NPK International Inc. Q1 FY2020 Earnings Call

Greetings and welcome to the Newpark Resources First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator instruction: Participants may enter the queue to ask questions during the Q&A. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard, Investor Relations for Newpark Resources. 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 first quarter 2020 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 Dave Paterson, President of the Fluids Business. Following my remarks, management will provide a high-level commentary on the financial details of the first quarter results and near-term outlook before opening the call for Q&A. Before I turn the call over to management, I have the normal housekeeping details to run through. There will be a replay of today's call available by webcast on the company's website at newpark.com. There will also be a recorded replay available until May 20, 2020, and that information is included in yesterday's release. Please note that the information reported on this call speaks only as of today, May 6, 2020, and therefore you are advised that time-sensitive information may no longer be accurate as of the 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 some of those risks, uncertainties and contingencies including the potential impact of COVID-19. 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. Now, with 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. While our focus remains on the health and safety of our employees, their families and the communities where they live and work, we continue to manage through the impact of the COVID-19 pandemic both here in the U.S. and around the world. Thankfully, here at Newpark, we have only a few confirmed COVID cases among our employees. The vast majority of our employees around the world have been able to continue to service our customers through the pandemic as both of our businesses have been considered essential services. On a related note, we are proud to announce that we have recently joined the fight against COVID-19 leveraging our chemical blending capacity and expertise to help meet the increased need for a variety of disinfectants and cleaning products. After recently obtaining the necessary regulatory approvals from the Food and Drug Administration and the Environmental Protection Agency, production of certain cleaning products is now underway at our Conroe chemical blending plant, which I'll cover in more detail in my closing comments. Now turning to the market conditions. The unprecedented collapse of the oil and gas industry created by the coronavirus and the resulting imbalance of supply and demand has caused the price of oil to decline to historic lows. As a result, we moved quickly to adjust our cost structure, including headcount reductions and furloughs, temporary salary reductions for the majority of our U.S. employees including executives and the Board of Directors, and the suspension of company contributions to our U.S. retirement plan. These are tough decisions but necessary to downsize our cost base to match the current and anticipated decline in activity. Fortunately for Newpark, we have been working diligently over the last several years to reduce our dependency on the U.S. shale market, executing strategic actions across both segments. These actions have strengthened our position and diversified our revenue base with approximately 57% of our first quarter consolidated revenues generated outside of the U.S. land E&P market. Over the last several years we've highlighted the importance of that strategy in order to achieve the returns desired by our shareholders. With the unprecedented decline in U.S. land activity and the uncertainty we are now facing, it is more critical than ever that we continue to execute that strategy. We recognize that the recent collapse in oil prices will likely have long-lasting effects in the U.S. land market requiring swift structural changes to further right-size our fluids business. As discussed in previous calls, we have already undertaken significant actions to reduce our U.S. fluids operational footprint, driving towards a more variable cost structure. But in light of the COVID-19 pandemic and the resulting longer-term supply-demand imbalance, we have accelerated and expanded efforts to reduce our cost structure as well as the level of invested capital in the U.S. land business. Outside of U.S. land, it's important to note that while we expect that all markets will see some impact from COVID and the collapse in oil prices, we anticipate our heavy IOC and NOC concentration in both the International and Gulf of Mexico markets will result in greater revenue stability relative to U.S. land, which is consistent with our experience in 2015 and 2016. Further, with the EMEA region, I'd like to highlight that our Cleansorb subsidiary acquired last year was recently awarded a contract extending our supply of patented breaker products in Saudi Arabia for an additional two years. With the North American volatility, our expanding role in the Middle East is now more meaningful than ever to our fluids business. In our mats business, it's important to highlight that we are not facing the same situation as our fluids business. Apart from the immediate coronavirus headwinds impacting the timing of both product sales and utility projects, our medium to longer term outlook remains unchanged. Through our diversification efforts in recent years, we've shifted our dependency away from the U.S. land E&P markets. The energy infrastructure and other non-E&P markets now generate roughly 60% of our total Mats segment revenue while the revenue contributed from oil-focused basins has declined to less than 20%. Accelerating our growth in the utilities and other non-E&P markets remains a strategic focus as we look beyond the reopening of the U.S. economy. With the medium to longer-term outlook and competitive landscape in the utilities and non-E&P markets remaining intact, our strategy in the mat segment remains unchanged. Now turning to the specifics of the quarter. Our Fluids Systems performance was relatively in line with our expectations, posting first quarter 2020 revenues of $133 million, relatively flat sequentially. North American Fluid Systems revenues improved $4 million sequentially as seasonal strength in Canada and continued growth of IOCs in the Gulf of Mexico were largely offset by a $7 million sequential decrease in U.S. land. For the first quarter, U.S. land contributed $58 million of revenue in Fluid Systems. Outside of North America, revenues pulled back by $6 million sequentially to $46 million in the first quarter, reflecting a combination of the anticipated timing of customer activities as discussed on February's call, as well as the unanticipated COVID-related delays in March. In the Mat segment, rental and service activity remained relatively stable during the quarter aside from a modest COVID-related slowdown caused by logistical restrictions in March. Product sales declined by $23 million sequentially to $4 million in the first quarter. This decline was due to a combination of the anticipated pullback from the record Q4 results along with delays in a number of sales orders in the U.S. and European markets by customers citing growing market uncertainty related to the COVID shutdown. Finally, I'd like to note that consistent with our plans identified on February's call, we began to address our December 2021 convertible note maturity by purchasing 15% of our outstanding bonds during the quarter. We ended the first quarter with a net debt of $114 million, including a cash balance of $49 million and a total debt balance of $163 million. Despite the impact of a temporary lag in receivable collections near the end of the quarter and growth in our Mats inventory due to order delays, we generated positive free cash flow during the first quarter. We remain committed to taking the necessary actions to preserve free cash flow generation through the oil and gas industry downturn. We have a solid balance sheet with available liquidity under our credit facility and meaningful opportunities to reduce our working capital as we did in 2015 and 2016, which positions us well to settle not only our debt maturities but also fund our ongoing operational needs. With that, I'll hand the call over to Gregg to discuss the detailed financials of the quarter.

