KLX Energy Services Holdings Inc (KLXE) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the KLX Energy Services Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Perlman, Treasurer and Senior Director of Investor Relations. Sir, you may begin.

Thank you, Bridget. Good morning, and thank you for joining us. Today, we are here to discuss KLX Energy Services' financial results for the full year and fourth quarter period ended January 31, 2019. The company's earnings news release, which was issued earlier this morning, presents these results. If you haven't received it, you'll find a copy on our website.

During 2018, the management completed the merger of the Aerospace Solutions business of KLX, Inc. with The Boeing Company, spin-off of the Energy Services business into an independent public company, the amendment of its $100 million asset-based lending facility, the issuance of $250 million of senior secured notes due 2025 and the acquisition of Motley Services. The company incurred approximately $30 million of onetime costs associated with these activities, approximately $2 million of which was incurred in the fourth quarter. The company will therefore report both GAAP results and financial results adjusted to exclude the costs associated with the aforementioned activities, which are collectively referred to as costs as defined.

We will begin with remarks from Amin Khoury, Chairman and Chief Executive Officer of KLX Energy Services. Also on the call this morning is Tom McCaffrey, Senior Vice President and Chief Financial Officer.

For today's call, we have prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the KLX Energy Services website at klxenergy.com. In addition, copies of the slides are posted on our website for you to refer to.

Before we begin, we have some additional information to cover. Any forward-looking statements that we make are subject to risks and uncertainties. And as always, in our prepared remarks and our responses to your questions, we will rely on safe harbor exemptions under the various securities acts and our safe harbor statements in the company's filings with the Securities and Exchange Commission. We will address questions following our prepared remarks. At that time, the operator will provide Q&A instructions.

Now I'll turn the call over to Amin Khoury.

Thank you, Michael, and good morning, everyone. I'm pleased to report financial results for our first full fiscal quarter as a stand-alone public company. During the quarter, we successfully completed the integration of the recently acquired Motley business in just 90 days, which speaks volumes with respect to our organizational structure and our powerful IT resources and systems. In addition, we made important progress in the commercialization of our newly launched proprietary tools. In fact, fourth quarter organic downhole production solutions revenues, which includes our proprietary dissolvable plugs, debris-less flotation collars, composite plugs, wet shoe bypass sub, toe sleeves and liner hangers, increased about 43% over the same period in the prior year and increased approximately 16% as compared to the third quarter.

During the quarter, we also completed the divestiture of certain excess assets in our Northeast/Mid-Con segment, resulting in an approximate $4 million gain, which was largely offset by new product introduction and Motley integration costs.

As a stand-alone public company, KLX Energy Services is recognized as a premium service provider of a broad range of services to top-tier E&P operators. The company's expanding footprint of high-quality differential equipment and highly competent personnel, supported by an integrated platform, is beginning to enable the company to deliver best-in-class solutions across all major U.S. onshore geographic regions and allows customers to simplify their operational planning and execution by sourcing from one provider.

For the full year, we delivered strong revenue growth of approximately 55%, which was driven by a double-digit percentage increase in the number of new customers and a significant increase in the breadth of services provided to existing customers. In addition, we successfully introduced a number of new product service lines or PSLs and delivered a significant earnings turnaround.

Excluding the costs associated with the Boeing merger, the spin-off, the amendment, the issuance of the $250 million in notes and the acquisition of Motley, adjusted net earnings improved by $65 million during the year, from a loss of about $9 million in 2017 to a profit of $57 million in 2018. In addition, we ended the year with $164 million in cash, an undrawn $100 million credit facility, and we delivered a return on invested capital of 16%.

