Greetings, and welcome to the KLX Energy Services Fiscal Second 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.
Thank you, Ken. You may begin. Thank you, Ken. You may begin.
Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal Q2 2021 results. With me today are Chris Baker, KLX'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 second quarter and outlook before opening the call for questions and answers. There will also be a replay of today's call and it will be available by webcast on the company's website at klxenergy.com.
There will also be a telephonic recorded replay available until September 17, And more information on how to access these features is included in the press release yesterday. Please note that information reported on this call speaks only as of today, September 10, 2021, and therefore, you are advised that time sensitive information may no longer be accurate as of the 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's management. However, various risks, Uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in statements made by management. The listener is encouraged to read 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 reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX Energy Web Now with that behind me, I'd like to turn the call over to KLX Energy's President and Chief Executive Officer, Mr. Chris Baker. Chris?
Thank you, Ken, and good morning, everyone. Thank you for joining us today for the KLX Energy Services fiscal Q2 2021 conference call. We are excited to report our 2nd quarter results. Similar to the prior quarters, I'll begin by providing an update on the broader market as well as some of the significant themes impacting our quarterly results. I will then turn the call over to Keefer to review our Q2 financial performance before returning for some final comments on our strategy and outlook.
Following the seasonally weak Q1 that was exacerbated by winter storm Yuri As well as customer scheduling and well issues, the 2nd quarter was characterized by continued broad based improvement in the market. For the fiscal Q2 ended July 31, WTI prices were up over 16% and natural gas prices were up 34% It currently sits around $5 per MMBtu. Rig count was up approximately 11% ending our 2nd quarter approaching 500 rigs. Additionally, the U. S.
Frac spread count increased approximately 13% during the fiscal second quarter, ending with roughly 240 frac spreads running across the U. S. While the global economy Still has a cloud of uncertainty due to COVID-nineteen, it does continue to show meaningful improvement in terms of market fundamentals, which bodes well for the domestic onshore market. U. S.
Oil demand for June 2021 was almost back to pre COVID levels of June 2019. As we stated on our Q1 call, our customers continue to prioritize returns And capital discipline over production growth, so activity gains have been muted relative to past cycles. However, it also appears that we have weathered the worst of the storm and that despite lingering macroeconomic headwinds, There is a growing confidence that is building and driving greater levels of activity and spending. We are proud to report that our Q2 revenue increased 23% sequentially and adjusted EBITDA returned to the black for the first time since Q1 2020. Both came in ahead of our expectations in prior guidance.
This quarter commemorates the 1 year anniversary of the closing of the merger. We have accomplished a lot, Integrated the company's and realized synergies, all while navigating one of the worst downturns in the history of the oil patch. I would like to thank the full KLX team for all of their hard work over the past 12 months. Our 23% sequential revenue growth compared favorably to only an 11% increase in rig count. This was achieved by capturing our share of the increasing market, marginal pricing gains, albeit pricing continues to remain depressed and increased market share in several key service lines.
Year to date, we've seen the rate of pricing improvement accelerate every month, Although we still have a long way to go to return to pre pandemic pricing levels. Our monthly revenue results have improved every month so far in fiscal 2021 and we exited Q2 with solid momentum generating a new monthly revenue record for the combined company. Through it all, KLX has continued to make progress on our cost reduction initiatives. After having completed $46,000,000 In annualized merger synergies, we have now fully implemented the additional $4,400,000 in annualized fixed cost savings that were outlined during our Q1 earnings call. This partially benefited our Q2 results and will fully benefit our Q3 results.
We experienced a $10,000,000 increase in quarterly adjusted EBITDA from Q1 to Q2 and generated positive adjusted EBITDA for the first time in 5 quarters. The considerable sequential improvement in adjusted EBITDA was driven by the absence of winter storm Yuri, Improved revenue and enhanced margin driven by a combination of synergies, increased utilization, marginally improved pricing and significant operating leverage in the business after realizing the $50 plus 1,000,000 in annual cost savings. We believe that 3Q will build upon the positive momentum that has already been established in Q2. I'll discuss our outlook in greater detail later in the call. We exited 2Q on a positive run rate and expect our results to improve further in Q3.
