Greetings, and welcome to the Newpark Resources' Fourth 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's now my pleasure to introduce your host, Ken Dennard. Thank you, Mr. Dennard. 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 fourth quarter and full-year 2019 results. With me today 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 fourth quarter and full-year results and near-term outlook before opening the call for Q&A. Before I turn the call over, I have the normal housekeeping details to run through. There will be a replay of today's call, and it will be available by webcast on the Company's website at newpark.com. There will also be a recorded telephonic replay available until February 21, 2020, and that information on how to access that is in the yesterday's release. Please note that the information reported on this call speaks only as of today, February 7, 2020 and therefore, you're advised that time-sensitive information may no longer be accurate as in a 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 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 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 CEO, Mr. Paul Howes. Paul?

Thanks, Ken and good morning, everyone. Before covering the specifics of the fourth quarter financial results, I'd like to begin by reflecting on our safety performance for the full-year 2019. For both Newpark and our customers, employee safety is paramount and our most important core value. Although, we saw a slight increase in our total recordable incident rate, which came in at 0.65 for the year, we believe this result compares favorably within the industries that we operate. I would like to thank all of our employees for their unwavering commitment to working safely and the pursuit of a zero harm workplace. Now turning to the fourth quarter operating results. Although the slowdown in the North American land market proved to be even more challenging than we anticipated, I'm pleased with the swift actions taken in the fourth quarter. In our Mats business, we remain focused on accelerating the growth within the energy infrastructure and other non-E&P markets. Consistent with our historical experience, the fourth quarter benefited from strong seasonal demand for product sales, which led to a 9% sequential increase in segment revenues and an improvement in operating margin to 27%. The strength in product sales during the quarter was somewhat offset by weaknesses in the U.S. E&P market, which led to softer rental and service revenues, particularly in gas focused basin in the Northeast. In contrast with the E&P market, energy infrastructure rental activities have remained relatively stable, contributing to the continued shift in our revenue mix away from the E&P market. For the fourth quarter, 75% of our total segment revenues are derived from non-E&P markets, including 55% of rental and service and nearly all of our product sales. In fluids, the volatile E&P market in the North American land continues to validate the key components of…

Thanks, Paul 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 $135 million for the fourth quarter of 2019, reflecting a 12% sequential decrease and a 24% year-over-year decrease. Revenues in the U.S. declined 21% sequentially to $77 million, which compares to an 11% reduction in U.S. rig count with the softness felt across most land basins. In addition to lower market activity in general, certain of our customers also laid down rigs at a higher rate than the broader market, which combined with an increasingly competitive pricing environment negatively impacted our market share. Further for those customers that remained active, our fourth quarter results reflected a notable decline in revenue per rig impacted in part by extended downtime through the holidays. The $22 million decline in U.S. land was slightly offset by a $1 million sequential improvement from deepwater Gulf of Mexico, where revenues improved to $10 million for the fourth quarter. On a year-over-year basis, U.S. revenues declined 28% from Q4 2018, which compares to a 24% reduction in average rig count over the same period. U.S. land revenues declined $39 million or 37%, primarily reflecting the lower rig count in 2019, as well as lower market share. As Paul touched on, although we've seen our first revenues in the U.S. land stimulation chemical market, this provided only a minor contribution to Q4 results. The softness in U.S. land was partially offset by our expanding market share in the deepwater Gulf of Mexico, which provided a $10 million revenue increase year-over-year. In Canada, although the market rig count improved modestly on a sequential basis, revenues declined 33% to $5 million driven…

