KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) Q4 2019 Earnings Conference Call March 9, 2020 9:00 AM ET
Ryan Tyler - Vice President, Corporate Development, Financial Planning and Analysis
Amin Khoury - Chairman and Chief Executive Officer
Conference Call Participants
John Watson - Simmons Energy
Ladies and gentlemen, thank you for standing by and welcome to the KLX Energy Services Fourth Quarter 2019 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] 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 Ryan Tyler, Vice President, Corporate Development, Financial Planning and Analysis. Thank you. Please go ahead sir.
Thank you, Shannon. Good morning and thank you for joining us today. We are here to discuss KLX Energy Services financial results for the fourth quarter ended January 31, 2020. For comparative purposes, we have presented our financial results adjusted to exclude costs associated with the company's major downsizing program, new product service line introduction and related cost. These costs are collectively referred to as costs as 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 website. 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 have 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 website at klxenergy.com. In addition, copies of the slides are posted on our website for you to refer to.
Before we begin, we have some additional information to cover. Any forward-looking statements that we make are subject to risks and uncertainties and 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.
Thanks, Ryan and good morning everyone. Thank you for joining us today to discuss our fourth quarter and full year financial results. I’d like to adhere from the script for a couple of moments given what’s happened over the weekend and do a quick analysis or review of where we were earlier in the year, where we are now and how the outlook may have changed here.
So, during the first half of the year, we were operating at about $622 million annualized revenue run rate with an adjusted EBITDA margin of about 19% that’s after all corporate cost allocations. By the fourth quarter of this year, revenues of $99 million roughly, represented an annualized run rate of about $395 million. That’s about a 38% lower annualized run rate, and more importantly, our first half EBITDA margin of 19% adjusted EBITDA margin decreased to about 1.5% of revenues.
So, first half versus where we were running in the fourth quarter dramatically reduced activity. We have a business which is gaining market share. It’s gaining new customers. It’s gaining share of customer spend with solid businesses and essentially all of the important Shale Plays, but which cannot perform well at Q4 E&P activity levels.
Management is doing what we can in this environment. We’ve reduced headcount by 360 people or about 22% and we’ve attacked cost in every aspect of our business. We substantially strengthened and broadened our service offerings in each of our geo regions and we expect to be able to continue doing so, but at current activity levels industry consolidation is an absolute imperative.
The announcement over the weekend that the [Saudis] will cut prices and increase output to gain share will not only bring Russia to its [knees] it will also bring the U.S. oil and gas industry to its [knees]. Clearly all E&P companies are in reassessment mode this morning, but in any event there will be a further sharp reduction in E&P investment in the coming months, an OFS demand will be further reduced.
With that background, I think we’ll just get into our script, run through our obligations here with respect to the fourth-quarter and full-year and then do a Q&A. So, the decline in demand in the fourth quarter was a continuation of the abrupt deterioration in industry conditions, which began in the third quarter. The decline in demand was principally due to the E&P companies, abrupt cessation and activities and their intense focus on capital discipline and free cash flow generation.
In addition to customer budget exhaustion, of course. The severity of the decline in the second year half of the year ended January 31 by the E&P companies led to a sharp decline in U.S. land rig count and an unprecedented decline in operating frac spreads from the second quarter through the end of the calendar year. As we reported last quarter, we initiated an ongoing comprehensive business review and cost rationalization program targeted at aligning our cost structure with customer demand.
Specifically, we implemented and approximate 360 person or approximate 22% reduction in force, we warm stacked our Permian based wireline assets, we aggressively cut cost in every year of our business. We will continue to carefully monitor our staffing and cost structure. We began to realize the benefits of our cost rationalization actions in the fourth quarter of this year and despite the 27% reduction in revenues as compared to Q3, we generated about 1.5 million in free cash flow during the quarter and ended the year with approximately $124 million in cash and a 100 million undrawn credit facility.
While we have reduced our personal level substantially, we’ve also recruited experienced coiled tubing personnel to join the company in both the third and fourth quarters as we have received and are currently deploying the last of our five new large diameter coil tubing spreads. The cost of these start-up activities was an approximate $2.3 million drag on Q4 operating results.
We believe the company's coil tubing services strategy, which both increases the number of customers serves and gains greater share of customer spend by pulling through our broad range of asset life services together with continued tight cost controls and a focus on free cash flow generation should enhance the company's position as a broadly confident proven value-added partner to our clients with strong liquidity, a history of providing value-added services, while maintaining superior health safety and environmental standards.
On today's call we’ll review the current oilfield services market, discuss our fourth quarter 2019 financial performance, and will comment on our outlook.
Let’s turn to Slide 3. And begin by reviewing the current oilfield services market environment. The U.S. land market continues to be under intense pressure during the fourth quarter as exploration and production companies reined in spending while maintaining an intense focus. This resulted in significant sequential quarterly declines in completion activity, rig count; frac spreads across all major U.S. shale basins.
