Danaher Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard.

Operator

Thank you. 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 Q1 2023 results. With me today are Chris Baker, KLX Energy's President and Chief Executive Officer 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 Q4 and outlook before opening the call for your questions. There will be a 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.

Speaker 1

Please note that information reported on this call speaks only as of today, May 11, 2023, 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. 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 other 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 these risks, uncertainties and contingencies.

Speaker 1

The comments today may also include certain non GAAP financial measures. Additional details and reconciliations to the most comparable GAAP financial measures Services' President and CEO, Mr. Chris Baker. Chris?

Speaker 2

Thank you, Ken, and good morning, everyone. KLX continued its positive momentum from 2022 by closing the highly accretive Greens acquisition And reporting a strong Q1 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 Green's on March 8, 2023. Green'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.

Speaker 2

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 Green'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 remain 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 $240,000,000 which was above our guidance range of $225,000,000 to $230,000,000 and represents our 12th consecutive quarter of revenue growth.

Speaker 2

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, coiled tubing And tech services. And finally, the Rockies contributed 28% led by coiled tubing, rentals and tech services. The Haynesville falls within our NortheastMid 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 We believe this microcosm Is a testament to our premier positioning within the market and service lines and customer mix during Q1.

Speaker 2

On a product line basis, drilling, completion, production and intervention services contributed approximately 25%, 54%, 12% and 9% respectively to revenues for the Q1 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. ALX generated 1st quarter adjusted EBITDA of $38,000,000 above our guidance range of $30,000,000 to $35,000,000 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 Q1, including elevated personnel costs from the January reset of unemployment taxes, as well as commodity price volatility to report record 1st quarter results that exceeded our expectations and guidance across all metrics. Note that because the Greens deal was closed on March 8, they only contributed a partial month to consolidated KLX Q1 results.

Speaker 2

Pro form a for a full quarter impact from Green's, Q1 revenue and adjusted EBITDA would have been 252,000,000 and $41,000,000 respectively. Drilling down into the Q1 cadence, March proved to be a record month for the company And we ended the quarter north of $1,000,000,000 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?

Speaker 3

Thanks, Chris. Good morning, everyone. I'll begin by discussing our Q1 2023 results in more detail. As Chris mentioned, we reported record quarterly revenue of almost $240,000,000 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.

Speaker 3

Additionally, we were very pleased to have experienced our 4th consecutive sequential improvement and adjusted EBITDA to $38,000,000 for the Q1 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 Q1 was $21,000,000 Adjusted EBITDA and adjusted EBITDA margin We're $38,200,000 15.9 percent respectively. Adjusted EBITDA increased approximately $33,000,000 Over Q1 of 2022 $1,000,000 sequentially. Total SG and A expense for Q1 Approximately $26,200,000 When you back out the non recurring cost, adjusted SG and A expense for Q1 And $11,500,000 respectively. Pro form a for a full quarter's impact of greens, Pro form a revenue, adjusted EBITDA and adjusted net income for Q1 would have been $252,000,000 $41,000,000 $12,400,000 respectively.

Speaker 3

Turning now to a review of our segment income statement results. I'll begin with the Rockies. The Rockies segment's 1st quarter revenue was $67,900,000 representing a 3% increase over the Q4 of 2022 and an all time quarterly record for the segment. Adjusted operating income for the Q1 was $9,800,000 Adjusted EBITDA was $15,500,000 As compared to Q4 adjusted EBITDA of $17,900,000 The slight decrease in profitability was driven by seasonality, white space and seasonally elevated payroll taxes previously discussed. Moving now to our Southwest segment.

Speaker 3

The segment experienced a slight 2% sequential decrease in revenue, generating revenue of $73,400,000 in the quarter. The minor decrease in revenue was primarily driven by slightly lower activity to begin the year as operators reset their budgets Adjusted EBITDA was $10,200,000 for the Q1 compared to 4th quarter adjusted EBITDA of $12,400,000 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 $98,300,000 A significant 19% increase relative to Q4, driven largely by sequential improvement in activity and pricing This is our broadest geographic segment and the geographic segment with the most gas exposure as it includes both the Haynesville and the Marcellus Utica. For the Q1, the Haynesville accounted for 10% of consolidated revenue and we actually captured market share while seeing an increase in weighted average pricing.

