KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) Q1 2023 Earnings Call Transcript May 11, 2023

KLX Energy Services Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.8 EPS, expectations were $0.8.

Operator: Greetings and welcome to KLX Energy Services 2023 First Quarter 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you. You may begin.

Ken Dennard: Thank you, operator, and good morning, everyone. We appreciate you joining us for KLX Energy Services conference call and webcast to review first quarter 2023 results. With me today are 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 fourth quarter and outlook before we open the call up for your questions. There will be a replay of today’s call that will be available by webcast on the Company’s website at klxenergy.com. There will also be a telephonic recorded replay available until May 25, 2023. And more information on how to access these replay features was included in yesterday’s earnings release.

Please note that information reported on this call speaks only as of today, May 11, 2023, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call 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 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.

These comments today may also include certain non-GAAP financial measures. Additional details and reconciliations to the most comparable GAAP financial measures are included in the press release, which can be found on the KLX Energy website. And now with that behind me, I’d like to turn the call over to KLX Energy Services’ President and CEO, Mr. Chris Baker. Chris?

Chris Baker: Thank you, Ken, and good morning, everyone. KLX continued its positive momentum from 2022 by closing the highly accretive Greene’s acquisition and reporting a strong first quarter that surpassed our expectations and has propelled KLX to one of the strongest starts to a year in its history. We exceeded our guidance across all financial metrics in Q1 overcoming numerous headwinds during the quarter. As we previously reported, we closed on our acquisition of Greene’s on March 08, 2023. Greene’s wellhead protection, flowback and well testing services, augment KLX’s frac rentals and flowback product lines and provides us with a broader presence in the Permian and Eagle Ford basins. Although we are in the early stages of integration, we are excited about the opportunity to blend the teams together and the technology brought by Greene’s and believe there is a tremendous strategic fit and ultimately a more differentiated compelling offering to our customers.

In the early days of integration, the teams have already identified numerous revenue synergies, which were not factored into the deal and while minimal on a total revenue basis speak to the fit and entrepreneurial nature of the managers involved. From a macro standpoint, the commodity price backdrop was volatile yet remained constructive, and the supply and demand fundamentals are still materially in favor of the services sector and the longer-term outlook is favorable as well. OFS equipment and labor capacity remains tight and OPEC Plus seems to have taken a more proactive approach to supporting commodity prices based on recent actions, which is bullish not only for the North American onshore service industry, but for KLX in its role as a premium provider.

From an operating results perspective, despite seasonality, weather disruptions and commodity price and rig count volatility, we realized a 7% sequential improvement in revenue, at approximately $240 million, which was above our guidance range of $225 million to $230 million and represents our 12th consecutive quarter of revenue growth. On a geographic basis, the Northeast/Mid-Con contributed 41% of Q1 revenue led by our pressure pumping, coil tubing and rental PSLs. The Southwest contributed 31% led by directional drilling, coil tubing and tech services. And finally, the Rockies contributed 28% led by coil tubing, rentals and tech services. The Haynesville falls within our Northeast/Mid-Con segment and accounted for 10% of Q1 revenue, which was increased slightly from Q4.

Despite market volatility and a 3% sequential reduction in average Haynesville rig count, KLX was able to maintain its strong utilization rate in the basin due to pent-up demand for KLX services and through Q1 has more than offset activity disruptions via incremental market share and weighted average pricing gains in the basin. We believe this microcosm is a testament to our premier positioning within the market and service lines and customer mix during Q1. On a product line basis, drilling, completion, production and intervention services contributed approximately 25%, 54%, 12% and 9% respectively to revenues for the first quarter of 2023, which represents a 5% increase in leverage to the completions end market. We saw relative strength across our completion and production PSLs, where we experienced sequential increases in revenue activity and weighted average pricing.

KLX generated first quarter adjusted EBITDA of $38 million above our guidance range of $30 million to $35 million and adjusted EBITDA margin of approximately 16%, which was above the top end of our prior guidance range of 13% to 15%. We overcame seasonal pressures in the first quarter including elevated personnel costs from the January reset of unemployment taxes as well as commodity price volatility to report record first quarter results that exceeded our expectations and guidance across all metrics. Note that because the Greene’s deal was closed on March 8, they only contributed a partial month a consolidated KLX Q1 results. Pro forma for a full quarter impact from Greene’s, Q1 revenue and adjusted EBITDA would have been $252 million and $41 million respectively.

Drilling down into the first quarter cadence, March proved to be a record month for the Company, and we ended the quarter north of $1 billion of revenue on an annualized monthly run rate basis. We exited the quarter with strong momentum and are encouraged about KLX’s outlook and free cash flow generation in Q2 and the remainder of 2023. With that, I’ll now turn the call over to Keefer, who will review our financial results, and I will return later in the call to discuss our outlook in greater detail. Keefer?

