[Operator Instructions] Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newpark Resources First 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 (800) 723-6062 for domestic or (402) 220-2665 for International. [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 First 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 May 3, 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.

Thank you, Gregg, and welcome to everyone joining us on today's call. Our first quarter performance was a solid start to the year, one highlighted by both sequential and year-over-year growth in adjusted EBITDA. Industrial Solutions project activity levels accelerated as the first quarter progressed, positioning us for a strong second quarter, consistent with our expectations coming into 2024. At a strategic level, we continue to advance our multiyear business transformation plan during the first quarter investing in the growth of our Industrial Solutions business, which remains the central driver of our long-term value creation strategy. For those newer to our story, we've spent the last 3 years positioning Newpark to become a leading pure-play specialty rental business servicing the global worksite access market. Operating the nation's largest fleet of the DURA-BASE Composite Matting System, along with our adjacent services we provide customers with a reliable all-weather load-bearing work surface that allows their critical infrastructure construction projects to be undertaken safely and efficiently. In 2023, nearly 60% of our Industrial Solutions revenues were the customers within the electrical, utility, infrastructure market, positioning Newpark as a leading beneficiary of an ongoing multiyear investment cycle focused on the expansion, hardening and resilience of our electric grid. With multibillion-dollar government programs focused on improving the nation's electricity infrastructure, combined with the on-shoring of several industry segments and growth in AI data centers, we see a significant and sustained investment cycle in the electrical grid to support these programs, creating long-term demand for our worksite access solutions. Through our unique vertically integrated model, we design, manufacture, rent, sell and service our DURA-BASE Composite Matting Solutions. Our rental fleet and world-class manufacturing capabilities allow us to respond quickly to the needs of our customers, making us a responsive and reliable partner for the varying needs…

Thanks, Matthew, and good morning, everyone. I'll begin my remarks with a summary of our consolidated and the segment level results for the first quarter, followed by an update on our outlook for 2024. Our first quarter was highlighted by a 31% sequential improvement in adjusted EBITDA, driven by strong profitability within our Industrial Solutions segment and the International Fluids business units. Consolidated first quarter revenues improved 1% sequentially, generally in line with our expectations shared on our previous quarterly call. The Industrial Solutions segment revenue was $49 million in the first quarter, down at 12% on a year-over-year basis due primarily to the timing of product sales, but up 5% on a sequential basis. This result was generally in line with our expectations as we anticipate customer activity and project timing to ramp up through the year. Total Rental and Service revenues were $35 million for the first quarter, down slightly on both a sequential and year-over-year basis. As Matthew touched on, rental project activity steadily improved through the first quarter, leading to a 5% sequential improvement in rental revenues though our mix of less service-intensive projects led to a sequential decline in service revenues. The first quarter rental fleet utilization improved modestly on a sequential basis, though our Q1 exit rate was meaningfully stronger than the full quarter average, which positions us for a strong sequential improvement into Q2. By industry, the utility sector contributed nearly 60% of rental and service revenues for the quarter, delivering growth on both a year-over-year and sequential basis, while oil and gas pipeline and other industries decline. First quarter product sales were $14 million, a meaningful sequential improvement though below prior year levels due to project timing issues. Our Rental and Service revenues contributed more than 70% of our first quarter segment…

Thanks, Gregg. As we look at the remainder of 2024, our priorities are clear. First, we will continue to execute our plans to become a leading pure-play specialty rental business serving the global worksite access market as we build upon our leading position with the DURA-BASE Composite Matting System. At an organic level, we intend to continue prioritizing capital investment in the growth of our rental fleet which historically has generated cash returns in excess of 25%. During the first quarter, 95% of our total CapEx was directed towards the Industrial Solutions segment. Second, we will continue to drive further efficiency improvements across all corners of the organization, positioning us to realize improved operating leverage. During the first quarter of 2024, we continue to take actions to streamline our overhead structure across both segments and the corporate office, generating approximately $3 million in annual cost savings. Finally, we remain committed to a returns-focused capital allocation strategy that includes a combination of internal investment, inorganic growth and return of capital to shareholders. In February, we increased our remaining share repurchase authorization to $50 million to support our return of capital program. While the first quarter included annual employee incentive program payouts, and investments in rental fleet that reduced free cash flow generation, we expect to be free cash flow positive for the duration of 2024, positioning us to advance our capital allocation priorities. Turning briefly to our Fluids business strategic review. We continue to work diligently to evaluate alternatives, and we remain focused on having the process substantially completed by midyear 2024. 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] And we do have our first question from Aaron Spychalla with Craig-Hallum.

First for me, you've kind of talked about the pipeline growth, mid- to high teens last quarter in Industrial. Can you just give us an update there, especially considering the additions to the fleet in the first quarter? And then just any changes you're seeing in the market competitively within composites or wood just given lumber prices or it really seems like we're starting to see this transition away from wood towards composites? You kind of talked about 75%, 80% of the market being wood today.

