KLX Energy Services Holdings Inc (KLXE) 2021 Q2 法說會逐字稿

Greetings, and welcome to the KLX Energy Services Fiscal Second Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Ken. You may begin. Thank you, Ken. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal second quarter 2021 results. With me today are Chris Baker, KLX's President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide a high-level commentary on the financial details of the second quarter and outlook before opening the call for questions and answers. Also be a replay of today's call and will be available by webcast on the company's website at klxenergy.com.

There will also be a telephonic recorded replay available until September 17. And more information how to access these features is included in the press release yesterday. Please note that information reported on this call speaks only as of today, September 10, 2021, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, management's comments may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX's management.

However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in statements made by management. The listener is encouraged to read Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies. The comments today may also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX Energy website.

Now with that behind me, I'd like to turn the call over to KLX Energy's President and Chief Executive Officer, Mr. Chris Baker. Chris?

Thank you, Ken, and good morning, everyone. Thank you for joining us today for the KLX Energy Services fiscal second quarter 2021 conference call. We are excited to report our second quarter results. Similar to the prior quarters, I'll begin by providing an update on the broader market as well as some of the significant themes impacting our quarterly results. I will then turn the call over to Keefer to review our Q2 financial performance before returning for some final comments on our strategy and outlook.

Following the seasonally weak first quarter that was exacerbated by Winter Storm Uri as well as customer scheduling and well issues, the second quarter was characterized by continued broad-based improvement in the market. For the fiscal second quarter ended July 31, WTI prices were up over 16%, and natural gas prices were up 34% and currently sit around $5 per MMBTU. Rig count was up approximately 11%, ending our second quarter, approaching 500 rigs. Additionally, the U.S. frac spread count increased approximately 13% during the fiscal second quarter, ending with roughly 240 frac spreads running across the U.S.

While the global economy still has a cloud of uncertainty due to COVID-19, it does continue to show meaningful improvement in terms of market fundamentals, which bodes well for the domestic onshore market. U.S. oil demand for June 2021 was almost back to pre-COVID levels of June 2019. As we stated on our Q1 call, our customers continue to prioritize returns and capital discipline over production growth. So activity gains have been muted relative to past cycles. However, it also appears that we have weathered the worst of the storm and that despite lingering macroeconomic headwinds, there's a growing confidence that is building and driving greater levels of activity and spending.

We are proud to report that our Q2 revenue increased 23% sequentially and adjusted EBITDA returned to the black for the first time since Q1 2020. Both came in ahead of our expectations and prior guidance. This quarter commemorates the 1-year anniversary of the closing of the merger. We have accomplished a lot. Integrated the companies and realized synergies, all while navigating one of the worst downturns in the history of the oil patch. I would like to thank the full KLX team for all of their hard work over the past 12 months. Our 23% sequential revenue growth compared favorably to only an 11% increase in rig count.

This was achieved by capturing our share of the increasing market, marginal pricing gains, albeit pricing continues to remain depressed and increased market share in several key service lines. Year-to-date, we've seen the rate of pricing improvement accelerate every month, although we still have a long way to go to return to pre-pandemic pricing levels. Our monthly revenue results have improved every month so far in fiscal 2021 and we exited Q2 with solid momentum, generating a new monthly revenue record for the combined company.

Through it all, KLX has continued to make progress on our cost reduction initiatives. After having completed $46 million in annualized merger synergies, we have now fully implemented the additional $4.4 million in annualized fixed cost savings that were outlined during our Q1 earnings call. This partially benefited our Q2 results and will fully benefit our Q3 results. We experienced a $10 million increase in quarterly adjusted EBITDA from Q1 to Q2 and generated positive adjusted EBITDA for the first time in five quarters.

The considerable sequential improvement in adjusted EBITDA was driven by the absence of Winter Storm Uri, improved revenue and enhanced margin, driven by a combination of synergies, increased utilization, marginally improved pricing and significant operating leverage in the business after realizing the $50-plus-million in annual cost savings. We believe that 3Q will build upon the positive momentum that has already been established in Q2. I'll discuss our outlook in greater detail later in the call. We exited 2Q on a positive run rate and expect our results to improve further in Q3.

With that, I'll now turn the call over to Keefer, who will review our Q2 financial results. Keefer?

Thank you, Chris. Let me begin by discussing our second quarter 2021 consolidated results. As Chris mentioned, we experienced sequential improvement in revenue across all segments and saw segment adjusted EBITDA return to the black for all three geographic segments for the first time since Q1 2020. For the fiscal second quarter ended July 31, 2021, revenues were $112 million, an increase of $21 million or 23% compared to the fiscal first quarter of 2021. Once again, the revenue increase reflected the impact of improving market activity across all geo markets and the vast majority of our product lines, particularly directional drilling, coiled tubing, rental and fishing.

