Earnings Call Transcript - NPKI Q3 2025

Operator, Operator

Thank you for holding. My name is Tina, and I will be your conference operator today. I would like to welcome everyone to the NPK International Third Quarter 2025 Earnings Call. Thank you. It is now my pleasure to turn the call over to Gregg Piontek. You may begin.

Gregg Piontek, President and Chief Executive Officer

Thank you, operator. I'd like to welcome everyone to the NPK International Third Quarter 2025 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 contain 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 npki.com. Please note that the information disclosed on today's call is current as of October 31, 2025. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I'd like to turn the call over to our President and CEO, Matthew Lanigan.

Matthew Lanigan, President and Chief Executive Officer

Thanks, Gregg, and welcome to everyone joining us on today's call. We are very encouraged by our third quarter performance that continued to showcase the robust outlook for our served markets and our ability and agility in responding to our customers' needs. The quarter produced very strong year-over-year growth that reflects the strengthening demand for our products and services. We also saw modest quarter-over-quarter growth, a result of our purposeful focus on maximizing our rental asset utilization during a traditionally slower seasonal quarter. Our total third quarter revenues of $69 million is very pleasing given Q3 has traditionally seen a more meaningful pullback in utility activities during the warmer summer months. On a year-over-year basis, our total revenues improved 56%, while rental and service revenues improved 37%. Focusing on our rental and service activity, which we believe represents the stickiest and highest long-term driver of returns, we recently achieved our highest rental fleet utilization on record as we responded to multiple short notice project extensions and expansions. As we have mentioned in the past, we are proud of our fleet scale and our operational flexibility to be able to meet these changing customer demands. However, the combination of short notice, accelerated start times and high utilization does lead to certain transportation inefficiencies as matting inventory is relocated. While we expect some level of this inefficiency due to changing customer demands, the timing and extent experienced late in the third quarter led to approximately $1 million of elevated costs that negatively impacted our gross margins in Q3. We anticipate some carryover impact of these elevated costs in early Q4. However, we believe they will be recovered over the project term, allowing us to maintain our typical gross margins over the longer term. Product sales activity also remained robust, generating $25 million of revenue, reflecting continued strength in demand from multiple utility customers. Given the continued demand and robust outlook across our served markets, we maintain our commitment to the expansion of our rental fleet, investing a net $12 million in the third quarter and increasing our full year fleet investment by $10 million to meet the anticipated demand growth as we approach 2026. I also wanted to highlight that with the strengthening market outlook underpinned by continued upward revisions in forecasted utility transmission spend as well as a strengthening midstream and general infrastructure outlook, we accelerated our manufacturing capacity expansion planning efforts during the quarter. We expect these efforts to continue into early 2026 before moving on to procurement and construction activities. We are also making progress with our previously mentioned debottlenecking activities at our plant, which are being executed in parallel with the manufacturing capacity expansion planning. Notably, we recently completed process modification, achieving roughly a 5% increase in production levels, which further supports our growth plans and operational efficiency objectives. Finally, I wanted to touch on cash flow generation and capital allocation during the quarter. We are once again very pleased with the strong cash generation in the third quarter with cash provided by operating activities of $25 million and free cash flow of $13 million. During the quarter, we used $3.4 million to repurchase more than 400,000 shares at an average price of $8.45, while also building our cash balance by $10 million. And with that, I'll turn the call over to Gregg for his prepared remarks.

