Earnings Call Transcript - NPKI Q2 2025

Operator, Operator

Ladies and gentlemen, good day. Thank you for standing by. My name is Jim, and I will be your conference operator. We are happy to welcome you today to this NPK International Second Quarter 2025 Earnings Conference Call. As a reminder, today's session is being recorded. And now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Mr. Gregg Piontek. Welcome, sir.

Gregg S. Piontek, President

Thank you, operator. I'd like to welcome everyone to the NPK International Second 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 in today's call may also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our quarterly earnings release, which can be found on our corporate website. There will be a replay of today's call, and it will be available by webcast within the Investor Relations section of our website at npki.com. Please note that the information disclosed on today's call is current as of August 6, 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 S. Lanigan, CEO

Thanks, Gregg, and welcome to everyone joining us on today's call. We are very pleased with our execution through the first half of 2025, which continued to validate our long-term growth strategy and unique value proposition. We believe that our strong first half results clearly demonstrate that our singular focus on worksite access and our commitment to rental fleet scale, geographic expansion and service quality are being increasingly recognized by our growing customer base. Total second quarter revenues were $68 million, delivering a 5% sequential increase. Pleasingly, while the second quarter 2025 was relatively in line with the second quarter last year, last year's results included a record $30 million from product sales, while this year's revenues reflect a much larger contribution from rental activities. Rental revenues came in at $32 million, reaching yet another single quarter record and representing a 34% increase year-over-year. We believe that the increase in rental revenues provides a more consistent and stable growth profile, supported by strong demand across our core utilities and critical infrastructure customers. As we touched on last quarter, customer rental demand surged late in the first quarter, including several concurrent large-scale transmission projects, which continued through the second quarter. To meet this concentrated surge in customer demand, we leveraged our rental fleet and logistics capabilities as well as our third-party network, demonstrating our ability to scale rapidly and deliver for our customers. Product sales activity also remained robust, generating $22 million of revenue, reflecting continued strength in demand from utility companies and other fleet owners supporting the utilities and critical infrastructure markets. Given the continued demand and robust outlook across our served markets, we maintained our commitment to the expansion of our rental fleet, investing a net $8 million in the second quarter, strengthening our scale, customer responsiveness and ability to serve the needs of the largest critical infrastructure projects. Also consistent with our capital allocation priorities, we used $6 million of cash in the second quarter to purchase 1% of our outstanding shares. As we look ahead to the second half of the year, we are encouraged by the strength in market activity as well as our pipeline of rental projects and product sales heading into the seasonally slower summer months. Given the combination of our strong performance in Q2 and our current visibility into the second half, we have raised our full year revenue and EBITDA expectations for 2025. And with that, I'll turn the call over to Gregg for his prepared remarks.

