Greetings and welcome to the KLX Energy Services Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. 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 third quarter 2021 results. With me today is 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 third quarter and outlook before opening the call for questions and answers. There’ll be a replay of today's call and will be available by webcast on the Company's website at klxenergy.com.

There also will be a telephonic recorded replay available until December24, 2021. More information on how to access the replay features was included in yesterday’s earnings release.

Please note that information reported on this call speaks only as of today, December10, 2021 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening or the 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 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 may also include certain non-GAAP financial measures, additional details, and reconciliations of 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, 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 third quarter 2021 conference call. Let me begin by highlighting a snapshot of our strong third quarter results as well as some of the significant things impacting our business during the quarter.

After this, I will turn the call over to Keefer to review our financial performance in greater detail before returning for some final comments. The macro backdrop for fiscal Q3 was the most constructive in years, WTI price averaged $73 per barrel and we exited our fiscal Q3 with oil 13% higher than where we began the quarter.

Henry Hub natural gas prices averaged $4.90 per MMcf, and we exited our fiscal Q3 with natural gas 37% higher than where we began the quarter. Recount over the same period expand at 55 rigs or 11%.

Beginning with our fiscal third quarter results, I'm very pleased to report that the third quarter revenue increased 24% to $139 million, which was double the high end of our 8% to 12% guidance provided on the Q2 call.

The sequential increase in revenue was largely driven by an improved commodity price environment and associated increases in utilization, market share, and pricing across the majority of our drilling, completion, production, and intervention product and service lines.

Fiscal third quarter adjusted EBITDA was $5 million, improving materially relative to Q2 results, and what's positive for the second consecutive quarter.

Additionally, we ended the quarter with total liquidity of $80.8 million and available liquidity net of the FCCR holdback of 70.8 million, an increase of approximately 13.6 million or 24% compared to Q2. Despite the market improvement, there're always countervailing forces that they're monitoring, and this time is no exception.

We are in the midst of an acutely inflationary environment. We have seen material wage pressure in the labor market as well as both higher costs and longer lead times for critical items in our supply chain. These variables will and have pressured our cost structure and are one of the primary challenges to expand in our margins.

The supply chain issues and inflationary pressures became prevalent in late Q3 and have persisted into the fourth quarter while our suppliers have provided some advanced warning on lead times and price inflation there always surprises.

This is just another unfortunate challenge that our team has to manage and will force us to make early decisions in vendor selection as well as whether to pre-purchase consumables and inventories at current lower prices were available.

The key going into 2022 will be to stay ahead of such pressures by providing transparency to our clients and moving service pricing ahead of realizing these inflationary pressures, not afterwards. The OFS industry cannot sustain margin erosion on consumables and has to pass these calls directly through our customers.

Ultimately, it will take a partnership approach with our vendors and customers to manage the inflationary pressures. On the labor front, we discussed it before.

However, it's disappointing that just when the industry begins to have positive pricing momentum competitors resort to employee poaching and attempted deploying, incremental assets, rather than focusing on maximizing price and utilization, which are the true keys to profitability and cash flow.

So once again, the industry can become its own worst enemy.

Additionally, COVID-19 had a material impact on our business in the third quarter and the low vaccination rate within the oilfield is complicating the industry's ability to staff crews in an already tight labor market as well as creating white space and driving incremental overtime throughout the organization.

We have incurred $1 million of cost year-to-date on COVID testing and treatment. And in the third quarter, incurred material expense related to overtime and contract labor costs due to quarantine crews. To put some numbers to this, from Q2 to Q3 quarantine days increased over 3x from over 300 days in Q2 to approximately 950 days in the third quarter.

COVID will continue to be an issue for the industry, but we currently have crews in quarantine today. With all of that said, I'm very pleased to report that to-date we have been largely successful at staying ahead of these rising cost pressures and have been able to pass on higher prices across our service lines.

This will remain a critical priority going forward as we look to maintain the margin gains we have achieved over the last few quarters. Operationally, we continue to excel and we have made great strides in augmenting our suite of proprietary products and services.

We continue to take share in the frac plug market with our latest generation composites and dissolvable plugs. Plug sales volume increased approximately 32% sequentially in the quarter.

We are also now beginning to benefit from our fully integrated R&D organization and are working towards commercializing latest generation technology our completions customers that will submit our position as a market leader.

Additionally, despite our minimal capital spending, our R&D in fabrication team have done a fantastic job at cost effectively working to electrify portions of our wire line, coal tubing and snug in operations, and we will continue to pursue opportunities to electrify our equipment where possible and cost-effective.

The macro market has clearly been volatile over the last few weeks. Despite this volatility and concerns over a new COVID variant, we are highlighting towards our third quarter results, and we exited the third quarter on a strong run rate with over 600 million in annualized revenue, which gives us considerable optimism for 2022.

With that, I'll now turn the call over to Keefer who will review our Q3 financial results.

Keefer?.

Thank you, Chris. Let me begin by discussing our third quarter 2021 consolidated results. For the third quarter ended October 31, 2021, revenues were $139 million, an increase of $27 million or 24% as compared to the revenue for the fiscal second quarter of 2021.

