Good morning. My name is Todd and I will be your conference operator today. At this time, I would like to welcome everyone to the Newpark Resources Third Quarter 2023 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 12:30 p.m. Eastern. The recording can be accessed by dialing 888-219-1276 for domestic or 402-220-4949 for international. [Operator Instructions] It is now my pleasure to turn the floor over to Rob Krotee, Vice President of Investor Relations and Strategy. Please go ahead.

Thank you, operator. On behalf of the entire team at Newpark Resources, I'd like to welcome you to our third quarter 2023 results conference call. Leading the call today are Matthew Lanigan, our President and CEO; and Gregg Piontek, our CFO. 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 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 are current as of November 1, 2023. At the conclusion of our prepared remarks, we will also open the line for questions. With that, I'd like to turn the call over to our President and CEO, Matthew Lanigan.

Thank you, Rob and welcome to everyone joining us on today's call. I'm pleased to share that our team delivered strong third quarter results, while demonstrating continued execution on our multiyear business transformation strategy. Ongoing commercial growth and operational excellence initiatives across the enterprise contributed to significant year-over-year growth in net income, adjusted EBITDA and free cash flow in the third quarter, putting us on pace for a solid full year performance. We generated third quarter net income of $7.7 million or $0.09 per diluted share on revenues of $198 million. Industrial Solutions revenue improved 12%, delivering a 28% improvement in segment adjusted EBITDA, while divestitures and other actions within Fluid Systems are driving a more focused and profitable business delivering a 12% improvement in segment adjusted EBITDA on 16% less revenue. On a consolidated basis, year-over-year revenues declined 10%, including the impacts of fluids divestitures, while adjusted EBITDA improved 13% to $22.3 million in the third quarter and adjusted EBITDA margins increased 230 basis points to 11.2% in the period. Adjusted EPS came in at $0.09 per diluted share, increasing 71% from the prior third quarter. We generated $23 million of free cash flow in the third quarter as we continue to optimize our Fluids balance sheet 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. The solid Q3 cash generation brings our year-to-date free cash flow to $47 million. I'd now like to provide a progress update on our commercial growth in the third quarter. Within our Industrial Solutions segment, we delivered the strongest Q3 revenue on record at $57 million, up 12% versus the prior year, driven by strong underlying demand across our core end markets, continued share…

Thanks, Matthew and good morning, everyone. I'll begin my remarks with a summary of our consolidated and segment level results for the third quarter, followed by an update on our near-term outlook. Our third quarter was highlighted by solid revenue growth in Industrial Solutions, the Fluids EMEA region in Canada, continued margin expansion and strong cash flow generation, providing for further debt reduction and return of capital to shareholders. Total third quarter revenues exceeded our expectations shared on our previous quarterly call with stronger-than-expected customer activities within Europe and Africa leading to yet another record revenue quarter for our EMEA region of the Fluids business. The Industrial Solutions segment revenue was $57 million in the third quarter with roughly 2/3 coming from rental and service and 1/3 from product sales. Rental and service revenue was $38 million for the third quarter, a 16% year-over-year improvement. Growth in rental and service revenues reflects continued organic growth across most of our served infrastructure markets, led by a 21% year-over-year increase from customers operating within the utility sector. Direct sales rebounded in line with expectations, contributing $19 million for the third quarter. On a year-to-date basis, rental and service revenues have increased 21%, while product sales have increased 13% year-over-year, supported by strong demand from the utility sector. Industrial Solutions segment profitability remained strong in the third quarter as reflected by the segment adjusted EBITDA margin of 34.4%, a nearly 440 basis point year-over-year improvement. Improved segment margin realization reflects growth in rental and product sales volumes as we maintain price discipline along with improved operating cost leverage across our rental operations. The Fluid Systems segment generated revenue of $141 million in the third quarter, representing a decline of 16% versus the prior year period, primarily reflecting the impact of last year's divestitures.…

Thanks, Gregg. As we move into fourth quarter, 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 continued to deliver significant 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 near-term prospects for our business which has delivered $81 million of trailing 12-month EBITDA through the third quarter. In Fluid Systems, the EMEA region continues to deliver significant year-over-year growth in revenue and strong profitability, offsetting the declines in the U.S. land markets with the segment realizing significant improvement in adjusted margins and reducing net assets employed by $50 million since the start of the year. I'm immensely proud of our global Fluids business as they continue to navigate the changing global landscape with a laser focus on safety and exemplary customer service while improving margins and working capital efficiency. With respect to the fluid sale process, we're pleased with the level of interest from potential acquirers who recognize the high quality of our industry-leading technical expertise, service quality and established customer relationships. The process is progressing in accordance with our expectations for substantial completion in the first half of 2024. In addition to funding our Industrial Solutions growth, we've also continued to strengthen our balance sheet and repurchase shares, purchasing over 6% of our outstanding shares in the first 9 months of the year. I'm humbled by our teams across the organization for their unwavering professionalism and commitment to our customers, consistent with the high-performance culture we have 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, we'll open the call for questions.

[Operator Instructions] Our first question will come from Aaron Spychalla with Craig-Hallum.

So first for me, can you just maybe talk about a little -- how do you think about the trade-off between growth in volumes and kind of price and margins as you think about investing more in the industrial business given the value proposition there?

