KLX Energy Services Holdings, Inc. (KLXE) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the KLX Energy Services First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded. I’d now like to introduce your host for today's conference, Mr. Michael Perlman, Treasurer and Senior Director of Investor Relations at KLX Energy. Sir, please go ahead.

Thank you, Liz. Good morning and thank you for joining us. Today, we are here to discuss KLX Energy Services financial results for the first quarter period ended April 30, 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 in our website. 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 this discussion. You can find a 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 the prepared remarks and our responses to your questions, we will rely on the 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. Thanks for joining us today to discuss our first quarter financial results. First quarter 2019 revenues were up 1.3% as compared to the immediately preceding quarter. While our Rocky Mountains and Northeast/Mid-Con segments performed substantially better than our peers and slightly better than our expectations for the quarter, our Southwest segment performed somewhat worse than our expectations. Specifically, Rocky Mountains and Northeast/Mid-Con segments delivered organic revenue growth of approximately 4.5% and 2.5% respectively, offset by a 14% decline in organic revenues in the Southwest segment. Revenue growth in the greater Rocky Mountains and Northeast/Mid-Con segments was driven by market share gains in both of these geo segments. While the revenue decline in the Southwest geo region reflected very slow activity levels by certain of our Southwest customers, particularly during the first two months of the quarter, and lower utilization of our wireline asset as a result of the weak pricing environment. The pricing environment was such that we chose not to deploy these assets. Fortunately, pricing has firmed during April and May as activity has picked up and these assets are coming back on line. Importantly, all geo segments experienced strong revenue growth in April. In fact, April, the third month of the quarter, experienced the revenue increase of approximately 24% as compared to February, the first month of our quarter. Moreover, April adjusted EBITDA was more than double February adjusted EBITDA, and April adjusted EBITDA margin was greater than 23%. Notwithstanding the challenging market conditions in the first quarter, the Company generated peer-leading adjusted EBITDA margins of approximately 18%. As we begin the second quarter, revenues and profitability have continued to improve during the month of May such that the Company is expecting an approximate 25% increase in the second quarter 2019 revenues, as compared to the first quarter, accompanied by an approximate 55% increase in adjusted EBITDA to approximately $41 million. As we look to the second half of the year, we expect revenue and profitability growth to accelerate, aided by the planned rollout of large diameter coiled tubing spreads in the Mid-Con and in the Rockies, and our planned expansion of flow back services that’s flow back testing services in several of our geo markets. The rollout of our large diameter coiled tubing assets is important not only because of the specific customers who have requested the services from us but also because of the pull-through effect on our non-frac high-pressure pumping, our wireline, our thru-tubing and DHPS and other complementary services. We will of course remain focused on driving penetration of our services into existing customer accounts, gaining greater share of customer spend. And finally, we will complete the integration of the recently acquired businesses. I would now like to take a moment to review what has been a very productive first quarter for the Company. During the quarter, we successfully expanded the breadth of services provided to existing customers and strengthened our geographical presence in the Mid-Con and in the Rockies through the recent acquisitions of Red Bone Services and Tecton Energy Services. These integrations are expected to be completed by the second and third quarters of 2019, respectively. The integration of Red Bone will be completed before the end of Q2 while the integration of Tecton will be completed during Q3. We have hired and trained approximately 70 personnel in advance of the specific regional launches of our new coiled tubing product service line and our filtration, testing and flow back product service line. In fact, our Southwest segment operating personnel flawlessly executed the roll out of three additional large diameter coiled tubing spreads through the month of May, increasing our total count of large diameter coiled tubing spreads by 60% to 8. And we have continued to roll out several of our new proprietary product service lines or PSLs, including our dissolvable plugs, flotation collars and liner hangers along with the Tempress HydroPull tool in combination with our own proprietary Havok motor bearing assembly. Transaction and integration related expenses principally associated