Many E&P scaled back or completely shut down operations during the fourth quarter. The decline in activity is even more pronounced of the natural gas plays as natural gas prices hit multi-year lows and growing supply concerns continue to weigh on activity. Clearly, conditions in the second half of 2019 were extremely difficult. Slide 3 reflects this sharp reduction in demand.
KLXE revenues, adjusted EBITDA, and adjusted EBITDA margin in the first half of this year were 300 million in revenues, $60 million, and 19% respectively as compared with second half revenues and adjusted EBITDA and adjusted EBITDA margin of 233 million, 19 million and 8% respectively. And as of the fourth quarter, our EBITDA margin was about 1.5% and we were operating at a rate that was 38% lower than the first half.
Let us turn to Slide 4 to review our fourth quarter consolidated results. Q4 2019 revenues of approximately $99 million decreased approximately 27%, as compared to Q3. Adjusted operating loss was $19.5 million, compared to third quarter adjusted operating loss of about $4 million. Adjusted EBITDA was approximately $1.3 million, compared to third quarter adjusted EBITDA of approximately $17 million or approximately 13% of revenues.
Adjusted net loss was $12.9 million or negative $0.56 per diluted share for the fourth quarter, compared to third quarter adjusted net loss of $5 million or approximately $0.22 per diluted share. For the full year, the company reported an adjusted net loss of $2.5 million or $0.11 per diluted share. That was for fiscal 2019, as compared to fiscal 2018, adjusted net earnings of $58.6 million or $2.90 positive per diluted share. So, for the full year, the company reported an adjusted net loss of $2.5 million.
Before we review our fourth quarter 2019 segment financial results, we would like to mention that the company allocated all corporate cost to its three segments. Total costs allocated to our three segments during the fourth quarter were approximately $12 million. Cost allocated to each segment for the three months period ended January 31 and October 31 were as follows.
Rocky Mountain segment, 5.8 million in Q4, and 6.9 million in Q3; Northeast/Mid-Con segment $3 million in Q4 and $4.6 million in Q3, respectively; and Southwest segment $3.5 in Q4 and $4.7 million in Q3.
Let’s now turn to Slide 5 and review our third quarter Rocky Mountains financial results, which include a $5.8 million allocation of corporate costs in Q4 of this year. Fourth quarter 2019 Rocky Mountain segment revenue of $46.7 million decreased by $10.9 million or 18.9%, as compared with the third quarter of 2019. The decline in revenues was primarily due to a number of customers substantially curtailing or even some spending operations for the balance of the year due to budget exhaustion and the E&P's intense focus on capital discipline and free cash flow generation.
Adjusted operating loss for the fourth quarter was $1.1 million as compared with adjusted operating earnings of 4.4 million in the third quarter of 2019. Operating results in the current period were negatively impacted by the approximate 19% decline in revenues and resulting negative operating leverage. Adjusted EBITDA was $6.3 million resulting in adjusted EBITDA margin of 13.5% as compared to third quarter adjusted EBITDA and EBITDA margin of $12 million and 21% respectively, and first half 2019 revenues and adjusted EBITDA margin of $112 million, revenues, $26 million in EBITDA, and 23.4% EBITDA margin.
Let’s turn to Slide 6 and review our fourth quarter Northeast/Mid-Con segment performance. Fourth quarter ended January 31, 2020 Northeast/Mid-Con segment revenues of $24 million decreased by 37.5% as compared with the third quarter of 2019. The decline in revenues was primarily due to a number of customer’s substantially curtailing or even suspending operations for the balance of the year.
In this case, along with dramatically lower activity levels, particularly by natural gas customers. The Northeast/Mid-Con segment has the highest exposure as the percentage of revenue to natural gas customers. Natural gas rigs declined by almost 43%, as compared with February 2019. Northeast/Mid-Con segment adjusted operating loss was about $9.9 million, compared to third quarter adjusted operating loss of about $0.5 million.
Fourth quarter’s 2019 operating results reflect the approximate 38% decline in revenues and weaker pricing. Fourth quarter 2019 adjusted EBITDA was a negative $3 million as compared to third quarter adjusted EBITDA and adjusted EBITDA margin of $6.6 million and 17.2% respectively and first half 2019 revenues adjusted EBITDA and adjusted EBITDA margin to $87.3 million, $22.3 million in EBITDA and a 25.5% EBITDA margin after all cost allocations.
Let’s turn to Slide 7 and review fourth quarter results for the company’s Southwest segment. Fourth quarter ended January 31, 2020 Southwest segment revenues of $28 million decreased 27% driven primarily by lower activity levels and a decline in wireline revenues as the company elected to warm stack the vast majority of its wireline assets in the Permian, due to the weak pricing environment.