For the fourth quarter, revenue growth from our newly introduced PSLs, including the DHPS PSL, the Tempress HydroPull tool in combination with our patented Havok motor bearing assembly, along with the addition of Motley's large-diameter coiled tubing business, help to offset the impact of the reduction in completion activity, which was brought about by the 44% decline in oil prices, from $76 a barrel on October 3 down to $42 a barrel on December 24. Notwithstanding these fourth quarter headwinds, the company turned in a solid fourth quarter performance, with revenues up approximately 53% to approximately $144 million, including Motley, and adjusted EBITDA up almost 200% to approximately $32 million as compared to the same period in the prior year.

As we look ahead to 2019, we're confident that our expanding portfolio of products and services, complemented by our newly introduced proprietary PSLs, will continue to drive both growth in our customer base and growth in our share of customers' expenditures.

On today's call, we will review the current oilfield services market, provide an update on our new proprietary tools, discuss our full year and fourth quarter 2018 financial performance and discuss full year 2019 guidance.

Let's begin by reviewing the oilfield services market. Through the third quarter of 2018, strong oil macro conditions, including increasing demand and disciplined production from OPEC and international non-OPEC members, supported improving oil prices, which peaked at about $76 a barrel in October, a 3-year high. In the fourth quarter of 2018, the oil macro environment significantly weakened driven by stronger-than-expected global production, easing production cuts by OPEC and its allies, concerns relating to a possible economic slowdown in China and waivers on Iranian export sanctions. This resulted in oil prices declining by over 40% in just 3 months, from $76 a barrel in early October down to $42 a barrel by December 24.

During this period, completion activity was significantly curtailed, as reflected by a decline in the number of frac cores of approximately 20% in the Permian alone. Also contributing to the decline in completion activity were the Permian takeaway capacity issues. Since the beginning of 2018, the overall DUC count has increased approximately 30%. The Permian, which accounts for approximately 50% of the total DUC count, now stands at approximately 4,200 drilled but uncompleted wells, an increase of approximately 75% year-over-year and approximately 20% as compared to the third quarter. We believe this trend will reverse and create a significant increase in completion activity as additional pipeline capacity comes online in the second half of 2019.

Since the end of the fourth quarter, we've seen oil prices rebound from December lows, supported by international production cuts. The U.S. shale sector currently appears to be on a trajectory to drill and complete more than 20,000 wells this year, an 8% increase over 2018, if WTI oil prices stabilize around $55 to $60 per barrel. This increase in activity would mark the highest number of wells drilled since 2014. Moreover, completion activity, again, dependent upon stable oil and gas prices at current levels, is set to outpace drilling on a basin-by-basin basis as operators begin to draw down the large inventory of DUCs.

We would now like to update you on the progress we've made on our new proprietary tools. As reported in the prior quarter, we partnered with an engineering firm to codevelop a magnesium alloy-based line of dissolvable plugs. Our proprietary dissolvable plugs deliver all the benefits of a traditional frac plug but without the need for bottom-hole intervention for removal. Our dissolvable plugs have been deployed in approximately 90 wells for over 30 customers with superior results compared to competitive products. Our plugs dissolve quickly and reliably, resulting in faster time to production. Our plugs are effective in a wide range of operating temperatures and salinity, including temperatures ranging from 80 degrees to 275 degrees Fahrenheit. And our plugs do not require millout, thus saving time and cost.

Next, let's discuss our new proprietary flotation collar. KLX flotation collar is the only casing flotation system on the market that introduces 0 debris into the wellbore and requires no specialized plug sets to operate. It is used in extended horizontal applications to reduce friction forces and better allow the efficient construction of extended lateral. The KLX flotation collar is designed to be simple, consistent and highly reliable in extended horizontal applications.

And finally, let's discuss our cooperative marketing agreement with Tempress, a business of Oil States International, Inc., for collaboration with respect to their HydroPull tool. The HydroPull tool, in combination with our own patented Havok motor bearing assembly, complements our large-diameter coiled tubing product service line in servicing extreme extended-reach laterals. This combination of tools dramatically reduces the friction drag and extends the lateral reach of the tubing by delaying the onset of helical buckling and lockup. We've successfully run the HydroPull tool on numerous wells above our own proprietary Havok downhole motor, which boasts the industry's only all-Polycrystalline Diamond Compact bearing design. These tools have proven to be a formidable combination delivering superior results for our clients.

