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

Thank you, Joelle. Good morning and thank you for joining us. Today, we are here to discuss KLX Energy Services financial results for the second quarter period ended July 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.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 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 our 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. Thank you for joining us today to discuss our second quarter financial results. During the quarter, we made initial progress in rolling out new product service lines in all three of our geographical segments. We introduced large diameter coiled tubing services, in conjunction with the proprietary HydroPull tool and our own proprietary motor bearing assembly, in both the Northeast/Mid-Con and Rocky Mountains segments. And we’re pleased with the consistent pull-through effects for our complementary asset light services.We also completed the training of the personnel required to roll out the flowback and testing PSL in one additional GEO region. In spite of these significant new PSL training and launch costs, we did manage to absorb all of these costs and still deliver a profitable quarter.Second quarter 2019 revenues were up approximately 13% as compared to the first quarter of 2019, and we’re up approximately 40% as compared to the same period in the prior year. Organic revenue growth was approximately 8%. Our Rocky Mountains and Northeast/Mid-Con segments delivered sequential quarterly revenue growth of approximately 31% and 23% respectively, while our Southwest segment revenues declined approximately 8%. Organic revenue growth for our Rocky Mountains and Northeast/Mid-Con segments were very strong at approximately 25% and 13% respectively.Our second quarter 2019 performance reflected lower activity levels, and reduced capital spending by exploration and production companies almost all of which intensified their focus on capital discipline in order to deliver announced levels of free cash flow. Additionally, severe weather conditions in the Mid-Con including severe flooding which led to impassable roads and highways began in the month of May and persisted through June, resulting in a significant decline in activity in the Mid-Con until the second half of our quarter ending July 31. The magnitude of the negative…

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

Thank you. [Operator Instructions]. Our first question comes from Brad Handler with Jefferies. Your line is now open.

Maybe I would appreciate if you could speak a little bit more to what's going on in the wireline business in your Southwest region. It does sound like there’s competitive threats and I guess I'm happy to tee up. What feels like is probably what you're offering as a solution to that by -- with greaseless wireline and then your preassembled perf guns. But if you could just kind of speak to that? And maybe in a sense what allows it to get better, more significantly enough better or do you foresee -- maybe in addition to what I was just suggesting from a more proprietary standpoint, do you foresee moving assets out of that region, because it’s simply -- it's just too competitive for the long run?

There is too much wireline supply and insufficient demand in the Permian and you got a lot of irrational prices for wireline services in the Permian. We've chosen not to deploy our assets at the prices being offered by competitors. We know a lot of folks that are basically running their equipment into the ground and generating cash flow. We are deploying some of those assets to other regions, where we have better capacity demand and better pricing environment. But we expect that in the long-term we will have to offer a complete range of our services to our customers in the Permian.So we will return -- we will retain a certain amount of wireline capacity but we are going to choose to keep it sideline until such time as we can generate a reasonable return on our investment in those assets.

Got it. So, again you used the term running it into the ground, so you assume that after some period of time, it’s -- what is unsustainable, the pricing needs to move higher or else too many companies won't be able to offer the services long-term. Something along those lines?

Exactly, right. And then we have -- you know that there are a couple of companies teetering on the brink at this point in time and they are basically running their assets for cash flow and we choose not to do that. And we want a reasonable return on assets for our investors. And so we've got a couple of regions here where we have really strong organic growth, I mean 25% and 13% is very strong organic growth, and we are increasing our customer count. We are increasing our penetration and share of wallet. And customers are really growing market share and delivering excellent results.In the Permian, there is -- particularly with respect to wireline, there is just way too much capacity, insufficient demand and the status of some of the competitors in that environment are such that they’re running those assets for cash flow.

If I pivot to look at the second half of the year and get at your guidance a little bit, it’s easy to see potential weakness in natural gas and NGL-related activity in the second half, which would obviously address Northeast/Mid-Con region. You’re talking about weakness, that’s a lot of other different nature in the Permian. Maybe help us think a little bit about regions in terms of your guidance and nevertheless where your opportunity lies please?