Gregg Piontek, President and Chief Executive Officer

Thanks, Matthew. I'll begin with a more detailed discussion of our third quarter and year-to-date results, then provide an update on our outlook and capital allocation priorities for the remainder of 2025. As Matthew touched on, third quarter revenues came in above our expectations, benefiting from our strategic focus on maintaining strong rental utilization through the seasonally slower summer months, along with several late quarter large-scale mobilizations and robust product sale demand. Total rental and service revenues were $44 million for the third quarter, with rental revenues down 7% sequentially through the seasonally slower Q3, but improving 57% year-over-year, while associated service revenues were flat sequentially and improved 9% year-over-year. Revenues from product sales also remained robust at $25 million for the third quarter, up 12% sequentially and more than doubling the third quarter of last year. For the first 9 months of 2025, rental and service revenues have increased 29% year-over-year, while revenues from product sales increased 21%, both primarily driven by significant demand growth in the power transmission sector. Turning to gross profit. The third quarter result was impacted by roughly $1.7 million of costs in the quarter, related to the late quarter transportation costs required to meet customer project timelines, along with manufacturing planning projects and other charges. Gross margin was 31.9% in the third quarter, down from 36.9% in the second quarter and up from 27.5% in the third quarter of last year. Third quarter SG&A expenses totaled $13.3 million, a decrease of $400,000 sequentially and a $2.3 million increase compared to the prior year. The third quarter was again impacted by elevated costs associated with performance-based incentives, including long-term incentive programs linked to the company's share price as well as those tied to 202525 revenues, profitability and other performance targets. The third quarter SG&A also included roughly $500,000 of project costs associated with strategic planning efforts and our ongoing ERP implementation. Income tax expense was $3 million in the third quarter, reflecting an effective tax rate of 33% as our year-to-date effective tax rate increased modestly to 28%. Adjusted EPS from continuing operations was $0.07 per diluted share in the third quarter compared to $0.11 in the second quarter and breakeven in the third quarter of last year. Turning to cash flows. Operating activities generated $25 million of cash in the third quarter, including $16 million from net income adjusted for noncash expenses and $9 million of cash provided by a net decrease in working capital. Net CapEx used $12 million, which includes $10 million of net investment in fleet expansion. Additionally, as Matthew touched on, we used $3.4 million to purchase 402,000 shares under our repurchase program, reflecting an average purchase price of $8.45 per share. Looking at year-to-date cash flows for the first 9 months of 2025, we've generated a total of $55 million of cash from operating activities, along with $14 million of additional proceeds from the fluids divestiture using $31 million to fund net capital expenditures and expanding our mat rental fleet by approximately 13% from the end of 2024, while also using $20 million to repurchase 3 million shares at an average purchase price of $6.70 per share reducing our outstanding share count by nearly 4% from the end of 2024. We ended the quarter with total cash of $36 million and total debt of $10 million for a net cash position of $26 million. Additionally, we have $144 million of availability under our bank facility. Now turning to our business outlook. As disclosed in yesterday's press release, considering the continued strength in rental project activity and robust product sale demand, particularly within the utility sector, we have increased our full year 2025 expectations with total anticipated revenues now in the $268 million to $272 million range and adjusted EBITDA of $71 million to $74 million. The midpoint of our 2025 range reflects 24% revenue growth and 32% adjusted EBITDA growth over 2024. Breaking our full year revenue expectation down further, we expect total rental and service revenues to grow by a mid-20s percentage and product sales to grow by a high teens percentage range relative to 2024 levels. With the current strong demand and outlook carrying into 2026, we're increasing our full year net CapEx expectation for 2025 to $45 million to $50 million with over $40 million invested into the rental fleet. As for the near-term outlook, we expect to see Q4 rental revenue set a new quarterly record, surpassing the level achieved in Q2. On the product sales side, we expect Q4 revenues to pull back from the exceptionally strong third quarter, likely in the upper teens range. Q4 gross margin is expected to return to the mid-30s range, which includes some continued transitory impacts of the elevated transportation and cross-rent activity. In terms of SG&A, we expect Q4 incentive-related expenses will remain elevated in light of our share price performance and projected full year results against 2025 performance targets. Additionally, we expect Q4 SG&A will also be impacted by costs from the ongoing strategic planning and ERP implementation projects, which will likely keep SG&A around the Q3 level in the fourth quarter. Our goal of mid-teens SG&A percentage of revenue following the completion of our ERP implementation in early 2026 remains unchanged. Though it's worth noting that we expect 2026 SG&A will continue to carry elevated incentive costs associated with the company's 2025 share price performance. In terms of taxes, we expect our effective tax rate to remain in the upper 20s range. Though with the benefit of existing NOLs and other tax carryforwards, along with accelerated deductions under the recent OB3 legislation, we expect our cash tax obligations will remain limited for the next several years. In terms of our capital allocation strategy, we continue to prioritize investments in the growth of our rental fleet and expect to continue returning a portion of free cash flow generation to shareholders through our share repurchase program. And with that, I'd like to turn the call back over to Matthew for his concluding remarks.

