Ladies and gentlemen, thank you for standing by and welcome to the KLX Energy Services Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today Michael Perlman, Treasurer and Senior Director of Investor Relations. Please go ahead sir..

Thank you, Sonya. Good morning and thank you for joining us. Today we are here to discuss KLX Energy Services financial results for the third quarter ended October 31, 2019.

For comparative purposes, we have presented our financial results adjusted to exclude costs associated with the company's major downsizing program and its non-cash asset impairment charge as described in the company's pre-announcement on November 19. These costs are collectively referred to as costs has defined.

The company's earnings news release which was issued earlier this morning presents our results. If you haven't received it, you'll find a copy on our Web site.

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 will be prepared a few slides to help you follow our discussion.

You can find our presentation on the Investor Relations page of the KLX Energy Services Web site at klxenergy.com. In addition copies of the slides are posted on our Web site for you to refer to.

Before we begin, we have some additional information that cover any forward-looking statements that we make are subject to risks and uncertainties as always in our prepared remarks and our responses to your questions.

You will rely on the Safe Harbor exemptions under the various securities acts and our Safe Harbor statements and 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 will turn the call over to Amin Khoury..

Rocky Mountain segment $6.9 million; Northeast Mid-Con segment $4.6 million; and Southwest segment $4.7 million. Let's now turn to Slide Four and review our third quarter Rocky Mountains financial results. Third Quarter 2019 Rocky Mountain segment revenues of approximately $58 million decreased by approximately $6 million or 9%.

The decline in revenues is primarily driven by a number of our customers to spending operations for the balance of the year along with lower activity levels amongst certain other customers.

As previously discussed, the aggregate number of active frac spreads in the DJ, Niobrara and Williston Basins declined approximately 20% on a sequential quarterly basis.

Adjusted EBITDA was approximately $12 million resulting in an adjusted EBITDA margin of approximately 21% compared to second quarter adjusted EBITDA and EBITDA margin of $16 million and 26% respectively. Let's turn to Slide Five and review Q3 Northeast Mid-Con segment performance.

Third quarter 2019 Northeast Mid-Con revenues of approximately $38 million decreased by about 20%.

Decline in revenues was primarily driven by a number of customers completely suspending operations for the balance of the year as well as a number of other customers where there were substantially lower activity levels particularly from natural gas customers.

The Northeast Mid-Con segment has the highest exposure as a percentage of revenues to natural gas customers. As previously discussed, in the gassier basins including the Marcellus, the Utica, the Woodford and Haynesville, a number of active frac spreads declined about 50% on a sequential quarterly basis.

Adjusted operating loss was a shade under breakeven compared to second quarter adjusted operating earnings of about $4 million. Adjusted EBITDA was about $7 million resulting in an adjusted EBITDA margin of about 17% that compares to second quarter adjusted EBITDA and adjusted EBITDA margin of $11 million and 23% respectively.

Let's take a quick look at our Southwest segment. For the third quarter Southwest segment revenues decreased about 28% driven primarily by lower activity levels by existing customers and a decline in wireline revenues as the company elected to warm-stock the vast majority of its Permian-based wireline assets due to the weak pricing environment.

As previously discussed the aggregate number of frac spreads in the Permian and Eagle Ford shale basins declined about 22% on a sequential quarterly basis. Adjusted operating loss was a negative $7.9 million as compared to second quarter adjusted operating loss of $1.1 million.

And adjusted EBITDA was a negative $1.3 million as compared to a positive second quarter adjusted EBITDA of $5.6 million. Take a quick look at our financial position on Slide Seven. For the quarter ended October 31, 2019, net cash flow provided by operations was about $41 million.

The company generated free cash flow of about $31 million increasing its cash balance to about a $121 million. Capital expenditures were about $11 million. Fourth quarter CapEx is expected to be about the same as Q3 or roughly $10 million reflecting the application of prior deposits on the new leased CT spreads.

Total long-term debt of $250 million less cash resulted in net debt of about a $129 million and the company's net debt to net capital ratio was about 28%. There were no borrowings outstanding under the company's $100 million credit facility.

And the company's net debt to adjusted EBITDA leverage ratio for the 12-month period ended October 31 was approximately 1.2x. During the third quarter, the company's Board of Directors authorized a stock repurchase program of up to $50 million and to-date we've repurchased about $1.1 million of our common stock.

We remain committed to deploying capital where we believe it will generate the highest potential range return for our shareholders and evaluating share or debt repurchases or capital investments in our product service lines through the same lens.

Moreover, we believe our strong financial position will allow us to continue to explore strategic combinations. Briefly review our outlook. We expect customer activity to decline further in the fourth quarter due to our E&P customers intense focus on free cash flow generation, in addition to budget exhaustion and seasonal issues.

While we expect to realize the benefits or begin to realize the benefit of our third quarter cost reduction activities early in the fourth quarter, we're also recruiting additional experience coiled tubing personnel who joined the company in the fourth quarter as we have begun to receive and deploy our five new large-diameter coiled tubing spreads.

The coiled tubing start-up costs related to the deployment of these five new spreads are expected to be a drag on our fourth quarter earnings. We expect to have all 13 of our large-diameter coiled tubing spreads in operation by the end of the first quarter of 2019.

We will remain focused on serving the needs of our customers and gaining share of customer spend by providing a broad portfolio of services and equipment across all major basins while preserving a solid balance sheet maintaining a healthy levels of liquidity and prudently managing our capital expenditures.