With that, I'll now turn the call over to Keefer, who will review our Q2 financial results. Keefer?
Thank you, Chris. Let me begin by discussing our Q2 2021 consolidated results. As Chris mentioned, we experienced sequential improvement in revenue across all segments and saw segment adjusted EBITDA return to the black for all three geographic segments for the first time since Q1 2020. For the fiscal Q2 ended July 31, 2021, Revenues were $112,000,000 an increase of $21,000,000 or 23% compared to the fiscal Q1 of 2021. Once again, the revenue increase reflected the impact of improving market activity across all geo markets and the vast majority of our product lines, particularly directional drilling, coiled tubing, rentals and fishing.
Now to detail our revenue contribution by end market. Q222revenue was 29% drilling, 46% completion, 15% production and 10% intervention services, which compares to 27%, 49%, 13% and 10% respectively for the fiscal Q1 of 2021. Drilling continues to increase its contribution to KLX post the merger with QVS. This trend is driven by the leading directional drilling franchise We added via the merger coupled with our ability to cross sell rentals equipment and accommodation as part of a more comprehensive offering for our drilling customers. Turning to the completion side of our business, the biggest driver of our completions business remains our coiled tubing and rentals product lines.
We've made great strides pulling through plug sales and 3 tubing services to our integrated coiled tubing offering throughout each of our geo markets. We experienced a 41% sequential increase in dissolvable plug sales from Q1 to Q2 and are experiencing a very positive market reception for our latest generation dissolvable plug. On the production side, we provide a wide range of services for well reactivations and remedial work. We saw our production services become a larger driver of KLX results in the 2nd quarter. And as oil prices climbed back into the 60s 70s, We expect to continue to see an uptick in production related activity.
Moving on to our consolidated profitability. Adjusted operating loss was $14,900,000 for the quarter. Adjusted EBITDA and adjusted EBITDA margin were $600,000 50 basis points respectively. Adjusted operating loss and adjusted EBITDA improved sequentially by $12,000,000 and $10,000,000 respectively. I would also like to highlight a couple of items that negatively impacted our 2nd quarter margin.
First, Our quarterly cost of sales continues to be burdened by $2,100,000 of lease expense tied to 5 coiled tubing operating leases, which may impact our comparability to peers. 2nd, we incurred stand up costs of $1,300,000 within the quarter order to mobilize and prepare equipment to meet the increased demand for our services in Q2. I will now turn to the segment P and L review. Beginning the segment review with the Rockies. The Rockies segment fiscal 2nd quarter revenue of $33,600,000 increased by $9,300,000 or 38% as compared with the fiscal Q1 of 2021.
The sequential increase in revenue was primarily driven by stronger utilization and pricing across all product lines, primarily led by fishing, rentals, cement, coiled tubing, directional drilling and wireline. Adjusted operating loss for the fiscal 2nd quarter was $2,000,000 as compared with adjusted operating loss of $6,800,000 in the fiscal Q1 of 2021. Adjusted EBITDA was $3,100,000 as compared to the fiscal first quarter Adjusted EBITDA loss of $1,600,000 The increase in profitability was related to a combination of less white space on the calendar, improved utilization, modestly improved pricing and cost synergies. Now moving to our Southwest segment. Our Southwest segment increased its revenue by 13% sequentially as compared to the fiscal Q1 of 2021, generating revenue of $43,000,000 The increase in revenue was driven by stronger utilization and pricing across most product lines, primarily led by directional drilling, wireline and rentals.