Thanks, Aaron. It's Matthew. I'll take that one. Look, in terms of pipeline, we still see robust growth in the pipeline. There hasn't been material change quarter-on-quarter in terms of the growth we have seen there. What we are seeing is that pipeline representing a more forward-looking view of project start duration. If you look back historically, roughly 50% plus of our pipeline was starting and the projects within the quarter that they were quoted. We're seeing that now push out a quarter or so into the future, which is positive for us. It gives us a better line of sight to the future quarter. But other than that, quoting activity remains robust, which I think is supported by the views in the market of a stronger second half to the year and continue to reinforcement of CapEx plans from utilities. So all looking positive there. On the competitive side, not a lot to report that's different there. I think there's still a tightening, I believe, in supply and demand as we look forward. Interesting to note that some of the participants in the market who have large positions in timber fleets are now calling out that they're looking to build composite fleets. So I think your inference there is accurate that people are seeing the value advantage of the composite mats in terms of unit economics and lifetime advantages. So we're encouraged by those signals as well.

Great. And then maybe second, you've had good progress on the cost reduction and efficiency efforts. I think you called out $3 million of annual savings. So it looks like we're around kind of mid-20s for those corporate costs adjusting for some things. Can you just kind of talk about the progress towards that kind of high teens target and kind of time line to get there?

Yes, this is Gregg. If you carve out the transaction related, the sale process related costs that we had mentioned here, you're really running now in a, call it, a 22%, 23% range in terms of cash expense at the corporate level. And as we had talked about in the past, while we're continuing to look -- you're always looking for ways to continue to streamline your organization. I think the more meaningful shift is really post-completing the strategic review of Fluids. That's really when you have the greater ability to adjust your cost structure.

Our next question comes from Amit Dayal with H.C. Wainwright.

So with respect to the cadence for the rest of the year, you indicated year-over-year improvements in 2Q. So from that point onwards, again sort of sequential improvements? Or maybe any lumpiness in the next 3 quarters?

Yes. I mean I'll attempt that one. As far as the visibility goes, we're continuing to see good growth in the pipeline, which would suggest continued growth throughout the year. We do call out every year that depending on how dry the summer months are, and the loads on the grid during the summer months, that can slow activity on the rental and service side. And then typically, we have seen a stronger Q4 on the direct sales side. We're not seeing anything that causes us to think that those longer-term trends have changed. And just based on the strength of our pipeline, build here, we feel comfortable with the rest of the year is building quite nicely.

And then you highlighted maybe pursuing longer-term rental contracts and those could come with slightly lower margins. How much lower would those margins be relative to your legacy rental business?

Yes, this is Gregg. I guess the way I would frame that is I wouldn't think it would be a large driver in terms of bringing your overall pricing down. Again, you got to look at these projects in terms of their overall profitability. The longer term gives you greater visibility, gives you more stability, allows you to manage your fleet to a higher utilization. So net debt, you're generating a solid of a return on investments as the shorter-term projects but the pricing profile is just -- can be lower and it's really a function of size and length of project is what drives that difference.

Okay. Understood. Then I guess just last one. Maybe you touched on a little bit already, this corporate overheads, where are savings on that side? Is there any further room or are we done with those types of cuts for now?

I would generally say we're -- I would not expect meaningful movement in the cost structure in the near term. Like I said, we're always looking for opportunities to streamline. But again, the more meaningful change in our overall structure really comes following completion of our strategic review of Fluids.

And our next question comes from Gerry Sweeney with ROTH Capital.

Question on the Midwest, West. You've discussed building out your sales in those areas. Just curious a couple of little questions here. How big of an opportunity is it versus I know I think you're a little bit bigger, especially in the Southeast, how does sort of that zone compared to the Southeast? And then how long would it take to get a big enough presence there that we start to see some dollars coming through in a meaningful way?

Yes, Gerry, I think the way we look at that market is there's no reason it couldn't be a substantial, as say, our Texas market or something like that based on the infrastructure requirements there. So a reasonably meaningful piece. The sales cycle really depends on project timing and our ability to get in there and penetrate some customers that we haven't traditionally serviced. But our anticipation would be that within 12 months, we should see that operating at a fairly efficient level. So the great thing about this business is we're getting there with sales first. We start to build the relationships then we start to move the assets into those markets. So we're not committing a large amount of capital here and waiting for it to be productive. We can flex that in as the activity levels dictate.

Yes. I was just going to add, I think you can look at the examples of our previous expansion, when we went into the East Coast, the Southeast and the Mid-Atlantic regions. And as we build that out, that was kind of a 12- to 18-month sort of process to ramp those up.

And I was going to say, would acquisitions be an opportunity in that area, especially to speed up the process or gain a little bit more scale?

Yes, Gerry, we've always kind of said that we would evaluate those markets on an acceleration basis. If having somebody in there that already has the relationships and has the appropriate safety culture and operational efficiency that we look for, we'd obviously consider that as well as doing it organically ourselves.

Got it. One more question. This is government spending, i.e., stimulus we're working with a bunch of companies that's seeing a lot of stimulus spending. But a lot of the commentary from them is "hey, we're at the back end, the dollars had to flow through, projects approved, et cetera." Most of them are just seeing a little bit of dollars coming through today and expectations always going to speed up '25, '26. Are you guys in the same boat, or are you seeing a little bit more spending earlier?

