Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newpark Resources Q2 2023 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 800-934-3336 domestic or 402-220-1148 international. All lines are currently muted, and after the prepared remarks, there will be a live question-and-answer session. If you would like to ask a question during the Q&A segment, please press star 1 on yo ur phone. If your question has been answered, you may remove yourself from the queue at any time by pressing star 2.
We do ask that you please pick up your handset for optimal sound quality. It is now my pleasure to turn the floor over to Rob Crotty, Vice President of Investor Relations, Strategy and Corporate Development. Please go ahead, sir.
Thank you, operator. On behalf of the entire team at Newpark Resources, I'd like to welcome you to our Q2 2023 results conference call. Leading the call today are Matthew Lanigan, our President and Chief Executive Officer, and Gregg Piontek, our Chief Financial Officer. 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 statement 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 obligations to update our forward-looking statements. Our comments on today's calls 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 our investor relations section of our website at newpark.com. Please note that the information disclosed on today's call is current as of August 2nd, 2023. At the conclusion of our prepared remarks, we'll open the line for questions. With that, I'd like to turn over the call to our President and CEO, Matthew Lanigan.
Thank you, Rob, and welcome to everyone joining us on today's call. During the Q2, we continued to execute on our business transformation strategy, demonstrating meaningful progress around our commercial growth, operational excellence, and capital allocation priorities, while continuing to build an Industrial Solutions platform equipped to drive long-term value creation for our shareholders. We delivered Q2 net income of $1.7 million, or $0.02 per diluted share on revenues of $183.3 million, with net income improving $9.5 million on a year-over-year basis in the period. Adjusted EBITDA increased 49% year-over-year to $19.8 million in the Q2, while Adjusted EBITDA margin increased nearly 400 basis points to 10.8% in the period.
Adjusted EPS came in at $0.08 per diluted share, increasing from $0.01 per diluted share in the prior Q2. We generated positive free cash flow and continued to monetize our fluids divestitures in the Q2, which contributed to a modest reduction of debt and the return of capital to shareholders through continued repurchases of our equity in the open market. The timing of working capital changes in Q2 also sets up well for a re-acceleration of free cash flow generation in Q3 from the collection of receivables. Let's now begin with the progress update on our commercial growth in the Q2. Within our Industrial Solutions segment, our actions to drive sustained, profitable growth have yielded encouraging results.
On a trailing 12-month basis through the Q2, Industrial Solutions segment revenue and Adjusted EBITDA have increased by 20% and 41%, respectively, driven by our continued penetration of utility projects, improved pricing, along with raw material sourcing and operating cost efficiencies. Importantly, we continue to have a significant pipeline, scheduled rental projects and product sales opportunities, which positions the business well heading into the second half of the year. Across the Industrial Solutions business, we've continued to prioritize investment to support the expansion of our higher-margin specialty rental and service offerings. During the Q2, we invested $7 million to expand our rental fleet.
Notably, roughly $2.5 million of this investment was related to the deployment of our new DURA-BASE 800 Series mat, which fully integrates with our existing DURA-BASE mat format and offers a nearly 15% reduction in weight, driving further efficiency in transportation costs and associated carbon emissions without impacting product performance. We believe our continued organic investment in fleet will equip us to drive sustained double-digit annualized revenue growth as we capitalize on accelerating demand in the utilities and critical infrastructure markets we serve. Within our fluids segment, the Q2 was highlighted by yet another record performance from our Eastern Hemisphere team, which generated $65 million in revenue and surpassed the US in terms of Fluid Systems revenue contributions.
At the same time, we've continued to take steps to harvest cash from the fluids segment, reducing our net capital employed by $20 million in the Q2, with reductions coming primarily from the U.S. Moving now to a progress update on our recent efforts to drive operating cost optimization and efficiency improvements across our global footprint. As outlined in Q1 call, we've taken decisive actions to reduce layers of redundancy across our organization, while building an increasingly durable, competitive business structure positioned for profitable growth throughout the cycle. In 2023, we've taken actions to remove $6 million in annualized fixed overhead costs across both corporate and fluids, consistent with our cost optimization initiatives. In addition to these cost reduction efforts, we've also continued to closely examine the areas of the business that do not meet the required return thresholds.