Speaker 3

Adjusted operating income for the Q1 was $18,700,000 and adjusted EBITDA was $23,700,000 The 20% sequential increase in adjusted EBITDA Was driven by a favorable shift in job mix and continued strength in 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 $12,200,000 and $11,200,000 respectively. The corporate adjusted EBITDA loss improved by 9% sequentially. I'll now turn to our net working capital, cash flow and capitalization.

Speaker 3

Our Q1 2023 cash balance It's $39,600,000 down from $57,400,000 at year end. The sequential decrease in cash It was largely due to a material investment in net working capital driven by a handful of transitory timing factors. We continue to proactively manage working capital and convert cash flow as quickly as possible. Net working capital was approximately $115,000,000 Sequential increase in net working capital and corresponding decrease in cash was largely driven by 1, a 7% increase in revenue 2, a $12,000,000 working capital contribution from Green's 3, A 7% increase in DSO as customers slowed payments in response to commodity price volatility 4, 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, 5, incremental payrolls in the Q1 of 2023 relative to the Q4 of 2022.

Speaker 3

This all normalized and as of April 30, 2023, our cash balance returned to approximately $61,000,000 and our available liquidity was approximately $106,000,000 Currently, we are at similar cash and liquidity levels to month end April, even after making our semiannual interest payment on May 1. Total debt outstanding as of March 31, 2023 was $283,600,000 which was in line with our Q4 balance as we did not draw on or pay down the ABL nor did we execute additional 3A9 exchange transactions. Net debt balance as of Q1 was $244,000,000 and accrued interest as of March 31 was $11,500,000 for the senior 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 1.6 times and 1.5 times when you pro form a for greens. We ended the Q1 with $84,000,000 in total liquidity consisting of $39,600,000 of cash And availability of $44,400,000 on the March 2023 ABL borrowing base certificate.

Speaker 3

As I stated earlier, cash normalized in April and as of April 30, our cash balance was approximately $61,000,000 and our available liquidity approximately $106,000,000 Our borrowing base as of our March certificate is significantly larger than the facility size. We had $42,000,000 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 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.

Speaker 3

The only share issuances in 2023 were associated with share based long term compensation 100 percent stock acquisition of greens. Now turning to our CapEx. CapEx for the Q1 was approximately $10,000,000 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 $60,000,000 to $70,000,000 inclusive of greens, though we likely come in towards the lower end of that range. This spend will be primarily focused on maintenance spending With approximately 75% to 80% supporting ongoing operations and the remaining CapEx earmarked for reactivation and growth, focused on quick payback projects.

Speaker 3

As always, we will reassess capital spending in real time based on market conditions. At the end of the Q1, we had $4,900,000 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 twenty twenty three. 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 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.

Speaker 2

Thanks, Keefer. 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 entered the Q2, we have seen consolidated rig count Declined 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.

Speaker 2

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 KLAX 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 Q2, 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 to $250,000,000 and adjusted EBITDA margin to be in the range of 16% to 17%.

Speaker 2

Further, as Keefer mentioned, we expect strong sequential free cash flow generation this quarter despite making our semiannual interest payment in early May. Yesterday, we also reaffirmed our full year 2023 guidance. Full year revenue is expected to be in the range $975,000,000 to $1,040,000,000 and 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.

Speaker 2

Most recently, we completed the highly accretive acquisition of Green's 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. Sell side interest remains strong, but the bid ask spread remains challenging. We believe KLX is a counterparty Choice for potential M and A targets amongst the publicly traded diversified services providers and the Greens 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.

Speaker 2

Operator?

Operator

Thank you. We will now be conducting our question and answer Our first question is from the line of Ignacio Bernalges with EF Hutton.

