Q1 2021 KLX Energy Services Holdings Inc Earnings Call

Greetings and welcome to the Calix energy Services' fiscal first quarter 'twenty 'twenty, 1 earnings conference call.

At this.

Participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ken Dennard. Thank you can you may now begin.

Thank you operator, and good morning, everyone. We appreciate you joining us for the tail ex energy services conference call and webcast to review fiscal first quarter 2021 results.

With me today are Chris Baker, <unk>, President and Chief Executive Officer with T for leaner Executive Vice President and Chief financial.

You'll officer.

Following my remarks management will provide a high level commentary on the financial details of the first quarter and the outlook before opening the call for questions and answers there will be a replay of today's call there'll be available by webcast on the company's website at scale ex energy Dot Com will.

It'll be a reported replay telephonic Lee until June 17, 2021, and more information on how to access. These replay features were included in yesterday's earnings release.

Please note that information reported on this call speaks only as of today.

'twenty 'twenty 1 and.

And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, management's comments may contain certain forward looking statements within the meaning of the United States Federal Securities laws.

These forward looking statements reflect the current views of <unk> manner.

However, various risks 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, our current reports on form.

Okay.

I understand certain of those risks uncertainties and contingencies.

The comments today May also include certain non-GAAP financial measures additional details and reconciliations for the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the <unk>.

From 8 <unk> website.

And now I'd like to turn the call over to <unk>, President and Chief Executive Officer, Mr. Chris Baker, Chris.

Thank you Ken and good morning, everyone. Thank you for joining us today for Calix energy Services' fiscal first quarter 2021 conference call.

I'll begin by providing an update on the broader market environment as well as some of the significant themes impacting our results during the quarter.

I will then turn the call over to Keefer to review our financial performance before returning for some final comments on our outlook and strategy.

As the global economy reopens.

<unk> post COVID-19, the market continues to improve from both a macro supply demand perspective, as well as from a U S onshore activity perspective.

For the fiscal first quarter ended April 30, both wty for Isis and rig counts were up roughly 21% and the rig count currently sits.

At approximately 10% above the Q1 average. Additionally.

Additionally, the U S frac spread count increased approximately 24% during our fiscal first quarter ending with roughly 212 frac spreads running in the U S.

With that said our customer base continues to focus on capital discipline.

And returning capital to shareholders.

While we are seeing very evident signs of meaningful market improvement. We also found ourselves in a difficult transitory period in which some of the crosscurrents, we mentioned during our prior call weighed on our Q1 results.

Yes.

Margins were impacted materially by seasonal weather issues winter storm here as well as material customer scheduling and well issues, particularly in the Rockies.

We lost approximately 7 plus revenue days due to winter storm area alone, which coincided with our staffing up to service the increased.

Activity levels expected in March and April so there was significant negative operating leverage associated with the foregone revenue.

Despite the aforementioned headwinds experienced in Q1, our revenue improved 5% sequentially to approximately $91 million.

Monthly results improved throughout.

Revenue quarter, and we exited Q1 on a high note generating our highest revenue level since closing the <unk> merger.

Last quarter, we spoke at length about pricing power for oilfield services companies and how it remains challenging despite clear improvements in commodity fundamentals.

Throughout the positive side and since we spoke last quarter, our ability to improve price has improved around the margin, but the broader macro themes remain the same.

Our customers are focusing heavily on returns and capital discipline, rather than production growth leading to activity gains insignificantly.

Will it be lower than would have occurred in prior cycles.

When combined with the large quantity of stacked equipment in the marketplace and the lack of meaningful consolidation amongst Oss company. It is easy to see why making proportional headway in pricing is considerably more difficult now than in previous.

Cycles.

Our team has done an excellent job executing our merger integration and cost reduction initiatives since completing the implementation of the $46 million in annualized merger synergies in April 2021, we have actions and additional for $4 million in annualized fixed cost savings.

During late Q1 and into Q2 that will begin to benefit our Q2 results it should be fully reflected in our <unk> results.

These savings are inclusive of the actions taken during the June.

Annual meeting to reduce the size of the board from 9 directors decided.

Our effort.

To seek out greater savings and operational efficiencies have been very successful and we will continue to monitor the need for future actions alongside our attempts to move pricing where it is viable to do so.

I'll discuss our outlook for Q2 in more detail later in the call, but we are optimistic around the trajectory of the industry.

Industry and our competitive positioning in <unk>.

We expect our results improve materially in Q2, as we expect revenue will increase 15% to 20% sequentially and the business should return to breakeven adjusted EBITDA in the quarter for the first time since early 2000.

With that I'll now turn the call over to Keiper, who will review our Q1 financial results.

Thank you Chris.

Let me begin by discussing our first quarter 2021 consolidated results for the.

Our first quarter ended April 32021.

