KLX Energy Services Holdings Inc (KLXE) 2020 Q3 法說會逐字稿

Greetings, and welcome to KLX Energy Services Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for today's call, Ken Dennard. Thank you. 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 third quarter 2020 results. With me today are Chris Baker, KLX's President and Chief Executive Officer; and Keefer Lehner, Chief Financial Officer and Executive Vice President.

Following my remarks, management will provide an overview of the market environment as well as an update on their post-merger integration efforts. Then they will discuss the financial details of the third quarter and the market outlook before opening the call for Q&A. There will be a replay of today's call and will be available via webcast on the company's website at klxenergy.com. There'll also be a recorded replay telephonically available until December 15, 2020. More information on how to access the replay features were included in yesterday's earnings release.

Please note that the information reported on this call speaks only as of today, December 8, 2020 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 the statements made by management. The listener is encouraged to read the 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 reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX Energy website. And now I'd like to turn the call over to KLX Energy Services President and CEO, Mr. Chris Baker. Chris?

Thank you, Ken, and good morning, everyone. Thank you for joining us today for KLX Energy Services Fiscal Third Quarter 2020 Conference Call. Let me begin by updating you on the broader market environment during the quarter as well as the progress we've made on the integration. I will then turn the call over to Keefer to review our fiscal third quarter financial performance before returning for some final comments on our strategy and outlook.

Turning to the fiscal third quarter, the overall market environment remained very challenging, not only due to the volatility in commodity prices, but also the overhanging issue of COVID-19, which has had far-reaching impacts on the worldwide economic activity. I'm pleased to report that despite the persistent impacts of these challenges, fiscal third quarter market activity picked up considerably from Q2. During which time, we saw our revenue hit its lowest level in June. Since then, our revenue has increased every month, ending October with revenue being up more than 50% from the June bottom.

However, it is important to note that we are coming off a historically low bottom in the midst of a very depressed market, which means that even a large percentage increase in revenue may actually be relatively nominal in absolute terms. As a result, the Q3 revenue gains, coupled with the cost reduction and synergy realization efforts, drove a meaningful reduction in our adjusted EBITDA loss. And we exited the quarter approaching breakeven adjusted EBITDA. But we are not yet back to positive unlevered free cash flow.

Commodity prices have been rather unpredictable over the last few quarters as a strong rally that followed the initial COVID-related price decline in March and April fizzled out, with prices topping out in August and declining during the months of September and October. Despite WTI being down roughly 11% during our fiscal third quarter, we've seen a strong rebound in Q4, with prices up about 26% since the end of Q3 on news of potential COVID vaccines.

Rig count for the third quarter stood in stark contrast to commodity prices as the steep decline that began last spring was finally halted in August. Since then, rig count has steadily climbed, ending the fiscal third quarter up 18% from the end of fiscal second quarter and currently up 32.4% from the bottom. Likewise, the active frac spread count has also been trending favorably, up from a bottom of roughly 40 spreads to 120 to 140 spreads running today, roughly half of which are working in the Permian Basin. KLX remains well positioned to capitalize on a rebounding market with significant exposure to the drilling, completion, production and intervention end market across all geographic markets in the U.S.

As it relates to Permian completion activity specifically, the pro forma combined company generated greater than 50% of 2019 combined revenue from completions activity in the Permian with our second largest geographic market. We have seen consolidation accelerate amongst our customers, and we believe this is a positive trend for the industry as a whole and KLX specifically. KLX has deep relationships with most of the largest operators in the U.S. and generated 40% of our pro forma combined year-to-date 2020 revenue from the top 20 operators by rig count, where we provide products and services to approximately 90% of this group on a year-to-date basis.

So overall, we've seen steady improvements in most areas of the market, with our drilling, completions, production and intervention services all seeing higher utilization sequentially. That said, pricing remains challenging as competition has been fierce among service providers and the most financially desperate providers seem to be making irrational pricing and staffing decisions.