Gregg S. Piontek, President

Thanks, Matthew. I'll begin with a more detailed discussion of our second quarter and first half results, then provide an update on our outlook for 2025 and our capital allocation priorities. As Matthew touched on, second quarter revenues benefited from the late Q1 broad-based surge in rental demand, which included several large-scale utility infrastructure projects that continued through the second quarter. Total rental and service revenues were $46 million for the second quarter, with rental revenues improving 13% sequentially and 34% year-over-year, while associated service revenues declined 4% sequentially but improved 15% year-over-year. Revenues from product sales remained robust at $22 million for the second quarter, up modestly sequentially, but down $8 million from the record result in Q2 of last year. For the first half of 2025, rental and service revenues have increased 25% year-over-year, while revenues from product sales are relatively in line with the prior year. By industry, our year-over-year growth in rental and service revenues was driven by broad-based demand growth in power transmission, pipeline and general construction, somewhat offset by a lower contribution from the oil and gas sector, while product sales continue to be heavily directed to power transmission. Turning to gross profit. The second quarter result was relatively in line with the prior quarter, with the gross margin primarily impacted by the elevated cross-rental activity in support of the sharp surge in customer demand. Gross margin was 36.9% in the second quarter, down from the exceptionally strong 39% in the first quarter and relatively in line with the 37.2% in the second quarter of last year. Second quarter SG&A expenses totaled $13.7 million, an increase of $1.9 million sequentially and $900,000 year-over-year. The sequential increase is primarily attributable to elevated costs associated with performance-based incentives, including long-term incentive programs linked to the company's share price as well as programs tied to 2025 sales, profitability and other performance targets. The second quarter SG&A also included $300,000 of severance charges associated with our ongoing rightsizing efforts. FX gains provided a modest tailwind to the quarter, driven by the U.S. dollar to British pound currency fluctuation. Income tax expense was $3.5 million in the second quarter, reflecting an effective tax rate of 28%. Adjusted EPS from continuing operations was $0.11 per diluted share in the second quarter compared to $0.12 in the first quarter and $0.10 in the second quarter of last year. Turning to cash flows. Operating activities generated $21 million of cash in the second quarter, including $19 million from net income adjusted for noncash expenses and $2 million of cash provided by a net decrease in working capital. Total investing activities used $6 million, which included $10 million of net CapEx, substantially all of which was invested into fleet expansion, partially offset by $4 million of additional proceeds from last year's divestiture. Additionally, as Matthew touched on, we used $6.2 million to purchase 818,000 shares under our repurchase program, reflecting an average purchase price of $7.58 per share. Looking at the year-to-date cash flows for the first half of 2025, we've generated a total of $30 million of cash from operating activities and $15 million of additional proceeds from the Fluids divestiture using $18 million to fund net capital expenditures and expanding our mat rental fleet by approximately 8% from the end of 2024, while also using $17 million to repurchase shares at an average purchase price of $6.45 per share, reducing our outstanding share count by 3% from the end of 2024. We ended the quarter with total cash of $26 million and total debt of $9 million for a net cash position of $17 million. Additionally, we have $148 million of availability under our new bank facility. At the end of the quarter, we have roughly $4 million of net assets remaining related to the Fluid sale, including the $5 million note receivable bearing interest at 12.5%. Now turning to our business outlook. As disclosed in yesterday's press release, in light of the continued strength in rental project activity and robust product sale demand, particularly within the utilities and pipeline sectors, we have increased our full year 2025 expectations with total anticipated revenues now in the $250 million to $260 million range and adjusted EBITDA of $68 million to $74 million. The midpoint of our 2025 range reflects 17% revenue growth and 29% adjusted EBITDA growth over 2024. Breaking our full year revenue expectation down further, we expect total rental and service revenues to grow in the high teens to low 20s percentage range over 2024, while product sales, which are more difficult to predict, are expected to grow by roughly 10% to 15% over 2024 levels. Our net CapEx expectation remains unchanged at $35 million to $40 million, which includes roughly $10 million of maintenance capital. As for the near-term outlook, we expect to see Q3 rental activity pull back from the exceptionally strong Q2 results, including the effects of the typical summer seasonality in the utility sector, but we expect third quarter rental and service revenues will show similar year-over-year growth as the first half of 2025. On the product sales side, we expect Q3 activity to remain at a similar level to the Q2 results. Q3 gross margin is expected to remain in the mid-30s range, reflecting the ongoing transitory effects of the elevated cross-rent activity. In terms of SG&A, we expect Q3 expense will return to the Q1 level following the elevated incentive costs recognized in Q2. As we discussed previously, we are actively working to streamline our overhead structure for the simplified business, and we expect to drive additional reductions late in the year as our goal of mid-teens percentage of revenue by early 2026 remains unchanged. In terms of taxes, we are still evaluating the full effects of the recent tax legislation. Based on our preliminary analysis, we anticipate the legislation will have a minimal impact on our effective tax rate, though we expect to see additional cash flow timing benefits through the accelerated tax deductions of certain capital investments, which, coupled with our existing U.S. NOL and other carryforward tax benefits, should limit our cash tax obligations 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 also expect to continue returning a portion of our free cash flow generation to shareholders through our programmatic share repurchase program. With the completion of our new facility in June, we now have approximately $175 million of cash and available liquidity, which provides much greater flexibility to support our strategic growth plans. And with that, I'd like to turn the call back over to Matthew for his concluding remarks.

Matthew S. Lanigan, CEO

Thanks, Gregg. We remain very pleased with our strong performance, which we believe continues to validate our unique value proposition and growth outlook. 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 markets. As previously discussed, a big component of this is the effectiveness of our commercial front end, where we remain very pleased with the team's strong execution. Our quoted volumes continue to grow meaningfully year-over-year, while our award rates remain in line with historical levels, resulting in a 33% year-over-year growth in rental revenues for the first half of 2025 with similar year-over-year growth expected in the third quarter. To support this growth, we expanded our mat rental fleet by approximately 13% in 2024 and by an additional 8% in the first half of 2025 as we continue to build on our leading position within the rental market. Our second focus area is on driving operational efficiencies across every aspect of our business. During the quarter, we had some noise associated with certain performance-based incentive costs recognized. However, we continue to make progress in our efforts to streamline our overhead structure to achieve our target SG&A as a percentage 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 continue to execute on programmatic share repurchases while thoughtfully evaluating core strategic inorganic opportunities that increase our market coverage, value, and relevance to customers in key critical infrastructure markets. In closing, I want to thank our shareholders for their ongoing support, our employees for their dedication to the business, including their commitment to safety and compliance, and our customers for their ongoing partnership. And with that, we'll open the call for questions.