Yes. Look, we're in the same boat, Gerry. I think from the outset, we were sort of seeing '25 will be the year where those funds would start to flow through in a way that would be impactful to us. And I still think that is our view at this point.

Our next question comes from Min Cho with B. Riley Securities.

I'm on for Alex Rygiel this morning. Great quarter. Most of my questions have been answered, but I have a quick one regarding the rental revenue, maybe breakdown in the U.S. versus U.K.? I know that you have a strong business in the U.K. Can you talk a little bit about any difference in the demand dynamics there?

Well, let me -- I'll start with the mix. First of all, overall, when you look at our Rental and Service split is roughly 90% U.S., 10% U.K. In terms of the demand dynamics.

Yes, look, in terms of the demand dynamics, I think primarily, the market in the U.S. is the electrical utilities in the U.K., we tend to also get more rail. If you look at High-speed 2 and some other large infrastructure projects going on there, they are consumers of access. So the only real difference we see there is the industry service. But both here and in the U.K., the thematic of infrastructure investment and improvement of both is strong, and we're looking forward to that sort of supporting the business for years to come.

Yes. In terms of the CapEx that we mentioned, I just wanted to point out that, that is supporting both growth in the U.S. and also the U.K. fleet.

Excellent. Also, and Gregg -- SG&A was a little bit higher than we had expected. Do you expect this to be a pretty good run rate on a quarterly basis for the rest of the year?

I think when you look at the quarter, again, I think it's important that you do look at the transaction, the sale process and related items that we had called out as well as the severance. But adjusting for that, yes, I think that, that underlying growth run rate is a fairly accurate rate going forward.

Excellent. And then finally, you had mentioned targeting larger projects. Do you have anything in backlog yet? Or if you could just talk about the progress that you're making on those types of projects so far?

Yes. Thanks, Min. As we look at our forward pipeline, we are seeing a distribution shift towards larger projects. So we are seeing that start to flow through. And if we would describe that as backlog, then we are seeing a build in that backlog in those larger projects. So we feel like that focus is working for us.

And our next question comes from Bill Dezellem with Tieton Capital.

I'd actually like to follow up on that last question, the pipeline of new projects becoming larger and ask why, what has led to that? Is that a function of what's happening in the market? Or is that your own emphasis on those projects?

Yes, Bill, I think it's a little bit of both. One of the things that we were coming into the T&D space, traditionally from our oil and gas markets, there was some concern that we would have the fleet capacity to service some of these larger projects. Over time, as we've invested in fleet and we've demonstrated our ability to service and meet the varying needs of those project types I think we have one more confidence with the project owners that we can execute and meet their needs. Moving forward, as we continue to invest in our fleet, we see that being even more so. So I think there's a little bit of A, the projects are out there; and B, we continue to demonstrate that we can service them safely and efficiently and meet all of the requirements of our customers, which is helping pull through more volume in that space.

And obviously, the more you penetrate this, it just improves your visibility, improves your stability in your overall rental and service operations.

Great. That is helpful. And then continuing on the Industrial Solutions segment, what's led to the strength exiting the first quarter? Is it as simple as project timing? Or is there something bigger that's taking place there?

I think you nailed in the first bit there, Bill, it's really just the projects getting underway. So I'd like to say there was more magic than that, but it really is just the way these things have timed out.

I've given you the opportunity to take credit for Magic and you're just going to set that aside.

Yes. I think this goes back to why we continually emphasize the focus on the full year and TTM. Again, you do have these project timings resulted in quarter-to-quarter sort of swings, but they do balance out over the year.

Great. And then a couple of questions relative to the Fluids business, please. Are books still going out on the Fluids business? Or are those out? And now we're in the next phase of the process?

Yes, Bill, I think it's probably safer for us to kind of leave that one and just trying to revert to the script that we put forward, which is we're moving forward in the process and optimistic about our conclusion in the first half.

Okay. And then would you please discuss the swing factors with the Fluids operating income that led to it being up what, I think, $3-plus million on a $24 million revenue decline.

Yes. Overall, it is more than anything. You've got the mix shift. And we've always -- we've talked about the profitability of the business here International versus the U.S., which is historically the international has been a stronger performer. So you have that mix shift as well. We also had the benefit of the pricing. We had talked over the past year of the impact that we've had with some of the inflation, which we're unable to push through contracts. We had to wait for contract renewals that's continuing to come through to drive strength in the overall pricing. And then the last factor there is also on the U.S. side. With the U.S. being a much tougher market landscape continuing to take cost out to offset some of the deterioration. So you put all those things together, and ultimately, it's leading to a more profitable business than what it was a year ago.

And we have reached our allotted time for our question-and-answer session today. I will now turn the call back over to the management team for closing remarks.

Sure. That concludes our call today. Should you have any questions or requests, please reach out to us using our e-mail at investors@newpark.com. And we look forward to talking to you again next quarter. Thank you.

This does conclude today's program. Thank you for your participation. You may now disconnect.