Further, we have clearly determined that we are successfully leveraging our coiled tubing assets to pull through our non-frac high-pressure pumping, wireline, thru-tubing and certain other services.

Let's turn to Slide 3 and review our excellent full year 2018 results. The revenues were $495 million, an increase of approximately $175 million or about 55% as compared to the same period in the prior year. Revenue growth was driven by a double-digit percentage increase in the number of new customers and a significant increase in the breadth of services provided to existing customers. Revenue growth included an approximate 42% increase in Rocky Mountains segment revenues, an approximately 54% increase in Northeast/Mid-Con segment revenues and a 70% increase in Southwest segment revenues.

Adjusted operating earnings and adjusted operating margin of $52.7 million and 10.6% improved by approximately $73 million and 1,700 basis points, respectively, as compared to the same period in the prior year. Adjusted EBITDA and adjusted EBITDA margin were $107 million and 21.6%, respectively.

Adjusted net earnings and adjusted net earnings per diluted share were $56.8 million and $2.81 per diluted share, increases of $65.4 million and $3.24 per share, respectively, as compared to the prior year period. And full year return on invested capital was 16%. So all in all, 2018 was a pretty good year.

Let's now turn to Slide 4 and review our Rocky Mountains full year 2018 results. Full year 2018 Rocky Mountains segment revenues of $179.7 million represented approximately 42% revenue growth as compared to the same period in the prior year, driven primarily again by significant increases in both the number of active customers and the breadth of services provided to existing customers.

Gross profit increased about 71% on the 42% increase in revenues. Adjusted operating earnings, excluding costs as defined, were $17.4 million, an increase of $16.8 million. And adjusted EBITDA was $36.8 million or 20.5% of revenues, an increase of $19.6 million.

Let's turn to Slide 5 and review our Northeast/Mid-Con segment performance. Full year 2018 Northeast/Mid-Con segment revenues of $129 million represented approximately 54% revenue growth as compared to the same period in the prior year. The increase in revenues was also driven primarily by significant increases in both the number of active customers and the breadth of services provided to existing customers.

Gross profit increased about 160% on the approximate 54% increase in revenues. And adjusted operating earnings, excluding costs as defined, increased $31.3 million to $21.9 million. Adjusted EBITDA increased by approximately $34 million to $38.7 million, representing an adjusted EBITDA margin of 29.9%.

Let's turn to Slide 6 and review our Southwest segment performance. Full year 2018 Southwest segment revenues increased 70% to $186 million, driven primarily again by increases in the number of customers and the breadth of services provided to existing customers. Southwest segment also benefited from the addition of Motley's large-diameter coiled tubing business. Southwest segment gross profit increased approximately 300% on the 70% increase in revenues.

Adjusted operating earnings, including costs as defined, were $13.4 million, an increase of $25 million. Adjusted EBITDA increased by $29 million to $31.5 million.

Let's now turn to Slide 7 and discuss our fourth quarter 2018 consolidated results. Fourth quarter 2018 consolidated revenues of $143.9 million represented 52.6% revenue growth as compared to the same period in the prior year. Our consolidated results reflect an approximate 20% increase in Rocky Mountains segment revenues, an approximate 28% increase in Northeast/Mid-Con segment revenues and an approximate 109% increase in Southwest segment revenues. Obviously, Southwest segment revenues benefited from the November 5, 2018, acquisition of Motley.

Fourth quarter adjusted operating earnings and adjusted operating margin of $14.4 million and 10% improved by approximately $15 million and 1,000 basis points, respectively, as compared to the same period in the prior year.

Adjusted EBITDA was $31.9 million and represented a solid 22.2% EBITDA margin. Adjusted net earnings and adjusted net earnings per diluted share were $11.2 million and $0.55 per diluted share, increases of $8.5 million and $0.42 per share, respectively, as compared to the same period in prior year.

