KLXE - NASDAQ

Good day, ladies and gentlemen, and welcome to the KLX Energy Services First Quarter Earnings Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host,

Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review first quarter 2024 results. With me today are Chris Baker, KLX Energy's President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide a high-level commentary on the financial details of the first quarter and outlook before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at www.klx.com, and there will also be a telephonic recorded replay available until May 22, 2024. More information on how to access these replay features was included in yesterday's earnings release. Please note that information reported on this call speaks only as of today, May 8, 2024, 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. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader 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 will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release that can be found on the KLX Energy website. And now I'll turn the call over to KLX CEO, Chris Baker. Chris?

Thank you,

Thanks, Chris. Good morning, everyone. As Chris mentioned, we reported Q1 revenue of $175 million, representing a 10% sequential decrease and consolidated Q1 adjusted EBITDA of $12 million. On a consolidated basis, the sequential decrease in revenue was driven by increased white space and a shift in geographic and product service line mix with reduced contribution from the Rockies and from some of our higher-margin product service lines, including rentals and tech services, which includes our fishing business, which as Chris mentioned, we expect to see this trend reverse in the second quarter. The Southwest and Northeast Mid-Con segments contributed 40% and 34% of Q1 revenue, respectively, led in the Southwest by our directional drilling, coiled tubing and frac rentals product service lines and in the Mid-Con, by our pressure pumping, accommodations and directional drilling offerings. The Rockies contributed 26% led by coiled tubing, rentals and tech services. Total SG&A expense for Q1 was $21.6 million. When you back out nonrecurring costs, adjusted SG&A expense for Q1 would have been only $18.7 million or just 10.7% of our quarterly revenue. During late Q1, we actioned several changes to our fixed cost structure related to third-party costs and insurance to reduce our overhead going forward. This will begin to be reflected in our Q2 results and will benefit margins for the remainder of 2024. KLX continues to have one of the most streamlined overhead structures for a diversified business. Turning now to a review of our segment results. Starting with the Southwest. Southwest revenue, operating loss and adjusted EBITDA for Q1 were $69.4 million, negative $700,000 and $6.7 million, respectively. First quarter revenue represents a 3% sequential increase over the fourth quarter of 2023 largely due to operational and management improvements, aided by a 1% increase in average rig count, which positively affected our flowback, wireline, tech services and coiled tubing offerings despite being negatively affected by the extreme weather of the polar vortex. Segment adjusted EBITDA decreased 24% sequentially as a function of slightly reduced pricing and the maintenance of slightly elevated staffing levels to support an expected increase in Q2 activity. Moving to the Rockies. Rockies revenue, operating loss and adjusted EBITDA for Q1 was $45.6 million, negative $1.2 million and $5.4 million, respectively. First quarter revenue represents a 24% sequential decrease over the fourth quarter of 2023, largely due to a 2% reduction in average rig count, annual seasonality, increment weather, and non-KLX related safety standdowns which negatively affected the vast majority of our regional drilling, completion and production offerings, including rentals, tech services, frac rentals and wireline and were partially offset by an increase in coiled tubing activity. Adjusted EBITDA decreased 58% sequentially as a function of the seasonal decrease in revenue, which is expected to materially correct as we progress through the second quarter of 2024. Lastly, for segment results, the Northeast Mid-Con segment revenue, operating income and adjusted EBITDA for the segment were $59.7 million, $2.4 million and $10.2 million, respectively, for the first quarter of 2024. First quarter revenue represents 11% sequential decrease over the fourth quarter of 2023 due to reduced regional gas-focused activity across the vast majority of our drilling completion and production offerings including coiled tubing, directional drilling, accommodations and tech services. Segment operating income and adjusted EBITDA decreased 42% and 5%, respectively, largely due to lower pricing. At corporate, our adjusted operating loss and adjusted EBITDA loss for Q1 were $11.6 million and $10.3 million, respectively. The corporate adjusted EBITDA loss increased slightly on a sequential basis, but improved 8% when compared to Q1 of 2023 and is expected to improve in Q2 based on the previously actioned and discussed fixed cost reduction initiatives. I'll now turn to our net working capital, cash flow and capitalization. Net working capital was approximately $60 million as of Q1, and we ended the quarter with a net debt balance of $200 million. Our March 31 cash balance was $85 million, down sequentially and up 113% from $40 million in Q1 of 2023. Consistent with prior commentary, the first quarter is typically our most working capital-intensive quarter driven by seasonally elevated payroll driven by the payment of the 2023 bonus payout, an extra payroll run in the first quarter and elevated payroll taxes that typically burden the first quarter relative to fourth quarter of 2023. We also experienced a slight sequential increase in DSO and a reduction in DPO, both of which had negative impacts on the sequential change in cash. Now turning to CapEx. First quarter capital expenditures were $13.5 million, which were primarily focused on maintenance spending across our segments, Q1 net CapEx or CapEx less asset sales was approximately $10 million. Going forward, we now expect total CapEx for 2024 to be in the range of $50 million to $55 million, down approximately 10% from our original forecasted range of $50 million to $60 million. Most of the budget for the year is earmarked for maintenance expenses with around 80% dedicated to supporting our ongoing operations. We ended the first quarter with roughly $128 million in liquidity, consisting of $85 million of cash and availability of $43 million under our March 2024 ABL borrowing base certificates. Our ABL and senior secured notes, both mature in the fall of 2025. Given our conservative capitalization and outlook for meaningfully improved results and positive free cash flow generation through year-end, we are confident the business is well positioned. Throughout the remainder of 2024, we will continue to monitor market conditions and evaluate opportunities to refinance the outstanding notes and our ABL. Going forward, our focus remains on maximizing margins and free cash flow generation, ensuring robust financial strength and that KLX is well positioned to pursue value-creating growth opportunities. With that, I'll now turn the call back to Chris.