Looking at our results for the third quarter, we saw significant sequential improvement in our revenues and adjusted EBITDA. And as I stated a moment ago, revenues have increased every month since the market bottomed in June. On a combined basis, we improved our adjusted EBITDA loss by almost $13.9 million quarter-over-quarter as we went from a pro forma adjusted EBITDA loss of $19.3 million in Q2 to a $5.4 million loss in Q3.

Now let me update you on our integration efforts during the third quarter. Our progress integrating our operations and realizing efficiency gains and cost synergies continues to proceed exceptionally well. When we were evaluating the merger between KLX and QES, we knew that there was a natural and complementary fit between our respective cultures. And in our first 120 days, we believe the teams have collaborated well and made excellent progress in their coordination efforts.

You may recall that one of our major objectives in reining in cost was the closure of our Wellington, Florida legacy corporate headquarters and relocating all key functions to Houston. We have successfully completed this initiative during our third quarter. Another objective is the further rationalization efforts directed at eliminating duplicative functions in our Houston offices and field operations. On this front, we also made tremendous strides in optimizing and rationalizing our cost structure, having consolidated 13 facilities across our operational platform during the quarter. These efforts are all ongoing, and we remain firmly focused on aligning our personnel, processes and systems across all functional areas within the current market conditions.

As we stated before, we originally expected to capture annualized run rate synergies of at least $40 million by the end of the first fiscal quarter of 2021, but we are now several months ahead of schedule relative to our initial expectations. As of yesterday's release, we have already exceeded this goal, implementing approximately $41 million of run rate annual cost savings.

As we have progressed through this integration process, we have gained greater clarity and insight into the finer details of our cost structure. And this has enabled us to identify some additional cost efficiencies that can be realized. As a result, we now believe that there is at least $6 million of incremental cost savings we can achieve over and above our initial projections. Alongside the realization of these cost efficiencies, we also continue to seek ways to leverage our expanded product service lines and proprietary technologies to operate more effectively and deliver added value to our customers at lower cost. This effort encompasses greater coordination and a more unified approach towards our customers, which will help drive more cross-selling and pull-through opportunities. As I've stated before, this strategy will be a critical factor in driving our long-term efficiency and competitiveness in the marketplace.

Throughout this integration process, we have relied heavily on the hard work, dedication and sacrifice of our many employees in helping to make this transition as quick and smooth as possible. Without their efforts, the synergies I discussed simply would not be possible. So I would like to thank everyone for their tireless efforts in helping KLX prepare for the future and to make our company stronger, more prepared and more competitive in a challenging marketplace.

With that, I'll now turn the call over to Keefer, who will review our Q3 financial results. Keefer?

Thank you, Chris, and good morning, everyone. Before we review our fiscal third quarter 2020 results, I'd like to bring a few items to your attention.

First, keep in mind that since the merger completed on July 28, our combined second quarter results include only 3 days of results from the legacy QES business and are therefore largely representative of KLX's premerger structure. However, when appropriate, I will highlight sequential comparisons, in which Q2 results are adjusted to reflect a pro forma full quarter of QES results rather than the as-filed KLX Q2 results.

Second, we are changing our methodology for the allocation of corporate costs this quarter, which will directly impact our segment presentation. Previously, 100% of our corporate costs were allocated across our 3 geographic segments. However, we will now allocate to the geographic segments only those costs that directly tie to their operations, including AR, AP, insurance, audit, supply chain, HSE and others, whereas the remaining unallocated balance will now sit at corporate and appear as a separate line item in the segment reconciliation. This presentation method is in accordance with information used in our own performance assessment and resource allocation decisions and also improves comparability with our peers.

Third, we had a handful of extraordinary costs impacting our results in the quarter. During the quarter, we had $8.5 million in integration costs for expenses to relocate corporate headquarters, integrate the QES business, reduce headcount and consolidate service and support facilities. Merger costs of $1.3 million were incurred primarily for legal and professional fees.

