Greetings, and welcome to the KLX Energy Services Fiscal 2020 Second Quarter Earnings Conference Call. At this time, all participant are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard with Dennard Lascar. Thank you, Mr. Dennard. 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 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 a commentary on the recent completion of the KLXE/Quintana merger, the financial details of the second quarter and their integration and operational plans and outlook before opening the call to Q&A. There will be a replay of today’s call that will be available by webcast on the company’s website at klxenergy.com. There will also be a recorded replay available until September 10, 2020. More information on how to access that replay feature was included in yesterday’s earnings release. Please note that information reported on this call speaks only as of today September 3, 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 report, 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 and 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 with that behind me, 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 second quarter 2020 conference call. This is an exciting time for all of us, as it represents the inaugural post-merger call for the new KLX, which brings together the outstanding personnel, comprehensive asset and customer bases and extensive industry expertise of two leading oilfield services companies, KLX Energy Services and Quintana Energy Services. Since the closing of this merger on July 28, I have formally taken on the role of President and Chief Executive Officer of KLX. And Keefer Lehner has likewise assumed the role of Executive Vice President and Chief Financial Officer of the company. Together, with the rest of our leadership team, we see the tremendous potential of this merger and look forward to the successful integration and bright future of the company with an eye on additional consolidation opportunities. With that in mind, I would like to begin by talking about the merger and highlighting the many strategic merits of the deal. I will then turn the call over to Keefer to review our fiscal second quarter financial performance before returning for some final comments on our strategy for the business going forward, including integration, synergy capture, and the generation of new opportunities in the marketplace. Now, let me begin by discussing the closing of our recent merger. On July 24, KLX and QES shareholders approved the merger of the two companies at their respective special meetings. Our shareholders also approved a reverse stock split, which resulted in our Board ultimately authorizing a one-for-five split ratio for a final post split exchange ratio of 0.0969. Both the reverse split and the merger closing were completed on July 28. Given all the hard work and countless hours put in by…

Thank you, Chris. Good morning, everyone. Before we review our second quarter 2020 segment results, I’d like to highlight a few noteworthy items. First, please keep in mind that since the merger was completed on July 28, our combined second quarter results include only three days of results from legacy QES business. And they are, therefore, largely representative of KLX’s premerger structure. Additionally, there’s little to no synergy benefit reflected in our Q2 results. Second, we will maintain a January 31st fiscal year-end that follows KLX Energy’s legacy financial reporting and our segment results will be reported on a geographic basis consistent with KLX’s past practice. The three geo markets will remain the Southwest, the Rockies and the Northeast and Mid-Con. Third, after completing our initial draft of the purchase price allocation for the merger, the transaction was determined to be a bargain purchase due to the fair market value of acquired assets exceeding the purchase price. This is a function of the depressed market environment driving low prevailing market caps and the transaction being structured on a relative basis with the consideration primarily being KLX shares. As a result, our incomes statement reflects a total bargain purchase gain of approximately $41 million. Fourth, in addition to the bargain purchase gain, there were a handful of extraordinary costs impacting our results for the quarter. We had $5.5 million of deal costs, $7.5 million of severance, and $15.1 million of non-cash equity compensation tied to accelerated vesting. With that said, I’ll now dig into our second quarter 2020 consolidated results. For the second quarter ended July 31, 2020, revenues were $36.2 million, a decrease of $46.8 million, or 56% as compared to the first quarter of 2020. The decrease in revenues reflects the impact of the COVID-19 pandemic, the impact of…