In an operating environment where our financial strength is a key differentiator, we believe that our ongoing cost reduction efforts along with the anticipated positive impact from the rollout of five new large-diameter coiled tubing units and the resulting pull-through of our broad range of asset-light services that will allow us to continue to gain share of customer spend and to generate free cash flow through 2020 despite the anemic demand levels the industry is experiencing.

With that I will turn the call back over to Michael..

Thank you, Amin. I'll now turn the call over to the operator for the Q&A portion of today's call. The operator will provide instructions on how to ask the questions.

Sonya?.

Thank you. [Operator Instructions] And our first question comes from Ben Carl of Simmons Energy. Your line is now open..

All right. Thanks guys. First, just wanted to ask about the trajectory of margins over the coming quarters just given an expectation for the customer activity to decline like you have just said and compared with your cost reduction efforts, I mean kind of qualitatively what should we expect -- should we expect those to offset each other.

Just any color there would be helpful..

We are not in a position to be able to give out information on margins in the fourth quarter.

Important thing I think is in the fourth quarter, we expect that our free cash flow will be more or less breakeven maybe generate a few million dollars or use a few million dollars but our focus right now is on free cash flow managing CapEx very carefully introducing our new coiled tubing assets. So we can execute our strategy.

We should be in a position to execute the company's strategy by the end of the fourth quarter of this year. And so, during essentially all of 2020, we should have 7, 2 5/8-inch units and operation in 6 [indiscernible] units in operations essentially all of which are new.

And where we are finally in a position to execute our strategy of pulling through a broad range of asset-light services. Our expectation is, we will generate positive free cash flow during 2020 and we will further build our balance sheet. Expect to moderate, but we're not in a position to give any guidance on margins..

No problem. Thank you for that. And I guess secondly, I just wanted to see if you could just break down your phase and exposure maybe give us some more color on how the variance phasing is performing.

And maybe just kind of as the rig count contracts, do you expect a more concentrated exposure in certain areas assets moving around and just kind of your broad strategy with [indiscernible] exposure..

Our strongest businesses are in the Rockies followed by Northeast and Mid-Con. Southwestern businesses are weakest. Now I think during the coming quarter or two, we don't have more visibility than that.

We should expect to see rough going in the gassier basins in the Northeast, the weakest sector in terms of the oil plays I would say will be in the Mid-Con and the strongest overall business in the Rockies probably the Southwest segment will do a little better in the coming quarter as compared to the prior..

Great. Thanks. That's all for me..

Thank you. And the next question comes from Simon Wong of Gabelli & Company. Your line is now open..

Hi, good morning. The [indiscernible] that you'll be receiving in the fourth quarter.

Does those units already have customer commitments or are you bidding for jobs currently?.

We have -- actually we received two, the third we'll receive in this week. The two we've received have already gone to customers. The one that's coming this week has already slated for our customer. We expect to receive the last two by the end of our fiscal year, by the end of January 31. And both of those units are allocated to customers..

How are the pricing related to those units relative to let's say the first half of '19?.

Pricing in the first half of '19?.

The pricing of those five units you just received or you're in the process of receiving how pricing….

It depends on a number of units that are dedicated versus the number of units that are doing spot work.

And that remains to be determined down half the fleet or more will be dedicated units and a smaller portion we doing spot work and where they're doing spot work, they're doing it for customers which are near one another so that we can get the highest utilization responses.

The rates on spot work are higher than the rates on dedicated work where you have higher utilization rates..

Okay.

The cost drag that you mentioned related to the startup costs of the coiled tubing in the fourth quarter and first quarter of 2020, can you quantify how much that is?.

We have taken out about $40 million in cost and will begin to realize the benefit of those cost reductions beginning in the fourth quarter. But at the same time, we will be hiring in something in the neighborhood of 80 to 90 additional folks to rollout our coil tubing spread.

So, we won't get the full benefit of the cost reductions which we've achieved until later in 2020 for the coil tubing spreads are operative and pulling through services, at the same time that the business should be growing at that time. And we're maintaining pretty close control of costs..

I just want to make sure I heard that right, the 40 million annualized cost savings that you've just pulled off out of your company?.

That's right..

And okay, that's annualized. Okay. And then, you recently have planned to spend about $90 million to $100 million in CapEx this year. It looks like it have been ramped down in third quarter.

Is that related to timing or have you reduced your capital spending for this year?.

Our CapEx this year will be about $75 million. If we take into account the application of the deposits that we have on the coil tubing spreads, it will come out to about $75 million..

Okay, great.

And then, you have a number for 2020, the CapEx number?.

It will be obviously a very much lower number than this year. But we won't give out that number until we report our fourth quarter two months from now..

Okay. My final question is, in your press release and even your [indiscernible] you talk about stock buyback, debt repurchases as well as strategic combinations.

Can you rank your free cash flow priority in those -- like those?.

It'll depend upon what alternative uses we have for cash at the time. So we can't rank them unless we know exactly what we're looking at. And right now we are looking at some alternatives. And we'll make the determination based on what gives our shareholders the greatest bang for the buck or the greatest return on our investment..

Okay, great. Thank you..

You are welcome..

Thank you. And ladies and gentlemen this does conclude our question-and-answer session. I would now like to turn the call back over to Michael Perlman for any closing remarks..

Thank you, Sonya. That concludes our comments for today. Thank you to everyone participating on this morning's call. We look forward to speaking to you again next quarter. Bye..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..