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. In the Fluid Systems segment, revenues from U.S. land declined 10% sequentially to $58 million in the first quarter, reflecting a combination of a 4% reduction in U.S. land rig count, a modest softening in market share and a decline in the number of wells drilled per rig with the declines being felt across most U.S. land basins. The softness in U.S. land was partially offset by a stronger contribution from the offshore market as Gulf of Mexico revenues improved to $16 million in the first quarter, reflecting a $3 million sequential increase. In Canada, revenues reflected the typical Q1 seasonal uptick improving to $13 million in the first quarter, an $8 million sequential increase. Outside of North America, as we discussed on February's call, due to the timing of activities within key contracts, our international revenues pulled back 12% sequentially to $46 million in the first quarter with operations in the Middle East and Africa showing the largest declines. In addition to the anticipated decline based on project scheduling, our EMEA region also experienced unanticipated COVID-related disruptions late in the quarter, most notably in Italy. On a year-over-year basis, our Fluid Systems revenues declined 17% compared to Q1 of 2019. This $28 million decline includes a $39 million reduction in U.S. land revenues offset by $10 million of growth in the Gulf of Mexico, which benefited from our expansion into completion fluids, while our international revenues have also increased 4% year-over-year. As discussed on our February call, we initiated action plans in Q4 to right-size our operational footprint and drive a more variable cost structure in the U.S. land market. With the recent impact of COVID and the longer-term industry headwinds that we now face, we've significantly expanded and accelerated these actions. To date, we have exited four of our U.S. facilities and we are evaluating the closure of several additional facilities based on the evolving longer-term outlook. In addition, we are taking actions to reduce our centralized U.S. support infrastructure to adjust to the market slowdown. Overall, we've reduced our U.S. fluids workforce by nearly 30% year-to-date while also implementing furloughs and reductions in employee compensation and benefits, collectively reducing our annualized personnel expenses by approximately $25 million. While the majority of these actions were taken within the past month, our first quarter Fluid Systems results included $1.2 million of charges related to inventory write-downs and employee separation costs as highlighted in yesterday's release resulting in a $2 million operating loss and an EBITDA of $3 million in the first quarter. Turning to the Mat business. Total segment revenues declined 42% sequentially to $32 million in the first quarter, largely reflecting the anticipated pullback in product sales following the record fourth quarter result. As Paul touched on, in addition to the anticipated pullback in product sales from the strong Q4 demand, our first quarter was negatively impacted by a number of orders totaling more than $10 million in revenues being delayed by customers citing COVID-19 uncertainty resulting in $4 million of product sales in the quarter. Although our rental projects experienced a modest impact from COVID as we exited the first quarter, total rental and service revenues remained flat sequentially and relatively in line with our expectations. From a mix perspective, roughly 60% of our total segment revenues in the quarter was derived from the energy infrastructure and other non-E&P markets. Of the $13 million of revenues derived from E&P markets, more than half of that was generated in the gas-focused basins in the Northeast. Comparing to the first quarter of last year, Mat segment revenues declined $19 million, largely reflecting a $14 million rental and service revenue decline in the U.S. land E&P markets along with a $4 million decline in product sales. With the $23 million sequential decline in product sales, the Mat segment operating income declined from the fourth quarter resulting in first quarter operating income of $3 million and EBITDA of $8 million. Total corporate office expenses declined $2.3 million sequentially to $6.7 million in the first quarter, as compared to $9 million in the fourth quarter. The sequential decline was driven in part by lower charges associated with workforce reductions. The first quarter includes $200,000 in severance charges as compared to $1.1 million in the fourth quarter. The remaining sequential decline is due to reductions in personnel expense and lower spending related to M&A activity. On a year-over-year basis, corporate office expenses declined by $5 million, primarily reflecting the impact of a $3.4 million charge in the prior year associated with the retirement policy change along with lower legal and professional spending and personnel costs. SG&A costs were $25 million in the first quarter compared to $28 million in the fourth quarter and $31 million in the first quarter of last year. The sequential decrease primarily reflects lower severance charges as well as decreases in legal and professional spending and personnel expense. The year-over-year decline largely reflects the $4 million charge for the retirement policy change in the prior year, as well as lower personnel expense and legal and professional spending. We purchased $14.5 million par value of our convertible notes for $13.8 million during the first quarter. However, despite purchasing the notes at a $700,000 discount to par, the accounting rules required a $1.6 million non-cash write-off of unamortized debt discount and issuance costs associated with the purchased notes, resulting in a $900,000 loss on the extinguishment of debt. With the benefit of the decline in interest rates and the convertible note repurchases, interest expense declined to $3.2 million in the first quarter, of which roughly half reflects non-cash amortization of facility fees and discounts. As of the end of the first quarter, the weighted average cash borrowing rate on our debt facilities was approximately 3.2%. The first quarter provision for income taxes was $200,000 despite reporting a pretax loss of $12 million in the period. This result reflects the impact of the geographic composition of our