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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Please hold. Hang on one second.
Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review fiscal second quarter 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'll be available by webcast on the company's website at klxenergy.com. There will also be a telephonic recorded replay available until September 17th, 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 10th, 2021, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, management's comments may contain forward-looking statements within the meaning of the U.S. 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-K, quarterly reports on Form 10-Q, and current reports on Form 8-K 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 Services website. Now, with that behind me, I'd like to turn the call over to KLX Energy Services' 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 second quarter 2021 conference call. We are excited to report our second 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 a seasonally weak first quarter that was exacerbated by Winter Storm Uri, as well as customer scheduling and well issues, the second quarter was characterized by continued broad-based improvement in the market. For the fiscal second quarter ended July 31st, WTI prices were up over 16%, and natural gas prices were up 34% and currently sit around $5 per MMBtu.
Rig count was up approximately 11% ending our second quarter approaching 500 rigs. 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. The global economy still has a cloud of uncertainty due to COVID-19, 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. Activity gains have been muted relative to past cycles. It also appears that we have weathered the worst of the storm and that despite lingering macroeconomic headwinds, there's 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 and prior guidance. This quarter commemorates the one-year anniversary of the closing of the merger. We have accomplished a lot, integrated the companies, 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 million in annualized merger synergies, we have now fully implemented the additional $4.4 million 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 million increase in quarterly adjusted EBITDA from Q1 to Q2 and generated positive adjusted EBITDA for the first time in five quarters.
The considerable sequential improvement in adjusted EBITDA was driven by the absence of Winter Storm Uri, 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 million 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 second quarter 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 second quarter into July 31st, 2021, revenues were $112 million, an increase of $21 million or 23% compared to the fiscal first quarter of 2021. Once again, the revenue increase reflected the impact of improving market activity across all geomarkets and the vast majority of our product lines, particularly directional drilling, coiled tubing, rentals, and fishing. To detail our revenue contribution by end market. Q2 2021 revenue was 29% drilling, 46% completion, 15% production, and 10% intervention services, which compares to 27%, 49%, 13%, and 10%, respectively, for the fiscal first quarter of 2021.
Drilling continues to increase its contribution to KLX post the merger with QES. 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 to 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 have made great strides pulling through plug sales and through 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 second quarter, and as oil prices climb back into the 60s and 70s, we expect to continue to see an uptick in production-related activity. Adjusted operating loss was $14.9 million for the quarter. Adjusted EBITDA and adjusted EBITDA margin were $600,000 and 50 basis points respectively. Adjusted operating loss and adjusted EBITDA improved sequentially by $12 million and $10 million respectively. I would also like to highlight a couple of items that negatively impacted our second quarter margin. First, our quarterly cost of sales continues to be burdened by $2.1 million of lease expense tied to five coiled tubing operating leases, which may impact our comparability to peers.
Second, we incurred stand-up costs of $1.3 million within the quarter in order to mobilize and prepare equipment to meet the increased demand for our services in Q2. I will now turn to the segment P&L review. Beginning the segment review with the Rockies. The Rockies segment fiscal second quarter revenue of $33.6 million increased by $9.3 million or 38% as compared with the fiscal first quarter 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 second quarter was $2 million as compared with adjusted operating loss of $6.8 million in the fiscal first quarter of 2021. Adjusted EBITDA was $3.1 million as compared to the fiscal first quarter adjusted EBITDA loss of $1.6 million.
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 first quarter of 2021, generating revenue of $43 million. 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 $3.6 million compared to fiscal first quarter adjusted operating loss of $6.6 million, and adjusted EBITDA was $1.8 million for the second quarter compared to fiscal first quarter 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 second quarter revenues were $35.3 million, up 24% as compared to the fiscal first quarter of 2021. Adjusted operating loss for the fiscal second quarter was $3.2 million, an improvement of $2.9 million as compared with adjusted operating loss of $6.1 million in the fiscal first quarter of 2021. Adjusted EBITDA was $500,000 as compared to fiscal first quarter adjusted EBITDA loss of $2.1 million. 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 second quarter was $4.8 million versus $5 million 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 million of synergies are flowing through the P&L. Big 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 forma loss of $19 million in Q2 2020 by $20 million to positive adjusted EBITDA of $600,000 in Q2 2021. This represents an $80 million 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 million, less our Q2 cash balance of $39 million, resulting in net debt as of the end of the second quarter of approximately $235 million.
As of July 31st, 2021, total net liquidity was $57 million, including cash on hand of approximately $39 million. We also drew $30 million 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 million of remaining availability and $18 million of net availability when factoring in the $10 million 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 would also expect that our borrowing base would increase in conjunction with the continued revenue increases expected for Q3.