Yes, I'll take that one, Aaron. Look, I think -- I mean the way I'd summarize it really, if you look at the long-run margin profile of the business at an EBITDA level, we've kind of got low early 30s to high 30s EBITDA margin that we've been able to manage as we continue to introduce fleet and expand our footprint. And we would expect that we're going to be able to continue to do that and manage within that range. So that seems like something that we can manage moving forward.

Okay. And then maybe just a second. Can you just talk about any impact you might be seeing from interest rates on project financing across your end markets and any impact that might be having on kind of rent versus buy decisions?

Yes, I'll grab that one, again. Look, I think at this point, it's fair to say we're really not seeing any material impact. When you look at where our large exposures are, it's more around that critical infrastructure and resources which are not really at this point, indicating any pullback in the CapEx profiles associated with interest rates. When it comes to the mix, obviously, higher interest rates, we would expect to push the marginal purchaser to a rental over a purchase. But still at this point, we're not seeing any material shifts in our mix from that perspective but something we're definitely watching moving forward.

All right. And then maybe just -- could you provide an update on your efforts on the recycling side of things? Maybe an update on internal capabilities and kind of setting up the supply chain there, customer conversations and just a general update there.

Absolutely. Look, I think the important thing on this one, we're 5 years into this program when you really step through it, we started in 2018 really focusing on the material side of recycling recognizing it's not just as simple as throwing some recycled material into your process and being able to maintain the quality and the structural performance of the product. So we leaned into that, then we moved into the processing side of it. And now as we've got those things under control, we're expanding our supplier relationships, looking for the sources of material there with reliability and consistent quality. So those things are all moving ahead very well. In terms of customer conversations, they're evolving. As we scale this up more, we're going to continue to lean into the fact that this has economic and societal benefits from the use of recycled versus the virgin material. So we're really happy with our progress to date but expect to see that amplify over the coming years.

Understood. And then maybe, Gregg, one question for you on the free cash flow outlook. Can you just talk about some of the moving pieces there as we think about 4Q versus 3Q. Is there any more kind of working capital benefit that you expect from just some of the actions in Fluids over the past year?

Yes. Yes, we definitely expect that to continue. You look at Q3 versus Q4. Obviously, Q3 came in strong toward the high end of our expectation. The overall second half look was -- it remains fairly unchanged in line with what our view was 3 months ago. What we did see here in Q3 is with the timing of some of the third quarter mat sales. Within Industrial, we saw an acceleration, stronger DSO performance and we see that kind of reverting back to a more typical timing in Q4. So it's really just a shift there, Q4 to Q3. And then as Matthew touched on a little bit here, also on investment side, we look to continue to accelerate our growth here on the rental side of the business. So we are making investments there and continuing to drive production through the plant to be able to support our growth aspirations.

[Operator Instructions] Our next question comes from Bill Dezellem with Tieton Capital.

Would you dive into a bit of detail relative to the $0.5 million that was spent on the strategic planning projects. And I'm less focused on the dollars than I am kind of what it is that you are in process of evaluating and the implications that, that may have over the course of time.

Yes. Bill, that's primarily spend associated with the process on the fluids side of the business. That's the vast majority of it.

That's super simple. Let me shift then to the industrial side of the business. Your guidance seems a little bit conservative relative to how we have thought of this business historically having a strong fourth quarter, often times with some pretty big mat sales, et cetera. Would you talk about that level of conservatism or maybe pragmatism that I'm not fully grasping?

Yes, Bill. Look, we're kind of calling it as we see that order book build. As Gregg said, we're enthusiastic at the quote levels we're getting until those orders are booked and in the bag, we're not going to claim them. So that number seems appropriate for what we're seeing at this point in time.

Yes. And if you go back over the years, I think there's 2 aspects to Q4. Number one is it's typically where we see the seasonal strength and the other item that we've talked about is usually that's pretty late developing as you progress through the quarter. So you don't have as much visibility as you prefer. But again, it just goes back to what we're seeing on the quoting side is we're encouraged by and we'll take it from there.

Okay. I'm going to put my own words to what you said that essentially, your guidance is the number that you feel quite confident that you will be able to hit but you do recognize that late in the quarter which is hard to forecast, there has historically been many times some larger sales that have taken place but you're just not willing to stretch out and assume that those are going to happen this year and every year in the future.

Yes, Bill, I mean, I think the reality is and I think Aaron touched on it in his question in the interest rate environment and what we're seeing in the larger macro economy here being too bullish would seem a little out of place. So we're calling it the way we see it at this point.

Then relative to your tax rate being in that 34% to 35% range, once the Fluids business is no longer part of Newpark. Where do you see that tax rate moving to?

Yes. I think that low to mid-30s rate that we're seeing today is heavily influenced by the geographic mix and the fluids business. I think as you go forward and look at a business that's much more U.S.-centric, you're probably in the mid- to upper 20s range is where this levels out.

Congratulations on another nice quarter.

Thank you. At this time, we have no further questions in queue. I'll turn the call back to Rob for any closing remarks.

Thanks, Todd. That concludes our call for today. Should there be any questions or requests, please reach out to me using our e-mail, investors@newpark.com. And we look forward to hosting you all again on our next quarterly conference call.

Thank you. This does conclude today's call. We appreciate your participation. You may disconnect at any time.