Thanks, Gregg. Although, the North American land environment remains very challenging. It's important to note that we've been through this before, and we have demonstrated our ability to pull the necessary levers to adjust course and deliver consistent free cash flow. And as we completed our long-term strategy update in 2019, it's worth noting that mitigating the risks associated with North American market volatility was an integral part of the planning process. Our strategy, which was approved by our Board of Directors in November is underpinned by several key elements intended to further diversify our product offering, customer base, and geographic scope. In Mats, we remain focused on being an environmentally and socially responsible partner, specializing in full service site and access solutions that reduce our customer total operating costs and risks. In our Analyst Day presentation a little over a year-ago, we laid out the details of our opportunity to expand into this multi-billion dollar energy infrastructure market, where today we still have limited market share. I'm pleased to report that our extensive strategic review validated both the addressable market size and our competitive advantages. The resilience of our Mats business has been demonstrated over the past decade, generating consistent cash flow and solid returns on invested capital. And with the majority of our Mats segment revenues now derived outside of upstream E&P, we are taking steps to accelerate our growth into this multi-billion dollar energy infrastructure market. To achieve that goal, we are making investments in several fronts, by expanding our geographical and commercial footprint to align with the key market opportunities, investing in new technology and continuing with a disciplined expansion of our rental fleet based on the near-term outlook and opportunity set. In Fluids, although we recognize our business will always be tied to the E&P…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first set of questions comes from the line of Praveen Narra of Raymond James. Please proceed with your question.

Good morning, guys.

Good morning.

I guess if we could start on the Fluids side, so I guess breakeven for Q1. We've done some more variablizing of the cost structure as well as reducing the footprint. So I guess as we think about that as we move through the rest of the year, have we aligned the cost structure to today's activity level enough? Or have we variablized it enough such that we can get to kind of a mid single-digit margin for that business by year-end given the tailwinds that we're still seeing in Gulf of Mexico and stimulation benefits?

Sure. This is Gregg. I'll take that. As we've seen in the past, when you do see a meaningful shift in the topline, it does take a little bit of time. And so we did take a number of actions in Q4. Those actions have continued in Q1. So I think it's going to take a few quarters for that to work its way through. And part of what you're doing is evaluating the region-by-region activity levels and trying to evaluate short-term weakness versus long-term expectations. And that's why it takes a few quarters to work through

Praveen, good morning. This is David Paterson. I think just to add to Gregg's point. I think Q4 was a sort of transition. As U.S. land dropped, we start to see the meaningful growth in the Gulf of Mexico. What I was super excited about was, now we've really proven our performance with completion fluids. We're staying on the rig much longer than we were in the Gulf of Mexico. With the recent Shell award, we're going to have full service on two out of three of the Shell rigs with drilling fluids and completion fluids, and we're working towards scaling full service on three rigs. So I think as the year moves forward, we'll reach that critical mass level in the Gulf of Mexico, which I think will bolster the overall financial performance of the segment. And also looking out to sort of late Q2, Q3, we're seeing some of the recent wins starting to manifest themselves in the Eastern Hemisphere, right. So the deepwater project in Cyprus, some of the recent wins in Algeria. And we're seeing some other healthy, I would say, dynamics in the market in the Middle East that I think is going to position us to reach the financial levels that you indicated by late Q3, Q4.

And so just bringing it back to your question, I mean that kind of points to a Q1 of, like I said, breakeven then improving from there. The exact trajectory of that is a little bit dependent on how the North American market behaves from this point forward as well.

Sure. But I guess given the flow-through on the P&L of the initiatives that are taking place in Q4, it sounds like a little bit more in Q1, North America should at least be less of a drag even if activity doesn't improve significantly from here. Is that fair? Or does it continue to be as much of a drag as it must have been?

No, I think that's a fair point because again, back to those cost initiatives, we are seeing the steady month-over-month cost improvements as we take these actions. It's a gradual affair.

Right, okay. On the Mats side, just quickly, obviously non-E&P significant portion of your revenue now. So I guess I'm curious in terms of the breadth of your non-E&P Mats customer base. Can you talk about how that's increased over the last year or what that's been over the last year and kind of where we stand in terms of product awareness and just adoption by multiple parties?