Now to detail our revenue contribution by end market; Q2 2021 revenue was 29% drilling, 46% completion, 15% production and 10% intervention services, which compares to 27%, 49%, 13% and 10%, respectively for the fiscal first quarter of 2021. Drilling continues to increase its contribution to KLX post the merger with QES. This trend is driven by the leading directional drilling franchise we added via the merger, coupled with our ability to cross-sell rentals equipment and accommodation as part of a more comprehensive offering to our drilling customers.

Turning to the completion side of our business, the biggest driver of our completions business remains our coiled tubing and rental product lines. We have made great strides pulling through plug sales and thru-tubing services to our integrated coiled tubing offering throughout each of our GEO markets. We experienced a 41% sequential increase in dissolvable plug sales from Q1 to Q2 and are experiencing a very positive market reception for our latest generation dissolvable plugs. On the production side, we provide a wide range of services for well reactivations and remedial work. We saw our production services become a larger driver of KLX results in the second quarter.

And as oil prices climb back into the $60s and $70s, we expect to continue to see an uptick in production-related activity. Moving on to our consolidated profitability; adjusted operating loss was $14.9 million for the quarter. Adjusted EBITDA and adjusted EBITDA margin were $600,000 and 50 basis points respectively. Adjusted operating loss and adjusted EBITDA improved sequentially by 12 and $10 million respectively. I would also like to highlight a couple of items that negatively impacted our second quarter margin. First, our quarterly cost of sales continues to be burdened by $2.1 million of lease expense tied to five coiled tubing operating leases, which may impact our comparability to peers.

Second, we incurred stand-up costs of $1.3 million within the quarter in order to mobilize and prepare equipment to meet the increased demand for our services in Q2. I will now turn to the segment P&L review. Beginning the segment review with the Rockies, the Rocky segment fiscal second quarter revenue of $33.6 million increased by $9.3 million or 38% as compared with the fiscal first quarter of 2021. The sequential increase in revenue was primarily driven by stronger utilization and pricing across all product lines, primarily led by fishing, rentals, cement, coiled tubing, directional drilling and wireline.

Adjusted operating loss for the fiscal second quarter was $2 million as compared with adjusted operating loss of $6.8 million in the fiscal first quarter of 2021. Adjusted EBITDA was $3.1 million as compared to the fiscal first quarter adjusted EBITDA loss of $1.6 million. The increase in profitability was related to a combination of less white space on the calendar, improved utilization, modestly improved pricing and cost synergies. Now moving to our Southwest segment; our Southwest segment increased its revenue by 13% sequentially as compared to the fiscal first quarter of 2021, generating revenue of $43 million.

The increase in revenue was driven by stronger utilization in pricing across most product lines, primarily led by directional drilling, wireline and rentals. Q2 adjusted operating loss was $3.6 million compared to fiscal first quarter adjusted operating loss of $6.6 million, and adjusted EBITDA was $1.8 million for the second quarter compared to fiscal first quarter adjusted EBITDA loss of $700,000. The increase in profitability was driven by a combination of improved utilization, modestly improved pricing and cost synergies fully benefiting margins.

Now to wrap up the segment discussion with the Northeast and Mid-Con; fiscal second quarter revenues were $35.3 million, up 24% as compared to the fiscal first quarter of 2021. Adjusted operating loss for the fiscal second quarter was $3.2 million and improved $2.9 million as compared with adjusted operating loss of $6.1 million in the fiscal first quarter of 2021. The adjusted EBITDA was $500,000 as compared to fiscal first quarter adjusted EBITDA loss of $2.1 million.

The improvement in adjusted EBITDA was primarily driven by top line expansion due to utilization and pricing improvements in most product lines, led by fishing, coiled tubing and directional drilling, coupled with the reduced cost structure benefiting from the merger synergies and cost reductions driving significant operating leverage in the segment results.

Our adjusted corporate and other EBITDA loss for the fiscal second quarter was $4.8 million versus $5 million in fiscal Q1. With that said, the cost synergies from the merger are now materially benefiting the results of KLX and the full quarterly impact of the annualized $46 million of synergies are flowing through the P&L. Big picture, we have experienced a dramatic turnaround in results in the last year since closing the QES merger at the end of Q2 2020. Adjusted EBITDA improved from a pro forma loss of $19 million in Q2 2020 by $20 million to positive adjusted EBITDA of $600,000 in Q2 2021. This represents an $80 million annualized improvement in adjusted EBITDA from Q2 2020 to Q2 2021.