Revenue growth was driven by broad increases in drilling, completion, production and intervention activity.

On a product line basis, drilling, completion, production and intervention products and services contributed approximately 28%, 49%, 14% and 9% to revenue respectively for the fiscal third quarter of 2021.Adjusted operating loss for the quarter was $9.6 million. Adjusted EBITDA and adjusted EBITDA margin was $5 million and 3.6% respectively.

Adjusted EBITDA improved by roughly $4.4 million compared to fiscal second quarter. On an annualized basis, this would imply a $20 million run rate for Q3 2021.

And when compared to our year ago Q3 2020 results would imply a $42 million annualized improvement driven by a combination of realized cost synergies as well as a significant rebound in our underlying activity and pricing. Total adjusted SG&A expense for Q3 was $13.8 million, which equates to roughly 10% of revenue.

Our adjusted corporate and other EBITDA loss for the fiscal third quarter was $5.1 million, which represents only 3.7% of revenue. We believe these metrics highlight the merit of the QES merger and the associated cost synergies.

KLX now has one of the most efficient cost structures in the OFS industry, and we believe we can scale further from current levels with minimal SG&A additions. Turning to review our segment results.

Let me begin with the Rockies, the Rocky Mountain segment fiscal third quarter revenue of $36.5 million increased by $2.9 million or 9% as compared with the fiscal second quarter of 2021.

The sequential increase in revenue was primarily driven by material uptick in fishing, rentals, drilling and our completion oriented services included coil tubing, wire line, pumping, and plugs sales offset by modest declines in a few of our smaller completion oriented service lines due to customer scheduling issues.

Adjusted operating loss for the fiscal third quarter was $1.7 million as compared with adjusted operating loss of $2 million in the fiscal second quarter. Adjusted EBITDA was $3.5 million as compared to fiscal second quarter adjusted EBITDA of $3.1 million.

Sequential margin improvement was driven by revenue mix shifting to higher concentration of our higher margin service lines in Q3 including rentals and tech services. Moving to our Southwest segment. The segment generated Q3 revenues of $45.8 million, an increase of $2.8 million or 6.5% as compared to fiscal second quarter of 2021.

The sequential improvement in revenue was driven by increases in directional drilling, wire line, coil tubing, plug sales and accommodation. It was modestly offset by slight decline in fishing activity.

Q3 adjusted operating loss for this segment was $3.8 million compared to fiscal second quarter adjusted operating loss of $3.6 million and adjusted EBITDA was $800,000 compared to fiscal second quarter adjusted EBITDA of $1.8 million.

The decline in margin was primarily driven by lower margins in our South Texas region due to labor constraints and COVID-related overtime and contract labor costs. Now to wrap up the segment discussion with the Northeast and Mid-Con. Fiscal third quarter revenues were up 61% sequentially to $56.7 million.

The increase in revenue was driven by increases across all drilling completion and production service lines led by directional drilling, coil tubing, pumping, fishing and rentals. Adjusted operating income for the fiscal third quarter was $2.1 million as compared with adjusted operating loss of $3.2 million in the fiscal second quarter.

Adjusted EBITDA was $5.8 million as compared to the second quarter adjusted EBITDA of $500,000. The material increase in activity and revenue led to a corresponding 25% incremental margin for the segment from Q2 to Q3. Now, I'll turn to our balance sheet and cash flow. Cash increased by $1.4 million or almost 4% sequentially to $40.8 million.

Our net debt increased by $3.6 million sequentially to $243.9 million driven by a slight increase in long-term debt and capital leases offset by the aforementioned increase in our cash balance. For the three months ended October 31, 2021, cash flow used in operations was $5.8 million and free cash flow was negative $2.5 million.

Net working capital was $44.4 million compared to Q2 net working capital of $40.3 million. Capital expenditures for the quarter were approximately $1.8 million, and we're focused on maintenance spending.

We now expect total CapEx for 2021 to be in the range of $9 million to $11 million, which is down from previous guidance of $14 million to $16 million in part due to the abbreviated fourth quarter. We able to offset cash flow used in operations in CapEx with proceeds from the ATM program and asset sales.

During the fiscal third quarter, we had aftermarket sales of 1.07 million shares, which yielded proceeds of $4.8 million net of plan costs.

We also sold $2.6 million of obsolete assets within the quarter, primarily tied to the sale of a company owned aircraft and an obsolete operational location, and $2.6 million remains in assets held for sale of which we expect to close $0.5 million by the end of 2021.

Our borrowing base increased 43% sequentially to $40 million based on increased activity and revenue driving our net AR balance to $102.9 million. We also reduced our letters of credit as part of our annual insurance renewal during Q3 by $1.6 million or 24%, which has a one for one impact on borrowing base availability.

As of October 31, 2021, our total liquidity was $80.8 million, which was comprised of $40.8 million in cash and $40 million in available borrowing base. And our available liquidity was $70.8 million, less a $10 million fixed charge coverage ratio holdback.