Yes, Praveen. It's Matthew. I'll take that one, and I'll address it in two parts. Firstly, on the direct sales side, I think if you look at our Q4 result, which was dominated by T&D customers, we had over two dozen customers purchasing Mats from us. Pleasingly, a number of them were repeat customers in this space, which sort of speaks to the value they see in the product on an ongoing basis. So we're getting more breadth in that space. So on the rental and service side, we're also seeing similar expansion. If you look at our strategy, it's been really to prove our capability with these end users and make sure we have the necessary skill set to service them in a credible, safe and environmentally sensitive way, which we've done largely around our existing E&P – infrastructure in E&P basins. Now, we are at a stage where we're going to start to expand that to where these customers want us to be and things are looking good on that front.

Okay. Thank you very much, guys.

Thanks.

Our next set of questions comes from the line of George O'Leary of Tudor, Pickering, Holt & Company. Please proceed with your questions.

Good morning, guys.

Good morning.

Good morning.

Clearly, a lot of work done on the cost savings plan and variabilizing those costs. So I just wondered if you could frame for us the impact from a fixed cost perspective to the business kind of quantify that a little bit further. And then also the impact on maintenance CapEx going forward, if there are any notable changes to those two buckets that's would be super helpful?

Sure. It is Gregg. In terms of the fixed cost structure, it is a bit tough to frame up because as volumes change dramatically, all fixed cost become variable. And so what we are going through, as we have described, is evaluating our footprint first and foremost. And so we have a handful of locations that we have either now shutdown or are in the process of shutting down and that's your step change of taking some of the cost out of it. On the capital side of things, the maintenance capital for this business both – it's roughly $20 million is our maintenance CapEx fairly evenly balanced between the two businesses is how you should think about that. Obviously in times like we are in a North America, we're being extremely prudent on all of our spend. So that may pull that back a little bit.

Yes, George, David Paterson. Just to add to what Gregg said, we're actually taking a very deep look at our fixed cost structure mainly in U.S. land. We've been in multiple basins and multiple locations. So we're doing a lot of work, really streamlining that our roofline and how that looks to support the business in 2020. So we've taken already some action to get out of some facilities, there are some more earmarked for Q – sort of late one, Q2 and we'll start to see the benefit of that really in the second half of 2020.

Okay. That's super helpful. And then kind of piling onto one of Praveen's questions for the Mats side of the business, as you think about non-upstream non-E&P opportunities, could you just frame that opportunity set? And I'm not looking for revenue guidance, just more the size of that opportunity set year-over-year as you guys go out from the sales and marketing perspective? And where – which pieces of the pie, whether it's more utility work or midstream work or construction, where are you guys most acutely focused on marketing and selling those Mats in 2020?

Yes, it's Matthew. I'll take that one again. Look, our focus is clearly on primarily around the southern market regions in the T&D space. That's where we have a natural footprint to service that and capabilities and where we see ongoing activity. I think when we think about it, we're not needing significant ramps up in activity. The activity is there. We have just got to capture the share that we've been focusing on moving forward.

Yes, I mean as you look at your utility infrastructure within the U.S., there is a large concentration in the eastern corridor there, the East Coast of the U.S. And obviously, we've had a limited presence more so around our E&P activities in the Northeast. But beyond that our footprint is largely about – has been around the oil basins.

Yes. That makes perfect sense. I appreciate the color guys. I’ll turn it back over.

[Operator Instructions] Our next set of questions comes from the line of Bill Dezellem of Tieton Capital Management. Please proceed with your question.

Thank you. A group of questions here. First of all, relative to the U.S. land and your efforts to make the cost structure more variable, would you talk to how you are looking to do that? Or what you were doing to increase the variability of the cost structure? And then secondarily, would you also discuss in the Gulf of Mexico, your second customer there, the number of wells that you're expecting to be on and revenue levels relative to what you're expecting from Shell here in 2020?