During the Q2, we incurred $5 million in charges related to the substantial completion of our exit of the Gulf of Mexico, as well as asset impairments related to the previously discussed decision to wind down our U.S. stimulation chemicals business, along with the recent decision to shutter our Dampier facility in Australia. We expect to incur additional exit-related costs as we complete the exit of the Dampier facility in the second half of the year. Further, on June 20th, we issued a press release announcing that Newpark is exploring strategic alternatives for the long-term positioning of our Fluid Systems division. While we've made significant progress improving the operating performance of our fluids business during the last year, we believe that now is the appropriate time to explore synergistic opportunities for the business.
We remain committed to exploring all viable options that are in the best interest of the Fluid Systems business and our shareholders. We are confident that in pursuing this course of action, we will enhance the competitive positioning of the fluids business and unlock the inherent value in our two divisions for our shareholders, while also positioning our Industrial Solutions business for accelerated growth, transforming Newpark into a scaled industrial rental and service company. Should we successfully divest the fluids business, we believe this would create opportunity to further simplify our overhead structure and drive a meaningful SG&A reduction within the remaining organization. As a reminder, we do not intend to disclose developments with respect to the progress of our evaluation of any strategic options until such a time as the board of directors has approved a transaction or we otherwise deem disclosure required or appropriate.
Finally, turning to a discussion of our capital allocation priorities. We remain committed to maintaining a conservative, well-capitalized balance sheet, one that prioritizes maintaining a conservative net leverage profile while providing for organic fleet investment to support growing demand within our critical utilities and infrastructure markets, and positioning the company for creative acquisitions to accelerate our growth plans together with return of capital through share repurchases. With that, I'll turn the call over to Gregg for his prepared remarks.
Thanks, Matthew. Good morning, everyone. I'll begin my remarks with a summary of our consolidated and segment-level results for the Q2, followed by an update on our near-term outlook for the business entering the Q3. Our Q2 results were generally in line with the expectations shared on our Q1 call in May, highlighted by solid rental and service revenue growth, continued margin expansion, positive cash flow generation, continued momentum within our Industrial Solutions business, and another record revenue quarter for the EMEA region of our fluids business. Industrial Solutions segment revenues were $48 million in the Q2, with rental and service revenues representing 83% of the segment revenue. Rental and service revenue was $40 million for the Q2, a 32% year-over-year improvement.
Growth in rental and service revenues reflects continued organic growth within our core utility infrastructure markets, which remain healthy. Product sales activity pulled back to $8 million for the Q2, based on typical quarterly fluctuations in order timing, though first half 2023 product sales are up 20% year-over-year, supported by strong demand from the utility sector. Industrial Solutions segment profitability remained strong in the Q2, as reflected by the segment Adjusted EBITDA margin of 37.7%, a 660 basis point year-over-year improvement. Improved segment margin realization reflects growth in higher-margin rental volumes and continued price discipline, along with improved operating cost leverage, including strong manufacturing and fleet utilization. The Fluid Systems segment generated revenue of $135 million in the Q2, representing a decline of 7% versus the prior year period.
Segment Adjusted EBITDA margin improved 350 basis points to 6.5% in the Q2. As Matthew touched on, the Fluid segment incurred $5 million of charges in the Q2, primarily associated with the exit of offshore markets and the stimulation chemicals, which impacted GAAP operating margin. During the Q2, we reduced our net capital employed in the Fluid Systems business by $20 million or 8%, reflecting the ongoing monetization of receivables, inventories, and excess PP&E, as well as the effect of the asset impairments. Our international fluids operations delivered $65 million of revenues in the Q2, reflecting 16% sequential improvement and a 33% year-over-year growth, benefiting from strong customer activity across most of the Eastern Hemisphere.
Revenues in Canada declined 46% sequentially and 8% year-over-year to $10 million in the Q2, relatively in line with expectations and overall market activity, reflecting the effects of the seasonal spring breakup, as well as the effects of the wildfires on the Canadian market. US land revenues declined 13% sequentially, and 23% year-over-year to $60 million, reflecting lower market activity and lower market share as we maintain our focus on pricing discipline. As of the end of the Q2, the fluids business has a little over $200 million of net working capital, consisting primarily of inventory and receivables, which represents roughly 85% of the segment's net capital employed.