We've continued to see strong growth in our customer base, accompanying the increase in the breadth of services provided in each geographic segment. During 2018, we achieved a double-digit percentage increase in the number of customers served as compared to the same period last year. Moreover, the number of customers that generated over $3 million in quarterly revenues and the number of customers that generated over $5 million in quarterly revenues both increased more than 100% as compared to the same period last year.

Let's now turn to Slide 8 and review our fourth quarter 2018 segment financials, beginning with our Rocky Mountains segment. Fourth quarter 2018 Rocky Mountains segment revenues of $43.6 million represented approximately 20% revenue growth as compared to the same period in the prior year. The increase in revenues was again driven by increases in both the number of customers and the breadth of services.

Rocky Mountains segment gross profit increased 27%, and adjusted EBITDA was $7.8 million, an increase of 47%. In 2019, we plan to further broaden out our PSL footprint in the Rockies, including the rollout of large-diameter coiled tubing services to certain specific customers, which further enables the pull-through of our non-frac high-pressure pumping, DHPS, wireline, thru-tubing and other complementary services.

Let's turn to Slide 9 and review our Northeast/Mid-Con segment performance. The fourth quarter 2018 Northeast/Mid-Con segment revenues of $32.7 million represented about 28% revenue growth as compared to the same period in the prior year. Adjusted EBITDA was $11.4 million, an increase of $8 million or 235% on the 28% increase in revenues. In 2019, we plan to further broaden out our PSL footprint in the Mid-Con, including the rollout of large-diameter coiled tubing and all of the additional pull-through services, again, to specific customers who have already requested our new services.

Let's turn to Slide 10 and review the fourth quarter results for the company's Southwest segment. Fourth quarter approximate 109% increase in revenues in the Southwest segment benefited primarily from the Motley acquisition. So notwithstanding the fourth quarter commodity price decline and Permian takeaway constraints, we were able to generate a gross profit increase of about 258%. And adjusted EBITDA was $12.7 million, an increase of $10.5 million or almost 500% as compared to the same period in the prior year.

Let's now take a moment and review our financial position on Slide 11. As of January 31, cash on hand was approximately $164 million. There were no borrowings outstanding under the company's $100 million credit facility. Total long-term debt of $250 million less cash resulted in net debt of approximately $86 million, and the company's net debt-to-net capital ratio was approximately 20%.

For the year ended January 31, 2019, net cash flow provided by operations was approximately $62 million. Capital expenditures were approximately $79 million, excluding approximately $5 million in deposits on equipment to be received in 2019. CapEx spending reflects the company's strategy to broaden out our footprint in each geographic segment. 2018's returns on invested capital was 16%.

Let's now briefly review our 2019 guidance. The company is confirming previously provided full year 2019 guidance. The company's guidance again assumes an average WTI price of oil of $55 per barrel and a range of about $50 per barrel to about $60 per barrel for the full year 2019. Our guidance also assumes an average price of natural gas of about $2.75 per million BTU for the full year 2019.

As mentioned earlier, during 2018, management completed the spin-off of the Energy Services business, the merger of the aerospace business with The Boeing Company, the amendment of its asset-based lending facility, the issuance of the senior notes and the acquisition of Motley. The company incurred about $30 million of onetime costs associated with these activities, and as a result, the company reported both GAAP and financial results adjusted to exclude the onetime costs.

In 2019, the company does not expect to report financial results adjusted for onetime costs, where either the company will report GAAP results as well as EBITDA adjusted to exclude noncash compensation expense and net earnings adjusted to exclude both noncash compensation expense and amortization.

