NPK International Inc. Q3 FY2025 earnings call

· Strong third quarter performance with 56% year-over-year total revenue growth and 37% growth in rental and service revenues. · Achieved highest rental fleet utilization on record, but late quarter transportation inefficiencies led to approximately $1 million of elevated costs impacting gross margins in Q3. · Product sales remained robust at $25 million. · Invested $12 million in rental fleet in Q3, increasing full-year fleet investment by $10 million. · Accelerated manufacturing capacity expansion planning due to strengthening market outlook. · Completed process modification at plant, achieving ~5% increase in production levels. · Strong cash generation: operating activities provided $25 million, free cash flow $13 million; repurchased over 400,000 shares and built cash balance by $10 million.

Total third quarter revenues were $69 million. Rental and service revenues for the third quarter were $44 million, with rental revenues down 7% sequentially but up 57% year-over-year, and associated service revenues flat sequentially but up 9% year-over-year. Product sales revenues were $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 increased 29% year-over-year, while product sales revenues increased 21% year-over-year.

· Increased full-year 2025 revenue expectation to $268-$272 million and adjusted EBITDA to $71-$74 million. · Q4 rental revenue expected to set new quarterly record; Q4 product sales expected to pull back from Q3 but gross margin to return to mid-30s. · SG&A expected to remain elevated in Q4 due to incentives and ongoing projects. · 2026 net CapEx expectation to be evaluated with focus on rental fleet growth.

· Transportation inefficiencies leading to elevated costs in Q3 with some carryover impact in Q4. · Uncertainties in manufacturing capacity expansion costs and timing. · Impact of share price performance on SG&A incentives.

Q: 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?

A: 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.

Q: On the capacity expansion plans, 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?

A: Yes, it's a little early for us on that one. We've ticked off the planning. I mean it's -- we will continue to work through it, but I would expect that we would be putting something in line with about half of our existing capacity in that range is what we would be looking at, at this point. And then we're really working hard on the cost, Aaron. It's a pretty wide range. So I'm nervous about getting anyone fixated on a given figure. The outside cost that we're looking to bring down would be what we spent on our last plant expansion. We continue to think we can do better than that. So we feel like it will be south of that figure.

Q: 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?

A: Yes. I would say that we're kind of -- they don't play a big part in our business at all really, Lauren. Most of everything we do is direct to the end customer rather than intermediated. I mean, at the margin, there are the occasional time, particularly international sales, not that they've played a big part in this year. But at this point, we're not really seeing it as a meaningful influence on our strategy.

Q: Is the fleet expansion CapEx tracking proportionately with revenue growth?

A: It's -- over the long term, it should. This year, it's short -- there's a couple of things to that. Number one is we have really improved the level of utilization. So we're basically getting more revenue generation from our existing fleet. And then obviously, you also have a gap here that we're filling currently with cross rents. And that has the margin compression impact, and that's in part why we're accelerating investments into the fleet to help drive that cost reduction and get a better margin on that.

Q: 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?

A: Yes. Good question, Gerry. I mean, we are seeing some increased traction in the areas that we did kind of see with our commercial. During the quarter, I think the Mid-Atlantic, and we've called out the Midwest a few times. We did see meaningful quarter-on-quarter growth in those areas. Again, when you're coming from a smaller base there, those numbers aren't as material as some of our historical basis, but we're very encouraged with the progress we're making there. So I would say our commercial efforts to grow our -- the breadth of our distribution geographically is paying off. And then this quarter, you could definitely see we called out large projects, extensions, et cetera. They were more in our established territories. So that I would put more as an industry growth. So I feel there's a nice blend of both, probably industry-leading over the geography at this point on an absolute basis.

Q: In terms of your raising CapEx, I know that you're talking about -- you're planning for some new manufacturing capacity. Is that more in terms of adding lines at existing manufacturing locations? Or are you actually looking to expand your location as well?

A: Yes. Min, I'd say we're not kind of settled on that one yet. Part of the planning that we're doing is to look at what the right answer there is. There's obviously a lot of pull towards the [indiscernible] facility based on the space we have at the site and the investment we already have there. But I'd say we're not settled on that one yet as we continue to look at optionality.

Q: Just given these plans, should we assume that directionally CapEx for 2026 will be higher than 2025?

A: 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.

Q: What percentage of revenue was U.K.? And can you just talk about the growth dynamics you're seeing there?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: Yes. I think we called it out. I mean midstream has been very dormant for many years. Previous administrations, I think, were very much curtailing activity in that market space. We're seeing a lot more activity there. Again, the majority of that activity is met with a different matting technology that we don't have in our fleet for the mainstreaming operations there, but definitely around laydown areas and egress and so on, we have a role to play. So generally speaking, the stronger that industry, the more opportunity we will have there. And so -- but when you really think about it, the majority of the spend and focus will be around the electrical utility transmission spend over the next few years, the way we see just the relative contributions.

Q: 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?

A: 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.

Q: As you -- I think this is the second quarter this year that you have had some inefficiencies tied to customers changing project scope, time line, et cetera. Does that imply that ultimately, you want your inventories to be higher and to give you more flexibility to respond to these situations? And then if the answer is yes, do you even have the capacity with the level of activity in the market to increase your inventories enough to solve the riddle that we're talking about here?

A: Yes. I think I'd say the answer is yes, Bill. Obviously, the higher our utilization gets, you're more responsive to moving things further than you would ideally like to. And that's what happened to us in Q3 here. So the CapEx that we're spending on our fleet, the planning we're doing on manufacturing expansion is all designed to help manage that challenge and get the margins back into the business. When it comes to capacity, if we look at '25, we ran -- we started running the plants 24/7 in April. So year-on-year, we're going to have incremental capacity going into '26. We talked about our debottlenecking activities, which give us incremental capacity. We've always got the cross-rent flex that we've been working. So we feel comfortable that we're able to meet our growth requirements and get better at our planning efficiency. But honestly, Bill, it's during a quarter, projects you planned on coming up to speed new projects. If that doesn't happen exactly the way it was planned, you're always going to have a level of inefficiency. And I would say when you're running at the high utilizations we are, that's a heightened challenge for you. So -- but we feel like we can manage it.