Thanks, Keefer. Before we wrap up, I'd like to share some additional color on the current market and our outlook for Q2 and the remainder of 2024. The E&P industry experienced over $200 billion in merger and acquisition activity in 2023 and operator consolidation continues in 2024. We are confident that our platform is exceptionally well positioned to capitalize on the growing industry consolidation as we have outsized exposure to the largest, most active customers across our geographic regions. This customer consolidation is driving a greater need for certified equipment at higher specifications, including enhanced redundancy and safety features across many of our PSLs. These requirements are driving a portion of our 2024 capital expenditure program as we lean into the demand and position KLX for the future. Customers continue to search for the safest and most efficient service providers available. KLX stands apart with its performance-driven technologically differentiated offerings, exemplary safety record and premier job execution and in certain instances, KLX has already been selected as vendor of choice by top-tier operators due to our enhanced capabilities. These capabilities, combined with our broad geographic footprint, contribute to our strong competitive position. Our industry continues to expect investment in LNG to drive incremental gas demand and key industry players believe it will be the fastest-growing energy source through 2050. KLX intends to benefit over the next 2 years from constructive commodity prices as U.S. LNG export demand rises, which is expected to drive incremental U.S. onshore natural gas directed activity, which should ultimately support elevated service pricing and utilization across all basins. As we exited Q1, white space is much less pronounced. Based on our current schedules, we expect a sequential improvement in Q2. For perspective, based on our current results, April was our best revenue month since November of 2023, partly driven by the dissipating impact of seasonality in the Rockies for segment revenue for April was the strongest it has been since October of 2023, and consolidated May and June are currently scheduled to be above April levels. We anticipate second quarter revenue to be $180 million to $200 million or roughly 5% to 15% higher than the first quarter, with adjusted EBITDA margins of 9% to 11% with an increasingly stronger performance into Q3. In summary, I would like to thank our customers and shareholders for their support of KLX and most importantly, our team members for propelling us to where we are today. By prioritizing safety, customer service and the successful execution of our strategic initiatives, we will deliver continued profitability even in a relatively flat market. With that, we will now take your questions. Operator?

[Operator Instructions] And we'll take our first question from Steve Ferazani from Sidoti.

I appreciate all the detail on the call. In terms of how you think the year plays out, based on your guidance for 2Q, if we're assuming -- in your closing comments noted, assuming was probably is going to be something close to flat U.S. land activity for the remainder of the year. What do you -- beyond the typical 3Q seasonal uptick that you usually see, what can you get to drive profitability? Or do you expect not to drive further profitability at this point in the second half of the year? Will we see the full cost cuts in 2Q, immobilizing assets? Anything you can tell us in terms of how you think right now based on what we know today, what you think about second half compared to how you're guiding for 2Q?