For the full year 2019, the company is focused on broadening out its PSL footprint in each geographic region, rolling out its higher-margin proprietary PSLs, including our newly acquired large-diameter coiled tubing PSL and related complementary services. The rollout of these services will impact operating costs as we have hired and begun the training of numerous personnel in advance of the specific regional service launches. The cost of personnel hired and trained prior to product launches is included in our 2019 financial guidance. The rollout will also impact CapEx as we add new large-diameter coiled tubing spreads and complementary services in the Mid-Con and Rockies.

Let's turn to Slide 12 and review our full year 2019 guidance, which includes the aforementioned prelaunch mobilization costs. So revenues are expected to increase by about 50% to approximately $750 million. EBITDA, adjusted to exclude noncash compensation expense, is expected to increase approximately 75% to approximately $190 million, representing an approximate 25% adjusted EBITDA margin. Net earnings and net earnings per diluted share, adjusted to exclude noncash compensation and amortization expense, are expected to increase approximately 70% and 60%, respectively, to about $97 million per net earnings and approximately $4.50 per diluted share.

Capital expenditures are expected to be approximately $100 million, reflecting investments to roll out large-diameter coiled tubing and related services to the Mid-Con and Rockies geo regions, thereby enabling each geographic segment to fulfill its commitment to specific customers, including the delivery of the broader range of services required by those customers. Return on invested capital is expected to be about 20%.

With that, I will turn the call back over to Michael for the Q&A portion of this morning's call.

Thank you, Amin. I'll now turn the call over to Bridget for the Q&A portion of today's call. Bridget will provide instructions on how to ask a question. Bridget?

(Operator Instructions) Our first question comes from the line of Brad Handler with Jefferies.

Amin, the thought process going forward does seem pretty clear, but maybe I'll ask you to retrace just a little bit. If we circle back to 3 months ago, you launched, you gave some guidance for EBITDA for the fourth -- for your fourth fiscal quarter. I know things came in a little bit light. The circumstances obviously makes that -- make a lot of sense. But how should we think about how important it is in your guidance for things to get back to normal, if you will, right, for that 8% growth in completed wells to take place? I'm just trying to get a sense for how the risk -- and is that how you're thinking about handicap of the risk associated with the guidance you're giving today, considering the fourth quarter did come in a little bit lighter than you expected it to be?

Brad, you're correct. I mean, the fourth quarter results did fall short of our expectations. However, commodity prices were clearly below our guidance-dependent range, right, so with fourth quarter oil prices dropping by about 45% from $76 a barrel on the 3rd of October down to $42 a barrel on Christmas Eve. The way we think about this is that unless oil prices remain in the approximate range of about $55 and gas prices around $2.75, that our guidance would be impacted if oil prices dramatically decline. I mean, if our customers drill and complete fewer wells and they lay down rigs, and they don't require our services, then our revenues will be negatively impacted. So -- however, I would say that the fourth quarter showed a terrific improvement as compared to the same quarter of the prior year, and we delivered solid EBITDA, $32 million of EBITDA in a challenged fourth quarter. So I think if your point is that our guidance must necessarily be dependent on the health of the market and the -- and commodity prices, clearly, you're correct. So the way we think about it is that for the full year, the company had a wonderful year and an excellent earnings turnaround, with the company reporting a $65 million increase in adjusted net earnings. Now we had an $8.6 million loss last year, and we've reported a $57 million profit in 2018 and ended the year with $164 million in cash and $100 million -- and an undrawn $100 million credit facility, and we delivered ROIC of 16%. I mean, a really good year and a terrific performance compared to the fourth quarter of the prior year, albeit that you are absolutely correct that we -- our fourth quarter did fall short of our guidance, and our guidance was dependent upon stable oil and gas prices, which weren't in the fourth quarter.

Fair enough, fair enough. No, I appreciate you just sort of fleshing that out.

Sure.

Okay. As a follow-up question, maybe a couple, a multipart one as it relates to Motley, please. I think in terms of growth plans for coiled tubing, we've heard about 3 on order. Can you please confirm that that's still the capital asset add planned for '19?

