KLXE - NASDAQ

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the KLX Energy Services Third Quarter Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ken Dennard. Thank you. You may begin.

Good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review third quarter 2025 results. With me today are Chris Baker, President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide commentary on its quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call and it will be available by webcast by going to the company's website at klx.com. There'll also be a telephonic recorded replay available until November 20, 2025. For more information on how to access these replay features go to yesterday's earnings release. Please note that information reported on this call speaks only as of today, November 6, 2025. And therefore, you're advised that time-sensitive information may no longer be accurate at 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's 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 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, which can be found on the KLX website. And now with that behind me, I'd like to turn the call over to Chris Baker. Chris?

Thank you, Ken, and good morning, everyone. Thank you for joining us today. The third quarter represents the strongest quarter of the year, overcoming continued market headwinds, including commodity price volatility and a softer OFS activity environment. Tax generated revenue of $167 million, up 5% from Q2 and adjusted EBITDA of $21 million, up 14% from Q2, ahead of our prior guidance. Adjusted EBITDA margin improved materially by 100 basis points sequentially to 13% despite the average U.S. land rig count declining 6% average frac spread count being down 12% over the same time period. Our results were driven by a 29% revenue increase in our Northeast Mid-Con segment which more than offset softer activity in the Rockies and Southwest segment. KLX outperformed the industry trend once again by strategically allocating its assets across our broad footprint focusing on field execution and efficiencies and tight cost controls. Operationally, our completion-oriented product lines in the Mid-Con Northeast, along with a rebound in our accommodations and flowback businesses contributed meaningfully to this quarter's top line strength. KLX's third quarter results are a testament to our team's agility, dedication and collaboration effectively managing white space in a difficult market, all while controlling costs. The operating environment remains challenging, shaped by OPEC+ supply growth and depressed rig counts across all major basins. We believe that our diversified asset base premium customer alignment and diverse geographic footprint will continue to support consistent performance. Third quarter revenue and adjusted EBITDA per rig were $318,000 and $40,000, respectively, 20% and 227% above the levels from the fourth quarter of 2021, the last time industry activity was at similar levels. This underscores the progress we've made in strengthening our competitive standing and driving operational and organizational cost efficiencies over the past several years. Simply put, KLX is significantly more efficient today than we've been in prior cycles. Now let's look at our segment results. The Southwest represented 34% of Q3 revenue, down from 37% in Q2. Northeast Mid-Con was 36%, up from 29% in the prior quarter, and the Rockies was 30%, down from 34% in Q2. The Rockies experienced reduced completion activity in our tech services, frac rentals and coiled tubing product service lines. In the Southwest, weaker demand in directional drilling, flowback and rentals driven by the overall reduction in Permian activity and white space associated with customer M&A integration initiatives resulted in a softer top line with revenue declining 4%, albeit still outperforming the segment's average rig count decline of 9%. The Northeast Mid-Con segment was a standout in Q3 with our completions-oriented product lines delivering sequential growth for both revenues and margins, demonstrating our ability to capture incremental activity by basin, focusing on crew and equipment allocation throughout the KLX footprint and we expect continued momentum into Q4. By end market, drilling, completion and production intervention services contributed approximately 15%, 60% 25% of Q3 revenue, respectively. Based on current customer calendars, we expect a healthy Q4 despite typical seasonality and budget exhaustion. This reflects recent market share gains, the solid execution of our strategy and a steady focus on long-term value creation, all of which positions KLX for increased activity anticipated in 2026. I'll now turn the call over to Keefer to review our financial results in greater detail, and I will return later to discuss our outlook. Keefer?