Matthew Lanigan, President and Chief Executive Officer

Thanks, Gregg. As discussed previously, our strategy for 2025 remains focused on three foundational elements to drive long-term shareholder value creation through scale enhancement, operating efficiency and return of capital optimization. Our primary focus remains on achieving consistent revenue growth through the scale-up of our high-return rental business, which includes a combination of geographic expansion and market share growth within our currently served U.S. and U.K. markets. Over the course of 2025, we have focused heavily on our commercial front-end scale-up to drive our geographic expansion, and we remain very pleased with the team's continued strong execution. Our quoted volume is growing meaningfully year-over-year, while our award rate remains in line with historical levels, resulting in a 40% year-over-year growth in rental revenue for the first 9 months of 2025. To support this growth, we remain committed to expanding our mat rental fleet, which grew by approximately 13% in 2024 and by an additional 13% in the first 9 months of 2025 as we continue to build on our leading position within the rental market. As I touched on in my opening remarks, in light of what we see as a strengthening multiyear capital cycle for our utility customers and the sustained market conversion from timber to composite, we have also kicked off manufacturing expansion planning. Our second focus area is on driving organizational efficiencies across every aspect of our business. During the quarter, we began the rollout of a new ERP system, a process that will continue into early 2026 as we look to further streamline our overhead structure and achieve our targeted SG&A as a percent of revenue in the mid-teens by early 2026. And our final priority is the allocation of capital beyond our organic requirements. With a strong balance sheet and a disciplined approach, we remain committed to our programmatic share repurchase program while also actively evaluating several core strategic inorganic opportunities that increase our market coverage, value and relevance to customers in key critical infrastructure markets. As we close out the final quarter of 2025 and sharpen our focus on 2026, I'm exceptionally proud of our team's execution and how we have positioned the company. Now a full year removed from our disposition of the fluids business, we have a world-class team, meaningful growing scale and manufacturing capacity and a strong balance sheet to support our capital allocation priorities. We expect to deliver over 20% revenue growth and 30% adjusted EBITDA growth in 2025. And with the building blocks in place and a robust outlook in our key served markets, I believe we are positioned to continue to deliver double-digit growth in 2026 and beyond. 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 partnerships. And with that, we'll open the call for questions.

Operator, Operator

Our first question comes from Aaron Spychalla with Craig-Hallum.

Aaron Spychalla, Analyst

First for me, you're obviously increasing expansion in the rental fleet and a lot of your customers are increasing CapEx plans. You're starting to get incrementally better project visibility from some of these longer duration projects. Can you just talk about how the overall pipeline has been growing year-over-year or just some kind of figures as you kind of look towards 2026?

Matthew Lanigan, President and Chief Executive Officer

Yes. Thanks, Aaron. I'll take that one. Look, if you look at the rate of growth that we have kind of commented on a year-over-year basis, it's fair to assume that the pipeline growth is in line with that, maybe a little outstripping that. What we are seeing is with these longer duration projects, we're getting a little bit longer to look at those. So we are seeing some elongation of the time to award as part of that. So kind of encouraging on both fronts, pipeline building in that kind of range that I quoted there and then longer duration visibility that you mentioned earlier in your question. So I think all of that is shaping up well into '26.

