Greetings, and welcome to the Newpark Resources Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Mr. Dennard. You may begin.

Thanks, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review third quarter 2019 results. With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; 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 and outlook before opening the call to Q&A. Before I turn the call over to management, I have a few housekeeping details to run through. There will be a replay of today's call, and it'll be available by webcast on the company's website at newpark.com. There'll also be a recorded replay available until November 14, 2019, and that information to access it is in yesterday's release. Please note that the information reported on this call speaks only as of today, October 31, 2019, and therefore, you're advised that time-sensitive information may no longer be accurate as of the - any time of the 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 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 directly comparable GAAP financial measures are included in the quarterly press release, which will be found on Newpark's website. And now with that being said, I'd like to turn the call over to Newpark's President and CEO, Mr. Paul Howes.

Thank you, Ken, and good morning, everyone. Although the slowdown in the U.S. land market provided a greater headwind to the third quarter than we anticipated, I'm very pleased with the continued execution of our strategic playbook across both segments. In Fluids, our deepwater Gulf of Mexico expansion continues to gain traction. Last quarter, we announced the award of a third rig with Shell Oil as well as our first award of a combined drilling and completion fluids package. In recent weeks, the first combined fluids project was completed, generating favorable customer feedback. Building on this initial success, our scheduled combined fluid projects in the Gulf is expanding with four projects currently scheduled to be completed over the next few quarters. As discussed previously, our expansion into completion fluids is meaningful, not only because it allows us to provide a combined drilling and completion package that customers value, but also because it expands our revenue potential in each well and helps stabilize our revenue stream as operators move between drilling and completion phases. Furthermore, we continue to build out our completion fluids technology portfolio. As included in yesterday's press release, we are very pleased to announce the acquisition of Cleansorb Limited, a leading global provider of specialty reservoir chemistry based in the United Kingdom, for cash consideration of $19 million. Over the past 25 years, Cleansorb has become a recognized leader in innovative improvement completion fluids technology, supporting several of Newpark's international contracts and also currently supplying key products into Saudi Arabia. Cleansorb's line of patented breaker products serves as a value-add to our total fluid solution offering, particularly for deepwater applications, both in the Gulf of Mexico and internationally. I'm also pleased to highlight several key wins on international tenders during the third quarter, which expands our relationships with…

Thank you, Paul, for the introduction. It's a great honor to join Newpark, and I'm very excited about the opportunity to work with the most dynamic company in the fluids space today. I've spent most of my career working in and around the fluids space, and although the competitive landscape has changed a lot in recent years, I feel Newpark is ideally placed to capitalize on the evolving market conditions. To date, Newpark is the only truly global independent fluids company, and we're extremely focused on what we do. This is what attracted me to Newpark. And as I talk to more of our customers, they really appreciate our focus on fluids and the caliber of professionals we have in the Newpark team. Since joining the company in mid-July, I've traveled extensively to meet our team, both internationally and here in the U.S. We have a fantastic team in place with extensive technical depth and many years of field experience in key locations around the world, some things our customers really value. Our technologies, particularly in the high-performance water-based fluids and deepwater synthetic fluids space are industry-leading in terms of performance. I've also been extremely impressed with the level of investment that Newpark has made in recent years, building out its capabilities and infrastructure to support its global growth. Our Technology Center in Katy, Texas sets the global standard in laboratory support and analytical capabilities for drilling, completion and stimulation fluids, and we continue taking steps to bring this capability closer to our customers, recently opening a new laboratory in Abu Dhabi. Our fluids operating business are also establishing an enviable reputation as the industry flagship facilities in key markets. I visited a number of our sites, including Port Fourchon, Louisiana as well as the Burgan field in Kuwait, and…