Speaker 4

Hey, good morning and congrats on the quarter. Thank you for taking my question. I was wondering if you could provide Some more color on what you're seeing in pricing trends kind of looking ahead and if or even where customers are pushing back on those prices?

Speaker 2

Yes, sure. Great question. Good morning, Ignacio. Appreciate your questions on the call. So look, The market seems somewhat like a tale of 2 tapes.

Speaker 2

The gas market, as everybody's alluded to recently, is challenging. The more fragmented your service lines are, the Closer you are to an area with rig count reductions, the more impacted you're going to be by transitory issues and pricing pressures. I would say this is especially true for the more fragmented service lines like DD, wireline, other commodity products in general. And so we've definitely seen some pricing pressures in those service lines. And candidly, strangely enough, we've seen competitors occasionally taken work at COVID type pricing levels in certain instances, which makes no sense whatsoever.

Speaker 2

However, in those instances, it really seems like it's just desperation to fill holes in schedules or redeploy That's not really resetting price and setting the new pricing paradigm. At the same time, We've seen strengthening in other markets, especially as we get ready to start midsummer programs, etcetera, on the completion production and intervention inside of the business. And so the market is focused on bifurcation of the electric frac, Tier 4 frac spread market, super spec rig market. It gets overlooked, but KLX likewise has its own bifurcation and market leading positions in numerous business lines, as I said, are overlooked and we're candidly fine with that. So, we've recently been able to raise price as much as 10% or 15% in certain business lines in certain areas and we believe the strength of those areas We'll all set the declines in the other areas.

Speaker 4

Perfect. Thank you so much. I really appreciate it.

Speaker 2

Yes, sure. Appreciate the question.

Operator

Thank you. Our next question is from the line of John Daniel with Daniel Energy Partners.

Speaker 5

And I'm curious if you can speak to the visibility you have for work for the balance of the year if they're under dedicated arrangements. Just any color around on that would be helpful.

Speaker 2

Yes. What I would say is, We don't have with the exception of a small contract on the industrial wireline side of our business, we're primarily a spot player in All of our business lines. And so, as I look at our calendar this week, we're kind of booked out for the foreseeable future And we're still bidding other opportunities into the 3rd Q4. I think people probably overestimate the contribution of those Businesses relative to our rentals business and coiled tubing and others, but here again, that's fine.

Speaker 5

Okay. Fair enough. Well, I don't know, I was assuming there was at least $30,000,000 to $40,000,000 of revenue per fleet, but maybe I've Misguided on that on an annualized basis.

Speaker 4

Yes, I think it's

Speaker 5

You noted that this

Speaker 2

No, go ahead. Sorry. I'll let

Speaker 5

you answer.

Speaker 2

Go ahead. No, I was going to say, I think, as you well know, those revenue numbers are highly dependent on whether it's pump only and you're Commodities, etcetera, right? Okay. Right.

Speaker 5

Fair enough. On the M and A commentary, Chris, You noted the disconnect between sellers, that are presumably just valuation expectations. I guess, as you're starting to look at some of The people that are being pitched to you and you look at the near term sort of headwinds the industry is facing, Do you see any chance of some of the smaller competitors having balance sheet issues, which would lead to maybe a more Rational approach to valuation?

Speaker 2

You sure would think so. And it's a great question. We talked about this, I think last quarter on the earnings call. Some of the competitors, especially the smaller Single basin competitors that have high degrees of gas exposure, you would think would capitulate on the bid ask spread. Here's what I'll say.

Speaker 2

Right now, we're focused on the Greenfield first. We're integrating that 1st and foremost and managing the blocking and tackling of our business, right? We absolutely remain steadfast in our opinion that consolidation needs to occur in multiple service And so to your point and Ignacio's question earlier, if the markets and certain markets weren't so fragmented, I don't think you would see some of the episodic I will say post announcing the greens deal, we have seen a handful of inbounds 4 privately negotiated deals that probably fit within the mold of what you're saying around Some of the smaller tuck in type opportunities. And so we'll evaluate those as they come. The reality of the situation is, it's To your point on relative value in multiples, our pitch to especially private sellers is KLX provides a pathway to liquidity Where the sellers can better time their exit and avoid cashing out at these low multiples, right?