With that said, I'll now discuss our third quarter 2020 consolidated results. For the third quarter ended October 31, 2020, revenues were $70.9 million, an increase of $16.4 million or 30% as compared to the pro forma revenue for the fiscal second quarter of 2020. The increase in revenues reflects the impacts of improving market activity across all of our end markets, but particularly on the completion side, as Chris discussed earlier on the call.

Adjusted operating loss was $20.6 million for the quarter. Adjusted EBITDA loss and adjusted EBITDA margin were $5.4 million and negative 7.6%, respectively. The adjusted EBITDA loss decreased 72% compared to pro forma fiscal second quarter loss of $19.3 million. The decrease in our adjusted EBITDA loss was driven by a combination of increased activity in revenue and the benefit of the cost synergies beginning to flow through our P&L.

I'll begin the segment review with the Northeast and Mid-Con segment. Fiscal third quarter revenues were $27.9 million, an increase of $13.9 million or 99%. The significant increase in revenue was driven by a full quarter impact from the legacy QES business. Adjusted operating loss for the fiscal third quarter was $2.4 million as compared with adjusted operating loss of $5.1 million in the fiscal second quarter of 2020. Adjusted EBITDA was $1.5 million as compared to the fiscal second quarter adjusted EBITDA loss of $2.5 million.

Now moving to our Southwest segment. The Southwest segment generated revenues of $24.8 million, an increase of $20.6 million or 491% as compared to the fiscal second quarter of 2020. Similar to the Mid-Con and Northeast, the significant increase in revenue was driven by a full quarter impact from the legacy QES business. Q3 adjusted operating loss was $8.5 million compared to fiscal second quarter adjusted loss of $7 million and adjusted EBITDA loss was $2.2 million compared to a fiscal second quarter adjusted EBITDA loss of $4.6 million.

Rounding out our segments, let's shift to the Rockies. The Rocky Mountain segment fiscal third quarter revenue of $18.2 million increased by $200,000 or 1% as compared with the fiscal second quarter of 2020. Adjusted operating loss for the fiscal third quarter was $3.8 million as compared with adjusted operating loss of $3.3 million in the fiscal second quarter of 2020. Adjusted EBITDA was $500,000 as compared to the fiscal second quarter adjusted EBITDA of $1.5 million.

I would also like to touch on our residual corporate costs given our new allocation methodology. Adjusted corporate and other EBITDA loss for the fiscal third quarter was $5.2 million compared to $5 million for the fiscal second quarter. We only experienced a 4% sequential increase in corporate and other adjusted EBITDA loss, which demonstrates the speed with which we were able to implement synergies.

Now I would like to shift gears from segment results and take a moment to review our consolidated financial position. KLX has afforded one of the strongest liquidity positions in the small and mid-cap OFS space. As of October 31, 2020, cash on hand was approximately $79.8 million and total liquidity was $106.2 million. Preserving cash and liquidity is our #1 priority given the current market uncertainty, and we are laser-focused on integrating the QES merger, realizing the associated cost synergies and returning the business to positive free cash flow as soon as possible.

Our long-term debt of $243.6 million less cash resulted in net debt of approximately $163.8 million. There were no borrowings outstanding under the company's $100 million credit facility, with $26.4 million of availability, which increased 77% from Q2 levels as we wrap the QES current asset collateral base into the borrowing base and AR expanded by $8.9 million or 22% from July 31 levels. Additionally, we've reduced our letters of credit by $2.8 million in November, which improves our availability by that same amount. There continue to be no near-term debt maturities with our ABL maturing in the fall of 2023 and our bonds not maturing until November 2025.

For the 3 months ended October 31, 2020, cash flow used in operations was $20.3 million and free cash flow was negative $22.9 million. The sequential decline in cash was largely driven by the $20 million loss in cash flow from operations, including $4 million of cash merger and integration costs associated with the QES merger and a $3.3 million investment in working capital. Capital expenditures were approximately $2.6 million for the quarter, most of which was primarily tied to maintenance spending. We continue to expect total CapEx for this fiscal year to be about $13 million to $15 million.