Thanks, David, 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. The Fluids Systems segment generated total revenues of $153 million for the third quarter of 2019, reflecting a 12% sequential decrease and a 16% year-over-year decrease. Revenues in the U.S. declined 16% sequentially to $98 million, which compares to a 7% reduction in U.S. rig count. As Paul touched on, the softness was felt across most basins with West Texas being the only exception. While we've maintained our disciplined approach to pricing, the softer top line performance relative to activity levels was reflective of increasingly competitive conditions in certain regions. In addition, despite our continued deepwater market share expansion, due to the timing of these large-scale projects within the quarters, revenues in the Gulf of Mexico declined $5 million sequentially. On a year-over-year basis, U.S. revenues declined 8% from Q3 of 2018, which compares favorably to the 12% reduction in average rig count over the same period. The modest outperformance compared to market activity levels is primarily attributable to a $6 million increase in the Gulf of Mexico, while land revenues have tracked fairly closely to the market rig count. In Canada, although the market activity levels in 2019 continued to remain well below recent years, revenues followed the typical seasonal trend coming out of spring breakup. Revenues in Canada improved 61% sequentially to $8 million, in line with the 61% sequential increase in rig count. On a year-over-year basis, Canada revenues declined by 53%, which compares to a 37% reduction in rig count. Outside of North America, although customer activity levels in our key markets remain much more stable than U.S. land, the third quarter was negatively impacted by…

Thanks, Gregg. One thing we've learned over the year is just to expect volatility in our industry, particularly in U.S. land. That's why we have a well-defined strategy to diversify into markets that are more stable than oil and gas, to grow our international operations with key IOCs and NOCs where the drilling programs are more resilient to market fluctuations and to expand our fluids product offering into adjacent chemistries. To that end, we've made progress along each front. First, we achieved our fourth consecutive quarter of growth in energy infrastructure markets with our Mats business. Second, we're awarded three new IOC/NOC contracts in the EMEA region. Third, we recently completed our first combined fluids project in the Gulf of Mexico, and were awarded three additional completion projects. And lastly, we successfully completed the acquisition of Cleansorb, an important addition to our technology portfolio. I'm very proud of what the team has accomplished despite the volatility in the U.S. land markets. With the U.S. shale becoming the marginal producer, we expect an increase in the frequency of cycles, although hopefully with a dampened amplitude. Or said another way, market volatility is the new norm on U.S. land. Our plan to address that volatility is embedded throughout our strategy, and our long-term goals remain unchanged: to maintain a strong balance sheet, to improve our returns on invested capital by leveraging our existing infrastructure and maintaining a capital light model and to provide increased stability in our long-term cash flow generation through further penetration of more stable markets. In summary, we continue to build upon our solid foundation, and the recent volatility only reinforces our resolve to execute on our strategy. With that, I'd like to close the call, as I always do, by thanking our shareholders for investing in us and thanking our employees for their hard work and dedication in Newpark as well as the continued focus on safety. We'll now take your questions. Operator?

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

Good morning, guys.

Good morning.

I guess if we could think through kind of how we should expect fluid margins to kind of trend into 2020, I know it's still a bit early, but it seems like given Q4 has so many headwinds, that we should see some tailwinds there. But I guess I want to understand how much it'll take to see margins get back into the mid- to high single digits. Do we need to see the U.S. rig activity increase? Or is there enough cost-cutting and other measures going on that we can see that occur at Q3-ish type activity level?

All right. It's Gregg. I'll take that one. In terms of the margin profile, what I will say is it's a bit murky right now because you have some more meaningful movements in the overall activity levels. And as you know, Praveen, that's the challenge that you always have is adjusting your cost structure when the volumes are changing. Now we were obviously making nice progress early in the year with our various margin improvement initiatives. We're seeing nice improvement in the U.S. in Q1 and Q2, obviously, with the top line dropping off to that extent it did in Q3. And that actual lag there that you have in your cost adjustments, we saw that headwind. Now as we go into Q4 as we framed up a softer top line, particularly in the U.S., but this is where we're continuing to take these cost actions here to right size it and, as David had touched on trying to drive this more towards a variable cost structure to make it more scalable. Now obviously, as you fast forward then into next year that's where you do see some benefits that do help you that helps strengthen that margin. Obviously, you have your cost actions you're taking, but then also the point of continuing to expand in the Gulf of Mexico, that's a key piece of it because that's a key accretive portion to it as well.

Yes. I think the other thing, as we've talked to around our total fluids solution is the fact that as we move into these adjacent chemistries, we're building momentum on the completion fluids side. That's accretive to margin, the deepwater. Our beginning success from the stimulation market, as you look out into 2020, as you move into the first half and beyond, we think there's a lot of opportunity to improve margin. But what we really need, I think, more than anything else is some stability in the U.S. land market. So if it stays relatively stable or uplifts slightly, that gives us more buoyancy with these other product lines that we'll be adding on.

Right. Stability can kind of stop masking some of the benefits that are happening.

Yes. Exactly.

