Blue Bird Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
December 9, 2021

There are 5 speakers on the call.

Operator

Greetings. Welcome to 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.

Operator

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

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal Q3 2021 results. With me today is Chris Baker, KLX Energy's President and Chief Executive Officer and Keith Lerlaineer, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide a high level commentary on the financial details of the 3rd quarter and Outlook before opening the call for questions and answers. There will be a replay of today's call.

Speaker 1

It will be available by webcast on the company's website at .com and there will also be a telephonic recorded replay available until December 24, 2021. More information on how to access the replay features was included in yesterday's earnings release. Please note that The information reported on this call speaks only as of today, December 10, 2021, and therefore, you are advised that time sensitive information may no longer be accurate as of any time of the replay listening or 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 Management.

Speaker 1

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 ks, quarterly reports on Form 10 Q and current reports on Form 8 ks to understand certain of those risks, uncertainties and contingencies. The comments today may also include certain non GAAP Financial Measures. Additional details and reconciliations to 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.

Speaker 1

Chris Baker. Chris?

Speaker 2

Thank you, Ken, and good morning, everyone. Thank you for joining us today for KLX Energy Services' fiscal Q3 2021 conference call. Let me begin by highlighting a snapshot of our strong Q3 results as well as some of the significant themes 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 our fiscal Q3 was the most constructive in years.

Speaker 2

WTI price averaged $73 per barrel 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 and where we began the quarter. Rig count over the same period expanded 55 rigs or 11%. Beginning with our fiscal Q3 results, I'm very pleased to report that the 3rd quarter revenue increased 24% to $139,000,000 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.

Speaker 2

Fiscal third quarter adjusted EBITDA was $5,000,000 improving materially relative to Q2 results and was positive for the 2nd consecutive quarter. Additionally, we ended the quarter with total liquidity of $80,800,000 and available liquidity net of The FCCR holdback of $70,800,000 an increase of approximately 13,600,000 are 24% compared to Q2. Despite the market improvement, there are always countervailing forces We are 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 cost and longer lead times for critical items in our supply chain.

Speaker 2

These variables will and have pressured our cost structure and are one of the primary challenges to expanding our margins. The supply chain issues and inflationary pressures became prevalent in late Q3 and have persisted into the 4th quarter, While our suppliers have provided some advanced warning on lead times and price inflation, there are always surprises. This is just another unfortunate challenge that our team has to manage and will force us to make early decision in vendor selection as well as whether to pre purchase consumables and inventories at current lower prices where 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 to our customers.

Speaker 2

Ultimately, it will take a partnership approach with our vendors and customers to manage the inflationary pressures. On the labor front, we've discussed it before. However, it's disappointing that just when the industry begins to have positive pricing momentum, Competitors resort to employee poaching and attempts at 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-nineteen had a material impact on our business in the Q3 and the low vaccination rate within the oilfield 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.

Speaker 2

We have incurred $1,000,000 of cost Year to date on COVID testing and treatment and in the 3rd quarter incurred material expense related to overtime and contract labor costs due to quarantine crews. To fit 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 Q3. COVID will continue to be an issue for the industry and 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.

Speaker 2

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 composite 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 and D organization and are working towards commercializing Latest generation technology, our completions customers that will cement our position as a market leader. Additionally, despite our minimal capital spending, our R and D and fabrication teams have done a fantastic job at cost effectively working to electrify portions of our wireline, coiled tubing and snubbing operations, and we will continue to pursue opportunities to electrify our equipment where possible and cost effective.

Speaker 2

The macro market has clearly been volatile over the last few weeks. Despite this volatility and concerns over a new COVID variant, we are highly encouraged by our 3rd quarter results, And we exited the Q3 on a strong run rate with over $600,000,000 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?

Speaker 3

Thank you, Chris. Let me begin by discussing our Q3 2021 consolidated results. For the Q3 ended October 31, 2021, revenues were $139,000,000 an increase of $27,000,000 were 24% as compared to the revenue for the fiscal Q2 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 Q3 of 2021.

Speaker 3

Adjusted operating loss for the quarter was $9,600,000 Adjusted EBITDA and adjusted EBITDA margin were $5,000,000 3.6 percent respectively. Adjusted EBITDA improved by roughly $4,400,000 compared to fiscal Q2. On an annualized basis, this would imply a $20,000,000 run rate for Q3 2021 and when compared to our year ago Q3 2020 results would imply a $42,000,000 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 and A expense for Q3 was $13,800,000 which equates to roughly 10% of revenue. Our adjusted corporate and other EBITDA loss for the fiscal Q3 was $5,100,000 which represents only 3.7% of revenue.

Speaker 3

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 OFS Industry, we believe we can scale further from current levels with minimal SG and A additions. Turning to review our segment results, let me begin with the Rockies. The Rocky Mountains segment fiscal third quarter revenue of $36,500,000 increased by $2,900,000 or 9% as compared with the fiscal Q2 of 2021. The sequential increase in revenue was primarily driven by a material uptick in fishing, rentals, drilling And our completion oriented services included coil tubing, wireline, pumping and plug sales, offset by modest declines in a few of our smaller completion oriented service lines due to customer scheduling issues.

Speaker 3

Adjusted operating loss for the fiscal Q3 was $1,700,000 as compared with adjusted operating loss of $2,000,000 in the fiscal 2nd quarter. Adjusted EBITDA was $3,500,000 as compared to fiscal 2nd quarter adjusted EBITDA of $3,100,000 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 $45,800,000 an increase of $2,800,000 or 6.5 percent as compared to fiscal Q2 of 2021. The sequential improvement in revenue was driven by increases in directional drilling, wireline, Cooled Tubing, Blood Sales and Accommodations and was modestly offset by a slight decline in fishing activity.