Q2 adjusted operating loss was $3,600,000 Compared to fiscal Q1 adjusted operating loss of $6,600,000 and adjusted EBITDA was $1,800,000 for the 2nd quarter compared to fiscal Q1 adjusted EBITDA loss of $700,000 The increase in profitability was driven by a combination of improved utilization, modestly improved pricing and cost synergies fully benefiting margins. Now to wrap up the segment discussion with the Northeast and Mid Con. Fiscal 2nd quarter revenues were $35,300,000 up 24% as compared to the fiscal Q1 of 2021. Adjusted operating loss for the fiscal second quarter was $3,200,000 and improved $2,900,000 as compared with adjusted operating loss of $6,100,000 in the fiscal Q1 of 2021. Adjusted EBITDA was $500,000 as compared to fiscal first quarter adjusted EBITDA loss of $2,100,000 The improvement in adjusted EBITDA was primarily driven by top line expansion due to utilization and pricing improvements in most product lines led by fishing, coiled tubing and directional drilling, coupled with the reduced cost structure benefiting from the merger synergies and cost reductions, driving significant operating leverage in the segment results.
Our adjusted corporate and other EBITDA loss For the fiscal 2nd quarter, it was $4,800,000 versus $5,000,000 in fiscal Q1. With that said, the cost synergies from the merger are now materially benefiting the results of KLX and the full quarterly impact of the annualized $46,000,000 of synergies are flowing through the P and L. Mid picture, we've experienced a dramatic turnaround in results in the last year since closing the QES merger at the end of Q2 2020. Adjusted EBITDA improved from a pro form a loss of $19,000,000 in Q2 2020 At $20,000,000 to positive adjusted EBITDA of $600,000 in Q2 2021. This represents an $80,000,000 annualized improvement in adjusted EBITDA from Q2 2020 to Q2 2021.
Now I'll turn to our consolidated balance sheet and cash flow. Our long term debt increased to 274,000,000 plus our Q2 cash balance of $39,000,000 resulting in net debt as of the end of the second quarter of approximately 235 $1,000,000 As of July 31, 2021, total net liquidity was $57,000,000 including cash on hand of approximately $39,000,000 We also drew $30,000,000 on our ABL within the quarter to maintain a healthy cash balance and help support the current and continued rebound of the business. With the drawdown, Our credit facility has $28,000,000 of remaining availability and $18,000,000 of net availability when factoring in the $10,000,000 structural holdback tied to the springing fixed charge coverage ratio. The continued management and preservation of our cash and liquidity remains a top priority And with activity expected to rise further through the balance of the year, we will continue to proactively manage our cost structure and working capital to maximize margins and cash flow. We'd also expect that our borrowing base would increase in conjunction with the continued revenue increases expected for Q3.
For the 3 months ended July 31, 2021, cash flow used in operations was $26,000,000 and free cash flow loss was $27,000,000 There's cash interest of $14,700,000 paid in the quarter, which drove more than half of the quarter's cash decline. The remaining balance of the cash decline was largely driven by a $10,000,000 investment in working capital due to higher activity levels, though there were also incremental net expenditures for CapEx and capital leases. Capital expenditures for the quarter were approximately $3,500,000
Although most
of the capital outlay was focused on maintenance spending, We did have some targeted growth expenditures as well. These were select projects focusing on very quick paybacks, typically less than a year. We sold $2,500,000 of obsolete assets within the quarter, offsetting approximately 70% of our quarterly CapEx spend. We continue to expect total CapEx for 2021 to be in the range of $14,000,000 to $16,000,000 and currently have $3,000,000 of assets held for sale, which we believe should sell in the second half of twenty twenty one. Lastly, in an effort to normalize our reporting and improve comparability with peers, We announced yesterday that we will modify our fiscal year end from January 31 to December 31.
This change will take effect for the period ended December 31, 2021, when we will file a transition 10 ks for an 11 month period and will begin fiscal 2022 on January 1. With that, I will now turn the call back to Chris to wrap things up.
Thanks, Keefer. I will close today's call by discussing strategy, consolidation and then wrap up the call by discussing our Q3 outlook. We do not have a material update on the consolidation front at this time. However, I can assure you that our team continues to review every opportunity available We believe there is strategic fit, synergy value, operational and cultural alignment and balance sheet enhancement. As discussed on prior calls, we believe further consolidation must occur to gain product line scale to remedy the pricing and utilization challenges faced by the industry and better position the industry to be healthy for the long term.