Speaker 2

And so if you really believe it's a multiple year up cycle, Doing a stock oriented deal with some semblance of a lockup makes a lot of sense.

Speaker 5

Fair enough. Final question just relates to labor, It's a hypothetical question. But if we have a hard landing here, and then you balance that with I think everyone would share a constructive outlook on natural gas for next year and beyond, right, as LNG comes online and then assuming oil markets Titan next year. So call it short term headwinds, long term positive. But if it's a little bit worse than maybe expectations, How do you handle the labor situation if you believe that 3 quarters from now we're going to be gearing back up again?

Speaker 5

Again, hypothetical, but how would you approach that?

Speaker 2

Yes. Look, I think to your point, I don't want to Assume what you mean by hard landing with regards to rig count fracs spread rollover, but there's no doubt that If rigs get stacked out or spreads get stacked out, it pushes people back into the system that are looking for jobs, right? At a minimum, it should put a hard Cap on any increases in some of the knife fights that go on, especially in the Permian around field level compensation. So it should put a hard Capital net and whether or not it drives down incremental field labor cost, I think is premature to speculate on.

Speaker 5

Okay.

Speaker 4

Fair

Speaker 5

enough. Thank you for your time.

Speaker 2

Absolutely. Appreciate it, John.

Operator

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

Speaker 4

Hey guys, thanks for taking the questions. And congrats on the quarter, I mean aside from the working cap issue, I think it's a really good quarter here.

Speaker 2

Yes. Thank you. Appreciate it.

Speaker 4

And it sounds like this working cap stuff has resolved itself As of April, Keefer, is that accurate?

Speaker 3

Yes. Good question. And yes, so as we exited Q1, we've talked about this in the prepared remarks, but obviously, We saw a decline in cash position that was largely driven by an investment in net working capital. There were a handful of factors that led to that increase. So it's a combination of just a general increase in our underlying business.

Speaker 3

Garene's brought over A meaningful amount of working capital, a little over $12,000,000 Additionally, we saw some of our customers begin to slow pay at the end of the first quarter. I think largely in response to some of the commodity price volatility that we're seeing at that point in time. And then we're working And have now successfully gone live on a systems implementation project that was completed in April. But in order to get ahead of that project, we accelerated some of our AP disbursement at the end of the Q1. And then lastly, we had those 2 incremental payrolls in Q1.

Speaker 3

So kind of All those things combined to drive a pretty material investment in net working capital. But like we stated on the remarks side of the call, cash kind of quickly began to normalize in April, and we ended April with $61,000,000 of cash on hand. Liquidity was back up to roughly $106,000,000 plus. And then further, as we sit here currently post Our interest payment in early May, we're back to kind of the similar month in April type cash and liquidity levels.

Speaker 4

That's really helpful. And then I guess my next question, the SG and A obviously is elevated because you got the acquisition and Once you start to realize some synergy, where do you see your SG and A shaking out Kind of over the balance of the year in terms of a percentage of revenue?

Speaker 3

Yes, good question. So we haven't Explicitly given a full year guide on SG and A, clearly, we gave a full year guide on EBITDA margin of 17% to 19%. As you look at the Q1, total SG and A expense was a little north of $26,000,000 There was a substantial amount of non recurring costs included in So if you were to back that out on a pro form a adjusted basis, you'd kind of get to a more normalized Q1 level of just north of $20,000,000 for the quarter and that would be roughly 8.4 percent of revenue, as you think about our Q1 results.

Speaker 4

That's really helpful. I appreciate that. And then, Great to hear that you guys are working on the credit facility. I wish that the Financial markets were a little more friendly and that the banking space was a little bit more friendly at the moment. But Within your lending group, you currently have no exposure to any of these regionals that are getting Kind of hammered, do you?

Speaker 3

Yes, really good question. We do not. So our lending group is Apprised of, some of the leading largest banks in the United States, and our agent is JPMorgan.