Now, I'll turn to our consolidated balance sheet and cash flow. Our long-term debt increased to $274 million, less our Q2 cash balance of $39 million, resulting in net debt as of the end of the second quarter of approximately $235 million. As of July 31, 2021, total net liquidity was $57 million, including cash on hand of approximately $39 million. We also drew $30 million on our ABL within the quarter to maintain a healthy cash balance and help support the current and continued rebound of the business. With the drawdown, our credit facility has $28 million of remaining availability and $18 million of net availability when factoring in the $10 million structural holdback tied to the springing fixed charge coverage ratio.

The continued management and preservation of our cash and liquidity remains a top priority. And with activity expected to rise further through the balance of the year, we will continue to proactively manage our cost structure and working capital to maximize margins and cash flow. We'd also expect that our borrowing base would increase in conjunction with the continued revenue increases expected for Q3. For the three months ended July 31, 2021, cash flow used in operations was $26 million and free cash flow loss was $27 million. There was cash interest of $14.7 million paid in the quarter, which drove more than half of the quarter's cash decline.

The remaining balance of the cash decline was largely driven by a $10 million investment in working capital due to higher activity levels, though there were also incremental net expenditures for capex and capital leases. Capital expenditures for the quarter were approximately $3.5 million. Although most of the capital outlay was focused on maintenance spending, we did have some targeted growth expenditures as well. These were select projects focusing on very quick paybacks, typically less than a year. We sold $2.5 million of [old] fleet assets within the quarter, offsetting approximately 70% of our quarterly capex spend.

We continue to expect total capex for 2021 to be in the range of $14 million to $16 million and currently have $3 million of assets held for sale, which we believe should sell in the second half of 2021. Lastly, in an effort to normalize our reporting and improve comparability with peers, we announced yesterday that we will modify our fiscal year-end from January 31 to December 31. This change will take effect for the period ended December 31, 2021, when we will file a transition 10-K for an 11-month period and will begin fiscal 2022 on January 1.

With that, I will now turn the call back to Chris to wrap things up.

Thanks, Keefer. I will close today's call by discussing strategy, consolidation and then wrap up the call by discussing our Q3 outlook. We do not have a material update on the consolidation front at this time. However, I can assure you that our team continues to review every opportunity available where we believe their strategic fit, synergy value, operational and cultural alignment and balance sheet enhancement. As discussed on prior calls, we believe further consolidation must occur to gain product line scale to remedy the pricing and utilization challenges faced by the industry and better position the industry to be healthy for the long term.

While we've seen some consolidation activity in the services space, our merger with QES remains one of the largest diversified OFS consolidations to-date. And most of the consolidation activity remains heavily weighted towards the E&P sector rather than oilfield services. Having now successfully completed a large integration and synergy realization project, we are true believers in the power and benefits of consolidation and continue to examine potential opportunities to enhance our own business lines, operations and balance sheet.

We believe we are now in a position where we can pursue additional consolidation and hope the next several months will present compelling consolidation opportunities. Now to wrap things up, I'll discuss our Q3 outlook. We've seen oil prices retrench approximately 8% since the end of our fiscal Q2. And natural gas prices are up another 28%, reaching their highest level since 2014. Rig count and market activity have largely continued their upward climb, with generally strong momentum through the early part of our third quarter. KLX's broad footprint enables us to be well-positioned to service the gas basins of the Northeast, East Texas and Louisiana, the Rockies and Eagle Ford.

We are becoming increasingly encouraged by the ever-improving industry outlook, but for the economy as a whole and for the OFS industry in particular. There continues to be mounting evidence of improving fundamentals, which should drive greater levels of activity and pricing through the balance of the year and into next year. There continues to be some push and pull in the ongoing economic rebound and fears persist regarding the Delta variant, global supply is expected to remain tight given OPEC+ and U.S. shale supply discipline, and demand is expected to continue to improve in the short to medium-term despite elevated WTI prices.

This gives us optimism that we can continue to strengthen our performance and competitive positioning as we have already reduced our cost structure to industry-leading levels based on our Q2 G&A burden, which stands at approximately 11% of revenue, yet we have the personnel, equipment, expertise and customer base to deliver in an improving macroeconomic environment. It is both encouraging and gratifying that we have been able to drive pricing of late. We have been working tirelessly to enhance our profitability through expense reductions and improved utilization at a time when the price lever has, for the most part, been unavailable to us.