with recent acquisitions and the on-boarding and training of approximately 70 operating personnel prior to rolling out these new services were approximately $5 million in the first quarter. On today’s call, we will review the current oilfield services market, discuss our first quarter 2019 financial performance and discuss our second quarter and full-year 2019 guidance. Let’s begin by reviewing the current oilfield services market environment. Since the dramatic decline in oil prices in the fourth quarter of 2018, the U.S. crude oil benchmark is up approximately 50%, which marked its best start to a year since 2002. Industry experts describe much of the price recovered to solid demand growth and to aggressive output cuts from OPEC and its allies, U.S. government sanctions on Iran and Venezuela and escalating conflicts in Libya. With the U.S. crude oil benchmark, our wild benchmark is off to a strong start to the year. The decline in oil prices in late 2018 which occurred right in the middle of the 2019 budgeting season, resulted in a substantial slowdown in spending by E&P companies in both the fourth quarter of 2018 and in the first quarter of 2019 and a mid-single-digit sequential decline in the U.S. rig count accompanied by another substantial increase in the DUC count. Completion activity was slow to ramp up as reflected by the near 20% decline in a number of frac cores operating in the Permian from a high of a 192 as of June 2018 to the current count of a 157 as of the end of our first fiscal quarter. The Permian takeaway capacity issues which would largely be resolved by the end of the second quarter, also put downward pressure on completion activity and have led to the 60% year-over-year increase in the number of drilled but uncompleted wells or DUCs in the Permian. Specifically, the DUC count in the Permian has accounted for over 90% of the year-over-year increase in the overall DUC count in the U.S. On a positive note, additional pipeline capacity has come on line recently, which we expect to result in a drawdown of the Permian DUCs and attended increased completion activity. Clearly, the E&Ps have taken a significantly more disciplined approach to adherence to the capital budget with most focused on generating free cash flow and returning capital to shareholders. We review this marked change in behavior by a broad cross-section of the operators as very positive for the long-term health of the industry. Let's turn to slide three and review our first quarter 2019 consolidated results. First quarter 2019 revenues of $145.8 million increased 1.3% as compared to the fourth quarter of 2018. Revenue growth reflected market share gains in our Northeast/Mid-Con and greater Rocky Mountains segments, including an increase in both the number of new customers and the breadth of services provided to existing customers in addition of course to the contributions from the recent acquisitions. Essentially, all of the solidly positive performance of our greater Rockies and Northeast/Mid-Con segments was offset by lower revenues and profitability in the Southwest segment. Rocky Mountains segment revenue increased by 11.5% while Northeast/Mid-Con segment revenues increased by almost 20%. The Southwest segment revenues decreased 14%, and on a product line basis completion production and intervention services contributed approximately 60%, 20% and 20%, respectively, to first quarter revenues. Adjusted operating earnings, adjusted EBITDA and adjusted net earnings were all negatively impacted by approximately $5 million of Q1 2019 activities costs, adjusted operating earnings were $7.5 million, adjusted EBITDA and adjusted EBITDA margin were $26.7 million and 18.3% respectively, and adjusted net earnings and adjusted net earnings per diluted share were $5.3 million and $0.25 per share, respectively. Let's now turn to slide four and review our first quarter 2019 segment financial results, beginning with our Rocky Mountains segment. First quarter 2019 Rocky Mountains segment revenues of just under $49 million, increased 11.5%, driven by market share gains and reflected increases in both the number of active customers and the breadth of services provided to existing customers and of course initial contributions from recent acquisitions. Adjusted operating earnings were $4 million, an increase of $1.4 million as compared with the fourth quarter of 2018 and adjusted EBITDA was $10 million or 20.6% of revenues, an increase of $2.2 million or 28% as compared to the fourth quarter of 2018. With respect to the Rockies, we further plan to broaden out our PSL footprint during 2019, including the rollout of large diameter coil tubing services, which as mentioned earlier, 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 five and review our Northeast/Mid-Con segment performance. First quarter 2019 Northeast/Mid-Con segment revenues of $39 million represented approximately 20% revenue growth as compared to the fourth quarter of 2018. This growth was primarily driven by initial contributions from recent acquisitions, but included market share gains, including increases in both the number of active customers and the breath