pre-tax losses, where the tax expense on our foreign earnings is higher than the tax benefit received from U.S. losses. Our net loss in the first quarter was $0.14 per share which includes charges of $0.02 per share as highlighted in yesterday's press release. This compares to a net loss of $0.19 per share in the fourth quarter, which includes charges of $0.19. Net income was $0.01 per diluted share in the first quarter of last year. Now turning to our near-term outlook. In Fluids, we expect to see meaningful revenue headwinds in the second quarter driven by a sharp decline in U.S. land activity, as well as the seasonal decline in Canada. In April, our U.S. land revenues have trended closely with the overall market rig count declines and we expect that to continue in the near term. In the Gulf of Mexico, we expect our activities will remain significantly more stable than U.S. land, subject to any COVID-related disruptions which to date have fortunately not had a meaningful impact on our U.S. offshore operations. Looking outside of North America, although we also expect our activities will remain more stable than U.S. land, our operations have not been immune from the global impact of COVID-19 with restricted movements of personnel, quarantines of staff and logistical limitations causing activity disruptions and project delays, particularly in the EMEA region. The Middle East remains the most resilient while activities in Europe and Africa are seeing the impact of COVID restrictions and project delays with Italy showing the most significant impact. While the duration and magnitude of the ongoing health pandemic are very difficult to predict, we currently estimate our international revenues will decline by at least $10 million sequentially in the second quarter. In terms of operating margin, while we are continuing to take the aggressive but necessary cost actions in the U.S. and targeted international markets we recognize it will take a few quarters for the actions to drive improvement to the bottom line. Further, while we are currently ramping up production of cleaning products, we expect the business line will provide only a modest benefit to Q2. Consequently, we anticipate the Fluids segment loss will increase in the second quarter. It's important to highlight that the majority of the invested capital in the Fluids business consists of inventories and receivables with the segment carrying roughly $250 million of net working capital as of quarter end. As we right-size the business in impacted markets, we expect to drive proportional reductions in net working capital over time, which will provide a tailwind to cash flows. In the Mat segment, although our rental and service activity has remained fairly stable, visibility is very limited at this point as customer projects remain dependent on a variety of COVID-related factors including the issuance of governmental permits, as well as potential supply chain and logistical restrictions. To the extent that these factors impact our customers, we could expect to see some short-term work stoppage or delays in project timing until the economy reopens. Similarly, on the product sales side, we expect customer orders to remain limited until they gain confidence in the broader economic recovery. That said, customer quoting activity remains robust, both for rental projects and product sales. And with the majority of our business now levered to non-E&P markets, we expect the Mat segment to improve to more typical performance as the economy reopens. Regarding corporate office spending, we expect Q2 expenses will remain near the $7 million level. With respect to taxes, we expect we will continue to see a modest net tax expense as the expense associated with profits from international operations will likely outweigh the tax benefit from U.S. losses. Turning to cash flow, first quarter cash provided by operating activities was $4 million, substantially all of which is attributable to a net decrease in working capital. Cash used in investing activities totaled $3 million in the quarter, which, consistent with the previous quarter, demonstrates our ability to adjust course in managing our net capital investments and cash flow. As Paul mentioned, we are aggressively pulling the levers to maintain continued free cash flow generation. In light of the changing market conditions, we have eliminated all non-critical capital investments, which we expect will reduce our total capital spend for the remainder of 2020 to roughly $10 million. Further, with the anticipated market softness, we expect strong cash generation from reductions in our roughly $280 million of net working capital, particularly as we right-size our U.S. Fluids business. Our leverage remains modest with a total debt balance of $163 million and a cash balance of $49 million as of the end of March resulting in a total debt-to-capital ratio of 24% and a net debt-to-capital ratio of 18%. Our primary debt components include the remaining $86 million of convertible notes due December 2021 and $79 million outstanding on our U.S. asset-based bank facility, which runs to 2024. We currently have $82 million of availability on this facility. Although substantially all of our $49 million of cash on hand resides in our international subsidiaries, we are executing actions intended to reduce this balance in the coming quarters, and we plan to use the repatriated cash to reduce our outstanding debt. We are continuing to take the actions necessary to prepare for the December 2021 maturity of our convertible notes, which remains more than a year and a half away. We currently anticipate that our available cash on hand, cash generated from operations and availability provided by our existing U.S. asset-based loan facility will provide sufficient liquidity to support our ongoing operations and our convertible note maturity. As we've noted in the past, it remains our intention to fund the maturity without a need to access public capital markets. It should also be noted that we have additional sources of liquidity available, should the need arise. We have meaningful U.S. real estate as well as assets within our European operations that can be used to create additional liquidity through secured financing or alternative arrangements. And with that, I'd like to turn the call back over to Paul for his concluding remarks.