But our persistence is paying off and the pricing gains we've achieved have been accelerating as we work through 2021. This sets the foundation for continued margin improvement in the coming quarters. With that said, we do continue to find it difficult to attract and retain personnel, which is one of the primary risks and impediment to growth today. We are not only competing with other oil service companies to attract and retain talent, but with other industries as well, which is not something the industry has encountered in recent cycles. We are seeing more and more workers permanently lead the industry after the downturn last year.

To some extent, we've been able to mitigate this by focusing on employee utilization and talent retention. We have some of the best people in the industry, and they are a key part of which differentiates KLX. The experience, know-how and expertise of our team is foundational to the quality of the products and services we offer, and we will continue to do everything we can to attract and retain top talent to the KLX family. While we are on personnel, I would like to touch on COVID-19. COVID remains a risk to our business as it jeopardizes the safety of our employees, potentially impacts our ability to staff crews, creating unforeseen white space on our calendar and can ultimately impact demand recovery for crude.

We are proactively working to ensure the safety of our employees and the efficiency of our operations, and we are encouraging and incentivizing employees to get back to native. Now let me turn to the third quarter and our outlook for the rest of the year. Activity is on the upswing and continues to improve across all end markets of our business: drilling, completion, production and intervention services. Utilization continues to improve, and we are achieving pricing gains across all the vast majority of our product and service lines.

Given these favorable developments and barring unforeseen COVID and our customer scheduling delays, we expect to see revenue increase again in Q3, with sequential uptick in the range of 8% to 12%. Pricing gains combined with the sizable cost savings we have achieved through the year should result in sequential improvement in adjusted EBITDA. Our second quarter adjusted EBITDA was just above breakeven. We exited the fiscal second quarter with a low to mid-single-digit adjusted EBITDA margin and positive unadjusted EBITDA.

For the balance of the year, we expect continued steady improvement activity and expect revenue and margins to increase accordingly. In closing, let me thank our team members, customers and shareholders for their continued support. We have now eclipsed the 1-year anniversary of closing our merger with QES, and we are excited about all of the positive developments and steady economic improvement we are seeing, and we are confident that KLX is well-positioned to continue to provide our value-added products and services as activity continues to accelerate.

With that, we will now take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Ian MacPherson with Piper.

I wanted to ask about the different basin outlooks for the calendar second half just given the divergence in [nati] and crude. We've heard -- I've heard mixed indications from some of your peers with regard to fourth quarter slowdown. So I'm seeing, I think, in Texas, seeing more of a November, December white space at this point than maybe we would have thought earlier in the year. But this gas price seems to be very constructive for a lot of your activity. So could you just parse out the view between your oily work and gassy work in the back half and what you expect in terms of seasonality beyond what you've guided for the prompt quarter?

Yeah, sure. I think, look, we definitely -- as we were coming into the third quarter, had more visibility than maybe we did in prior second half of the year cycles as we've all become very accustomed to fourth quarter budget exhaustion. What I'd say is definitely, East Texas, Haynesville activity seems to be ramping up. We're starting to see more and more RFQs in that basin. With regards to your question around Texas, specifically, look, we definitely have some potential for white space in the back half of the year. I would say we're starting to have conversations with some of those operators where they're thinking about going ahead and drilling through the end of the year, November and December.

And I think it's a little early in the cycle for those decisions to be made. But I would say those decisions and conversations are pretty promising. We're seeing this on the DD side of the business as well as the completion side of the business. So it's a little premature to give you a firm answer. But I would say the fact that they are considering continuing their programs is nothing but a positive, right? And then with regards to -- we clearly had a fruity material uptick in the Rockies, some of that is gas work.

A lot of that is just -- its episodic in two regards: one, customer concentration and the nature of the customers up there and their programs swing somewhat within a quarter and quarter-over-quarter, and we've got kind of cradle to grave activity there from the drilling side all the way through the completions and the drill outside of their programs. The other is most of those pads up there are exceptionally large. And so any delays, whether they be COVID delays, wellbore trajectory delays or otherwise, can cause some swings in that revenue base. But by and large, activity across the board seems to be picking up. I think it comes down to what happens in November, December, to your point.

Okay. Got you. You mentioned, Chris, that you exited Q2 at low mid-single-digit EBITDA margins. If we just look at the full quarter, your EBITDA incrementals from Q1 into Q2 were 45% to 50% in total. Is that a fair way to think about the margin progression into Q3 as well or are there other factors that could improve or dilute that incremental?

Yes. So look, it's a very fair question, and we're pretty proud of the incrementals in Q2. They were highly positive. I don't know that they're necessarily, unfortunately, sustainable on incremental revenue dollars, but we clearly saw extraordinary incrementals. I think a big part of that is, look, there's pent-up operating leverage in the business coming out of Winter Storm Uri in Q1 where you've got white space in your calendar, some costs that you couldn't flesh out, etc. So that incremental revenue flowed through exceptionally well.