While we've seen some consolidation activity in the services space, our merger with QES remains one of the largest diversified OFS consolidations to date. And most of the consolidation activity remains heavily weighted towards the E and P sector rather than oilfield services. Having now successfully completed a large integration and synergy realization project, we are true believers In the power and benefits of consolidation, we continue to examine potential opportunities to enhance our own business lines, operations and balance sheet. We believe we are now in a position where we can pursue additional consolidation and hope the next several months will present compelling consolidation opportunities. Now to wrap things up, I'll discuss our Q3 outlook.
We've seen oil prices retrench approximately 8% since the end of our fiscal Q2, and natural gas prices are up another 28%, reaching their highest level since 2014. Rig count and market activity have largely continued their upward climb With generally strong momentum through the early part of our Q3, KLX's broad footprint enables us to be well positioned to service the gas basins Of the Northeast, East Texas and Louisiana, the Rockies and Eagle Ford, we are becoming increasingly encouraged by the ever improving industry outlook, both for the economy as a whole and for the OFS industry in particular. There continues to be mounting evidence of improving fundamentals, which should drive greater levels of activity and pricing through the balance of the year and into next year. There continues to be some push and pull In the ongoing economic rebound and fears persist regarding the Delta variant, global supply is expected to remain tight given OPEC plus In U. S.
Shale supply discipline and demand is expected to continue to improve in the short to medium term despite elevated WTI prices. This gives us optimism that we can continue to strengthen our performance in competitive positioning As we have already reduced our cost structure to industry leading levels based on our Q2 G and A burden, which stands at approximately 11% of revenue, Yes, we have the personnel, equipment, expertise and customer base to deliver in an improving macroeconomic environment. It is both encouraging and gratifying that we have been able to drive pricing of late. We have been working tirelessly to enhance our profitability through expense reductions And improved utilization at a time when the price lever has, for the most part, been unavailable to us. But our persistence is staying off and the pricing gains We've achieved have been accelerating as we've worked through 2021.
This sets a foundation for continued margin improvement in the coming quarters. With that said, we do continue to find it difficult to attract and retain personnel, which is one of the primary risks and impediments to growth today. We are not only competing with other oil service companies to attract and retain talent, but with other industries as well, which is not something the industry has encountered in recent cycles. We are seeing more and more workers permanently leave the industry after the downturn last year. To some extent, we've been able to mitigate this by focusing on employee utilization and talent retention.
We have some of the best people in the industry and they are a key part of what differentiates KLX. The experience, know how and expertise of our team is foundational to the quality of the products and services we offer, and we will continue to do everything we can to attract and retain top talent to the KLX family. While we are on personnel, I would like to touch on COVID-nineteen. COVID remains a risk to our business as it jeopardizes The safety of our employees potentially impacts our ability to staff crews, creating unforeseen white space on our calendar and can ultimately impact demand recovery for crude. We are proactively working to ensure the safety of our employees and the efficiency of our operations and we are encouraging and incentivizing employees to get vaccinated.
Now let me turn to the Q3 and our outlook for the rest of the year. Activity is on the upswing and continues to improve across all end markets of our business: Drilling, Completion, Production and Intervention Services. Utilization continues to improve and we are achieving pricing gains across all the vast majority of our product and service lines. Given these favorable developments and barring unforeseen COVID and or Customer scheduling delays, we expect to see revenue increase again in Q3 with sequential uptick in the range of 8% to 12%. Pricing gains combined with the sizable cost savings we have achieved through the year should result in sequential improvement in adjusted EBITDA.
Our 2nd quarter adjusted EBITDA was just above breakeven. We exited the fiscal second quarter with a low to mid Single digit adjusted EBITDA margin and positive unadjusted EBITDA. For the balance of the year, we expect continued steady improvement activity and expect revenue and margins to increase accordingly. In closing, let me thank our team members, customers and shareholders for their continued support. We have now eclipsed the 1 year anniversary of closing our merger with QES and we are excited About all of the positive developments and steady economic improvement we are seeing and we are confident The KLX is well positioned to continue to provide our value added products and services as activity continues to accelerate.