Thanks, Keefer. As we look ahead, our efforts will be squarely focused on integrating and streamlining our operations and support functions, while fully capturing the $40 million of cost synergies that we have identified. Our anticipated synergy opportunities fall into three general categories. The first is the elimination of KLX’s legacy corporate headquarters in Wellington, Florida and rationalizing associated corporate functions to Houston. This will result in immediate cost benefits through the reduction of duplicative public company costs, including director and auditor fees and insurance economies of scale, as well as other administrative and support staff expenses, such as accounting, legal, IR and supplementary functions and the elimination of other legacy KLX corporate cost. We have made excellent progress in realizing these savings, as our corporate functions are being transitioned to Houston and we have either retained or hired new leaders for each of these areas. We currently anticipating closing the Florida office by the end of October at the latest. The second synergy category is the combination and rationalization of redundant Houston facilities and teams, which accounts for a smaller portion of the overall savings. This represents an additional reduction in duplicative management and associated costs, sales and marketing expenses, economies of scale related to benefits cost, as well as incremental savings in HR, IT and system savings, as well as the consolidation of the Houston corporate office space. The third category is made up of operational synergies in the area of personnel, facilities and rolling stock. These represent the consolidation of over 20 overlapping facilities, reductions in redundant management, sales, HS&E and other field level support staff within certain geographic basins, where we overlap with legacy QES operations, as well as procurement savings and economies of scale benefits across our operations. Beyond these three categories, we believe there…

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Daniel with Simmons. Please proceed with your questions.

Hey, guys, thanks for putting me in. Just for the transcripts, no longer with Simmons with Daniel Energy Partners. But Chris, you alluded to consolidation opportunities still something that you wish to pursue. Obviously, you’re probably pretty busy with the integration now. But can you speak to a consolidation strategy? Would you – does it make more sense to target the smaller tuck-in deals? Or do you go for the gusto again with another larger transaction?

Yes. Good morning, John, and a good catch. We saw that up on the screen, the Simmons note. So congrats on your new role and appreciate you dialing in and your interest in KLX. Look, as you know, we’re huge proponents of industry consolidation. We saw consolidation in the market earlier this week, and we congratulate both of those teams. I’m sure you’re well aware. We’ve also started to see some consolidation in some of the larger privates over the last month, same month. And so we congratulate all of those parties. I’m just starting to move the needle. First and foremost, we’re going to focus on integration and synergy realization period in the story, that’s our number one goal, along with bringing the company back to break-even EBITDA. And so that’s what we’re focused on. But I think we’ve discussed mergers, ad nauseam on prior calls. We view this as step one. We’re still looking to gain scale in certain service lines. And we’ll continue to look to add complementary technology, all while trying to preserve the strength of the balance sheet. And so, as we look at the outlook in front of us, KLX is afforded with a diverse mix of product service lines and an impressive technology portfolio and a strong balance sheet and liquidity position. So, we think we can use our position of relative strength to our advantage, and we’re going to continue to look for ways to grow the business. And I think, between myself and Keefer and our Board, we all have relationships, to your point, on the larger side of the business, as well as the private and we’re going to be opportunistic there. But we’re not going to let a transaction get in the way of integration.

Fair enough. Would you envision, as a consolidation strategy does unfold sort of sticking with existing core competencies? Or do you see yourself wanting to branch out to expand product line? And that’s all for me.

Yes. No, look, I think, to my earlier point, we’re pretty diverse at this point in time. And so we’re going to try to continue to gain scale and stick with our knitting, right? I’m not going to say that we wouldn’t look to bring the company into more production service lines in the OpEx side of the business. But it would be something that tucked in well and was synergistic to our existing technology platform, where we could cross-sell some of those technologies and tools.

Okay, great. Thanks for putting me in, guys.

Yes. No, I appreciate it, John. Thank you.

Our next question comes from the line of Jaime Perez with RF Lafferty & Co. Please proceed with your questions. Jaime Perez, your line is live.

Good morning, everybody. How are you doing? Thanks for headed on mute. Thanks for taking my question and congratulations on the merger. I have a question on utilization for the quarter. Can you give us some color or details on utilization? And what would be the break-even utilization for gross margins? I mean, we have a – gross margin is pretty weak. I’m just wondering what volume of work that you need to have to achieve break-even gross margins? And I have further questions beyond that.