Speaker 3

Q3 adjusted operating loss for this segment was $3,800,000 compared to fiscal 2nd quarter adjusted operating loss of $3,600,000 And adjusted EBITDA was $800,000 compared to fiscal 2nd quarter adjusted EBITDA of $1,800,000 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 $56,700,000 The increase in revenue was driven by increases across all drilling, completion and production service lines led by directional drilling, coiled tubing, pumping, fishing and rentals. Adjusted operating income for the fiscal third quarter was $2,100,000 as compared with adjusted operating loss of $3,200,000 in the fiscal 2nd quarter. Adjusted EBITDA was $5,800,000 as compared to 2nd 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.

Speaker 3

Now I'll turn to our balance sheet and cash flow. Cash increased by $1,400,000 or almost 4% sequentially to $40,800,000 Our net debt increased by $3,600,000 sequentially to $243,900,000 driven by a slight increase in long term debt and capital leases, offset by the aforementioned increase in our cash balance. For the 3 months ended October 31, 2021, cash flow used in operations was $5,800,000 and free cash flow was negative $2,500,000 Net working capital was $44,400,000 compared to Q2 networking capital of $40,300,000 Capital expenditures for the quarter $1,800,000 and we're focused on maintenance spending. We now expect total CapEx for 2021 to be in the range of $9,000,000 to $11,000,000 which is down from previous guidance of $14,000,000 to $16,000,000 in part due to the abbreviated 4th quarter. We were able to offset cash flow used in operations and CapEx with proceeds from the ATM program and asset sales.

Speaker 3

During the fiscal Q3, we had at the market sales of 1,070,000 shares, which yielded proceeds of $4,800,000 net of planned costs. We also sold $2,600,000 of assets within the quarter primarily tied to the sale of a company owned aircraft in an obsolete operational location And $2,600,000 remains in assets held for sale, of which we expect to close $500,000 by the end of 2021. Our borrowing base increased 43% sequentially to $40,000,000 based on increased activity in revenue, driving our net AR balance to $102,900,000 We also reduced our letters of credit as part of our annual insurance renewal during Q3 by $1,600,000 or 24%, which has a one for one impact on borrowing base availability. As of October 31, 2021, our total liquidity was $80,800,000 which was comprised of $40,800,000 in cash and $40,000,000 in available borrowing base. And our available liquidity was $70,800,000 less a $10,000,000 fixed charge coverage ratio holdback.

Speaker 3

Liquidity increased $13,600,000 or 24% sequentially, which is almost equivalent to a semiannual interest payment. Subsequent to the end of Q3, we made our 2nd semiannual 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 The December 31 taking effect, the Q4 of fiscal 2021 will be a shortened stub period comprised of only 2 months, November December. Once we complete Q4, we will file a transition 10 ks with an 11 month period and will begin fiscal 2022 on January 1.

Speaker 3

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

Speaker 2

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 both ramping demand and current production limits skews the supply demand equation in favor of a constructive macro backdrop going forward. Following this trend, pricing continues to plot an upward 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 variant.

Speaker 2

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

Speaker 2

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 have 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 and the improved free cash flow generation of our customers. For the abbreviated 2 month quarter, we expect revenue to be in the $90,000,000 to $95,000,000 range. For the pro form a 3 month 4th quarter period ended December 31, we expect to generate revenue between $145,000,000 Looking ahead to 2022, we are very optimistic about the prospects for all of our businesses.

Speaker 2

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 many of our customers to finalize their 2022 capital plans. With the positive momentum we've built through Cost rationalization via synergy realization along with the strides we are making on the R and D and technology side, There is significant operating leverage in the platform today, 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 and products and services.

Speaker 2

With that, we will now take your questions. Operator?

Operator

I would like to turn the conference back. We do have a question from John Daniels of Daniel Energy Partners. Please proceed. Please go ahead, sir.

Speaker 2

Hey, John. John, are you still there or did you drop? We lost you. We can't hear you if you're speaking.

Operator

Mr. Daniel, please check and see if your phone is muted. I believe there you go.

Speaker 4

All right. I'm not muted. Hey, can you guys hear me now?

Speaker 2

Yes. Good morning. We've got you, John.

Speaker 4

Sorry, I'm in the middle of nowhere, Texas. I've got terrible service, but I'm trying hard to listen to you guys. The question is just comment on assets that are sort of against the fence, Cost to reactivate those, should activity continue to ramp, just what we should be thinking about in terms of reactivation costs?

Speaker 2

So as you know, it's a very good question because there are plenty of assets still stacked in the business line 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 mean, I think you're doing a phenomenal job this year of offsetting reactivation costs via asset sales, etcetera. We still have some assets held for sale, probably about $2,600,000 that we expect will close at some point in time next This year, if not even in the Q4 of this year.

Speaker 2

And so there is, as you would expect, no way that we can curtail CapEx to the levels we could deposit at this year. That being said, the economics of standing up 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 rentals, the frac valve side, etcetera, we've actually spent a lot of that money this year And are pretty well situated for incremental activity going into Q1.

Speaker 4

Okay, great. Good job on the top line this quarter.

Operator

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

Speaker 2

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

Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

Powered by Quartr
Earnings Conference Call
Blue Bird Q3 2021
00:00 / 00:00