Steve, this is Chris. That's a long question with a number of different topics, I guess I'll take 2Q and 3Q guidance first. Look, ultimately, Q1 was tough as we know with some of the seasonal impacts, transitory issues, et cetera. For 2Q specifically, we expect reduced white space, a material rebound in our Rockies activity, which is typically our highest margin segment, as well as a rebound in overall higher-margin PSLs, which would include rentals and fishing. As we said in our prepared remarks, April is our best month since November, and April was the best month in the Rockies since October. And so when we think about our 2Q guide of $180 million to $200 million and 9% to 11% of adjusted EBITDA margin, if we just look at our current calendars as well as our initial look at our internal financials for April, we believe we're trending towards the mid- to high end of the guidance range is the reality of it. And as we stated, we expect further improvement as we progress to 3Q. And so as we think about 3Q relative to 2Q, we talked on the call about we saw an increase in revenue in April of our March exit rate, which was the highest exit rate in Q1. And so our current revenue forecast show a further increase in May, June and July. So if 3Q holds and you have 3 months that are on par with May and June, we'd expect continued improvement. And then to your point, and you astutely stated, 3Q historically is outside of cycles, it's typically the best month in the services space, just simply due to longer daylight fewer holiday, mere 0 seasonal impacts in the Northern regions as well. So we would expect just continued overall growth in the face and margin enhancement in the face of the cost cuts that we're enacting today.

That's really helpful. Given the challenges of this year and hopefully, certainly reasons to believe '25 is better. Over the last 2 years, you did a lot to improve the balance sheet. Obviously, you're sitting on a much better cash position than you had been 2 years ago. It sounded like Keefer said, you expect some level of cash flow this year. Is that fair? And with the lower CapEx, do you expect that you can protect the balance sheet this year given sort of your outlook?

Yes. Good question, Steve. I think what I said in the prepared remarks was Q1 is the low point. And in terms of operational performance, and as we progress through year-end, we actually expect to generate positive free cash flow from this point forward. Spot on in terms of where a lot of our focus has been over the last few years is growing back into the operating platform that we have and growing back into our balance sheet. We think we've more than done that. We're obviously coming off a pretty strong 2023, and we're exiting what is going to be the low point for 2024. So expecting as Chris mentioned, pretty strong sequential improvement into Q2 with further improvement thereafter. So we believe we continue to be conservatively capitalized from a leverage standpoint, and then obviously, from a cash and liquidity standpoint, have a very strong balance sheet.

If I can get one more in, in terms of refi conversations, it's May. Have you started those conversations. From the last time you did this, your balance sheet is much stronger. You've shown the improvement, but you're probably entering those conversations at a tough time for OFS in general, how does that influence those conversations? And how are you thinking about them right now?

Yes, I think Q1 was certainly tough. I think as we think about the remainder of 2024 and then certainly, as you think about the improved demand for U.S. onshore services as it relates to gas directed activity and what that does to support a higher floor across the broader market, including the liquids basins. I think we get pretty excited about 2025 and onward as you think about the short- to medium-term outlook for the services space. So I think there actually are some pretty strong tailwinds for the sector. With that said, we just talked about it. I think we're still conservatively capitalized. I think we have a really strong cash and liquidity position. There is almost a 3% call premium on the notes today. So we acknowledge that exists. And then as I said in the prepared remarks, we're actively monitoring the market and we'll continue to evaluate opportunities to refinance both the notes and the ABL as we progress through the remainder of 2024.

[Operator Instructions] And we'll take our next question from John Daniel from Daniel Energy Partners.

Just curious if we can pretend for [ summer ] that we're going to stay sort of range bound at 600-ish rig count over the next -- plus or minus 5%, over the next 1.5 years or so. As you look across the various basins that you're in, are there -- do you feel a need to do any -- prosecute any very small tuck-in deals just to get scale in particular areas? Is that something that you would be evaluating?

Look, we look at deals all the time, right? And we've talked about that, yes, I think on every earnings call we've had for the past couple of quarters, we're still seeing deal flow today. I won't say it's necessarily increased or decreased. What I will say is we've seen a couple of deals lately where the feedback from bankers has been that PE is the lead horse in essentially all cash deals and what we view as kind of outsized multiples, which candidly is a bit surprising. And so as we talked about before here at KLX, we're strong believers in aligning incentives and believe majority equity-linked deals are a keen alignment mechanism. That's how we executed the Greene's deal. So we've been very pleased with retention of customers and employees thus far. And so we're continuing to evaluate opportunities, but today, our primary focus is our internal initiatives and driving adjusted EBITDA. And so to your point, our diversification is a key strength because it allows us to integrate tuck-in deals very quickly. And so we'll evaluate them. The counter is all of our assets have wheels primarily can travel, and we have redeployed some assets into the more active basins as we've shied away from some of the gas basins and activity has declined. So I think we're going to take it on a case-by-case basis.