Thanks, Chris. Good morning, everyone. As Chris mentioned, Q3 2025 revenue was $167 million, a 5% sequential increase but 12% lower than Q3 2024. Average rig count was down 6% over this period and frac spread count was down 12% over the same period. Our Q3 sequential results were driven largely by strong growth in the MidCon, Northeast segment, which saw a 20% -- 29% quarter-over-quarter top line increase. The outperformance was complemented by disciplined management of fixed costs, resulting in consolidated adjusted EBITDA margin expansion to 12.7% from 11.6% in Q2 and was in line with last quarter's guidance and approaching Q3 2024 margin levels of 15% despite a market environment measured by rig count that is down 7% over the same period. Total SG&A expense for the quarter was $15.6 million. Excluding nonrecurring items, adjusted SG&A expense came to $14.8 million representing a 30% reduction from the same period last year and an 18% improvement sequentially. These reductions reflect the full impact of the cost structure initiatives implemented in 2024 supported by incremental efficiency gains realized throughout 2025, reduced third-party spend and settlement of a legal claim. Looking ahead, adjusted SG&A is expected to remain in the 9% to 10% of revenue range for the year. Moving to our segment results. The Rockies segment had Q3 revenue of $50.8 million and adjusted EBITDA of $8.1 million. Sequential revenue and adjusted EBITDA decreased 6% and 22%, respectively, mainly due to a slowdown in completions activity due to discrete customer scheduling, particularly in tech services, frac rental and coiled tubing. As we move into Q4, we've seen some choppiness to customer schedules and expect typical holiday slowdowns. In the Southwest segment, revenue and adjusted EBITDA were $56.6 million and $5.1 million, respectively. On a quarterly basis, Q3 revenue decreased 4% sequentially, with EBITDA down 29%. As expected, given the 9% decline in Southwest rig count, an 18% decline in permanent frac spread count, the Southwest experienced lower activity across directional drilling, flowback and rentals which drove a corresponding downward pressure on margins during the period. For the Northeast Mid-Con segment, revenue was $59.3 million and adjusted EBITDA was $14.5 million. The sequential increases in revenue of 29% and adjusted EBITDA of 101% were largely driven by higher utilization across our completions portfolio, reduced white space in our calendar and targeted expense management across our various PSLs operating within this segment. At corporate, our operating loss and adjusted EBITDA loss for Q3 were $8 million and $6.6 million, respectively, with our operating loss improving 11% from last quarter, and our adjusted EBITDA loss was within $300,000 of Q2 2025. Turning to our balance sheet, cash flow and capitalization. We ended the third quarter with approximately $65 million in liquidity, in line with Q2, including $8.3 million of cash and cash equivalents, and $56.9 million of availability on our revolving credit facility which includes $5.3 million on an undrawn FILO facility. Total debt as of September 30 was $259.2 million, including $219.2 million in notes and $40 million in ABL borrowings and is also largely in line with Q2 levels. We remain in compliance with our debt covenants. Our bonds require a 2% annual mandatory redemption paid quarterly. We've continued to make these payments, but we did PIK $6 million of interest in Q3, and we will evaluate future PIK versus cash decisions based on market conditions and company leverage and liquidity. It's worth noting that our most recent PIK election was 100% cash paid interest. Moving to working capital. As of September 30, we had $50.1 million of net working capital and our DSO held steady at a normalized level of 61 days and our DPO increased slightly to approximately 50 days, both roughly in line with long-term historical averages. We remain focused on disciplined and proactive management of working capital to ensure flexibility and resilience in the current market environment. Our capital expenditures for the quarter were $12 million, and $7.8 million net of asset sales, down 6% from Q2, and we expect a further decline in Q4, in line with our focus on further capital efficiency. Year-to-date, capital spending trends suggest a full year gross CapEx of $43 million to $48 million with net CapEx of $30 million to $35 million when you include asset sales. As activity declined, head count was reduced approximately 2% sequentially, supporting overhead control and increased operating leverage. Also, we completed the sale of facility in Q3 expect additional asset sales to close in Q4. We continue to monitor and respond to asset performance, and our finance leases are beginning to transition as older vehicles roll off in Q4. We contributing to increased operational agility into 2026, and our portfolio of finance leased coiled tubing units will be owned outright in late 2026, which will drive a meaningful improvement and free cash flow profile going forward. I'll now hand the call back to Chris for his concluding remarks and more color on our outlook.

