Q2 2020 KLX Energy Services Holdings Inc Earnings Call
Greetings and welcome to the Kate <unk> Energy services fiscal 2022nd quarter earnings Conference call.
At this time, all participants are in listen only mode.
Good question that exercise and we'll call it a formal presentation.
If any watch require operator assistant started a conference. Please press star zero on the telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure computers, your host tended art within our glassware.
This is an art you may begin.
Thank you operator, and good morning, everyone.
We appreciate you joining us for they kill ex Energy Services' conference call and webcast to review fiscal second quarter 2020 results.
With me today, or Chris Baker, KL exits, President and Chief Executive Officer.
Keeper later.
Financial Officer Executive Vice President.
We my remarks management will provide a commentary on the recent completion.
The Calexico, Montana merger the financial details on the second quarter.
And their integration and operational plans and outlook before opening the call Q at night.
There will be a replay of todays call.
Be available by webcast on the company's website.
Okay, Lx energy Dot com well also be a recorded replay available until September Twond 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 Threerd 2020.
And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript Brady.
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 Calix is manager.
However, various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in this case.
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 or uncertainties and contingencies.
Comments today May also include certain non-GAAP financial measures additional details and reconciliation to the most directly comparable GAAP financial measures are included.
The press release, which can be found on they calix energy website and that would have army I'd like turn the call.
Joe its energy services, President CEO Mr., Chris Baker, Chris.
Thank you Ken and good morning, everyone. Thank you for joining us today for Calix 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 Calix, which brings together the outstanding personnel comprehensive asset a customer bases and extensive industry expertise.
Two leading oil field services company, Calix energy services, and Quintana Energy services.
Since the closing up this merger on July 28, I have formally taken on the role of President and Chief Executive Officer of Kayla.
Keeper later 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 by I would like to begin by talking about the merger at highlighting the many strategic merits of the deal.
I will then turn the call over to keeper 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 24th Calite at U.S. shareholders approved the merger of the two companies at their respective especial meeting.
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.
The reverse split and the merger closing were completed on July 28.
Given all the hard work and countless hours put in by both teams to see this deal through two successful conclusion is extremely gratified to complete what was an accelerated process in a very challenging market and I'm thankful for all the contribution and tireless effort by all involved.
They're sacrifices his dedication have resulted in a company that is a much more robust organization that is better position to whether the current industry turmoil and to deliver growth via significantly reduced cost structure benefiting both our customers and our stockholders.
The successful completion of the merger creates an industry leading provider of drilling completion <unk> production intervention solutions across all major U.S. basis.
Hey, Alex is broad suite of asset light products and services spans the full well lifecycle and includes fishing and rental thru tubing pressure control fluid pumping downhole completion tools drilling motors flow back in testing services and well control and is supported by growing portfolio.
<unk> proprietary technologies, which greatly enhanced its margin and efficiencies and reduces the need for additional capital spending.
The combined asset base also includes the largest fleet of large diameter coil tubing units in the United States.
One of the largest wireline fleets in the United States and curious to contribute at leading directional drilling franchise.
There are also a number of complimentary strength across our key product service lines, which generates a greater potential for incremental cross selling and pull through opportunities, resulting in both new customers and greater share of customer spending.
Finally, the deal will be accretive to shareholders based on free cash flow per share within 12 months. It has significant and immediate cost synergies as well as additional upside for potential revenue synergies.
With the transaction now successfully consummated and our two companies combined into one we are fully turned our attention to integrating and rationalizing our cost structure and operations. So that we can best position calix in a very challenging market.
I'd note that prior to the merger both companies had already done a substantial amount of work on a standalone basis to reduce their fixed cost structure and.
And as we've stated previously we expect to capture annualized run rate cost synergies of at least $40 million and we plan to implement those annualized run rate cost synergies by the end of the first fiscal quarter of 2021.
As of today, we have captured approximately 18 million a run rate cost savings. The synergy opportunity is what I would largely categorized as low hanging fruit, which will enable us to realize the cost savings more quickly and opens the door to identify additional improvements to the cost structure as we work through it integration.
As a premier provider of drilling completion production intervention solutions Calix will continue to focus on operational excellence across its diverse product and service portfolio.
With the company now offering a significantly expanded suite of products service lines. The challenge is to leverage these as well as our combined proprietary technologies into a more cohesive fully integrated and symbiotic enterprise that will enable us to deliver more value to our customers at a lower.
Our cost.