of services provided to existing customers, and we did deliver about 2.5% organic revenue growth in that segment. Adjusted operating earnings were $5 million or 12.8% of revenues and increased $2.5 million as compared with the fourth quarter of 2018. Adjusted EBITDA was $11 million or 28% of revenues and increased $3.7 million or 50%. Here we expect to -- in 2019, we expect to further broaden out our PSL footprint in the Mid-Con including the roll out of large diameter coiled tubing services which importantly further enables the pull-through of our complementary services. In addition, we’re planning to roll out the newly acquired flow back services PSL into Mid-Con. Let’s turn to slide six and review the first quarter results of the Company’s Southwest segment. For the first quarter, Southwest segment revenues decreased approximately 14% to $58 million, driven by the slow ramp-up of completion activities in February and early March and low utilization of our wireline assets in a weak pricing environment at the beginning of the quarter. The Southwest segment bore the vast majority of first quarter activities and first quarter costs related to the hiring and training of approximately 70 personnel to support the launch of our coiled tubing PSL in the Mid-Con and in the Rockies. As discussed earlier, while first quarter financial performance of our Southwest segment significantly lagged of other two segments, the Southwest segment hired and trained the coiled tubing teams and flawlessly executed the rollout of three additional large diameter coiled tubing spreads in the Mid-Con and in the Rockies through the month of May, increasing our total count of large diameter coiled tubing spreads by 60% to a total of 8 units. Adjusted operating loss was $1.6 million and reflects the 14% decline in revenues and core absorption of operation cost. Adjusted EBITDA was only $5.5 million or about 10% of revenues and decreased $7 million or 56% as compared to the fourth quarter of 2018. Let’s now take a moment and review our financial position on slide seven. As of April 30, 2019, cash on hand was approximately $111 million, reflecting the acquisitions of Tecton and Red Bone and capital expenditures to support the rollout of our new product service lines. Total long-term debt of $250 million less cash resulted in net debt of approximately a $139 million, and the Company’s net debt to net capital ratio was approximately 26%. There were no borrowings outstanding under the Company’s $100 million credit facility. So, for the three months ended April 30, 2019, net cash flow provided by operations was $4.2 million. Capital expenditures in the current period were approximately $30 million, reflecting investments related to the Company’s strategy to expand recently acquired product service lines in appropriate geographic segments. The Company expects to complete the investment phase of our strategic plan by the end of the third quarter of 2019 and expects substantially reduced capital expenditures and strong free cash flow, beginning in the fourth quarter of 2019 and throughout fiscal year 2020. Let's now briefly review our second quarter and full-year 2019 guidance. First, to the second quarter. So, we expect revenues to be approximately $180 million, that would be an increase of about 25% as compared to the first quarter of 2019, and EBITDA adjusted to exclude non-cash compensation expense is expected to be approximately $41 million or approximately an EBITDA margin of about 23%. That would be an increase of about 55% and 500 basis-point improvement, as compared to the first quarter of 2019. Net earnings and net earnings per diluted share adjusted to exclude non-cash compensation and amortization expense, are expected to be approximately $18 million and approximately $0.80 per diluted share. Return on invested capital is expected to be about 19% in the quarter. Let's now turn to slide nine and review our full-year 2019 guidance. Revenues for the full-year are expected to increase by about 60% to about $800 million. EBITDA adjusted to exclude non-cash comp is expected to increase by about 85% to about $200 million, representing an approximate 25% adjusted EBITDA margin. Net earnings and net earnings per diluted share adjusted to exclude non-cash comp and amortization expense are expected to increase approximately 75% and approximately 60%, respectively, to about $100 million and about $4.50 per diluted share. Capital expenditures are expected to be about $100 million, reflecting investments to roll out new product service lines and related services to relevant geographic regions, thereby enabling each segment to offer the broader range of services required by our customers. The Company expects to complete the investment phase of its strategic plan by the end of the third quarter and expects substantially reduced CapEx and substantial positive free cash flow beginning in Q4 and for all of 2020. Return on invested capital is expected to be about 20% for the full year. With that I'll 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 Liz for the Q&A portion. Liz will provide instructions on how to ask the questions. Liz?