I think -- so the gas play in the Northeast region quite are gas-related revenues for the company, are about 17% of revenues, and we do expect a significant reduction in activity related to gas in the Northeast. Our segment is the Northeast/Mid-Con segment offsetting that. We got really strong operations in the Mid-Con. I mean we have 13% organic growth in spite of having lost $8 million to $9 million in revenues. That’s negative revenue impact from the tornadoes and flooding during that six weeks during the quarter from May through mid-June. So very strong growth, a large increase in the number of customers and significant increase in share of wallet.Now while rig count is way down in the Mid-Con as you know, we are doing pretty well there. We introduced coiled tubing services during this past quarter and the pull through that we’re getting from the coiled tubing service is consistent with our expectation and our strategy. So, we do expect the segment to do well during the quarter -- during the third quarter notwithstanding the substantially negative impact from the Utica and Marcellus gas plays.

And then maybe just one more from me and I guess I feel like I should ask a little bit about bigger picture and from your relatively fresh out of the gate kind of look standpoint too, as a standalone entity anyway. So your initial guidance for 2019 was in the order of 200 million, I think it was $200 million of adjusted EBITDA. If I'm taking sort of a stab at fourth quarter based on your comments, you’re now reining that into something more like a 120 million, 125 million of adjusted EBITDA. The oil price hasn’t necessarily been that different than what you were outlining in terms of the basis of your guidance, right? But obviously a number of other things have happened this year. And so I guess maybe you could speak to, in a sense what -- and sort of how to reassure -- in a sense how to reassure us that your current guidance is really sort of on target, there’s something that we’re going not wake up six months from now and say “Oh, wow, that was wrong for X or Y or Z reasons as well,” but that it is just that much more solid I guess?

Oh, we should talk about X, Y and Z, right?

I guess, if you can, I mean it’s obviously the unknowns, right? But it’s…

So see we’ve got -- I mean coiled tubing spreads are a very large revenue generator and also is a great deal of pull through. We’ve had delivery delays which have already impacted revenues during the second quarter, but we've now pulled all the revenues from five coiled tubing spreads, large diameter coiled tubing spreads out of our guidance for the full year. Those spreads generate, when they are up and running and operating, something in the neighborhood of $1 million to $1.2 million per month per unit together with the pull through effect, okay? So, not having that resource in the company and we did discuss this by the way in the -- I think it's both in the news release and in the script, we will be receiving those and we are enthusiastic about that and we're also very happy with the quality of the equipment we're getting. But we’ve moved all of those revenues out of our guidance and we still have in our guidance the receipt of the five units but at the very end of the year. And we will have the negative impact of the use of cash to buy those assets, but the revenues from those assets really won't come in until 2020.I would think that the good news there is that we would expect strong growth in both revenues, expanding margins and substantial free cash flow since the intensive capital investment phase of our strategy will have been completed. I mean what is our strategy about? It's about differentiating ourselves from the moms and pops that offer some of the services which we offer in order to -- by spending on capital assets that moms and pops are not necessarily able to do.So, being able to offer our customers coiled tubing and…

Thank you. [Operator Instructions]. And our final question comes from John Watson with Simmons Energy. Your line is now open.

On the coiled tubing side I wanted to follow up on your commentary for the five units that have been delayed. Do you have customers in place for those five units already? And can you also speak to the level of oversupply, undersupply in the large diameter coiled market and maybe compare and contrast that with what you’re seeing in wireline?

Yes, the new coiled tubing assets do have very specific customers to which they are expected to be employed. The coiled tubing assets are -- some of those assets are used on a dedicated basis round the clock, 24/7, for certain customers and some of the coiled tubing assets are used on a spot basis for multiple customers that are close to one another geographically.Obviously, the highest utilization comes from dedicated use of the large diameter coiled tubing spreads. There is a shortage of large diameter coiled tubing assets in the 2-5/8 inch range, undoubtedly. We’ve got customers who are begging us to bring that equipment online and we’re late with it because we just don’t have the equipment yet. We have one additional dedicated customer that we expect in the Permian who would like to have the assets, but there’s competition for the assets between regions that already have customers lined up. So the issue that we have right now is allocating our new coiled tubing assets, as they become available to us, to bring into the market. But it’s a very different picture than the wireline situation.