With that, we will now take your questions. Operator?
Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Our first question comes from the line of Ian Macpherson with Piper Stevens. You may proceed with your question.
Good morning, Chris and Kiefer.
Hey, good morning, Ian.
Good morning, Ian.
I wanted to ask about the different basin outlooks for the calendar second half, just given the divergence in Natty and Crude, we've heard I've heard mixed Indications from some of your peers with regard to 4th quarter slowdown, some seeing I think in Texas seeing more of a November, December white space at this point than maybe we thought earlier in the year. But this Gas price seems to be very constructive for a lot of your activity. So could you just parse out the view between your Oily work and gassy work in the back half and what you expect in terms of seasonality beyond what you've guided for the prompt quarter?
Yes, sure. I think, look, we definitely, as we were coming into the 3rd quarter, had more visibility than maybe we did in prior Second half of the year cycles as we've all become very accustomed to 4th quarter budget exhaustion. What I'd say is definitely East Texas Haynesville activity seems to be ramping up. We're starting to see more and more RFQs In that basin. With regards to your question around Texas specifically, Look, we definitely have some potential for white space in the back half of the year.
I would say we're starting to have conversations with some of those operators where They're thinking about going ahead and drilling through the end of the year, November December. And I think it's a little early in the cycle For those decisions to be made, but I would say those decisions and conversations are pretty promising. We're seeing this on the DD side of the business as well as the completion So it's a little premature to give you a firm answer, but I would say the fact that they are considering continuing their programs It's nothing but a positive, right? And then with regards to we clearly had a fruity material uptick in the Rockies. Some of that is gas work.
So a lot of that is just it's episodic in two regards. 1, customer concentration and the nature of the customers up there and their programs swing somewhat within a quarter And quarter over quarter, and we've got kind of cradle to grave activity there from the drilling side all the way through the completions in the drill outside of their programs. The other is most of those pads up there exceptionally large. And so any delays, whether they be COVID delays, Wellbore trajectory delays or otherwise can cause some swings in that revenue base, but by and large activity across the board seems to be picking up. I think it comes down to what happens in November, December to your point.
Okay. Got you. You mentioned, Chris, that you exited q2@lowmidsingledigit EBITDA Margins. If we just look At the full quarter, your EBITDA incrementals from Q1 into Q2 were 45% to 50% in total. Is that a fair way to think about the margin progression into Q3 as well?
Or are there other factors that could Improve or dilute that incremental?
Yes. Look, it's a very fair question and we're pretty proud of the incrementals In Q2, they were highly positive. I don't know that they're necessarily unfortunately sustainable on incremental revenue dollars, but we clearly saw Extraordinary incremental. I think a big part of that is, look, there's pent up operating leverage in the business coming out of winter storm Yuri in Q1 where you've got white Based on your calendar, some costs that you couldn't flush out, etcetera. So that incremental revenue flow through exceptionally well.
The caveat I would say with regards Two incrementals going into Q3 is there's a pretty broad diverse set of incrementals and margins on our product lines That have a range of, call it, 15% to 45% or thereabout depending on which product line you're thinking about. The other is we're all seeing quarantines from Delta and that can drive some inflation in your cost structure, Especially around this revenue opportunities and quarantine cost, overtime cost, etcetera, that thing kind of gets lost in the shuffle. With that, Keefer, anything else to add around the incremental calculations?
The only thing I'd add, and you mentioned kind of 15% to 45% depending on the product line is just the trends that we're experiencing on the pricing side of our business. We mentioned this a bit in the prepared remarks, But the rate of our pricing improvements have been accelerating month over month as we work through the year. So we would expect To continue to be able to walk pricing higher as we work through the remainder of the year and certainly would expect that as we get into next year, We'll be able to improve pricing even further there. But that's the only thing I'd add, Chris.