Okay, Bill, David Paterson. So in terms of building the variable structure in U.S. land, we're kind of – we're attacking on multiple fronts, right. I think facilities, as I've said, I think with the proliferation of unconventional business over the years in U.S. land, our roofline did expand, right. So we're basically pulling that in and really, looking at the facilities and looking at the mud plants, where they're located to service the work. So we're trying to move to more of a hub-and-spoke model for a week and more efficiently service all the rigs that we have. And I've seen the concentrated geographies of activity but without compromising our service quality and our deliverability. Also, we continue to develop technologies that I think will drive automation. We probably won't see that benefit in 2020, but there's ongoing efforts to look at how we can streamline really the service delivery associated with it, especially with pad drilling in the U.S. and the increased proliferation of pad drilling. So switching gears to the Gulf of Mexico, having locked in Shell, both with extending the scope through 2020 and expanding our scope now to include completion fluids and reservoir drilling. So it has been a huge step forward for us. The second IOC customer that Gregg talked to on the call there was in C&I. This is actually a one-off grassroots well. We originally had that sort of pigeonholed for starting in late Q1. We will see that now slip to Q2. They're going to drill an extra well on their term campaign with the rig. So that's really the dynamics. I hope that answers both the scalability and really some of the high-level dynamics in the Gulf of Mexico.

Great. Thank you. And a follow-up, would you please just take a step back and tell us what you're hearing from your customers about the 2020 activity plans as we go through the year from this activity level forward?

Yes. Hi, Bill. Yes. Certainly, what we're hearing from our customers in E&P, it's all around capital discipline, free cash flow to factor their investors. And so we're cautiously optimistic that we'll start to see a ramp-up in activity in the second and third quarter. But again, as they look to the fourth quarter and they look at their free cash flow, they could manage year-end activity as well. So again, I think it's going to be pretty flat for the year, but we'll see.

Yes, I think the biggest thing to watch is as we entered into this year, the one theme that we heard fairly consistently was the importance of maintaining a commodity price that was at least north of $50. And obviously, very recently, we've seen that dip down with some demand concerns. That's the one thing that puts – could change the dynamics for customers.

Okay. Thank you all.

Thanks, Bill.

Our next set of questions comes from the line of George O'Leary of Tudor, Pickering, Holt & Co. Please proceed with your question.

Hey, guys. Just had one follow-up question. Thanks for letting me back in. On the Mats side of the business, just want to make sure I am thinking about 2020 correctly. We see U.S. drilling and completion spend down year-over-year, call it, in the 10% to 15% ballpark. But there are clearly opportunities on the T&D and non-upstream side of the business as you guys framed answering to one of my previous questions. I realize you're not giving guidance for the full-year, but given those two kind of conflicting revenue trends, can that business grow in 2020? And again, not looking for exact guidance here, but can you have a year-over-year growth from a topline perspective in that Mats business and what are kind of the puts and takes there?

Yes. Sure. This is Gregg. I'll start and then either Matthew or Paul can add on. But I think the important thing to note is the pullback that we've seen and as we described the 2019 result, a lot of that was – it was all the headwind of the oilfield activity coming down. I guess the good news and that bad news is that it's now down to a fairly modest contribution even when you look at the rental and service here in Q4 it only made up roughly $12 million of revenue. So that's a much smaller base. We do continue to be concerned about that piece of it, but it's now down to a much smaller piece. The majority, now being non-E&P and as Matthew had described what we're doing here to expand geographically, that's really our plan to now grow the revenues in this business.

Yes. And if you look at the addressable market that we framed up a year ago at our Analyst Meeting, we're roughly – that T&D market we estimated to be about $3 billion. And so what we've been doing in Matthew's build – business is building out those core competencies and capabilities, and now we need to expand geographically. But our expectation, certainly, is that business will grow year-over-year.

Great. Thanks very much.

We have reached the end of the question-and-answer session. I would like to turn the floor back over to management for any closing comments.

All right. Thank you once again for joining the call and for your interest in Newpark and we look forward to talking to 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.