Thanks, Greg. As we navigate through these turbulent times and the uncertainty of when the economy will restart, I want to highlight three themes at the heart of the Newpark value proposition that I believe will drive growth opportunities and continue to set us apart. First, we will continue to provide outstanding service to our E&P and non-E&P customers around the world, whether we are providing access solutions to utility companies in North America, our drilling support to our oil and gas customers in the desert of Algeria, or at 8,000 feet of water in the Gulf of Mexico, outstanding service quality has always been and will continue to be a hallmark of Newpark. Second, we will continue to focus on growing our Mat business in the energy infrastructure market where utility companies are recognizing our performance advantages, including our positive impact on the environment. And third, we will continue to pursue opportunities for growth in our international Fluids business predominantly in the EMEA region where we expect longer term activity to remain more stable than in the U.S. Market volatility is not new to Newpark, but certainly the demand destruction created by the COVID pandemic is unprecedented in our industry's history. We at Newpark intend to face the storm head on and emerge a stronger company. Not unlike the 2015-2016 cycle, the current crisis provides an opportunity for us to change the way we do business and reposition ourselves within the marketplace. When the industry rebounds, which it will, we will be able to capitalize on our competitive advantages to drive consistent free cash flow and returns on invested capital. So let me provide details on one example of how we are quickly leveraging our capabilities and responding to the unprecedented market changes. Our Conroe chemical blending plant was opened in 2016, originally to provide specialty products to the U.S. E&P market. Our highly skilled personnel and best-in-class facility are well equipped to meet the chemical blending and packaging needs for a number of industries and these capabilities are highlighted in a video that can be found on our website. Having received our first customer order, we recently generated our first revenues from cleaning products and we expect additional customer orders to follow. The speed at which we've been able to adapt this facility in response to the changing market demands is a direct reflection of the ingenuity of our people and the flexibility of the Conroe Blending and Packaging Facility. I firmly believe that our world and our way of life will change as a result of the COVID virus with higher long-term demand for disinfectants and cleaning products being one of those lasting changes. This line of business provides us with yet another avenue of expansion outside of the volatile oil and gas market. Finally, I'd like to remind you that even in the face of these unprecedented times, our balance sheet and liquidity positions remain solid. We will continue to take the necessary actions to strengthen our balance sheet, harvesting cash from working capital and minimizing capital expenditures as we adjust our footprint in the oil and gas market and continue our strategic transition. We've been through downturns before, and we know what levers to pull to right-size our business. We have an experienced team that's capable of making the tough calls and moving quickly to adjust to the ever-changing landscape. 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 at Newpark as well as their continued focus on safety. We'll now take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. Operator instruction: To ask a question, please enter the queue using the system command. Our first question comes from the line of Praveen Narra with Raymond James. Please proceed with your question.