[Operator instructions] Our first question comes from the line of Brad Handler with Jefferies. Your line is open.

A few questions on my end, please, maybe a couple of tricky ones just because [indiscernible] that they involve, try and understand other behavior. But, could you -- your comments about March being a little bit weaker strike to me like being a little in contrast to what we heard from many other of the service providers that by March have seen a pretty significant turnaround, including in the Permian. And I'm trying to understand better if you can, maybe whether it’s specific type of customer that is still moving more slowly or perhaps something more specific to you that kind of caused that lag?

Actually, March was pretty good in both our greater Rockies and Northeast/Mid-Con segments, but it was pretty weak in the Permian where certain of our customers just did a lot less in terms of what our expectations were, and what a lot of the rest of the industry did. The combination of lower activity, particularly in the first part of the month of March, which I think I did mention during our call, combined with what we believe is irrational pricing activities by some of the even more important public companies in the wireline business, caused us to make the decision to actually take those assets offline rather than beat the assets up and lose money while performing those services. So, it appears to us that the irrational pricing has subsided or is subsiding those assets are coming back on stream. But, it was the combination of weaker activity by certain of our customers in the Permian together with really poor pricing environment for wireline in the Permian during the quarter.

Okay, understood. I just wanted to get a little extra color. So, thank you. In the first quarter, if I turn to the Northeast/Mid-Con segment, we were obviously pleasantly surprised by the margins delivered there. Can you comment a little on the sustainability of that or is there something a little anomalous that maybe we should tamper our expectations for margin through the rest of the year in that geo market?

There was nothing unusual in the quarter. I mean, we had a positive contribution in the fourth quarter from the sale of some assets which positively impacted that segment. Those gains were actually offset by other expenses in the fourth quarter. But in the first quarter, there were no unusual items. It was just solidly profitable quarter with nice organic growth and just a well run business. I think, we’re really pleased with the Red Bone acquisition and the strength of the relationship which the Red Bone folks who have been in that region for 30 years have with the customers. We’re really impressed with the pull-through of services from the flow of execution of the start-up of our wireline assets. It is just going really well and it’s running the business well and the services that we’re providing are delivering a high margin, that’s also true in the Rockies, margins not to the same extent and we’re still making improvements and changes there. But, I think these high margins in the mid to high-20s are sustainable in both those segments. In the Permian, I'm not so sure because of the irrationality of some of the pricing by competitors.

Okay, understood. Thank you for that. And maybe I’ll just slip in one more and turn it back. You were very clear in about certainly cash flow positive in the fourth quarter and your expectations into 2020, it sounds like are very clear directly. I guess, maybe -- it seems like I’m pressing and sounds that I’m not listening, it’s just that I’d like to get a sense if you have another opportunity that comes up that would require additional investment and I don’t know if it’s adding more units and more proceeding or something that would undermine that. Are you trying to tell us that you're not going to do that that the direction is, okay you’ve got enough for now and you're going to generate that free cash, perhaps pay down debt but that’s the direct for the several quarters following the current investment program, is that just a very -- that's what...