The caveat, I would say, with regards to incrementals going into Q3 is there's a pretty broad, diverse set of incrementals and margins on our product lines that have a range of, call it, 15% to 45% or thereabout, depending on which product line you're thinking about. The other is, we're all seeing quarantines from Delta, and that can drive some inflation in your cost structure especially around missed revenue opportunities and quarantine cost, over time, cost, et cetera, that I think, kind of gets lost in the shuffle. But with that, Keefer, anything else to add around the incremental calculations?

The only thing I'd add and you mentioned kind of 15% to 45% depending on the product line. It's just the trend that we're experiencing on the pricing side of our business. We mentioned this a bit in the prepared remarks, but the rate of our pricing improvements have been accelerating month-over-month that we work through the year. So we would expect to continue to be able to lock pricing higher as we work through the remainder of the year and certainly would expect that as we get into next year, we'll be able to improve pricing even further there. But that's the only thing I'd add, Chris.

Yeah. No, that's perfect. And I think that is the key is making sure pricing continues to outpace the inflationary pressures we're seeing across the board, and we work every day. It's one step forward or two steps forward, one step back sometimes we work every day on that front.

Okay. And then last one, if you don't mind. Keefer, I haven't finished pushing buttons on the model yet, but it looks like just given the rate of improvement in the second half, but with revenue still growing, working capital probably is not going to help you a great deal. So it looks like free cash is still a bit remote for the second half. Would you agree or correct me on that, that we should look probably to '22 rather than second half of '21 for the free cash inflection of the company?

Yes, I think that's right. As it relates to working capital, certainly, as activity continues to ramp we're going to be in a position where we're going to continue to make an investment in working capital. We're certainly focused on effectively managing the working capital to the best of our ability. Our AR days were down from Q1 to Q2. We hope that's a trend that we're able to continue. But as Chris said, that's something that we are focused on day in, day out. On the AG side, we've been able to work effectively with our vendors. So I think for free cash flow, there will be continued investment in working capital.

On the capex side of the equation, we are forecasting $14 million to $15 million of capex for the full year. Most of that, as we've mentioned, is maintenance oriented in nature. Maintenance spending will increase as our activity is picking up, particularly from Q1 to Q2 and then again from Q2 to Q3 and through the rest of the year. So we will have elevated capex spending levels likely in the second half of the year compared to where we were in the first half of the year. And I think that gives you most of the building blocks from an unlevered free cash flow perspective. And then obviously, on the leverage free cash flow perspective, we've got the $50 million semiannual interest payment that's payable in both May and November.

Thank you. Our next question comes from John Daniel with Daniel Energy Partners.

Just to follow-on to Ian's question. You touched on Q4. I'm just curious at this point if anybody -- any of your customers are making commitments for 2022? And if they are, again, touched on Ian's theme, are you seeing more of that in places like the Haynesville or is there a basis specificity that you can provide color on in terms of just that outlook?

Yeah. Look, fair question. At the end of the day, I think as you're well aware, we don't have a lot of contracted services similar to drilling rigs, frac spreads, right? What I will say is, look, we're very excited about our positioning. Some of the E&P consolidation that has occurred, I think fits very well because we have very strong relationships within our customer base that should pull-through incremental activity in certain of those basins like the Haynesville as you referenced. So I think we're very well situated. We're just at the forefront of RFQ season. I would say RFQ season's kind of kicked off a little early this year, but we're definitely seeing more of that activity directed towards some of those basins, and we're seeing full-fledged packaged RFQs for bundled services, et cetera, that I think we're exceptionally well positioned for and taking advantage of.

Okay. And then one on the labor market. I'm just curious, if you look at say, your Permian employee base, what percent of those guys and gals come from the East Texas market who might now want to stay at home and work in East Texas? Is that an issue you're facing yet?

It's not an issue that we faced to-date. I think the biggest issue today is just been a rotation of crews, quarantines and whatnot. Look, we've had that same phenomenon occur in the past with South Texas crews going in as well, right? And you're very familiar with that. And so it's something that we will have to juggle, and we'll work through. But we haven't had that as a roadblock or hurdle to jump through to-date. I think most -- business is speaking for KLX. Most of our employee base in East Texas, the Haynesville is -- are what I would say, locals. We've got a great foundation there. And so, we'll supplement and backfill as need be. So we encourage that. To your point on West Texas, you've got West Texas attrition in and of itself that is just the nature of the Permian that we work through all the time.

This concludes our Q&A session. I would like to turn the floor back over to management for closing comments.

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

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.