Aaron Spychalla, Analyst

Got you. And then on the capacity expansion plans, I mean, accelerating the efforts there. Can you just give some more detail on what this might add from a percentage standpoint and any details on kind of cost potential and timing?

Matthew Lanigan, President and Chief Executive Officer

Yes, it's a bit early for us on that. We've completed the planning phase. We will continue to work through it, but I would expect to align with about half of our existing capacity in that range. We're also focusing on reducing costs. It's a broad range, so I'm hesitant to have anyone fixate on a specific number. The external costs we aim to lower would be those associated with our last plant expansion, and we believe we can improve upon that, so we anticipate that it will be below that figure.

Operator, Operator

Our next question comes from the line of Laura Maher with B. Riley Securities.

Laura Maher, Analyst

My first question, how are you thinking about industrial distributors in your competitive landscape? Are they contributing to additional competition? Or are they primarily a source of sales for you right now?

Matthew Lanigan, President and Chief Executive Officer

I would say that they don't play a significant role in our business at all, Lauren. Most of what we do is directed to the end customer rather than through intermediaries. Occasionally, especially in international sales, there may be some involvement, but it hasn't been a major factor this year. At this point, we're not viewing it as having a meaningful impact on our strategy.

Gregg Piontek, President and Chief Executive Officer

Yes. I think one of the things to highlight here is, yes, on the product sales side, that's one of the major changes that we saw over the past year. As we had talked about in 2024, a lot of our product sales went to operators that had fleets. This year, the sales are much more concentrated with end user utility companies, which is really the preferred end customer that we're looking to build the relationships with.

Laura Maher, Analyst

Okay. And then maybe just one more. Is the fleet expansion CapEx tracking proportionately with revenue growth?

Gregg Piontek, President and Chief Executive Officer

Over the long term, it should. This year, it's short due to a couple of factors. Firstly, we have significantly improved utilization levels, allowing us to generate more revenue from our existing fleet. Additionally, we're currently filling a gap with cross rents, which has an impact on margin compression. This is partly why we are accelerating investments into the fleet to help reduce costs and achieve better margins.

Operator, Operator

Next question comes from the line of Gerry Sweeney with ROTH Capital.

Gerard Sweeney, Analyst

Sticking top line, you called out transmission and distribution and midstream being strong. But curious how much of growth is industry growth? And how is that coming into play as well as the opportunity to continue to expand maybe geographically as well as maybe with additional customers?

Matthew Lanigan, President and Chief Executive Officer

Yes, that's a great question, Gerry. We are noticing increased traction in certain areas that we have previously highlighted in our commercial efforts. Specifically, during the quarter, we saw significant growth in the Mid-Atlantic and have mentioned the Midwest several times. While the growth numbers might not seem substantial given the smaller base, we are very encouraged by the progress we're making. Our efforts to expand the geographical breadth of our distribution are indeed yielding results. Additionally, this quarter, we highlighted large projects and extensions primarily within our established territories, which I consider more as industry growth. Overall, I believe there is a healthy mix of both industry and geographical growth at this stage.

Gregg Piontek, President and Chief Executive Officer

Yes. I think that the whole material conversion from composite to wood is important to consider. We don't expect that mix to change significantly this year because everyone is simply keeping pace with industry growth throughout the rest of the year.

Gerard Sweeney, Analyst

Yes. Then separately, on the margins, I think you obviously called out the transportation side. But you also made the comment that you may pick that margin back up. I wasn't sure if the margins will return to, we'll say, the mid-30s or whatever the exact number is, just as they're getting settled on a go-forward basis or there's an ability to maybe make up some of that lost margin. I'm not sure if that was pricing or other opportunities.