Speaker 4

Yes, that's good. And then lastly for me, the senior secured notes through 20 25, I got to imagine that they're callable now at par. Are you I know market conditions aren't the best Right now they're going to try to refinance them, but have you started to consider a refinancing? And can you talk about what that may or may not look like?

Speaker 3

Yes, good question. So just 1st and foremost, the notes, they are callable today, but it is north of par. If you look at just take a step back and think about where we were from an annualized Q1 perspective, We exited the Q1 at a net leverage ratio of 1.6 times. If you pro form a for a full quarterly impact of greens, our net leverage ratio would be 1.5 times, net leverage ratio. So I think, at this point, we've kind of more than grown back into our capital structure.

Speaker 3

And based on our results over the last few quarters, we're currently sitting at kind of our strongest credit metric position Since we put the senior secured notes in place in late 2018. So yes, I think as we think about today, we're on extremely sound financial footing. We're focused day in, day out on execution and free cash flow generation. We've got 2.5 years of tenure on those notes. So I think right now we're really focused on the 2024 ABL maturity.

Speaker 3

But given we've got a really strong borrowing base, we've got an extremely high quality customer base And we've got a bank group that's very supportive of KLX. So we plan to address that maturity first and foremost, Kind of before that goes current later this year.

Speaker 4

Makes a lot of sense. Thanks guys.

Speaker 1

Thanks, Dave. Thank you. And as usual, we get some email questions and one of our questions from Luke at Piper, who's on the road somewhere. Yes. Chris, if you could walk through, let me 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?

Speaker 2

Yes, great question. And Luke, we'll try to address that. Appreciate the question. Look, we receive a 90 day rolling forecast every Monday morning that forecast revenue out for the next 90 days. And as I look at what's in front of me today and this week Forecasted clearly supports Q2 guidance.

Speaker 2

If you think about our March annualized run rate on a 1 month basis, It was above the midpoint of our full year guidance range. And so we alluded to that in our prepared remarks. If you look at the pro form a numbers contained in earnings release, The run rate numbers would imply slightly above $1,000,000,000 in revenue and slightly above $160,000,000 of adjusted EBITDA on a pro form a basis. So that's right at the bottom of the range. And so relative to and I think ties into what John Daniel was saying, There is no doubt the market is volatile.

Speaker 2

To Ignacio's point, there's pricing pressure in certain basins. However, with what we know today, we're comfortable with the 2Q guide and can only go from there. What we have seen is a strengthening in certain of our smaller markets, specifically with many of our completion production and intervention services And additional customer programs that are expected to start in early summer. We've noted on numerous of our prior calls that we have Our cement business, our refrac business, our P and A business, all in the Rockies are especially seasonal, typically kick off mid summer And the Q3 is notoriously our strongest quarter in those markets due to the thaw, runoff, wildlife migration steps, etcetera. So the second half of the year, the question remains, does that incremental activity offset any gas weakness?

Speaker 2

Right now, our calendars point to positives and we believe as long as WTI holds, maybe strengthens a little bit in the second half of the year, That we should be on track to hit that guidance. There's plenty of noise in the market right now. Yesterday, the house was discussing a NOPEC bill. I think once we get past June, the debt ceiling overhang, SPR releases have to come to an end at some point. You You get into summer driving season, I think you have much better visibility on the second half of the year.

Speaker 2

I guess the last point I would make, so that's all talking about the revenue side of the business. We also have cost reductions, right? We've got employment tax roll offs, which people tend to drastically underestimate the impact to your cost structure We have the incremental greens integration savings. And then finally, we do have some contributions that we expect to kick in from numerous R and D projects On the downhole tool side, which will both help the cost structure side of the business and the revenue side of the business.

Speaker 1

Thanks, Chris. So no more questions in the queue and I'll hand it back just to give some final comments And we'll move on to the next quarter.

Speaker 2

Thank you, Ken. Thank you once again for joining us on this call and thank you for your interest in 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.

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Earnings Conference Call
Danaher Q1 2023
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