Thanks, Keefer. While the broader market conditions remain mixed and near-term visibility is limited, we are encouraged by recent signs of stabilization and rig activity and the emergence of sustained and incremental activity in the natural gas basins. We continue to emphasize operational discipline, margin optimization and proactive capital stewardship sustained by close coordination across our operating regions to weather current market volatility. With improved overhead efficiency, a disciplined cost structure and a flexible balance sheet, we are confident in our ability to navigate the remainder of 2025 successfully and capture upside as the market strengthens. As we look ahead, we anticipate typical seasonality and budget exhaustion to moderate activity through the fourth quarter, yielding a mid-single-digit revenue decline from Q3 to Q4. This signals a less pronounced Q4 reduction than in years past. Importantly, we expect continued stable adjusted EBITDA margins, aided by ongoing cost discipline, year-end accrual dynamics vehicle turnover and regional activity mix. Our fourth quarter guidance reflects steady demand across our core product service lines, supported by new project awards from key accounts. Operationally, our diversified portfolio, prudent capital discipline and proven operating leverage continue to drive strong execution, helping to offset macro volatility in commodity noise. In addition, KLX stands to benefit as natural gas demand accelerates, underpinned by new LNG export capacity and increased data center activity. On a quarter-over-quarter basis, dry gas revenue rose 15%, building on the 25% increase we saw in Q2. Haynesville activity rebounded by 6 rigs in Q3, and we continue to monitor demand drivers on the board. with close to 11 Bcf per day of new LNG export projects scheduled to come online over the next 5 years, including key capacity additions along the Gulf Coast. The U.S. is well positioned to strengthen its role as a global energy supplier. Our internal planning highlights continued relative stability in completion-focused service lines along with a modest Q4 bounce back in drilling activity. Combined with incremental benefits from strategic cost controls already underway, these strengths reinforce our confidence in delivering profitable growth in 2026. Our strategic capital stewardship ensures we remain ready for both measured top line expansion and sustained margin strength. In summary, unused fleet capacity and minimal white space have allowed us to adapt operations efficiently and support margin expansion even in periods of softer activity. KLX is now better situated from an overhead efficiency standpoint than at any time in our post-COVID history, empowering us to strategically capitalize on future opportunities. KLX has significant operating leverage to a rebound in market activity. And similar to prior cycles, we will ensure we are best positioned from a personnel asset and technology standpoint to maximize our upside in future periods. We appreciate the ongoing dedication and commitment of our team members, the partnership of our customers and the support of our stakeholders, empowering us to deliver value and drive KLX forward. With that, we will now take your questions. Operator?

[Operator Instructions] Our first question is from Steve Ferazani with Sidoti & Company.

I got to start with the Northeast MidCon, which we expected it to trend higher for you. But those numbers were way past our expectations. That your Northeast Mid-Con margin was the highest it's been in 3 years and 3 years ago, natural gas prices were over $8. Can you indicate the performance because it's impressive?

No. Look, I appreciate that. Our Northeast -- if you really dig into it, our Northeast business within the Northeast Mid-Con remained relatively stable, predominantly driven by rentals and fishing. You dig into the Haynesville, we were able to capture revenue increases and accommodations and flowback specifically. And I think perhaps most importantly, we saw less white space overall in our Mid-Con PSL. And so when you think about the positive operating leverage and just being base loaded, you see a lot of margin expansion. And so I wish we were back in a market where we were at $8 gas price, we're not. I don't expect to go there anytime soon. I do think a macro theme though is KLX as a whole is just more efficient today than we were in the period you referenced. And I think that shined through in our Northeast Mid-Con performance.

Is it also fair to say you're gaining market share?

Well, look, I think rig count was up, what, 6 rigs quarter-over-quarter on average in the Haynesville. So you can think about that on a percentage basis where once again, we drove quarter-over-quarter revenue just from a dry gas perspective of 15%, 25% in the prior quarter, if you recall, our Q2 discussion. And so I think within certain product lines, yes, we've gained market share.

And then flipping to the other side, which was the Rockies, we know that drilling and completions are trending down, but you did outperform our estimates. Was there anything specific going on in that market in 3Q beyond the general macro?

I think specific in nature, look, rig count to your point, was really flat in the Rockies quarter-over-quarter. There were puts and takes in the various basins within the Rockies, but overall Rockies was generally flat. However, what we did see was some very episodic completion programs with an overall decline in kind of refrac activity. And we saw a lot of refrac activity in '23 and continuing into parts of '24. And so I think the episodic nature of those completion programs is back to the point with the Mid-Con, it really highlights the negative operating leverage when your cost structure is relatively fixed in the short term and at current market pricing levels. And so when you get a last-minute delay in a completion program that pushes revenue out of the schedule or maybe out for a month, it's really hard to adjust your cost structure in the short term. And so the negative operating leverage really impacts margin.

That's helpful. When you're indicating the slower year-end slowdown, you're certainly not the first company to say that during earnings season. What is it you're hearing from operators? And how does that make us think about next year when, obviously, a lot of folks are concerned about oil oversupply and pressure on WTI?