Okay, that’s helpful. I guess more near term, $8 million to $9 million of lost revenue from Mid-Con weather during the quarter. The revenue guidance implies your revenues are up somewhere around $5 million quarter-over-quarter. So the sequential increase that you’re contemplating for 3Q, the majority of that is making up for what you lost from the Mid-Con weather in 2Q. Am I thinking about that correctly?

Well we do expect the Mid-Con to be stronger and the Mid-Con itself to be stronger in Q3, but we expect Northeast revenues to be down in Q3, right? So our Northeast/Mid-Con segment is -- comprises both the Northeast which is gas-related and the Mid-Con which is of course oil and gas, but primarily oil. And so, the increase that we’re forecasting in Q3, I think is, is in spite of what we expect to be substantially lower activity levels in terms of both drilling and completions in the third quarter and I think you probably heard that from all of the OFS companies that have reported.

Right, absolutely. To that point, we’re three weeks through August at this point. Can you give us an update on how August is trending relative to maybe the 2Q average monthly results?

August is not even finished yet, August is not finished yet. We don't see anything unusual in August but we won't report on August until it's finished, if we report on August as a single month at all. So, I can't comment on our August numbers, except to say, we don't see anything unusual in August that I know of.

Okay. Okay. And then lastly, the Rockies were very strong and you gave some nice color on that in your prepared remarks. Obviously, just curious if there is anything else to share, anything else we should be aware of heading into the back half of the year in that region, given the strength you saw in 2Q?

Well we certainly have seasonal or weather-related issues in the Rockies in the fourth quarter, right? I mean you always have really tough weather, snow, maybe blizzards who knows what. So, we expect somewhat lower revenues in Q4 than we expect to report in Q3, but there's nothing else in particular that I would comment on that. And by the way, organic revenue growth in -- you’ve called out the Rockies because of the 25% organic revenue growth, which I guess is different than any other company that's reported, any other OFS company reporting anywhere but we had essentially the same result in the Mid-Con -- the Northeast/Mid-Con segment, because we had 13% organic revenue growth in spite of having lost $8 million to $9 million in revenues because of the tornadoes and floods, which really took us down for about six weeks.So I mean we've got a very strong business and our strategy seems to be working. We've got the issues to deal with in the Permian, the wireline issues to deal with the Permian but we have got two of our three segments that are really humming right now.

Thank you. And the final question will come from Simon Wong with Gabelli & Company. Your line is now open.

You mentioned that your capital adjustment program is coming to an end this year. Do you have a preliminary CapEx number for 2020?

No, not yet. We didn’t say it’s coming to an end. We said the intensive capital investment phase is coming to an end. So, this year we will spend close to $100 million in total, $20 million to $25 million in maintenance but the balance is all growth CapEx, which we won't experience the benefit from until 2020 and beyond. We will continue to offer new capital equipment to our customers and replace worn capital equipment and so on and so forth. But the level of expenditures will be dramatically lower than the level of expenditure which we have in 2019.

Okay. And then in relation to the stock repurchase authorization you announced two or three weeks ago, do you have the timeline on that or what’s your thinking about that?

Yes. There is no specific start date or end date and there is no specific timeline on that program. But given that we expect strong free cash flow in 2020 and given that we now have a cash balance of $92 million and an unused $100 million credit line, we think that it’s a very good investment for the company to buy back its shares with the share price depressed as it is currently.

Okay, one more -- last question. Is there anything in the new product side in the pipeline that you can talk about?

It’s a good question. I think that given that we’re rolling out so many new tools as we speak, I think we just assume not to talk about additional ones. I mean we started up the sales of our dissolvable plugs, that’s going pretty well and contributed to growth in the quarter, particularly in the Rocky Mountains segment. They HydroPull tool together with our Havok motor bearing assembling in conjunction with our coiled tubing is pulling through a lot of additional service revenues. So we’ve got a lot of new stuff that we are working through currently. So, I just assume not to talk about things that we haven’t yet introduced into the market. By the way, the last quarter we did mention the toe sleeves and the liner hangers and some of those products which we sell as part of our DHPS product line together with the dissolvable plugs. So there’s a lot of -- there are a lot of new products which we are delivering into each of our GEO segments.

I think with that our call has come to a close. We wish all of you a very good day and thanks for participating in our earnings call.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone, have a wonderful day.