With that, I'll turn the call back over to Chris. Chris?

Thanks, Keefer. While it's clear that we are still fighting through a tough market, there are signs that the market is on the mend. Commodity prices and activity gains in the oil service market, particularly in the completion space, have been supportive of a gradual but still tenuous improvement in the macroeconomic environment. And although COVID-19 remains a wildcard, the prospects of a viable vaccine give us hope that the situation will improve and energy demand recovery will begin in earnest at some point in 2021.

So the overall picture certainly gives us greater optimism, but we remain cautious due to the near-term uncertainty that surrounds this recovery. That said, we are concentrating our efforts on those factors that we can control, which we believe gives us a truly differentiated position relative to our peers. We have been proactive through this downturn, completing one of the very few OFS consolidating transactions, providing us with more levers to pull to return to positive free cash flow relative to our peers. However, with that said, we acknowledge that we can't cut our way to prosperity.

Our experience has shown us that consolidation and the synergies that result are what drive value for both our customers and shareholders alike. Back in 2015, we acquired the Archer Well Services Entities. And like the KLX-QES merger, that transaction yielded the benefits of added scale, meaningful operation efficiencies as well as a solid balance sheet. But perhaps more importantly, it enabled us to deliver an expanded and enhanced service offerings to our customer base and to better serve them at lower cost under an improved and more efficient operation. Just as we felt then, we are now seeing the benefits of synergies flowing through our financials as our integration efforts advance.

As we think through our Q3 results, the vast majority of our adjusted EBITDA loss occurred in the first month, as synergies were implemented in late July and August and did not begin to meaningfully impact our profitability until September and October. Although the more sizable synergies have already been achieved, there are additional sources of upside that we will continue to pursue. This includes items such as cross-selling opportunities across the organization, in-house manufacturing, the reallocation of expertise to the completion side of the business and the continued repurposing of legacy pressure pumping equipment to our wireline and coil tubing operations. We have already begun implementing many of these strategies and are very excited about the significant upside from cross-pollinating our machine shop and engineering groups to further reduce tool cost and advanced development of best-in-class downhole tools and real-time monitoring and automation. Optimizing these items will further benefit our returns, help our bottom line and enable us to better serve our customer base.

In a relatively short period of time, we have become a much stronger and financially sound premier provider of drilling, completion, production and intervention solutions across all major U.S. basins, with a broad suite of asset-light products and services that span the full life cycle of a well. And our broad customer base is built on strong, long-standing relationships with blue-chip customers across the U.S.

As I mentioned earlier, we've seen activity in utilization bounce back from the lows experienced earlier in the year, but the pricing side of the equation has yet to respond. We continue to see pricing in some service lines such as coil tubing and wireline at or below breakeven levels. Ultimately, we believe the service industry needs to raise prices in order to warrant deployment of additional equipment into the market as the current pricing regime in many of our service lines is unsustainable to support the industry long term.

On the strategic front, as we've emphasized many times in the past, consolidation is necessary for the long-term health of the industry, and we believe the service sector needs to continue consolidating to bring the market into equilibrium. We will continue to explore strategic opportunities to further enhance our platform, drive returns and free cash flow and accelerate our long-term growth strategy. Our focus will be on well-capitalized businesses with strong strategic fit, differentiated technology, a strong track record of returns and achievable cost synergies.

Given our team's track record of successfully seeking out and integrating acquisitions, we believe we will be able to realize a great deal of benefit from future transactions. And while macroeconomic issues such as COVID-19 and commodity supply and demand concerns will certainly continue to be major drivers in the market, KLX is well prepared to handle any challenges that may arise. We are continuing to rationalize our operations and maximize synergies from our merger, which will certainly benefit the business on a go-forward basis. Although we may see a seasonal revenue pullback in the fourth quarter, all else being equal, we will see an improvement in both profitability and the bottom line, thanks to our rationalization and integration efforts.