Yes. No, that's perfect. And I think that is the key is making sure pricing continues to out The inflationary pressures we're seeing across the board and we work every day to it's 1 step forward or 2 steps forward, 1 step back sometimes we work every day On that front.
Okay. And then last one, if you don't mind. Efra, I haven't finished Pushing buttons on the model yet, but it looks like just given the rate of improvement in the second half, but with revenue still growing, working capital probably is not going to Help you a great deal. So it looks like free cash is still a bit remote for the second half. Would you agree or correct me on that that we should Look, probably to 2022 rather than second half of twenty twenty one for the free cash inflection of the company.
Yes, I think that's right. As it relates to working capital, certainly as activity continues to ramp, we're going to be in a position where we're going to continue to make an investment in working capital. We're certainly focused on effectively managing the working capital to the best of our ability. Our AR days were down from Q1 to Q2. We hope that's a trend that we're able to continue.
But as Chris said, that's something that we are focused on day in, day out. On the AP side, we've been able to work effectively with our vendors. So as I think through free cash flow, there will be continued investment in working capital. On the CapEx side of the equation, we are forecasting $14,000,000 to $16,000,000 of CapEx for the full year. Most of that, as we've mentioned, is maintenance oriented in nature.
Maintenance spending will increase as our activity is picking up, particularly from Q1 to Q2 and then again from Q2 to Q3 and through the rest of the year. So we will have elevated CapEx spending levels likely in the second half of the year compared to where we were in the first half of the year. And I think that gives you most of the building blocks from an unlevered free cash flow perspective. And then obviously on the delever through cash flow perspective, we've got the $15,000,000 semiannual interest payment that's payable in both May November.
Got it. Thanks, Keefer. Thanks, Chris.
Thank you, Ian. Thanks, Ian.
Thank you. Our next question comes from John Daniel with Daniel Energy Partners. You may proceed with your question.
Hey, guys. Thank you. Just to follow on to Ian's questions, he touched on Q4. I'm just curious at this point if anybody, any of your customers are Making commitments for 2022 and if they are, again touched on Ian's theme, are you seeing more of that in places like the Haynesville Or is there a base of specificity that you can provide color on in terms of just that outlook?
Yes. Good morning, John. Look, fair question. At the end of the day, I think, as you're well aware, we don't have a lot of contracted services similar to drilling rigs, frac spreads, right? What I will say is, look, we're very excited about our positioning.
Some of the E and P consolidation that has occurred, I think It fits very well because we have very strong relationships within our customer base that should pull through incremental activity in certain of those basins like Painesville as you referenced. So I think we're very well situated. We're just at the forefront of RFQ season. I would say RFQ season kind of kicked off A little early this year, but we're definitely seeing more of that activity directed towards some of those basins and we're seeing full fledged packaged RFQs For bundled services, etcetera, I think we're exceptionally well positioned for and taken advantage of.
Okay. And then one on the labor market. I'm just curious, And if you look at, say, your Permian employee base, what percent of those guys and gals come from the East Texas market You might now want to stay at home and work in East Texas. Is that an issue you're facing yet?
It's not an issue that we faced To date, I think the biggest issue today has just been a rotation of crews, quarantines and whatnot. Look, we've had that same Phenomenon occur in the past with South Texas crews going in as well, right? You're all familiar with that. And so It's something that we will have to juggle and we'll work through, but we haven't had that as a roadblock or hurdle to jump True. To date, I think most this is speaking for KLX.
Most of our employee base in East Texas, the Haynesville is our What I would say locals, we've got a great foundation there. And so we'll supplement and backfill as need be, but we haven't heard that. To your point of West Texas, you've got West Texas attrition in and of itself that is just the nature of the Permian that we work through all the time.
Okay, guys. Thank you for your time.
Yes. No, I appreciate the questions.
This concludes our Q and A session. I would like to turn the floor back over to management for closing comments.
Thank you once again for joining us on the call and for your interest in KLX Energy Services. We look forward to speaking with you again next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.