Keefer Lehner: Thanks, Chris. Good morning, everyone. I’ll begin by discussing our first quarter 2023 results in more detail. As Chris mentioned, we reported record quarterly revenue of almost $240 million which represents a 7% sequential increase, outpacing the 2% decrease in the rig count and a 10% decrease in average quarterly WTI price. Q1 revenue continued to be driven by strong utilization and weighted average pricing across our drilling, completion, production and intervention activities. Additionally, we were very pleased to have experienced our fourth consecutive sequential improvement and adjusted EBITDA to $38 million for the first quarter, overcoming seasonal pressures from weather, elevated personnel costs from the January reset of unemployment taxes along with the well discussed commodity price volatility.

Adjusted operating income for the first quarter was $21 million. Adjusted EBITDA and adjusted EBITDA margin were $38.2 million and 15.9% respectively. Adjusted EBITDA increased approximately $33 million over first quarter of 2022 and $1 million sequentially. Total SG&A expense for Q1 was approximately $26.2 million. When you back out the non-recurring cost, adjusted SG&A expense for Q1 would have been $20.2 million or just 8.4% of quarterly revenue. Net income and adjusted net income were $9.4 million and $11.5 million respectively. Pro forma for a full quarter’s impact of Greene’s pro forma revenue, adjusted EBITDA and adjusted net income for Q1 would have been $252 million, $41 million and $12.4 million respectively. Turning now to a review of our segment income statement results.

I’ll begin with the Rockies. The Rockies segment’s first quarter revenue was $67.9 million, representing a 3% increase over the fourth quarter of 2022 and an all-time quarterly record for the segment. Adjusted operating income for the first quarter was $9.8 million. Adjusted EBITDA was $15.5 million as compared to fourth quarter adjusted EBITDA of $17.9 million. The slight decrease in profitability was driven by seasonality, white space, and seasonally elevated payroll taxes previously discussed. Moving now to our Southwest segment. The segment experienced a slight 2% sequential decrease in revenue generating revenue of $73.4 million in the quarter. The minor decrease in revenue was primarily driven by slightly lower activity to begin the year as operators reset their budgets and a shift in job mix that drove a modest decline in weighted average pricing.

Q1 adjusted operating income for the segment was $4.8 million. Adjusted EBITDA was $10.2 million for the first quarter compared to fourth quarter adjusted EBITDA $12.4 million. The decrease in profitability was driven by higher costs for this region related to seasonally elevated payroll taxes along with white space impacting margins early in the quarter as we prepared for a return to normalcy in March. Now to wrap up the segment discussion with the Northeast and Mid-Con, Northeast/Mid-Con Q1 revenue was $98.3 million, a significant 19% increase relative to Q4 driven largely by sequential improvement in activity and pricing across pressure pumping, cold tubing and directional drilling. This is our broadest geographic segment in the geographic segment with the most gas exposure, as it includes both the Haynesville and the Marcellus Utica.

For the first quarter, the Haynesville accounted for 10% of consolidated revenue and we actually captured market share while seeing an increase in weighted average pricing. Adjusted operating income for the first quarter was $18.7 million, and adjusted EBITDA was $23.7 million. The 20% sequential increase in adjusted EBITDA was driven by a favorable shift in job mix and continued strength and weighted average pricing across our core completions offerings. Q1 results for revenue adjusted operating income and adjusted EBITDA represent all-time segment records. Corporate adjusted operating income and adjusted EBITDA losses for Q1 were $12.2 million and $11.2 million respectively. The corporate adjusted EBITDA loss improved by 9%, sequentially.

I’ll now turn to our networking capital, cash flow and capitalization. Our first quarter 2023 cash balance was $39.6 million, down from $57.4 million a year end. The sequential decrease in cash was largely due to a material investment and networking capital driven by a handful of transitory timing factors. We continue to proactively manage working capital and convert cash flow as quickly as possible. Networking capital was approximately $115 million in Q1. Sequential increase in networking capital and corresponding decrease in cash was largely driven by. One, A 7% increase in revenue; Two, a $12 million working capital contribution from greens; Three, a 7% increase in DSO as customer slowed payments and response to commodity price volatility; Four, accelerated accounts payable in March as we paid some invoices early in preparation for a system implementation project in April, thereby reducing DPO by approximately 2% from year end levels; and lastly five, two incremental payrolls in the first quarter of 2023 relative to the fourth quarter of 2022.

This all normalized, and as of April 30, 2023, our cash balance returned to approximately $61 million and our available liquidity was approximately $106 million. Currently, we are at similar cash and liquidity levels to month end, April, even after making our semiannual interest payment on May 1st. Total debt outstanding as of March 31, 2023 was $283.6 million which was in line with our Q4 balance as we did not draw on or pay down the ABL, nor did we execute additional 3(a)(9) exchange transactions. Net debt balance as of Q1 was $244 million and accrued interest as of March 31 was $11.5 million for the senior secured notes and $200,000 related to the ABL. We exit Q1 with our strongest credit metrics since the notes were put in place in late 2018.