Gregg Piontek, President and Chief Executive Officer

I believe this ties back to our previous comments about the business, which we need to evaluate throughout the year, and we aim to maintain growth in the mid-30s. However, there will be exceptionally strong quarters, like Q1, where we reached 39% due to high utilization. Conversely, there will be slower quarters that introduce some inefficiencies. Additionally, as we increase our utilization levels, we've experienced higher transportation costs, but we do not expect this to persist. While some variability will always be present, we anticipate that Q4 will return to our typical mid-30s range.

Gerard Sweeney, Analyst

Okay. I'm going to squeeze in one quick one. I know you said 2. But just on that front, logistics, transportation, et cetera, was this more of a strategic move to get in with more clients, keep bigger clients happy and you saw longer rental times with some of these projects or juxtaposed to maybe at some point in the future, you can build in some better pricing and stuff to manage with some of these shorter-term projects? Quickly accelerating projects, I guess.

Matthew Lanigan, President and Chief Executive Officer

Yes, this was entirely related to a key strategic customer that had needs very late in the quarter, and we felt it was essential to respond to them. We will continue to support this customer because our long-term relationship is strong and beneficial for both parties. Regarding our margin recovery efforts, they are linked to our capacity expansion and improving coordination across our network to better manage our inventory. Unfortunately, we expected to assist this customer with some materials from other projects, but those opportunities did not materialize. This led us to scramble during the planning stage, where everything appeared promising initially. As projects were delayed and we couldn’t utilize that inventory, we had to resort to a backup plan. It was never our intention to compress margins in this way; it was simply a situation we encountered. Moving forward, we will continue to analyze our logistics efficiency and manage our processes accordingly.

Operator, Operator

Your next question comes from the line of Min Cho with Texas Capital.

Min Cho, Analyst

Congratulations on a strong quarter. I have a couple of questions. Regarding your increased capital expenditure, I understand you're planning to enhance manufacturing capacity. Are you adding lines at your existing manufacturing sites, or are you also considering expanding your locations?

Matthew Lanigan, President and Chief Executive Officer

Yes, Min, I would say we haven't made a final decision on that yet. We are currently assessing what the best approach would be. There is significant interest in the facility due to the available space and our existing investment there. However, I would say we are still exploring our options.

Min Cho, Analyst

Okay. And then obviously, just given these plans, should we assume that directionally CapEx for 2026 will be higher than 2025?

Gregg Piontek, President and Chief Executive Officer

Tough to say that. I think we'll talk more about our 2026 expectation in the next call. Obviously, we stepped up the CapEx here in the current year, which will now get us upper teens growth in the fleet. I think our '26 expectation is going to be a function of how we see the year shaping up as we get closer to it. But I think it is important to highlight that's one of the important pieces of this business is we can adjust our CapEx in the fleet based on the demand that we see in the marketplace.

Min Cho, Analyst

All right. And then just finally, I know you don't talk about your U.K. business a lot, but what percentage of revenue was U.K.? And can you just talk about the growth dynamics you're seeing there?

Gregg Piontek, President and Chief Executive Officer

So yes, the U.K. business, I mean, as you look at it on the rental and service side, it's a high single-digit percentage contributor to the overall portfolio, so the smaller pieces. But a lot of the same dynamics as what we see in the U.S. They have a lot of infrastructure projects, a lot of plans here in the coming years that's going to require an increase in spend and also an increasing recognition in the marketplace of the differentiation of the composite mats over the alternative products.

Operator, Operator

Your final question comes from the line of Bill Dezellem with Tieton Capital.

William Dezellem, Analyst

Well, let's start with the name. It's Bill Dezellem. And I have a couple of questions as you probably would guess here that the utilities, would you talk to us about their mindset towards rentals versus purchases today with this accelerated demand versus how they may have been thinking in the past, if there's any difference at all?