Revenues for $98 million, an increase of $4 million or 5% as compared to the revenue for the fiscal fourth quarter of 2020.

Once again, the revenue increase reflected the impact of improving market activity across 2 of our geo markets and multiple product lines, particularly.

Clearly the southwest segment up 26% driven by our directional drilling coiled tubing and rentals product lines.

Now to detail our revenue contribution by end market Q1, 2021 revenue was 27% drilling 49% completions, 13%.

Production, and 10% intervention services, which compares to 24%, 49%, 13% and 13% respectively in the fourth quarter of 2020.

Drilling has become a much larger contributor to <unk> revenue in Q1.2021 or.

Our directional drilling business.

Experienced a material increase in activity from Q4 to Q1 as rig count continue to rebound off 2020 lows and as of the end of Q1, we believe we have approximately 8% market share.

Directional drilling is now 1 of our largest product lines at KFC.

Turning to the completion side of our business.

The biggest drivers of our completion business remains our coiled tubing and rentals product lines.

Made great strides pulling through our plug sales and through tubing services to our integrated coiled tubing offerings throughout each of our Geo markets.

Moving to our consolidated profitability.

I would note that we changed our presentation this quarter.

And now breakout depreciation expense from cost of sales on the face of the income statement.

Jumping into our results adjusts.

Adjusted operating loss was $25.6 million for the quarter adjusted EBITDA loss and adjusted EBITDA loss margin were negative $9.4 million and negative 10% respectively.

As Chris alluded the increase in our adjusted EBITDA loss was the result of seasonal weather issues winter storm, Yuri and customer scheduling and well issues, particularly in the Rockies I'd also note that our cost of sales is burdened by $2.1 million per quarter related to 5 legacy coiled tubing operating leases.

Which impacts our comparability to peers.

I'll begin the segment review with the Rockies the Rocky Mountains segment fiscal first quarter revenue of $24.3 million decreased by $5.1 million or 17% as compared with the fiscal fourth quarter of 2020.

The sequential decrease.

Kris in revenue was primarily driven by reduced activity levels as a result of certain customer scheduling and well issues.

Adjusted EBITDA loss was $1.6 million as compared to the fiscal fourth quarter, adjusted EBITDA of $6.5 million.

The erosion in profitability was related to unforeseen customer scheduling and well issues.

Now moving to our southwest segment.

Our southwest segment increased.

<unk> revenue substantially by 26% as compared to the fiscal fourth quarter of 2020 generating revenues of $38 million.

<unk> increase in revenue was driven by meaningful increases in directional drilling and completion rental activity.

Q1, adjusted operating loss was $6.

$6 million.

Compared to fiscal fourth quarter, adjusted operating loss of $6.4 million and adjusted EBITDA loss was $700000 compared to fiscal fourth quarter adjusted EBITDA of $1.1 million.

Now to finish out the segment discussion with the northeast and mid Con.

<unk> fiscal fourth quarter revenues were $28.5 million up for.

<unk> as compared to fiscal fourth quarter of 2020.

Adjusted operating loss for the fiscal first quarter.

With $6.1 million and improved $4.3 million as compared with adjusted operating loss of $10.4.

In the fiscal fourth quarter of 2020.

Adjusted EBITDA loss was $2.1 million as compared to the fiscal fourth quarter, adjusted EBITDA loss of $5.4 million.

The improvement in adjusted EBITDA loss was primarily driven by the $4.6 million accounts receivable reserve.

Recognize in fiscal fourth quarter, 2020, and a response to a customer bankruptcy, which is detailed in our 10-K filing for.

Pro forma for this reserve the adjusted EBIT loss actually increased by $800000, primarily due to impacts from winter storm, Yuri which impacted the east, Texas and architecture regions, which are included.

Alluded in our mid Con segment.

Our adjusted corporate and other EBITDA loss for the fiscal first quarter remained largely unchanged sequentially at approximately $5 million with that said the cost synergies from the merger and now materially benefiting the results of <unk>.

When comparing first quarter SG&A.

Sustained alone legacy <unk> 2020, SG&A expense for first quarter 2021, SG&A expense is $1.4 million lower than that of Standalone <unk> in the first quarter of 2020.

On a pro forma basis for the <unk> merger first quarter 2021 adjusted.

Adjusted G&A expense was 38% or $8 million below pro forma first quarter 2020, adjusted SG&A expense annualized this would represent a $32 million of savings and recall that 100% of the merger synergies were not yet benefiting <unk> for the entirety of Q1.2021.

Now, let me review, our consolidated balance sheet and cash flow.

Our long term debt of $244 million less cash resulted in a net debt position as of the end of the first quarter of approximately $206 million as of April 32021, cash on hand was approximately $38 million.

And total liquidity was $79 million preservation of our cash and liquidity continues to be a top priority and as Chris mentioned, we expect materially higher activity through the remainder of the year. So we will continue to proactively manage our cost structure and working capital as the business continues to ramp in Q2 and order.