SG&A expenses increased on both a sequential and a year-over-year basis, primarily reflecting the costs associated with our Q2 overhead restructuring efforts discussed on our May call, as well as our strategic planning activities. Q2 SG&A expense included $1 million of severance costs, as well as $800,000 of strategic planning and M&A costs included in the corporate office expense. After consideration of these two items, the remaining Q2 SG&A totaled $23.8 million, including corporate office costs of $7.1 million. Interest expense held relatively flat sequentially at $2.1 million for the Q2, reflecting the net effect of increased borrowing rates, offset by lower overall debt balances. Tax expense was $2.1 million in the quarter, reflecting a 56% effective tax rate for the quarter, and 37% year-to-date.
Our tax rate in the Q2 was negatively impacted by elevated losses in certain foreign jurisdictions, for which we are unable to recognize the benefit. Adjusted EPS was $0.08 per diluted share in the Q2, a substantial increase from $0.01 per diluted share in the Q2 of last year, reflecting improved profitability within both segments, along with a 7% decline in our shares outstanding. In terms of cash flow, we had another solid quarter of generation following our exceptionally strong Q1 result, benefiting from the fluids divestitures. Operating cash flow was $7 million for the Q2, impacted by a $13 million decline in accounts payable, as payables naturally decline ahead of receivables as revenues decline. Free cash flow was slightly positive for the Q2, with another $11 million generated in the quarter from the fluids divestitures.
As Matthew highlighted, we used $7 million to fund our net CapEx, with the vast majority once again directed toward the expansion of our rental fleet. We also used $6 million to reduce debt and $5 million to fund share repurchases. Let's now turn to the near-term 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 multi-year tailwind to support our growth plans. Although the typical summer seasonality and extremely hot and dry weather currently impacting much of the US, has some potential to impact near-term projects, as loading on the power grid remains elevated to meet demand.
In Fluid Systems, while the US market outlook remains somewhat challenged in the near term, we continue to feel confident in the mid and longer-term outlook for Canada and Eastern Hemisphere markets as we continue to transform and position the business for future success. We anticipate Q3 Industrial Solutions revenue to improve sequentially to a range of $52 million-$58 million, primarily benefiting from the timing of product sales activity, including the effect of Q2 product orders that were delivered in early Q3. Within our Fluid Systems segment, we anticipate Q3 revenue to decline sequentially to a range of $120 million-$130 million, primarily reflecting a decline in the US and a pullback from the record quarter in the Eastern Hemisphere, partially offset by a seasonal recovery in Canada.
We anticipate total EBITDA in the range of $17 million-$22 million and interest expense of $2 million, while the effective tax rate should be near the 30% level for the Q3. In terms of cash flow, we've seen a solid start to the Q3, with borrowings under our ABL facility declining $8 million in July. We expect free cash flow generation in the range of $15 million-$25 million in the Q3, benefiting from solid EBITDA generation and reductions in net working capital, primarily within the U.S. fluids business. Beyond our continued organic growth investments in Industrial Solutions, we expect our Q3 cash generation to be primarily used to further reduce our debt, providing greater flexibility to accelerate our growth plans or return value to shareholders through our share repurchase program.
With that, I'd like to turn the call back over to Matthew for his concluding remarks.
Thanks, Gregg. Throughout the first half of the year, 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, which remains our core platform for growth longer term, continued to deliver significant year-over-year growth in revenue, EBITDA, and margin realization in the first half of the year. In Fluid Systems, Eastern Hemisphere delivered significant year-over-year growth in revenue, offsetting declines in North American land markets, with the segment realizing significant improvement in adjusted margins and reducing net capital employed by over $40 million since the start of the year. At the same time, we've continued to allocate cash generation towards investment in fleet expansion and share repurchases, while also reducing debt.
While our recent decision to explore strategic alternatives for the Fluids business was not taken lightly, it does mark a significant milestone towards simplifying our go-forward structure and positioning us to unlock value for shareholders. As we explore future alternatives for the Fluids business, it remains a world-class operation that continues to benefit from strong execution and market outlook, particularly within our Eastern Hemisphere and Canadian markets. To that point, in the 2023 Drilling Fluids Supplier Performance Report, recently issued by Kimberlite, Newpark once again outperformed the leading global fluids providers, showcasing the underlining value of the business to our global customers and the strong brand recognition Newpark has built for technology and service excellence.