Matthew Lanigan, President and Chief Executive Officer

Yes, Bill, there's no one answer across the utilities here. I think, generally speaking, utilities have shown us that they have an appetite to purchase some portion of their fleet requirements. Again, we talk to the economic incentives they have internally to spend capital and get a return of and a return on, on that. So we see that trend continuing. I think what we're seeing is with the scale of what they're needing to achieve here over the next few years, they're also recognizing that they need strong rental partners to help them, strong rental and service partners to help them through with that workload. So we're seeing them lean on both sides. It's been like that. I mean I think coming out of COVID, we saw them pull back on sales a little bit as they were looking to spend their capital on things that the supply chain was saying were perhaps more strained. So they wanted to secure those items to make sure they had what they needed for their projects. I think as supply chains are opening up a little bit, they're looking more broadly at their potential capital categories and matting is certainly one that we've seen this year, they're bouncing back towards. So I hope that answers your question, Bill.

William Dezellem, Analyst

That is helpful. And then relative to nonutility markets, are you seeing any new or other markets that are demonstrating meaningful potential? Or is the opportunity really centric on utilities?

Matthew Lanigan, President and Chief Executive Officer

Yes, we've noted that midstream activities have been quite stagnant for several years due to prior administrations limiting market engagement. However, we're now observing increased activity in that area. Most of this activity involves a different matting technology that we do not currently have in our fleet for midstream operations. Nevertheless, we do have a role in laydown areas and egress. In general, the healthier that industry is, the more opportunities we'll encounter. However, the bulk of spending and attention will primarily be on electrical utility transmission over the next few years, based on our assessment of the contribution dynamics.

Gregg Piontek, President and Chief Executive Officer

Yes. When you look at the year-to-date numbers compared to last year, the growth in the RNS segment is primarily coming from the utility sector. As Matthew mentioned, midstream is improving, but it’s starting from a low base. Overall, this is offsetting a modest decrease in the upstream sector, so the oil and gas industry is relatively flat year-on-year.

William Dezellem, Analyst

That's helpful. And since then the last question, I'm going to keep going here a little more, if I may. The M&A, you referenced that your eyes are wide open. Would you provide kind of some strategic insights in terms of what you are looking to accomplish with the M&A?

Matthew Lanigan, President and Chief Executive Officer

Yes. I think we've covered this on previous calls, Bill. Our focus now is really on close core, what we do today and then just looking to see how we can accelerate our penetration of markets where we believe that we could play a bigger role. So I think you can expect that to be where we're spending our time.

William Dezellem, Analyst

Nothing has changed there.

Matthew Lanigan, President and Chief Executive Officer

Correct.

William Dezellem, Analyst

And then one additional question, please. Given that this is the second quarter this year where you've experienced inefficiencies related to changes in customer project scopes and timelines, does this suggest that you would prefer to increase your inventories to enhance your ability to respond to these circumstances? If so, do you have the capacity, considering the current level of market activity, to expand your inventories sufficiently to address the issue at hand?

Matthew Lanigan, President and Chief Executive Officer

Yes, I would say yes, Bill. As our utilization increases, we find ourselves more frequently having to move things further than we would prefer. This is what happened to us in Q3. The capital expenditures we are making on our fleet and our plans for manufacturing expansion are all aimed at addressing that challenge and restoring margins. Looking ahead to 2025, we began operating the plants 24/7 in April, which means we will have additional capacity available year-on-year as we move into 2026. We've also discussed our debottlenecking efforts, which contribute to our incremental capacity. Additionally, we are always working on cross-rent flexibility. We are confident in our ability to meet our growth needs and improve our planning efficiency. However, Bill, during a quarter, if projects that were anticipated to ramp up do not progress as planned, it can lead to some inefficiencies. When operating at our current high utilization rates, this becomes a greater challenge for us, but we believe we can manage through it.

Operator, Operator

Good luck with the ongoing high-class problems. And with no further questions in queue, I will now hand the call back to management for closing remarks.

Gregg Piontek, President and Chief Executive Officer

Great. Thanks for joining us on the call today. Should you have any questions or requests, please e-mail us at investors@npki.com, and we look forward to hosting you again on our next quarterly call. Thanks.

Operator, Operator

Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.