This PML strategy will be a critical factor in driving our long term efficiency and competitiveness in the marketplace I'll discuss this effort as well as our go forward strategy in more detail a comment on my outlook our outlook in my closing remarks.
With that I'll now turn the call over to keeper, who will review our Twoq financial result cheaper.
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 the legacy Qbs business.
There are therefore, largely representative of care Lexus pre merger structure. Additionally, theres little to no synergy benefit reflected in our Q2 results.
Second we will maintain a January 30, Onest fiscal year end that follows Calix Energy's legacy financial reporting and our segment results will be reported on a geographic basis consistent with calix. Its past practice. The three geo markets will remain the southwest the Rockies and the northeast and mid Con.
Third after completing our initial drafted the purchase price allocation for the merger the transaction was determined to be a bargain purchase due to the fair market value of acquired asset 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 calix shares.
As a result, our income statement reflects the 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 a deal costs $7.5 million of severance and $15.1 million of non cash equity compensation tied to accelerate investing.
With that said I will now dig into our second quarter 2020 consolidated results.
For the second quarter ended July 30, Onest 2020 revenues were $36.2 million decrease at 46.8 million or 56% as compared to the first quarter of 2020.
The decrease in revenues reflects the impact of the covert 19 pandemic impacted the Saudi in Russia market share dispute and the resulting supply demand imbalance that led to unprecedented deterioration and U.S. industry drilling completion and production activity.
Adjusted EBITDA loss adjusted EBITDA margin adjusted to exclude cost as defined in depreciation expenses were $10.6 million and negative 29% respectively.
Adjusted operating loss was $23.1 million for the quarter.
Before I review, our second quarter 2020 segment results. Please keep in mind that the company allocates all of our corporate costs, excluding the bargain purchase gain into our Threeg geographic segments. I mentioned earlier total costs allocated to the three segments. During the second quarter were approximately $39.6 million costs allocated to each segment.
For the three month period ended July 31st were as follows.
$20.9 million allocated to the Rocky Mountain segment $13.7 million allocated to the northeast and mid Con segment and $5 million allocated to the southwest segment.
I'll begin the segment review with our second quarter southwest results. The southwest segment generated revenues of $4.2 million, a decrease of 20.2 million or 83% as compared to the first quarter of 2020.
Adjusted operating loss was $6.4 million compared to first quarter adjusted loss of $4.3 million and adjusted EBITDA loss was $1.9 million compared to first quarter adjusted EBITA income half a million dollars.
Moving to the Rockies.
The Rocky segment second quarter revenue of $18 million decreased by 15.8 million or 47% as compared with the first quarter of 2020.
Adjusted operating loss for the second quarter was $8.3 million as compared with adjusted operating loss of $3.6 million in the first quarter of 2020.
Adjusted EBITDA loss was $3.7 million as compared to the first quarter adjusted EBITDA income of $1.7 million.
Lastly, the northeast and mid Con segment second quarter revenues were $14 million, a decrease in 10.8 million or 44% from the first quarter.
Adjusted operating loss for the second quarter was $8.4 million as compared with adjusted operating loss of $5 million in the first quarter of 2020.
Adjusted EBITDA loss was $5 million as compared to the first quarter adjusted EBITDA income of $400000.
Now, let me take a moment to review our financial position.
Calix has afforded one of the strongest liquidity positions in the small to mid cap oil service space as of July 30, Onest 2020 cash on hand was approximately $99 million and decreased $27 million on a sequential quarterly basis. The sequential decline in cash was largely driven by 5.5 million.
Dollars of transaction cost associated with the qbs merger $7.5 million and severance tied to the Qs merger and exiting the calix legacy headquarters in Florida, and $10.6 million of adjusted EBITDA loss.
Total long term debt of $243 million less cash resulted in net debt of approximately $145 million. The company's net leverage ratio was approximately <unk> 0.93 times on a pro forma combined basis for 2019, when including synergies.
There are no borrowings outstanding under the company's 100 million dollar credit facility with $15 million of availability, excluding the Q. He asked current asset collateral base and there are no near term debt maturities with our bonds not maturing until November of 2025.
Preserving our cash and liquidity is our number one priority in the current market environment and we are executing on the realization of the $40 million of cost synergies as quickly as possible.
For the three months ended July 30, Onest 2020 cash flow used in operations was $22.5 million and free cash flow for the quarter was negative $26 million.
Capital expenditures were approximately $3.7 million most of which was spent early in the quarter and tied solely to maintenance spending.
We continue to expect total capex for the fiscal year of about $15 million to $20 million.