Liquidity increased $13.6 million or 24% sequentially, which is almost equivalent to a semi-annual interest payment. Subsequent to the end of Q3, we made our second semi-annual interest payment of 2021 in early November, utilizing cash on hand.

As we have emphasized in the past, the continued management and preservation of our cash and liquidity to support the continued rebound in our business remains a top priority.

Lastly, due to change in our fiscal year end from January 31 to December 31 taking effect, the fourth quarter of fiscal 2021 will be a short and stub period comprised of only two months, November and December. Once we complete Q4, we will file a transition 10-K with an 11-month period and we'll begin fiscal 2022 on January 1.

As part of this transition, we also plan to share pro forma results for calendar end periods. With that, I will now turn the call back to Chris..

Thanks Keefer. I will close the call by discussing the current market environment and notable changes taking place therein as well as our forward outlook and our efforts to achieve higher returns via pricing gains.

Looking out towards Q4 and beyond, we believe that a constructive commodity price environment is here to stay as opposed ramping demand, incur production limits, SKUs, the supply demand equation in favor of a constructive macro backdrop going forward. Only this trend, pricing continues to plot in upper path.

And the rate at which pricing is improving is continuing to accelerate, which bodes very favorably for our business and the industry as a whole through 2022. This positive outlook is clearly tenuous as we've experienced recently on Black Friday due to the Omicron variance.

However, thus far, we have not seen any of our customers materially alter their plans and it seems like WTI is regained steam as more as learned about Omicron. As you know, I've spoken in the past about how rising commodity prices have disproportionately benefited E&P companies in the early stages of the market up cycle.

Conversely, this has largely come at the expense of oilfield services companies as the fragmented nature of the industry and surplus of available equipment kept prices depressed. However, we are now at a point where demand is absorbing a greater proportion of the available supply of equipment, and more importantly, available crews.

As a result, we are able to attain greater levels of pricing power than was possible in the past few quarters, and we believe this trend will accelerate into 2022 as operator activity continues to increase. The simple reality is pricing has to continue to increase due to supply chain challenges.

I will now provide some color and guidance on Q4 in 2022.

We do expect a slight slowdown for the holidays, especially on the production services side of the business, but it will not happen nearly the same level of decline as we've seen in years past tied to budget exhaustion due to a more supportive commodity price environment in the approved free cash flow generation of our customers.

For the abbreviated two month quarter, we expect revenue to be in the $90 million to $95 million range. For the pro forma three months four quarter period ended December 31, we expect to generate revenue between a $140 million and $145 million. Looking ahead to 2022, we are very optimistic about the prospects for all of our businesses.

We have already been awarded sizable packages of activity and materially improved pricing across a range of product and service lines, but we are still waiting on a many of our customers to finalize their 2022 capital plans.

With the positive momentum, we built through extensive cost rationalization via synergy realization along with the strides we were making on the R&D and technology side, there is significant operating leverage in the platform to-date positioning KLX for substantial improvement as market activity and pricing continues to move in our favor.

In closing, let me once again thank our employees, customers and shareholders. As market conditions and KLX’s results improve, we are confident that even better times are ahead for KLX Energy Services.

The combination of our experienced personnel, comprehensive portfolio of specialized equipment and tools, and a strong focus on technological innovation positions KLX to generate higher returns and deliver superior operational performance from our comprehensive portfolio of products and services. With that, we will now take your questions.

Operator?.

Thank you. We do have a question from John Daniel of Daniel Energy Partners. Please proceed. Please go ahead, sir..

Can you guys hear me now?.

Good morning. We’ve got you John..

Sorry. I'm in the middle of nowhere, Texas, and I've got terrible service, but I'm trying hard to listen to you guys.

The question is just a comment on assets that are sort of against offence, the costs to reactivate those should activity continue to ramp? Just what we should be thinking about in terms of reactivation costs?.

So as you know, it's a very good question because there are plenty of assets still special as this one throughout the industry. What I would say is, we're very much still in the process of finalizing our budget for next year. So I don't have a specific number because it's very product line specific.

That being said, I think the phenomenal job this year of offsetting reactivation costs via asset sales, et cetera. We still have some assets held for sale probably about $2.6 million that we expect will close at some point in time next year, if not even in the fourth quarter of this year.

And so, there is as you would expect, no way that we can curtail CapEx to the levels we preserved at this year. That being said, the economic sustaining of the incremental assets in the face of what we've seen recently, which we're very optimistic about, which is double digit price increases, start to finally make sense.

And so, we're finalizing that process today, but I would say we're pretty well situated when it comes to incremental activity, especially on the rental, the frac valve side, et cetera. We've actually spent a lot of that money this year and are pretty well situated for incremental activity going into Q1..

Okay, great, good job on the top line this quarter. Thanks for taking my call..

Yes, anytime. Absolutely, appreciate it..

That concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

End of Q&A:.

Thank you, operator. We are very optimistic about the macro outlook for the remainder of 2021 and into 2022. Thank you once again for joining us on the call today and for your interest in KLX Energy Services. We look forward to next quarter.

Thank you. This does conclude today’s conference. You may disconnect your lines at time. And thank you for your participations..