Price margin and cash flow, we would also expect that our borrowing base would increase in conjunction with the 15% to 20% increase in revenue Chris mentioned earlier on the call.

In addition to the $4.4 million of incremental annualized cost savings. Chris mentioned previously there is another item that will benefit cash flow going forward.

<unk> Q3, 2020, we took a noncash charge for our grounded corporate aircraft lease, but there were still quarterly cash lease payments of roughly $700000, which burdened our Q1 quarterly cash flow net.

Net lease officially ended on April 30, and the plane was returned to the lessor following end of lease.

Forward infections in May and early June and is now fully off our books.

For 3 months ended April 32021 cash flow used in operations was $11.3 million and free cash flow loss was $7.4 million.

There was no cash interest paid in Q1.2021, and our next semi.

<unk> interest payment is due in Q2.

Cash flow used in operations was partially offset by a $4.8 million unwind in our investment in networking capital during the fiscal first quarter.

Capital expenditures for the quarter were approximately $2.2 million.

Most of which was tied to maintenance oriented spending.

Annual attorney to scrutinize, all capital spending and reduced our full year Capex spend we now expect total capex for fiscal 2021 to be in the range of $14 million to $16 million.

We also monetize $6 million of assets during Q1, primarily comprised of real property as part of our ongoing efforts to finalize our.

We can be footprint integration going forward, we would expect additional monetization of obsolete facilities and assets, including 3 facilities that are currently held for sale.

With that I will now turn the call back to Chris.

Thanks, Keith for looking.

Looking out over the oil and gas horizon, we see.

Widespread evidence both domestically and overseas with the macroeconomic fundamentals are becoming increasingly favorable which has been and should continue to drive a supportive commodity price environment for the <unk> industry.

<unk> seen rollout additional government stimulus the stronger.

Economic activity as well as declining crude stockpiles and OPEC plus production discipline have laid a solid foundation for growth in the U S onshore space.

With this encouraging backdrop why is profitability in the oilfield services industry lag as.

As we said before.

The fragmented nature of the industry as well as the oversupply of idle equipment available severely constrained potential pricing power.

This means that we seek to protect our profit primarily using the other lever available to us that is continued productivity improvement via consistent utilization.

As for reductions.

Yeah.

From that front, we've been extremely successful attaining an additional $4.4 million in fixed cost savings over and above the $46 million, we achieved last year.

So given our history of aggressively pursuing greater efficiency and lower cost.

We have a good handle on how to leverage our resources and operate with a lean cost structure as possible.

In the interim we are focused on pushing the other lever pricing, where it is economically feasible to do so.

Our efforts to affect pricing changes in the last few months equates.

Cost approximate $9 million annualized uptick in revenue.

So while we're making progress the majority of the benefit of higher commodity prices is accrued to our E&P customers and their shareholders.

This leads me to reiterate the margins for the service companies remains unsustainably.

Low and the industry remains out of balance from a competitive standpoint.

And this logically lead you back to consolidation, which is the corrective measure needed to bring things back into balance.

Validation remains a critical strategy component for both <unk> and the industry as a whole.

<unk> has successfully completed a merger and remains well positioned to continue to lead <unk> participate in the effort to consolidate the Oss industry.

We've long emphasized the consolidation and the realization of synergies are key components and remaining competitive competitive in this new normal environment.

I also want to touch from Q2, and our outlook for 2041.

We do expect stronger results in Q2, and an additional approved improvement throughout most of develop for the year.

This is supported by a material near term uptick in activity across many of our product lines.

Altogether.

Together, we expect the uptick in activity to drive the sequential revenue increase from the order of 15% to 20% above Q1 levels.

Combined with the substantial cost savings, we have attained over the last year and the modest pricing wins mentioned earlier, we believe we should be able to return to breakeven adjusted EBITDA.

In <unk>.

Looking out for the remainder of 2021, we also expect to generally see steady improvement in activity revenue and margins throughout the remainder of the fiscal year.

In closing, let me, thank our employees customers and shareholders for.

Their support we are.

We're confident that the improvement we're seeing in the economy will fuel better times ahead for our industry and that <unk> will continue to serve an important role in delivering its many mission critical resources assets and expertise to E&P operators throughout the U S.

With.

We will now take your questions operator.

Thank you we will now be conducting a question and answer session.

If you'd like to ask a question. Please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue you.

You mean for Istar to if you'd like to remove your question from the queue for.

For participants using speaker equipment.

That may be necessary to pick up for handset before pressing the star keys.

I will pause a moment to assemble the queue. Thank you.

Thank you.

There are no questions in the queue I will now turn the call back to Chris Baker for any final comments.

Thank you operator, and thank you once again for joining us political today and for your interest in Calix Energy services. We look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference you may disconnect your lines and have a wonderful day.