I think we should take these acquisition opportunities in two different places. Okay? First would be the acquisition of small add-ons. I don’t actually see us doing much of that in the balance of the year. And if we were to do it, we would do it with shares of the Company stock only, which would increase shares outstanding, increase EBITDA. We would only do that if those transactions were accretive to both our leverage ratios and our earnings per share. In terms of major transactions to add important new services as required by our customers, I think, there, we need to think about industry consolidation. There are way too many small cap companies with capitalization at $1 billion or $1.5 billion or under $1 billion and really no quality midsized -- midcap companies in this industry. The industry is desperately in need of real consolidation. It is clear to us that the number of companies that provide services -- public companies providing services, right now, will be smaller 12 months from and smaller yet 24 months from now. Those transactions are going to have to happen by combining the equity in two public companies, and whereas us we would not combine with a company, which had a weak balance sheet or excess indebtedness. So, it is -- if you're talking about a major transaction of some sort to acquire a significant business, which would substantially increase the equity market capitalization of the company, it would have to be an all-stock transaction, which is accretive to the shareholders and which doesn't crap up the balance sheet with a whole lot of debt on the acquired company. If it’s a smaller transactions, those transactions would likely be with private equity firms who have no other way to liquefy those assets except in steps, so to speak. And because there is essentially no credit availability for folks to buy these assets, we have found tremendous willingness by private equity folks who've owned these assets for many years, funds have been outstanding for too long, the investors in those funds have been maybe not so patient as it could be, depending upon which private equity firm. And they are willing to sell those assets in all stock transactions on an accretive basis. So, that's the way we think about the short-term and the long-term small transactions, large transactions.

[Operator Instructions] Our next question comes from the line of John Watson with Simmons Energy. Your line is now open.

Thank you. Good morning.

Good morning, John.

Amin, I appreciate the color on wireline pricing. I was wondering if you could give us an update on the coiled side. How is pricing progressing there, and does that have any impact on the Q1 margins in the Southwest region?

No, pricing was pretty good. Our utilization could have been a little better because certain of our customers -- we didn’t have the utilization that we had hoped to have. That is going very well now and our utilization is excellent, right now. But there was some weakness in utilization, not so much in pricing. And with respect to the roll out, pricing is pretty good in the new regions where we’ve rolled it out specifically in the Mid-Con and the Rockies.

Okay. Thanks for that. And given that dynamic as well as what you mentioned previously for wireline, can you help us think about how Southwest margins might increase in 2Q? I'm just trying to think through the magnitude for that region versus the other two.

Sure. I mean, we’re not going to obviously give guidance by segment.

Sure.

We expect a substantial improvement in margin in the Southwest segment in the second quarter. That is already beginning to happen. We put an awful lot of pressure on that group to hire and train all of these teams, and they did a fantastic job of execution on the rollout of the coiled tubing services in two other regions. But on the other hand, the combination of having to do that together with the weakness in wireline pricing in particular and the slow regaining of activity by certain customers, caused the segment to deliver I would say poor operational performance, maybe 10% EBITDA margin is not what we’re used to. So, but our expectation is of course substantially improved margin in the second quarter.

Okay, great. This is more of a crystal ball question, feel free to serve it. If I look at the2Q guidance and then the full year guidance, the protection is for improvement in the back half of the year, as you’ve mentioned previously. Am I correct in assuming that you would expect 3Q to be above 2Q and then for a dip different 4Q due to some level of seasonality, or am I bringing into that incorrectly?

Q2 will be very strong, I think 25% increase in revenue over Q1 and a 55% increase in EBITDA as compared to Q1 is a really big deal. And delivering Q2 is really important. During Q2 and Q3, we’re rolling out both coiled tubing, which is pulling through a lot of our other services and we’re rolling out the flow back filtration and testing business in several regions, and we expect really strong revenue growth in Q3 as you just pointed out. I think, there is likely to be small dip in Q4 due to seasonality, but there's a lot more assets coming on line in Q3, which will offset that in part.

Got it. Thank you. And just one last one for me. Integration costs, can you help us think about the magnitude in 2Q and 3Q? I know they’re decreasing but just any quantitative color you could provide would be helpful.

It should be pretty small, John. I mean, we took a brunt of it right here in Q1; there will be some. I mean, we will complete -- it's just little less than 90 days to complete the integration of an acquired business which I think is pretty amazing in itself. But we will complete the integration of Red Bone before the end of Q2 and then we will turn to Tecton and we will do that integration in Q3. Neither one of those integrations should be particularly costly. We will call out the number. It won't be anything like Q1.

I’m not showing any further questions in queue at this time. I would like to turn the call back to Mr. Perlman for closing remarks.

Thank you everyone participating on this morning’s call. We look forward to speaking to you again next quarter. Have a good day.

Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have great day.