Good morning, guys. I want to start on the cost initiatives and how we should think about how those are being enacted and how much more we should expect to see. When we think about what's taking place today and then what may take place down the road, is it looking at each individual facility and ensuring that that facility is cash flow or EBITDA positive and then cutting there, or is it saying, okay, well we expect this market to be this size and therefore we will cut our scale to that eventual size willing to take on some period of EBITDA or free cash flow negative periods?

Sure. So this is Gregg. I'll start and then hand it over to David. I think it's important to highlight as we look at the cost initiatives that we are really targeting the most impacted markets, which here is the U.S. The international markets we expect beyond COVID to be much more stable, the Mat business much more stable. So we're really talking about the U.S. Fluids business. The cost cutting that we have taken to date has really been keeping pace with activity coming down. And that's one of the keys to it: moving very quickly on that. But we recognize as we go forward here, you're going to have markets that have different long-term outlooks than the prior cycle in 2016. And that's where we get into what I described a little bit on the call regarding some structural changes that we'll need to evaluate; if the market is no longer expected to be a market of prior size, how do we restructure? David, you want to add to that?

Yes. Good morning, Praveen. When I look at the Fluids business, I look at three geographical pillars. And when I look at these pillars today, there's different dynamics in each of them. U.S. land is dropping. If you look at U.S. land today, it looks very similar to what it looked like in May 2016. Now, we expect a further softening in the rig count, so we will be taking further actions in U.S. land to structure for that rig count at the end of Q2 and early Q3. Gulf of Mexico looks very resilient. We have good exposure with the IOC customers and we've diversified into the completion fluids space. So we see steady activity with the majors in the Gulf of Mexico. The biggest uncertainty we have is in the international markets. The rigs have been impacted internationally because of the COVID situation rather than economic or oil price factors. So we will probably have better visibility in the international markets in Q2. So the big focus for us is really U.S. land and building a scalable structure that we've talked about in prior calls on that.

Yes, and to your point, our goal is to address all regions that would be negative EBITDA or cash and to right-size the business. What we're looking at is whether rig counts could be as low as 240 to 250 and all of our financial modeling is around hitting those kinds of levels and right-sizing the operations so we are not bleeding cash in the U.S.

All right. And that's really important for us to hear. Very happy to hear that you guys were committed to free cash flow positive through the downturn. 1Q was important to us. I guess when we think about you guys are obviously variablizing cost structure significantly—can we be sufficiently variable so that, and I know any given quarter can be lumpy, but over any meaningful period of time, we should still be EBITDA positive?

I think that's a tough one to call because this market is moving so fast and we have not only rigs dropping off but also COVID disruption. You take a step back and look at the longer-term view and, as Paul mentioned, the focus is on making sure that we can maintain cash flow positive. But in the interim periods, as you've seen in the past when we're taking cost out, there is a lead-lag in how fast you can take it out, so you can't necessarily maintain it all the way through immediately. That's what we're focused on getting to within the coming quarters.

That's our goal and there is always that lead-lag in how fast activity is dropping versus how quickly we can remove expenses. But we're committed to doing that, although it's tough to commit to exact timing right now.