On the mats side, can you talk about the expanding rental projects? One of the things, I guess, we've been talking about for a little while is the potential for some of these larger projects to come through. Is that something we're seeing in terms of either Q4 or 2020? Or is it project sizes in the utility space staying relatively similar?

Yes. No, the - we are starting to see that. Here in the third quarter, as we talked in the last quarter. Historically, third quarter had been a weaker period from seasonality, from the demands on the utility grid. We actually saw growth here in the third quarter, and that was because we had a few of these larger-scale projects that were coming on. We continue to gain traction in that area. We are adding more of these larger scale projects, which is also in part why we're having to deploy additional capital to build out that fleet that's dedicated towards that. So we would expect that to continue to build as we progress into 2020.

Yes. The other thought too, as we look at the tender activity, as you're looking out into 2020, we're currently build out - bidding on tenders that have larger mat requirements than we would traditionally see in the E&P space.

I guess I would just add to it that we still are very early in that penetration.

Absolutely.

Yes, sure. Thank you very much, guys.

[Operator Instructions] Our next question is from Bill Dezellem, Tieton Capital Management. Please proceed with your question.

Thank you. I'm actually going to try to squeeze three questions in. The first one is relative to Sonatrach, you said that they were fully ramped. Were they fully rammed in the third quarter? Or is there still some movement up into Q4 to reach the current full year ramp level?

No. The third quarter pretty much reflects the new run rate.

Yes. We are - Sonatrach is ramping down, Bill. Where we're seeing the ramping up of a contract in the EMEA region is with KOC in Kuwait. So that contract is coming up, while the Sonatrach contract in Algeria was ramping down. And now we believe we're at that run rate now for that new contract in Algeria.

Great. And then would you talk a bit more about Cleansorb? Talk to what it adds for you and how far around the globe you believe you can take that or those capabilities. Just as much detail as you can. Feel free to just get on the soapbox and go.

Good morning, Bill. This is David Paterson. So Cleansorb is a supplier of innovative improvement completion fluids technology and leading U.K. company. And their ORCA line of products, their advanced filter cake breakers, which are designed really in conjunction, tailor designed with the reservoir drilling fluids, or the RDS, that you'll hear us talk about. Its application is an open-hole completions. So this is really the very high-end, reservoir-facing part of the business. Customers are extremely critical about what it's exposed to the reservoirs, obviously. So it really represents a key component, obviously, in Newpark's total fluid solutions strategy really in the high-value markets. And that really enables us to be a technology leader in the space. Very excited that their biggest footprint is in Saudi Arabia. Saudi Arabia is a small market today for Newpark, but we're seeing more and more doors open in the Kingdom. And I think Cleansorb's technical standing in the Kingdom really will facilitate business opportunities going forward. So very excited about it. Applications in a lot of key markets around the world.

And then following up on that, is there Saudi penetration on land or offshore? Or is the question even relevant today or equally good on both?

So most people kind of relate land operations with Saudi Arabia. Most of that location is actually on the offshore fields at the moment. But I think there's increasing awareness on the performance of these products. And as we look to expand our own fluids offering within the Kingdom, I think you'll see strong opportunities for Cleansorb and other Newpark technologies in the coming years in Saudi Arabia.

Great, thank you. And then my final question is relative to the Gulf of Mexico and kind of how you see the drilling schedule unfolding for the rigs that you are on, what can you share with us relative to the next couple of quarters?

So I think Q2 was a pretty strong activity quarter for us in the Gulf of Mexico. Q3, there was some operational rig delays that impacted, really, our business in Q3. Q4, we see it getting back to a more stable revenue stream. And with the addition of our Fourchon 2 completion fluids plant, this really allows us to stay on these rigs from spud, through drilling, through TD, through completions. So we're really on the full cycle. We get the revenue benefit of staying on the rig longer through that full cycle. And we do see a return to drilling in Q4, and we're going to see some strong completion fluids activity also with Shell that we haven't seen in prior quarters. Looking forward to Q1, we see similar type of levels that we're expecting in Q4.

And I would add to it, that stability is another key piece of the operating margin story because the cost structure to support that deepwater is a much more fixed cost structure. So as you see variability in the top line, it obviously creates some challenges to your margins. So getting to that stability, as David touches on, is a key piece of strengthening the Fluids margin as a whole.

Thank you, both.

Thank you, Bill.

This concludes the question-and-answer session, and I will now turn the call back over to management for closing comments.

All right. 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.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.