In closing, let me express our gratitude to our shareholders who have remained steadfast as we have navigated through market upheaval and an ever-shifting industry landscape. I'd like to also thank all of our dedicated team members who have played such a vital role in bringing about some of the most momentous changes in KLX's history. The blending of our companies and our cultures, both with a history of leading safety performance and outstanding execution in the field, has positioned us as a truly premier oilfield service provider that is well equipped to navigate the current market challenges and ultimately prosper in the North American oil and gas market as global economy recovers.

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

(Operator Instructions) Our first question comes from Ian MacPherson with Simmons Energy.

Chris, your -- everything is obviously still very complex in your world, in our world. Your commentary on fourth quarter outlook, revenue-wise, it was rather nuanced, acknowledging some risk of holiday pullback. But if we simply reserved a bit of pullback from current run rate, we would still see quarter-on-quarter very strong comps for total market drilling and completions activity. And it was really -- you probably had greater percentage spring to the completions recovery in the third quarter than you might in the fourth quarter, but you have more, I would say, more activity tailwind to drilling in this fourth quarter.

So what are the considerations for a less vigorous revenue bounce in the fourth quarter? You talked about -- is price still a sequential drag on average? Is market share an issue in any of the product lines? Maybe just flesh that out a little bit more if you can.

Yes, not a problem. Appreciate the question, Ian. Look, some of our revenue, as you well know, as it pertains to well control, fishing services, et cetera, is somewhat episodic. But you're right, we did see that balance in the third quarter and would expect to see that going into the fourth quarter. I think the production side of the business and some of that episodic revenue is more holiday sensitive. Our calendar looks really, really strong coming into the beginning of the new year in January and so that should be helpful as we exit the fourth quarter. Our fourth quarter ends in January, as you well know. So we're one month off cycle.

But at the end of the day, look, cash preservation is key in the current market environment. And we're working to reduce combined cost structure as quick as we can. That's why we've been focused on the integration efforts as much as we have in capturing all the identified synergies. We've basically achieved that initial target at this point. So we're really focusing now on the incremental synergies that we talked about and alluded to as well as operations and pricing. To your point, we've talked about pricing. Pricing is unsustainable in the current market, but we are pushing price and we're seeing some improvement there, and we think that's going to drive profitability through our base business.

We exited Q3 near breakeven EBITDA. But with that said, to your question, we did see a slowdown in Thanksgiving on the production side of the business. And we expect the same thing in Christmas, but we do think January is going to pick up pretty tremendously, both on the drilling and completion side. And then further to your point, all the frac spreads that are being deployed right now, it will impact us January, February, et cetera, on the completion, on the drill out, the flowback side, et cetera. So there is a bit of a lag. I think that's what you're hearing in some of the hesitation. But I mean, despite the holiday slowdown, we do still expect to see a revenue increase of 7% to 14%, along with the increased synergies flowing through the P&L. We would expect to exit this Q4 with positive adjusted EBITDA. Clearly, commodity prices, COVID-19, et cetera, potential lockdowns all come into play. But we do feel really good about our position at this point and how we're going to enter the year.

And then lastly, like I said, the revenue mix will come into place somewhat. But we feel like we've got some tailwinds behind us finally.

Great. That's perfectly helpful. And then I also wanted to ask if you could maybe summarize for us, I know you don't want to give away all the details, but just the general state of utilization across some of your big service lines, coil -- large diameter coil, wireline and maybe directional and speak to your headroom for picking up more activity without a lot of capital intensity. In other words, can you keep your current level of CapEx in the next year and ramp up those utilization levels with the market without having to redeploy a lot of capital to -- with that activity?

Yes, sure. So I mean, first of all, as you well know, we're very KPI-driven here. We don't disclose KPIs and utilization stats for the 3 product lines, but we're tracking all of those. We're also tracking utilization for employees. And I think, unfortunately, utilization from an asset-based perspective across the industry is pretty meager, but we have seen a rebound there. Utilization in coil tubing, since the day we closed the transaction, has basically improved almost month over month over month. And so that's one area where the utilization of coil, along with the pull-through of motors and tools, et cetera, from the legacy KLX side, I would say, is -- has generated kind of one plus one is greater than 2 type opportunities, especially in certain basins. So we've been very proud of that.