Based on annualized Q1 results, we have a net leverage ratio of 1.6x and 1.5x when you pro forma for Greene’s. We ended the first quarter with $84 million in total liquidity consisting of $39.6 million of cash and availability of $44.4 million on the March 2023 ABL borrowing base certificate. As I stated earlier, cash normalized in April and as of April 30th, our cash balance was approximately $61 million and our available liquidity was approximately $106 million. Our borrowing base as of our March certificate is significantly larger than the facility size and we had $42 million of suppressed availability. We remain in compliance with all financial covenants and we expect to remain in compliance going forward. We are currently in conversations with lenders to address our September 2024 ABL maturity and believe there are highly constructive options available and we plan to address well before we go current later this year.

We did not issue shares under our ATM in Q1 and have not issued any shares so far this year. The only share issuances in 2023 were associated with share-based, long-term compensation and the 100% stock acquisition of Greene’s. Now turning to our CapEx. CapEx for the first quarter was approximately $10 million and we were primarily focused on maintenance spending across our segments. Going forward, we continue to expect total CapEx for 2023 to be in the range of $60 million to $70 million inclusive of Greene’s, though we likely come in towards the lower end of that range. This spend will be primarily focused on maintenance spending with 75% to 80% supporting ongoing operations and the remaining CapEx earmarked for reactivation and growth, focused on quick payback projects.

As always, we will reassess capital spending in real time based on market conditions. At the end of the first quarter, we had $4.9 million of assets held-for-sale. And based on our current estimates, we hope to close on the sale of approximately 50% of this balance in the second half of 2023. As we look to the remainder of the year, our focus remains on maximizing free cash flow and further reducing our net debt, all while being prudent stewards of capital and pursuing accretive consolidation opportunities. I will now turn the call back to Chris, who will provide some additional color on the current market and our outlook for Q2 and 2023.

Chris Baker: Thanks, Keeper. Before we wrap up, I’d like to share some more detail on our outlook. Despite recent volatility in commodity prices and rig count declines and rotations driving short-term dislocations, the market backdrop remains fundamentally constructive. Our customers are largely hedged and the supply and demand fundamentals continue to favor the services sector. As we enter the second quarter, we have seen consolidated recount decline, approximately 10 rigs from Q1 average levels and some softening across a few of our product lines, largely driven by a reduction in Haynesville activity and an associated impact on adjacent basins. However, the overall market remains tight for many of our market leading differentiated service lines.

KLX’s diversification will enable us to navigate any near term market disruption and dislocation. KLX is well positioned to manage these disruptions given our competitive positioning and ability to take a portfolio allocation approach to managing our assets across a diverse product line and geographic footprint. Looking forward to the second quarter, we expect continued strong utilization and margin, plus a full quarter’s impact from greens to drive sequential expansion of quarterly revenue and adjusted EBITDA. As we look out to full year 2023, we will continue to proactively manage our portfolio of assets to maximize our results in the face of market volatility and basin rotation with a focus on generating meaningful free cash flow. As I mentioned earlier, we exited March on a strong monthly run rate and are optimistic about Q2 results guiding to sequential improvement in both revenue and adjusted EBITDA.

We expect Q2 revenue to be in the range of $240 million to $250 million an adjusted EBITDA margin to be in the range of 16% to 17%. Further, as Keefer mentioned, we expect strong sequential free cash flow generation this quarter despite making our semi-annual interest payment in early May. Yesterday, we also reaffirmed our full year 2023 guidance. Full year revenue is expected to be in the range of $975 million to $1.04 billion in adjusted EBITDA margin in the range of 17% to 19%. Given these margin levels and our CapEx guidance, we expect meaningful free cash flow generation for the remainder of 2023. Lastly, on consolidation, KLX has a long history of accretive inorganic growth. Most recently, we completed the highly accretive acquisition of greens and we are working to quickly integrate our businesses.

Given the operational synergy and systems overlap, we expect a quick integration process and are well positioned to pursue the next deal. Well site interest remains strong, but the bid-ask spread remains challenging. We believe KLX is a counterparty of choice for potential M&A targets amongst the publicly traded diversified services providers, and the Greene’s transaction should serve as a blueprint for how KLX will structure and execute additional accretive tuck-in consolidation opportunities. With that, we will now take your questions. Operator?

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Ignacio Bernaldez with EF Hutton. Please proceed with your question.

Operator: Thank you. Our next question is from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.

Operator: Thank you. Our next question is from David Marsh with Singular Research. Please proceed with your question.

Operator: And as usual, we get some email questions and one of our questions from Luke at Piper who’s on the road somewhere. He asked, Chris, if you could walk through — pull it up here real quick. Walk through some of the improvements from Q2 to the second half on how you get to the midpoint of your guidance?

Ken Dennard: Thanks, Chris. So no more questions in the queue and I’ll hand it back to Chris to give some final comments and we will move on to the next quarter.

Chris Baker: Thank you, Ken. Thank you once again for joining us on this call, and thank you for your interest KLX Services. I would especially like to thank the KLX team for their stellar execution in Q1. We look forward to speaking with you again next quarter.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.