With that I'll turn the call back over to Chris.
Thanks Keith.
As we look ahead, our efforts will be squarely focused on integrating the streamlining our operations and support functions will 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 Calix legacy corporate headquarters in Wellington, Florida, and rationalizing associated corporate functions for Houston.
This will result in immediate cost benefits through the reduction of duplicative public company costs, including director in auditor fees and insurance economies of scale as well as other administrative and support staff expenses, such as accounting legal IR and supplementary function and the elimination of.
Their legacy Calix 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 anticipate in 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 cost sales and marketing expenses economies of scale related to benefits call.
As well as incremental savings in HR, IP and systems 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 facility and rolling stock. These represent the consolidation of over 20 overlapping facilities.
Reductions and redundant management sales HST and other field level support staff within certain geographic basins, where we overlap with legacy qbs operations as well as procurement savings and in Macau economies of scale benefits across our operations.
Beyond the three categories, we believe there to be additional sources of upside synergies that we will identify we're working through the integration.
These include such items as cross selling opportunities across the organization leveraging in house manufacturing and downhole tool expertise from the directional product line to the completion side of the business and the repurchasing of legacy horsepower to lower where wireline they coil tubing operations and support.
Sure.
Biondi, there's also the opportunity to enhance vertical integration by leveraging qbs is trucking and machining capabilities to reduce calix as transportation into a cost.
In short there are significant value creation opportunities in the near term that can be initiated to better position the organization for the future.
From a macro view conditions in the market remain very tenuous. Although there are some signs of improvement amid the weakness as keeper stated it was an extremely challenging second quarter.
Rig count declined approximately 40% from the end of our first quarter and Frac red activity bottom somewhere around 40 to 50 spreads. According to industry estimates similar to Q1 market demand for our services remains challenged due to the cobot 19 pandemic and macro supply concerns.
We begin to see an uptick in activity at the end of the quarter and early into third quarter, particularly on the completion side of the business, but the ultimate extended over the duration of the impact of Coven 19 on the global economy is unknown.
So far completions activity is leading the way and the recovery, but we have recently seen rig count.
Pre gen rigs off the bottom and we believe our diverse product and service offering uniquely positions calix to respond to a rapidly evolving marketplace.
So we can provide a comprehensive suite of engineered solutions for our customers with one call and one MSC.
In response to the current market conditions, we've reduced our capital spending by approximately 60% in the first half relative to our budget and are on track to cutting capital spending by more than 50% year over year.
With North American operators, reducing our spending activity and capex being cut in response to unfavorable commodity prices and pandemic related demand destruction, there's that far too much uncertainty to predict the timing of a recovery.
However, we are seem to be completion services have been the first to reflect an improvement in the market activity as operators have focused on completing their backlog of DUC wells from earlier in the year.
In terms of our own visibility on activity, we've seen an uptick in July and the August and September month have shown a notable increase in scheduled work, particularly for completions related projects as the completion of DUC wells will drive demand for coal tubing technical services as well as rentals.
However, I would reemphasize that this may merely be a transitory up to as the outlook for the fourth quarter remains opaque at best and there remains a good deal of overhanging concern from our clients regarding 2020 budget exhaustion.
With that said, we're working to realize synergies and reduce our cost structure and hope to exit the year on at least a $30 million synergy run rate.
Finally, let me emphasize that we remain committed to growing the business, while maintaining a conservative balance sheet and returns focused mentality and we continue to believe that industry consolidation is an ideal means to achieve this goal.
As such we will continue to remain active in pursuing consolidation opportunities and wolfort prioritize those that have a strong strategic fit and our offer meaningful technological differentiation maintained or improved the strength of our balance sheet and offer additional cost savings or synergies.
In closing, let me once again say that I'm very grateful for the support of our shareholders, who have entrusted us to see the company through these trying times and I'm also extremely thankful for our dedicated employees, who have made many sacrifices and adapting to these extraordinary conditions to deliver the superior product and service costs.
All right that our customers are accustomed to receiving.
With that we will now take your questions operator.
Thank you ladies and gentlemen at this time, we will begin ducking your question and answer assessment.
If you'd like to ask your question you May press Star one on your telephone keypad a confirmation in total and you take your line is in the question Q.
You May press Star account this relates to remove your question from the Q.
Or participants using speaker equipment, and maybe that's starting to pick up your handset well for pressing the star Keys. Our first question comes from the line of John Daniel Let's Evans. Please proceed with your question.
Hi, guys. Thanks, Let me and then just further.