On the drilling side, candidly, as rig count just crashed down, we did lose some market share in May and June type time frame of this year. We've seen ourselves claw that back. When rig count falls at the pace that it fell at, everybody just gets shut down, right? And sometimes, there's contracts or preferred providers that they get caught up in that. And so we've seen our market share claw back in the last few months. We see continued pace of acceleration there. So we're excited about that opportunity.

But what I would say is, look, just to round it out, we clearly have sufficient incremental assets across every single product line. You mentioned those 2 specifically to address those. But whether it's incremental rental equipment, BOPs, frac valves, fishing tools, et cetera, their wireline. There are plenty incremental assets to deploy to drive the revenue base without a substantial amount of incremental capital. I don't want to guide towards next year's CapEx yet. We're just starting to kind of work on our budget, given our fiscal year. But I would say, yes, look, we're going to do everything we can to control CapEx and keep it at a kind of a de minimis level consistent with where we've been this year.

(Operator Instructions) Our next question comes from Jaime Perez with R.F. Lafferty & Co.

Great quarter, especially in this challenging time and coming off of the merger. I have a question. As far as the COVID related, do you have any -- do you still see any COVID-related slowdown? And what impact did it have on staffing in the third quarter? And do you have -- what do you see COVID's impact on the fourth quarter?

Also, my second question is it seems like you believe you have the right size of assets to manage this current environment. Maybe you could provide some more color on that?

Yes. No. First of all, Jaime, I appreciate the question. So I guess I'll address COVID first. Look, I think our company, our HSE staff, our crews have done a phenomenal job in a global pandemic to continue operating across the board. We have had more than our fair share of quarantine events as have many companies in the oilfield services space. Our guys are out there as essential workers, putting themselves at risk every day of the week to continue to drive revenue and support their families, support the company and do their job, and we very much appreciate that. But we have, clearly, like many other companies, had a number of quarantine events. The vast majority of which have been third-party related, all of which have been nonwork-related incidents.

And candidly, this whole pandemic and the quarantines that are associated with those drive your cost structure up somewhat, right? Because you end up quarantining a couple of crews for 14 days, and you're wearing that cost. And we have to drive utilization, and we have to continue down the road to service our clients. And so we know that we're in, I guess, COVID wave 2 or 3.0 at this point in time, depending on which state you're in and how you slice the data. So I think it's premature. I think there's plenty of opportunity set and a lot of bright spots with regards to the vaccines. I don't want to get into political statements or I'm not a doctor to talk about the timing. But we're going to continue to manage our business to manage the risk appropriately as we have throughout this entire pandemic and to ensure the safety of our personnel on site.

And then your other question around assets, I guess -- look, it's sort of like I told Ian. At the end of the day, I think we have a very broad suite of products and services that we can deploy to the market. We have some specialized assets that are clearly job specific, but we have a very large asset base pro forma for the QES transaction. And so I think we can experience a significant amount of growth without necessarily adding to the incremental asset base.

What I would say is we absolutely believe in consolidation. We're going to continue to look at consolidating opportunities. I think we're just now starting to see the industry consolidate. Since we closed our transaction, it's really just been the tip of iceberg. I believe we've seen about 4 different consolidating transactions occur, specifically in the oilfield services space. We mentioned one of those on our prior call that closed right after we closed. The issue becomes our customers. The E&P space is consolidating at a much greater pace than what the oilfield services space has been consolidating at. And so we have outside market share with certain operators in certain regions, and we're going to continue to look for opportunities that are synergistic, whether it be a cost-saving synergies or operational synergies where things are strategic and fit well with the company. I think we've got a great track record of managing and integrating transactions, and we're going to continue to look for opportunities to do that.

This concludes the question-and-answer portion of the call. I would now like to turn it back to management for any final comments.

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

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