Operator, Operator

We'll take our first question today from the line of Aaron Spychalla at Craig-Hallum.

Aaron Michael Spychalla, Analyst

Maybe first for me, you noted you're seeing longer contract durations and increased visibility as a result. Can you just talk a little more about that dynamic, what it means for the business? How many days or months is this? And how that might affect margins? And do you expect this to continue as you kind of look at the pipeline and just demand over the next couple of years?

Matthew S. Lanigan, CEO

Yes. Thanks, Aaron. I'll jump in on that, and Gregg can catch up anything I missed. Look, I think this is a dynamic we've been talking about now for several quarters in terms of our focus on pushing for the larger duration projects. I think the nature of what we're seeing come through the pipeline now is showing a larger percentage of those. I think that's consistent with what you're probably hearing from the larger utilities or contractors as these big transmission projects start to take off. In terms of margin, I think what you're seeing is you'll see some slightly lower service revenues associated with that, but the longer duration rental revenues mean we get some increased utilization on the assets. So net-net, that should be a reasonably strong help to the margins. I think we've seen that the last couple of quarters. So at this point, it looks like we're seeing our pipeline consists of a reasonable percentage of those. So we're hopeful that this is a trend that will continue.

Aaron Michael Spychalla, Analyst

All right. And then just maybe second on the guide. It does imply a little bit more softness in the second half, I suppose. I know you have seasonality, and it's been kind of hot here recently. Can you just talk a little bit about some of the puts and takes in there between the low end and the high end and just trying to think of potential conservatism there?

Gregg S. Piontek, President

Yes. I would frame it in terms of the two different revenue streams on the RNS side. There is always some uncertainty with Q3 seasonality, influenced by how hot or dry the conditions are, which definitely affects the comparisons between Q2 and Q1. Additionally, when considering Q3 compared to the first half of the year, the strong performance in product sales during the first half is noteworthy. As we have mentioned before, this aspect is harder to predict and forecast, so I'm not expecting the same level of product sales in the second half of the year. However, when looking at year-over-year performance, we anticipate a healthy level of growth.

Amit Dayal, Analyst

So with respect to these utility projects, transmission projects, from where you sit, like where do you think we are in terms of the stage of deployment? I guess, are we still in the early stages? Do you still see a pretty decent runway in front of you tied to those tailwinds for that sector?

Matthew S. Lanigan, CEO

Yes. I mean, we've spent a lot of the second quarter at a number of industry events and talking to our customers. And I would say we are reasonably early in this wave of spending. The transmission forecast moving forward from here are very robust. I think if you listen to the utilities, they're all reaffirming or upping their CapEx commitments to transmission infrastructure build-out. So I think the activity is there. Obviously, some of the unknowns are timing related. It would be nice if all of these things just stacked up quarter after quarter, but sometimes either supply chain or other things mean that's not the case. But we're pretty excited about what we're hearing from our customers and the level of activity that they're seeing over the next five years.

Amit Dayal, Analyst

Just my last one, I guess, you have a pretty solid balance sheet, cash flows are positive. Like if you're going to look for potential acquisitions to drive a little bit more growth, where would that come from? And are you seriously considering any efforts on that side? Or are you maybe just waiting to see how the market develops? Just trying to see what the level of urgency you might have in terms of using the balance sheet and the tailwinds you are seeing in the sector to maybe drive additional growth?

Matthew S. Lanigan, CEO

Yes, I think we're in a good position, and we can be very thoughtful about the way we do this. It is something that we are considering. We've been talking about it for a while, but we're not going to be overpaying for things or doing anything that's irrational. We are definitely looking at what we consider close core. We think we understand the risk profile and know what we're doing in this space. So things that are complementary to that and associated with our core market are definitely things that we're looking at. But as you said, we're in a good position. We're not in a rush, and we'll continue to be thoughtful about that.

Alex Rygiel, Analyst

Very nice quarter, Matt and Gregg. A couple of quick questions here. First, as it relates to your fleet expansion year-to-date, is that on track with your plan? And are there some scenarios? And what are the scenarios where you might actually accelerate that this year or into next year?

Gregg S. Piontek, President

Yes, I would say that overall, our CapEx plan is on track. We have been able to achieve a higher level of rental revenue growth due to increased utilization. This has significantly improved our efficiency. The evaluation or increase in this will depend on what we observe in the second half of the year. As we have mentioned before, it is essential to maintain your finished goods inventory to meet market demands, and we will allocate assets to the fleet as necessary.

Alex Rygiel, Analyst

That's helpful. And then geographically, can you talk about some of the markets that you're investing more into your fleet right now?