Transcripts no longer Semmens, Daniel ours, 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 too.
A consolidation strategy would you is it make more sense to target the smaller tuck in deals or do you go for the GAAP to again with another larger transaction.
Yes, good morning, John and.
Hey, good catch we saw that.
Up on the screen decisions note. So congrats on your new role and appreciate you dialing in and your interest in Calix look as you know were huge proponents of industry consolidation, we sell consolidation in the market.
Earlier this week in would congratulate both of those teams.
Im sure Youre well aware, we've also started to see some consolidation in some of the larger private over the last I'll say month and so.
We congratulate all of those parties on just starting to move the needle.
First and foremost, we're going to focus own integration and synergy realization period in the story, that's our number one goal.
Along with bringing the company back to breakeven EBITDA and so.
That's what we're focused on but I think we've discussed.
Mergers consolidation AD nauseum on prior calls.
We view this as step one we're still looking to gain scale and certain service lines that we will continue to look to add complementary technology, all while trying to preserve the strength of the balance sheet. So you know as we look at the outlook in front of US Calix has afforded with a diverse mix of product service lines and impressive technology portfolio.
And a strong balance sheet 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 key for and our board, we all have relationships to your point, although larger side of the business as well as the private.
And we're going to be opportunistic there.
But we're not going to lead a transaction getting the way of integration.
Fair enough would you envision.
As a as a consolidation strategy does unfold sort of.
Yes, sticking with existing core competencies or or do you see yourself wanted to branch out to expand product line and that's all.
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 ill and stick with our knitting right I'm not going to say that we wouldn't look to bring the company into more of production service lines in the Opex side of the business.
But it would be something that tucked in welding was synergistic to our existing technology platform, where we can cross sell some of those technologies and tools.
Okay, great. Thanks for put me on that.
Yes, no appreciate it thank you.
Our next question comes from the line of Jamie Pres with RF Lafferty and company. Please proceed with your question.
Jamie for as your line is laws.
Good morning, everybody, how you doing thanks I had it on mute thanks for taking my question and.
Congratulations on a merger.
I've a question on utilization for the quarter can you give us some color or details on utilization and.
What will be a.
Breakeven utilization for gross margins I mean, we have no gross margins pretty weak I just wondered what what volume of work that you need to have to achieve breakeven gross margins on that front of questions beyond that.
Yes, Jamie appreciate the question look what I would say is across all product lines in all regions revenue was down.
Differing levels right and different levels of utilization and so we havent historically closed.
Utilization by product line, but overall twoq with a very difficult market for the rig count bottom basically to 31 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 out.
Were down in the 40 range and we now see those backup into the low 100 range and so thats going to drive utilization across a whole host of our service lines.
We're also starting to see some of the shut in wells the 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 still salt across the board and so.
From a breakeven 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 line 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 breakeven revenue, but I think that gives you the the building blocks and components.
All right that's that's helpful.
Also as far as the integration I mean, how how far Oh I know the the emerging completed let's close on a late July but as far as the integration of or do you have the company in a especially to feel and operations how far how we've gotten and if the operator want it.
Service.
Fast could you.
Provided.
Yes look what I would say as we talked about 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.
Consolidation of the Houston functions as well.
There is 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 set and I think we've done an excellent job and part of that consolidate consolidate.
Patient in 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. So I don't think we've had any issues with regards to response with this to customers.
Hi, good.
Yeah. My next question you have about $99 million cash balance sheet, what's what's the plan to use of cash you're going to use it to buy more equipment.
Is it.
Hey don't serve pay down some debt I mean, you do have a.
Large amounts of debt servicing throughout.
Well, it's about seven point.
$6 million this quarter and analyze that it's almost $30 million, what's management thought about paying down some debt.
Yeah, 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 scrubs maintenance capex to absolutely required a necessary items and so we will cut that number 50% year over year and.
Don't anticipate in this market increasing capital spending anytime soon.
Keep or you want to jump in on kind of the debt in the balance sheet sure.
Appreciate the question and good morning.
And you're spot on we ended the quarter with about $99 million in cash.
We got 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 Qs side, which were not wrapped into our borrowing base as of July 31st but that will be complete prior to were reporting our Q3 results.
I think to get to where you are buying with your question as it seem to be more on the liability management side.
And I think what I'd say, the company's 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, our king and so as we approach or evaluate liability liability management option.
We will do so in the same manner with which we evaluate all investing opportunities for the company, which is really to focus on on the risk adjusted returns there.
Understanding that the key.
And 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 Calix 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.