Yes. I think there's really 2 questions there. First, Q4, we stated a mid-single-digit revenue decline on a percentage basis. That's materially below the 13% quarter-over-quarter decline we saw last year. The decline is largely going to be driven by holiday slowdowns. I think, less pronounced budget exhaustion versus prior periods. I would note that on a monthly basis, our October revenue was flat to September whereas if you look at 2024, we saw a 7% decline October versus September in the same period. And so we're already off to kind of, on a relative basis, a better start. On the margin side, we expect margins to hold up despite declining revenue really just due to cost controls. We've got our typical Q4 accrual unwinds relative to PTO and other accruals. And we also talked about the fleet turnover in our prepared remarks that typically occurs in Q4. And so that's how we're set up on Q4 as we sit here today.

And then...go ahead.

Yes, I was going to say on next year, look, it's still too early to give firm guidance from a 2026 perspective. we've seen puts and takes with operators saying their CapEx budget for next year is going to be to slightly down. I think we're set up where the gas market is going to be very consistent, and everybody is projecting a full year-over-year increase in activity, and we would expect that to hold true for us. We continue to see consolidation. We saw a major consolidation transaction earlier this week. We know these transactions can lead to episodic white space and growing pains as they integrate their portfolios. Net-net, we are typically the beneficiaries as we talked about before of consolidation, but it still can create some puts and takes. I will say we've received some recent wins from an RFQ perspective on the award front, which we think are supportive of both Q1 and 2026 overall. And then lastly, I think the last part of your question, the EIA just posted a report earlier this week saying, and I think it was on Tuesday, saying we're going to have to ramp up U.S. activity to sustain U.S. crude production. And so it's very circular. I think it's if and when production declines take over, that is supportive of commodity prices and higher commodity prices is supportive of activity. And so it feels like it's a question of when, not if activity rebounds in the oil basins. I think there's some optimism building around the second half of '26 into '27. We'll just have to see how it plays out.

Fair enough. That's very helpful. I do want to touch on the balance sheet. $65 million in available liquidity. 4Q tends to be a strong cash flow quarter, but then Q1 is the working capital builds again more dramatically. I'm just trying to think about your flexibility. You haven't used the PIK option yet, you have that at your disposal, which can help depending on how the first part of next year plays out. Generally speaking, and you've been selling some equipment, I think you talked about some facility sales. Can you just give us a general overview about -- and you've done a great job trying to protect the balance sheet during this downturn. Just generally, how you're thinking about that without knowing exactly how activity plays out first part of next year?

Yes. Good question and lots of moving pieces, obviously, in there from a free cash flow perspective. First, on the PIK, so we did PIK a portion of our Q3 interest. We picked about $6 million of interest in the third quarter. But in the prepared remarks, we did say that our most recent cash PIK election that we submitted last week, we did do 100% cash pay there, but we will continue to evaluate PIK versus cash decisions through the wins of managing the balance sheet from a leverage and liquidity standpoint. So nothing is going to change there. As it relates to free cash flow, you're spot on that Q4 is typically a strong free cash flow quarter for us. We had $11 million or so of unlevered free cash flow in Q3. We did guide Q4 down on a mid-single-digit percentage basis. With that said, working capital should unwind. Given that decline, Q4 does not also have the extra payroll that we have in the third quarter. So those 2 things combined should lead to improved kind of free cash flow generation in the quarter largely due to working capital trends. DSO has been holding in pretty consistently around 60, 61 days. I would expect that to hold going forward. On the DPO side, we've been kind of trending in the low 50s. Again, I would expect that to hold going forward. As you think about CapEx and its impact on free cash flow, we're guiding to a much lower kind of minimal net CapEx spend in Q4. Obviously, kind of gross spending will be down, but that will be offset by some of the asset sales that we mentioned and you alluded to in your question. So I think all those things combined to Q4 being a strong quarter, and that's why we continue to reiterate that we expect liquidity to continue to improve as we navigate the remainder of this year. As you turn into 2026, I think the quarterly trends there, as you point out, will continue to play out to some extent. I will say that I expect Q1 2026 to be less burdensome from a working capital investment standpoint compared to the '24 to '25 transition just given what we know today.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Chris Baker for closing remarks.

Thank you, operator. Thank you once again for joining us on the call today and your continued interest in KLX. We look forward to speaking with you again next quarter.