Okay. Would you -- I mean it does feel like there could be pockets of weakness in Q2, I'm not saying you, but just broadly speaking. Do you think you're going to see more opportunities arise in the next 3 to 4 months?

We're sure seeing that way. We talked about that last call where you think there'd be capitulation with some of the mom-and-pops, especially in the gassier basins. I think to your point, if you look at the peer group, there's pretty material dislocation between the shape of both Q1 quarterly results and outlook and trajectory. With what we're seeing with the Rockies rebounding our completion and production side of our business, in particular and the Rockies rebounding into 2Q and 3Q, we're pretty confident in our guidance. I just think it comes back to how are you aligned with key customers, do they have gaps in their upcoming schedule? Do they take brakes to review production or manage capital discipline, et cetera. And earnings get whipsawed and I think that's what you've seen through Q1 by and large. But I think some of that starts to abate as the weather improves, et cetera, in 2Q and 3Q whether or not some of the smaller mom-and-pops and tuck-in opportunities take that market and to your point, kind of a flattish market as an opportunity to extract value, if you will, and take equity and ride the upside is TBD.

Okay. The last one for me is on the coiled tubing, the highlights you had earlier. To get to those steps, did you have to do anything differently, what got you to drive that -- to hit those records?

So what I would say is, look, any time you're at the tip of the spear, it takes incredible field execution, backstopped by very precise engineering, friction modeling, stream design, fluid selection as well, as you well know, optimal BHA, whether the motor, the ERT, the bits, the mills, everything has to work in concert with each other. I mean, the reality is it's a true team effort. We're very, very proud of the strides that we've made in expanding the commercial opportunity for coil. If you roll the clock back and I'm preaching to the quarter, you know this all too well. Pre-COVID, you would add a lot of people saying you'd never get beyond 2-mile laterals with CT and stick pipe, what's going to take over. And by the way, we have stick pipe. We have BOPs. We have snubbing units as well, right? So we can be a little agnostic, where we've seen this tremendous capacity expansion in the size and carrying capacity of coiled tubing over the last couple of years. And regarding our specific achievements, look, I'm not going to disclose what we think are competitive strengths candidly. That being said, what I will tell you is we were still making headway and acceptable ROP at mile 3.9 in the lateral and had not reached [ locked ] up yet. So how much deeper the rabbit hole go? I'm not sure, we'll wait and see, but we're clearly ecstatic, I would say, with our results. And I think we're continuing to see operators willingness to continue to experiment with extreme lateral length in coil tubing.

And we'll take our next question from David Marsh from Singular Research.

I just wanted to start with your proposed cost cutting. Could you -- Keefer, could you just give us a sense of how that's going to cut across the P&L in terms of whether it's going to be impacting mostly SG&A? Or is it going to be on kind of your fixed cost side that would impact your cost to get sold? And can you give us any sense of order of magnitude that you think that you could realize here?

Yes. David, this is Chris. I'll jump in and then Keefer can backfill. Short answer is yes. Look, as rig count continues to decline in Q1, we initiated a number of actions and those extend through to today is the reality of it. The way I'd frame those actions is really numerous adjustments and modifications to fixed cost corporate level vendors and those costs would include insurance accounting, IT, legal, you name it. And so we really try to attack the fixed cost side of the cost ledger. At the same time, we've always monitored crew utilization head count with an aisle maintaining capacity for May, June, July levels of forecasted revenue. So we haven't disclosed the dollar figure to date. However, what I would say is we're expecting a partial quarter realization from the 2Q cuts kind of it started in earnest in March through April, and we'll receive a full quarter benefit of those in Q3.

I guess the only thing I'd add there is to your question between COGS and G&A split, it's going to be a mix of both of those cost buckets, probably, frankly, evenly split. And to Chris' point, you'll start to see that roll through. But it's a mix of both fixed and variable, obviously, more variable at the COGS line and more fixed with the G&A line.

And this concludes our question-and-answer session. I'll turn the floor back to Chris Baker for closing remarks.

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