Matthew S. Lanigan, CEO

Yes. I think if you break it down, definitely, the South has been busy for us along the Gulf Coast, Texas market and moving further east have definitely been strong for the first half. We look ahead and we think markets like the Midwest are going to be strong moving forward from there as well. So I think that's pretty much the way it's breaking down.

Gerard J. Sweeney, Analyst

Just maybe one more question. I got a couple popped up, but maybe slightly different pack. Is there any place that you're not in that you think would offer good opportunity for growth? And if not, how do you move into that area organically or otherwise?

Matthew S. Lanigan, CEO

Yes, Jerry, I think we've touched on it in a couple of calls in the past. Obviously, our presence has been historically around the oil and gas basin. So obviously, the Texas, Louisiana Gulf Coast, we've pushed further east here in more recent quarters. We were strong up in the Northeast. I think the Midwest is an area where we're probably continuing to look to increase our fleet density to make sure we're taking advantage of the opportunity in that market. We have been spreading out. We've talked about our national footprint. We've talked about putting inventory in those markets. I think we're just managing the inventory scale in those markets associated with the opportunity. But the key growth markets are the ones I just touched on.

Gerard J. Sweeney, Analyst

Is some of this just about balancing growth opportunities with managing the income statement? Could you accelerate the process and accept a slight decrease in margins temporarily to achieve faster growth in the upcoming quarters? I'm just curious if that is part of the opportunity.

Matthew S. Lanigan, CEO

Yes. I mean I think at any given point in time, we're assessing whether we need to ramp up the fleet build for future pipeline opportunities. So I think we balance that pretty well. We have resisted the build it and they will come kind of concept here. It's one of the advantages around vertical integration. We don't have to get too far ahead of ourselves from that perspective. As Gregg said, we can carry the inventory and either put it to sales or fleet build. But I'd say at any point in time, Jerry, at the margin, we're kind of looking at what you just described.

Laura Maher, Analyst

Can you hear me?

Gregg S. Piontek, President

Yes.

Laura Maher, Analyst

My first question is, what is the current utilization rate across your fleet? And how does this compare to your target range?

Gregg S. Piontek, President

We do not disclose our specific utilization at any given time. However, our typical range of utilization has been between 60% and 80%, averaging around 70% over the course of the year. In the second quarter, consistent with the past three quarters, we have been running around the high end, close to 80%.

Laura Maher, Analyst

Okay. That's helpful. And then another one, I guess, just with the new administration's infrastructure priorities still evolving, are there any new end markets you guys see picking up?

Matthew S. Lanigan, CEO

Yes, Laura, we will continue to look at things. But as we talked about in the earlier question, the opportunity that we see in the transmission network build-out is significant. We're focusing on making sure we're there to service the key customers and their contractors in that space. Pipeline is another market where we're starting to see some activity grow. So we're making sure we're there. We have a national sales network. They're very glued into their local markets. And if something was to present itself that would benefit from our service and rental capabilities, we'd avail ourselves to it. But we still see the major drivers being that transmission and to a slightly lesser degree, pipeline growth.

William Joseph Dezellem, Analyst

Two questions. First, you've highlighted the pipeline as a strong area for you. However, that seems to contradict reports about the overall pipeline build-out being quite slow. Can you explain why your activity appears to be stronger than the industry trend?

Matthew S. Lanigan, CEO

Yes, Bill, everything we're hearing and seeing in the space is it's certainly having a nice renaissance with the change of administration. So interested in where you're hearing that it's in a particular lull. Our presence again on pipelines typically is in laydown areas and access to the routes and any maintenance and repair activity. We don't have a large presence on the core pipeline stringing operations, but we're seeing that activity levels up substantially, albeit a smaller part of our portfolio than transmission and even the oil and gas side of the business, but we're seeing a healthy rebound. So our pipeline is reflecting that.

William Joseph Dezellem, Analyst

Great. I appreciate that, Matthew. And then in the past, you all have talked about conversions from wood to composites. Do you have any examples or case studies of large-scale conversions from wood to composite that you can share with us?

Matthew S. Lanigan, CEO

Yes. We talked about it in previous sales quarters where we've had traditional timber fleet operators who have come to us and purchased large volumes of composite, recognizing the longer-term economic benefits of that solution for them. This quarter, as we touched on, a lot of our direct sales were through directly to utilities who continue to see the longer-term benefit. Those utilities have traditionally been timber mat customers at some point who are now recognizing that this asset provides them with a longer useful life and a better economic return. So I think they're the kind of sandbox that we would continue to call out, Bill.

Gregg S. Piontek, President

All right. Well, thanks for joining us on the call today. If you have any questions, please e-mail us at investors@mpki.com, and we look forward to speaking with you again next quarter.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference, and we thank you all for your participation. You may now disconnect your lines.