Right. If I could ask one more on working capital: you guys don't seem terribly concerned about the collectability of receivables. But we've seen significant pain, particularly among your U.S. customer base on the E&P side. Can you give us more color on that and how we should be thinking about collectability and how that translates into working capital benefit for 2020 or any way to interpret that further?

Yes. A couple of things: part of this is our customer base. You have to remind yourself that on a global level roughly 40% of our revenues in the Fluids business is coming from IOCs and NOCs, so that obviously has a very different credit-risk profile. U.S. is a challenging environment, and we do have the ability to secure our receivables through liens, etc. I think history is the best guide. We went through a very challenging time in 2016, and when you look back at our bad debt experience during that period, it was not significantly different from our historical experience. There was no significant elevation to bad debt then.

Yes. Just speaking about the quality of receivables: we're not bashful about placing liens against wells. Quite honestly, most unconventional wells produce and we're part of the construction process of those wells, so that's what we've used in prior cycles and we will continue to do in this cycle to ensure the quality of receivables necessary to generate the free cash flow that we've talked about.

Very helpful, thank you very much, guys.

Operator instruction: Our next question comes from the line of George O'Leary with Tudor, Pickering, Holt & Company. Please proceed with your question.

Good morning, guys. Adding on to one of Praveen's questions: I think about Fluids and Mats from that near-term versus the second half of the year decremental margin standpoint. It sounds like near-term decrementals are probably going to be a little bit harsher than they historically are in a normal environment, and then you would expect the margin pressure to update in the back half of the year. I wonder if you could talk about: one, is that the right way to think about it, and two, how that differs between the Fluids business and the Mats business?

Sure. Taking one by one, on the Fluids side, historically our decremental margins have run in that 20% to 30% range, which is the natural flow-through you'd expect to see in the near term absent more structural cost reductions. That's where David went into more detail about what we're evaluating. We're taking the actions and have taken the actions to date that have really been keeping pace with declines, but to improve on that we'll need more structural actions, and those will take a few quarters to show results. On the Mat side of the business, there is not anything structurally changing; the high decremental this quarter was tied to Mat sales and that was in the typical range of what we usually see. The question for Mats is revenue pickup timing, which is a COVID question more than anything. When customers regain comfort with the economic outlook, we would expect incremental margins from that revenue to be in the typical ranges historically seen.

Okay, that's very helpful. You provided good color around the balance sheet and leverage and your ability to deal with that. As you generate incremental free cash flow as we progress through 2020 and reduce working capital and resize the business, is the first priority for that cash to continue to whittle away at the debt balance at a discount? Is there any desire to hold cash on the balance sheet? How do you think about uses of that free cash flow and what your first and second priorities might be?

I think it's a balance. You want to continue to build liquidity as you take working capital down, which is important to fund operations. But there's no question we also have our eye on the December 2021 maturity and we want to be in a position to settle that while also funding operations. Immediately when we collect cash it will reduce our bank revolver, and so that's reducing our overall debt and enhancing our liquidity. So the proceeds will likely be used to reduce revolver balances and enhance liquidity while keeping the convertible maturity in mind.

Okay, great. And I'll just sneak one more in, if I could. If you think about international onshore markets to offshore color, especially with respect to the Gulf of Mexico, that framing was helpful. For international onshore markets for the Fluids business, any pockets of relative resilience, any geographies where you're seeing more pronounced pressure internationally on onshore?

Hey George, the Middle East remains the most resilient. The challenge we have in the Middle East is travel restrictions impacting crew changes and the ability to get people to well sites, but we've worked through that very well. I'm proud of how the team has handled it; they've been away for extended periods from their families and we really haven't missed a beat. But it is extremely challenging. I expect the Middle East to remain strong and resilient. Around Europe there's a lot of rigs being shut down because of the COVID situation and the ability to move people, products and rigs between countries. So there's a lot more uncertainty there, but once the dust clears and visibility improves, I'm fairly optimistic of a return to meaningful activity. I think North Africa probably has a bigger question mark in terms of activity, but again it's a very dynamic picture and it will probably be a month or so before we have clarity on the resumption of key activity in that part of the world.

Great, thank you, guys, very much for the color.

You bet, George.

This concludes our question-and-answer session. I'd like to hand it back to management for closing remarks.

Thank you, once again, for joining us on the call and for your interest in Newpark. We look forward to speaking with you again next quarter.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.