As we continue to thoughtfully harvest cash from the lower-returning areas of our business and to redeploy it towards our Industrial Solutions platform, we are on track to have the net assets of the industrial business exceed those in our Fluids Business by the end of the Q3 of this year, signaling yet another important milestone in our journey to transform from being an oilfield services company to a leading Industrial Solutions brand. With our continued expansion in the multibillion-dollar global worksite access market, we remain optimistic about near-term growth prospects for our business and anticipate the segment will surpass $80 million of annualized EBITDA in the second half of 2023. I'm exceptionally proud of our teams across the organization for their unwavering professionalism and commitment to our customers, consistent with the high-performance culture we've 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. With that, I'll open the call for questions.
Thank you. At this time, if you would like to ask a question, please press star 1 on your touch tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 if you would like to ask a question. We will pause for a moment to allow questions to queue. Thank you. Our first question will come from Bill Dezellem with Tieton Capital Management. Your line is now open.
Thank you. I have a group of questions. I'd like to start with the Industrial Solutions business. There was a reference in the press release to the service revenues being up 40%. Would you discuss what these services are, please?
Yeah, Bill, I'm happy to do so. It's Matthew. Yeah, look, the services is a sort of a broad bucket that'll include the transportation in and out of site. They'll also include any installation and removal of the mats, as well as ancillary services that we're, we're being called on to do more of, as customers appreciate our, our service quality and our safety performance. They're asking us when we're on site to broaden the basket of services that we offer and where we can do that at a value-added benefit to both parties, we continue to expand that. I, I guess you're seeing that with the service revenue growth outpacing rental revenue growth this quarter.
Okay, I'm gonna circle back to that, but a couple questions relative to Fluids. Relative to the strategic alternatives, would you discuss in a bit more detail, kind of the review that's taking place and a timeline that you might anticipate having some resolution, whatever direction that ends up being?
Yeah, sure. I mean, I think with respect to timeline, you know, I, I think this will just follow a typical process there, where you'd expect this to be resolved over the next few quarters. Would be kind of our expectation here, Bill. I might need you to expand on the review process.
Is there, is there really anything under consideration other than, than an outright, sale to another party?
Yeah, I think we've been clear that we're gonna be open-minded to, to whatever opportunities come, come forward there, Bill. It's probably a little premature to box ourselves into, to one line of thinking at this point.
Yeah. I think that that's probably what you would consider is the most, most logical. Ultimately, this comes up to value, what creates the greatest value for our shareholders. That's what will guide our, our decisions.
Great. That's, that's helpful. Thank you both for that. Then, and then if the Fluids business was sold, how do you foresee deploying the cash, that would, that would come from that activity?
Well, I think it starts with. Obviously, that would generate a significant amount of cash. Obviously, it builds a lot of dry powder. It gives you some flexibility there to accelerate your growth plans, and I think that's really where that next step is, looking at how do we further accelerate. Obviously, we have a very differentiated product. We're gaining share. We still have a lot of runway with it, but we would naturally explore how can we accelerate that growth rate.
Okay. That, that actually, I want-- like I said, I wanted to come back to the industrial business, and that might be the perfect segue. That I think it was the third paragraph in the press release, you made the comment, "While the composite mat technology and related support solutions remain one of our core value propositions, our vision is to expand the high margin or high value platform of site and access products." specifically rental solutions to further embed you as a tier one supplier and partner into the energy and industrial markets. That phrasing could be interpreted many different ways.
Maybe you could tie in your last comment and try to pull all that together and, and, and what it is you're really trying to communicate there? Because I don't want to go the wrong direction with that statement.
Thanks, Bill. I'll, I'll answer that question. Look, there's really two parts to it. Like, firstly, as we look out and see, you know, the, the, the market dynamics going on right now, they're being very supportive to long-term growth and demand, you know, be it through the grid modernization, renewable tie-ins, or general maintenance to support electrification efforts. We, we feel like continuing to invest in our fleet and the geographic expansion of our rental and service offering to be where that growth is and where our customers want us to be, is our number one priority there. I think we've touched on that in the past. Our expansions in the Northeast and Southeast over recent quarters are starting to show the benefits of that focus.
Secondarily to that is that as we continue to, and I touched on this earlier, as we continue to demonstrate our strong reliability and safety performance on site, we're often asked to provide additional services while we're on the right of way by our customers. And where these are value added, and we can get the appropriate shared benefit between ourselves and the customers, we're doing more of it. And these are things like stormwater prevention, pollution planning, sort of other right of way, kind of maintenance activities that we're asked to perform, that, that provide that little bit extra there. The more we do that, the more we embed ourselves as a trusted partner with our customers. Really, it's really an organic play to your strength kind of approach at this point, Bill.
