look ahead to 2024, I'm 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 once again delivered year-over-year growth in revenue, EBITDA and margin realization. With our ongoing expansion in the multibillion-dollar global worksite access market, we remain optimistic about the longer-term prospects for our business. In Fluid Systems, our international operations continued to deliver significant year-over-year growth in revenue and profitability, offsetting declines in U.S. land markets, with the total Fluids segment delivering the highest return on net assets since 2018.
I remain proud of our global Fluids business as they continue to navigate the changing global landscape, streamlining U.S. operations and overhead structures while enhancing support capabilities within strategic international markets and maintaining a laser focus on safety, exemplary customer service and working capital efficiency. Our priorities for 2024 are clear. Within our Industrial Solutions business, we're prioritizing geographic expansion within the U.S. across a higher-growth regional footprint, utilizing our unique position as a vertically integrated manufacturer of composite matting to expand our fleet and drive share gains within our existing markets. We will continue to manage to our return and margin targets, carefully balancing our pricing and fleet utilization as we evolve our project mix towards larger, longer duration projects that provides for more stable revenues, but more competitive pricing dynamics.
We will also continue to expand the usage of alternative and recycled materials in our raw materials mix, further cementing our circular plastics credentials and optimizing manufacturing costs without impacting quality, appearance or design capability of our products. While volume growth within this business isn't linear, given factors of permitting and project timing, we remain bullish on the multiyear demand outlook, given the pace of new investment within our energy and infrastructure markets and specifically within the utility transmission market, considering the growth in spend in this space that I referred to in my opening comments. As we expand our already meaningful relationships across the country with asset owners and their construction partners, we believe this will provide strong long-term growth and a reduction in quarter-to-quarter volume swings, such as we experienced in the fourth quarter.
We believe our matting portfolio includes the most flexible, lightweight and durable solution in the market, positioning us to win where we compete. As it pertains to our Fluid Systems business, our strategic review remains on track. Given the scope of our international Fluids operations, diligence is time-intensive. However, we're making good progress with our partners at Lazard to move the process forward and continue to anticipate it will be concluded around mid-2024. Finally, with respect to capital allocation, we continue to optimize our balance sheet while investing in the expansion of our matting fleet and service capabilities. As we move closer towards becoming a pure-play industrial solutions business, we see the opportunity to become a strategic acquirer of assets within our existing scope of capabilities, evaluating adjacent markets that enhance our unique value proposition with customers while supporting a path towards incremental margin expansion over time.
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.
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