Yes. Jaime, I appreciate the question. Look, what I would say is, across all product lines and all regions, revenue was down differing levels, right, and differing levels of utilization. And so we haven’t historically closed utilization by product line. But overall, 2Q is a very difficult market. I mean, rig count bottomed at basically 231 on a horizontal and directional basis. It’s now up plus 10. We talked about how frac spreads and completion activity, which includes flowback and all the related tools and drill outs were down in the 40 range, and we now see those back up into the low-100 range. And so that’s going to drive utilization across a whole host of our service lines. We’re also starting to see some of the shut-in wells be brought back online, and that will also drive intervention services and some of the tools to go back to work. And so, we’re seeing a ramp in utilization today. Pricing is still soft across the Board. And so, from a break-even perspective, it’s going to be highly dependent on the revenue mix coming out of the product lines, the revenue mix, whether it’s driven by incremental utilization or incremental pricing, we have seen a pricing uptick in certain business lines. And then lastly, the timing of realization of synergies within a given quarter. So I don’t think we’re prepared to provide guidance on required break-even revenue. But I think that gives you the building blocks and components.

Yes. That’s helpful. Also, as far as the integration, I mean, how far – I know the merger completed was closed on late July. But as far as the integration of all the –of the company and especially the field and operations, how far have we gotten? And if an operator wanted service, how fast could you provide it?

Yes. Look, I mean, what I would say is, we talked about it in the prepared remarks. We think we’ve realized about $18 million of synergies thus far. Step one was absolutely the consolidation of the corporate functions, right? And so we’re working on that. We’re working on the consolidation of the Houston functions as well. There’s only certain geographies where we truly had overlap, and that would have been the Southwest geo market and then the Mid-Con. And so we hit the ground running basically week one, day one with regards to consolidating those opportunity sets. And I think we’ve done an excellent job. And part of that consolidation and integration is what’s driving some of the uptick in activity that we’re seeing today. And so, from a customer response standpoint, we’re ready to go at a moment’s notice, as soon as they call us. So I don’t think we’ve had any issues with regards to the responsiveness to customers.

Very good. Yes. My next question, you have about $99 million of cash on the balance sheet. What’s the plan to use for the cash? Are you going to use it to buy more equipment? Is it pay down some debt? I mean, you do have large amounts of debt servicing throughout. It was about $7.6 million this quarter. And if you analyze that, it’s almost $30 million. What’s management’s thought about paying off some debt?

Yes. I think with regards to – I’ll just hit the first part of that question with regards to CapEx. We alluded to the fact that we basically suspended all growth CapEx and we have scrubbed maintenance CapEx to absolutely require the unnecessary items. And so we will cut that number 50% year-over-year and don’t anticipate, in this market, increasing capital spending anytime soon. Keefer, you want to jump in on kind of the debt in the balance sheet?

Sure. So I appreciate the question and good morning. So you’re spot on. We ended the quarter with about $99 million in cash. We had about $15 million of availability on our ABL facility. But as we noted in the prepared remarks, that doesn’t include the borrowing base impact associated with the current assets from the legacy QES side, which were not wrapped into our borrowing base as of July 31. But that will be complete prior to reporting our Q3 results. I think to get to where you’re going with your question, it seemed to be more on the liability management side. And I think what I’d say is, the company is evaluating all opportunities in front of us, whether it’s to grow through consolidation or to improve the balance sheet. So in addition to consolidation, liability management is certainly a hot topic within the industry today. But as we stated in the prepared remarks, cash and liquidity preservation in the current environment are king. And so, as we approach or evaluate liability management option, we’ll do so in the same manner with which we evaluate all investment opportunities for the company, which is really to focus on the risk-adjusted returns there, understanding that the key in this type of market environment is cash preservation and liquidity preservation.

This concludes our question-and-answer session. I’d like to hand the call back to Mr. Baker for closing remarks.

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.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.