Hopefully that answers the question.
Okay. No, that's, that's a great starting point. Really, that, that comment was intended to talk about the organic opportunities. Then I think Gregg, you were saying relative to the significant cash that would be generated if the fluid business was sold, that that would be an opportunity for acquisition focus. Would, would you talk maybe how, what areas the acquisitions would likely be appropriate and most value added in terms of bolting on to the to the current Industrial segment and how that would look over time? Maybe what you're trying to create there with time.
Yeah, Bill, I'll, I'll kind of jump in. Look, I, you know, I think that the most near-term focus would be to continue to grow scale in what we do. We, we see ourselves as still a low market share where, you know, consolidation in that space, in an area that we understand, with a margin profile that we like, with proven execution, would remain our primary focus in the near term. Beyond that, I think it's a little premature to talk about exactly what that shape might take. Obviously, we'd be very mindful to the to making sure that anything we do is accretive to the strong performance that we're, we're been demonstrating. Yeah, and, yeah, just to kind of round that out, obviously, we have a very disruptive product.
How can we accelerate the growth rate with that product? As Matthew touches on, it's got to be accretive, and if not, well, then your best use of cash is to ultimately return of capital to, to shareholders. We think there's a lot to explore here.
Great. Thank you both.
Thank you. Thanks, Bill.
Thank you. Once again, that is star one. If you would like to ask a question, we are now holding. Again, please press star one at this time to join the queue. This we do have a follow-up from William Dezellem. Your line is now open.
All right. Actually, I'll, I'll ask at least one more here. There was the reference in the press release to a $2.8 million dollar charge to exit additional fluid operations. Was that the Australia operations that you referenced in the opening remarks?
You had two pieces to it. You did have Australia in there, and then the other one was, there was a charge associated with the stimulation chemical exit that we had talked about on the May call. Again, that just kind of goes back to what we had been saying of, you know, continuing to evaluate areas of the business that are underperforming and lack a clear path, and taking the necessary actions.
Great. Then, a couple more here. You had $11 million of cash benefit from the fluid divestitures. What did, what did that come from?
That was primarily the rundown of the collections associated with that Gulf of Mexico exit. If you recall, part of that, we allowed for the sale of our inventory over a few quarters, and so it was the monetization of that, primarily.
Okay, that's, that's helpful. Lastly, the Industrial revenues were flat sequentially, but the operating income grew $3 million sequentially. Was that mix, or was there something else that was leading to that stellar operating income performance?
... Yeah, you know, as mentioned in my, my comments, you know, you do have a few pieces to it. You know, on a year-over-year basis, pricing was stronger than it was a year ago. The other thing that you are seeing some benefits of, raw material costs are improving from a year ago, and also just the overall operating cost leverage that you're getting as you grow, you know, at the manufacturing level, at the field operational level, et cetera. It was kind of a, a combination of all those factors.
Gregg, some of those factors you just mentioned were versus a year ago, and I was really focused specifically on Q2.
Oh, sorry. Sorry.
versus Q1.
Got it. Sorry. On Q2 versus Q1, you actually, you do have some of those same factors that are in there. The one thing that kind of comes out of that equation, Q2, Q1, is really the pricing side of it on the rental side was fairly flat. You know, we mentioned the service element, service margins. Now, that does fluctuate period to period. That was stronger in Q2 than it was in Q1. Other than that, it's pretty much the same.
Then to what degree does the mix of sales, map sales, skew the margins?
It doesn't really skew it significantly because, you know, when you think about it, on, you know, what is a bigger driver is when you have big mix shifts between rental and service. Because when you look at our margins, of the three lines, rental is the strongest. You have the sales that are in the middle, and service tends to be at the lowest end. You put RNS together, and the incremental profit margin profile of the RNS work is typically fairly in line with the direct sales activit y, so it doesn't really skew it significantly.
Great. Thank you both again.
All right. Thank you.
Thank you. This concludes today's question and answer session. I'll now turn the program back over to Mr. Crotty for any additional or closing remarks.
Thanks, Katie. That'll conclude our call for today. We look forward to hosting everybody on our Q3 conference call. In the meantime, if anybody should have any questions or requests, please don't hesitate in reaching out to me using our email, invest ors@newpark.com.
Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.