Well, actually, it's about double that. We are getting -- we have pressure from some of our customers to introduce coiled tubing services, and we will be putting 2 spreads in the Rockies and 2 spreads in the Mid-Con during 2019, and we are increasing our capacity in the Permian. So we will -- so of our $100 million in CapEx, you should think about it that almost half that amount is for coiled tubing spreads.

Okay. And then just on the fourth quarter performance for Motley, can you comment, how much was it impacted by the slowdown in the overall environment? Or did you hit that $30 million? I think you were targeting roughly $30 million in revenue for...

No, Motley was -- we -- I can't give you the whole thing because Motley's business has been integrated into our business. But I can tell you about coiled tubing because it's a specific product line. And coiled tubing services were down substantially in the fourth quarter, obviously negatively impacted by the reduction in completion during the quarter.

(Operator Instructions) Our next question comes from the line of John Watson with Simmons Energy.

The full year guidance implies $47 million to $48 million of adjusted EBITDA per quarter for the year. Can you walk us through the quarterly progression, how we get there and maybe just other levers you can pull to move from the $32 million in this past quarter to $48 million per quarter for the year?

Yes. We are not guiding to $48 million per year. We're guiding to $190 million for the...

Excuse me, $48 million per quarter.

Yes. Well, you're talking about EBITDA now. Yes, and...

Yes, that's right.

Yes. So for the first half of the year, we have all of the mobilization costs associated with the introduction of the services into the Mid-Con and the Rockies. And we don't have the revenues associated with the coiled tubing services and the services that they pull through. So our year will be a much larger second half, which is also aided by the increase in takeaway -- the reduction in takeaway capacity constraints in the Permian. So our year is -- starts out with a slower first quarter, building in the second quarter, with very strong third and fourth quarters as do all of the new assets, which we are investing in, come onstream.

Okay, great. That's exactly what I was looking for. One of your competitors mentioned pricing concessions in several business lines thus far in Q1. Do you expect to experience similar pricing concessions or margin pressures for wireline or coil in Q1 apart from the costs that you've mentioned?

I think wireline pricing is somewhat challenged. Our pricing is generally -- is substantially, generally and significantly higher than the market, okay. So we do sell our services at a premium. We have excellent equipment, really well-trained people, a broad range of services that we provide to customers. And I mentioned on the call, the increase in the number of customers now spending $5 million a quarter or $3 million a quarter with us, that number is growing rapidly as the breadth of services that we provide increases with respect to each customer. And customers are willing to pay us a premium. And you mentioned wireline services, and we do feel substantial pressure. We have made some price concessions, but our prices are substantially above market. And so obviously, I don't know which company you're referring to, but we don't expect to have a decline in margin as a result of pricing concessions during the period. And we are not feeling those same pressures, at least not at this point, with respect to our other service lines.

That's very helpful. And then maybe one last one for me. You mentioned dissolvable plugs in the prepared remarks and in the release. Can you give us some more color on the rollout of that product line and the reception of your customers thus far?

Yes. I think I mentioned the number of customers and the number of wells like 30 and 90. And we've done a lot of head-to-head sort of competitions with multiple wells on the same pad and where our plugs were compared to the others, and all of the others were eliminated in the competition, and our plugs were the only ones remaining in all of the wells on a going-forward basis. So performance has been really good over a pretty broad range of temperatures up to about 275 degrees Fahrenheit. And the revenue growth rate from third quarter to fourth quarter was about 16%. So we are spending a lot of money on it, on introductions and well testing. We've got a lot of operating people and salespeople and our technical people, all involved with the customers. So we're spending a hell of a lot of money introducing the products, but it is -- it's a successful introduction, and the outlook is for continued growth in the revenues of those products.

I'm not showing any further questions. I'll now turn the call back over to Mr. Perlman for closing remarks.

Thank you, everyone, for participating on this morning's call. I look forward to speaking with you again next quarter. Have a good day.

Have a good day, everyone.

Take care.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.