Adjusted operating loss was $8.5 million, compared to third quarter adjusted operating loss of about $7.9 million, and adjusted EBITDA was negative $2 million, compared to third quarter adjusted EBITDA of negative $1.3 million. Let’s take a moment and review our financial position on Slide 8. Cash flow provided by operations for the year-ended January 31, 2020 was approximately $58 million and the company ended the year with a cash balance of approximately $124 million.
Capital expenditures were approximately $71 million; total long-term debt of $250 million, less cash resulted in net debt of approximately $126 million. The company's net debt to net capital ratio was approximately 29%. Leverage ratio was approximately 1.6 times. There were no borrowings outstanding under the company's $100 million credit facility and there are no debt maturities until November 2025.
We remain committed to deploying capital where we believe it will generate the highest potential return to our shareholders and evaluate shared or debt purchases 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.
I’d now like to take a moment to comment on our outlook. So, demand began to improve in the latter part of January and the improvement continued in February. Before this morning, we were expecting an increase in revenues and improve financial performance in our first quarter ending April 30, as compared to our fourth quarter ended January 31, 2020. We are continuing to recruit additional experienced coil tubing personal joined the company in the first quarter and we’re currently deploying the last of our five new large diameter coil tubing spreads.
The coil tubing start-up costs related to the deployment of these new services are expected to be dragged on our first quarter earnings. We do however expect to have all 13 of our large diameter coil 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 both winning new customers and gaining share of customer spend by providing a broad portfolio of services and equipment across all major basins while maintaining a healthy level 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 our new large diameter coil tubing services and the pull-through of our broad range of asset light services will allow us to continue to gain market share to both increase the number of customers served and gain greater share of customers spend with the goal of generating free cash flow through 2020.
Nevertheless, oil and gas demand destruction being caused by the coronavirus pandemic with WTI and natural gas prices now having moved to lowest levels in decades could cause further deterioration in E&P spending and investment in the coming months.
With that, I’ll turn the call over to Ryan.
Thank you, Amin. I will now turn the call over to the operator for the Q&A portion of today's call. Operator will provide instructions on how to ask questions. Shannon?
[Operator Instructions] Our first question comes from John Watson of Simmons Energy. Your line is open.
Thank you. Good morning.
Good morning, John.
I appreciate it’s an increasingly fluid situation, but I was hoping you could speak to your approach to costs and how you might be able to further cut costs in 2020 given the macro backdrop?
Well, I think you’re asking us to discuss plans that we haven’t yet developed this morning based on activity over the weekend. Look, we have attacked cost in every part of our business. From the end of the second quarter, we have reduced our headcount by 360 people or 22%. Now, we’ve added a certain number of employees to implement our coil tubing strategy and we’re currently in the process of rolling out the last of our five new coil tubing spreads. And at the heart of our strategy is to pull through our asset light services based on the coil tubing assets.
So, there are many coil tubing companies, but none of them go to market with a range of asset light services and thereby pulling through a higher margin services and there are lots of companies moms and pops that offer some or many of the services which we offer in specific geo regions, but they don’t have the capital or position to be able to offer both coil tubing spreads – services and the pull through that goes along with this.
We are implementing our strategy. It’s a strategy that we absolutely know works. Question is, what will the level of demand be? So, we have really built solid businesses in each of the Shale regions, which we serve, and we have been gaining share consistently adding customers and gaining share of customer spend. So, we know that our strategy works, but in the current demand environment, current meaning the fourth quarter demand environment there’s not much we can do really to further reduce costs.
We had cut cost to the point where we could offer the services in quality, fashion and with environmental and help environmental and safety concerns at a minimum level, meaning that we have to maintain a certain level of safety and a certain level of quality and to do so, we’re basically near a cash flow breakeven. That’s where we were in the fourth quarter. If demand further declines, which it appears that it will based on what’s happened over the weekend, we’ll be developing further plans to further reduce headcounts and capacity in the near term to deal with what is very likely to be a significant reduction, further reduction in E&P activity and investment in the near coming months.
Okay. Great. Thank you for that. I appreciate it. That’s a difficult situation. On a similar front and understanding it’s subject to change, but can you help us think about the 2020 CapEx budget?
Well it’s going to be dramatically reduced as compared to the 2020 budget. You’re talking about our next fiscal year. So, our next fiscal year CapEx will be dramatically reduced from the 70 million or so that we invested in CapEx this year. I don’t want to actually give a number this morning, because I think it’s all subject to change and we will be looking very, very hard at every single CapEx requests.
Okay. Great. I appreciate that. It is not an easy question. Thanks for taking a [stab] at both of mine. I’ll turn it back.
Thank you. And I’m currently showing no further questions at this time. I’d like to turn the call back over to Ryan Tyler for closing remarks.
Thank you, Shannon and thank you to everyone for 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.