For the three months ended July 31st, 2021, cash flow use in operations was $26 million, and free cash flow loss was $27 million. There's cash interest of $14.7 million 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 million 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 $3.5 million. 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 $2.5 million 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 million-$16 million, and currently have $3 million of assets held for sale, which we believe should sell in the second half of 2021. 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 31st to December 31st. This change will take effect for the period ending December 31st, 2021, when we will file a transition 10-K for an 11-month period and will begin fiscal 2022 on January 1st. 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. I can assure you that our team continues to review every opportunity available where we believe there's 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, most of the consolidation activity remains heavily weighted towards the E&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 and 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. 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 third quarter. 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+ and U.S. shale supply discipline. 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 and competitive positioning as we have already reduced our cost structure to industry-leading levels based on our Q2 G&A burden, which stands at approximately 11% of revenue.
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. Our persistence is paying 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-19.
COVID-19 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 crews. 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. Let me turn to the third quarter 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 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. For our second quarter, adjusted EBITDA was just above break even. 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 that 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 Sandler. You may proceed with your question.
Good morning, Chris and Keefer.
Hey, good morning, Ian.
Morning, Ian.
I wanted to ask about the different basin outlooks for the calendar second half, just given the divergence in natty and crude. I've heard mixed indications from some of your peers with regard to fourth quarter slowdown. Some I think in Texas, seeing more of a November, December white space at this point than maybe we had thought earlier in the year. This gas price seems to be very constructive for a lot of your activity. 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?
Yeah, sure. I think, look, we definitely, as we were coming into the third quarter, had more visibility than maybe we did in prior second half of the year cycles, as we've all become very accustomed to fourth 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 and December. I think it's a little early in the cycle for those decisions to be made. 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 side of the business. It's a little premature to give you a firm answer, but I would say the fact that they are considering continuing their programs is nothing but a positive, right? With regards to, we clearly had a pretty material uptick in the Rockies. Some of that is gas work. A lot of that is just, it's episodic in two regards. One, customer concentration and the nature of the customers up there and their programs swing somewhat within a quarter, in quarter-over-quarter. We've got kind of cradle-to-grave activity there from the drilling side all the way through the completions and the drill out side of their programs.
The other is most of those pads up there are exceptionally large, and so any delays, whether they be COVID delays, wellbore trajectory delays, or otherwise, can cause some swings in that revenue base. 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. Gotcha. You mentioned, Chris, that you exited Q2 at low mid-single-digit EBITDA margins. If we just look at the full quarter, your EBITDA incrementals from Q1 into Q2 were 45%-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. 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. We clearly saw extraordinary incrementals. I think, a big part of that is, look, there's pent-up operating leverage in the business coming out of Winter Storm Uri in Q1, where you've got white space in your calendar, some costs that you couldn't flush out, et cetera. That incremental revenue flowed through exceptionally well. The caveat I would say with regards to 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%-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 missed revenue opportunities and quarantine costs, overtime costs, et cetera, that I think 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%-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, the rate of our pricing improvements have been accelerating month-over-month as we've worked through the year. We would expect to continue to be able to walk pricing higher as we work through the remainder of the year. Certainly would expect that as we get into next year, we'll be able to improve pricing even further there. That's the only thing I'd add, Chris.
Yeah. No, that's perfect. I think that is the key, is making sure pricing continues to outpace the inflationary pressures we're seeing across the board. It's one step forward or two steps forward, one step back sometimes, but we work every day on that front.
Okay. Then last one, if you don't mind. Keefer, 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. It looks like free cash is still a bit remote for the second half. Would you agree or correct me on that we should look probably to 2022 rather than second half of 2021 for the free cash inflection of the company?
Yeah, 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. 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 million-$16 million 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, then again from Q2 to Q3, and through the rest of the year. 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. I think that gives you most of the building blocks from an unlevered free cash flow perspective. Then obviously on the levered free cash flow perspective, we've got the $15 million semiannual interest payment that's payable in both May and 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.
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, touching on Ian's theme, are you seeing more of that in places like the Haynesville? Or is there a basin specificity that you can provide color on in terms of just that outlook?
Yeah. 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-
Right
frac spreads or otherwise, right? What I will say is, look, we're very excited about our positioning. Some of the E&P consolidation that has occurred I think 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 the Haynesville, as you referenced. I think we're very well situated. We're just at the forefront of RFQ season. I would say RFQ season's 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, et cetera, that I think we're exceptionally well positioned for and taking advantage of.
Okay. One on the labor market. I'm just curious, if you looked at, say, your Permian employee base, what % of those guys and gals come from the East Texas market who 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 face to date. I think the biggest issue to date has just been a rotation of crews with quarantines and whatnot. Look, we've had that same phenomenon occur in the past with South Texas.
Right
crews going in as well, right?
Right
Well familiar with that. 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 through to date. I think most, this is speaking for KLX.
Right.
Most of our employee base in East Texas, the Haynesville, are what I would say locals. We've got a great foundation there. We'll supplement and backfill as need be, but we haven't heard that. To your point on 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.
Yeah, no, appreciate the questions.
This concludes our Q&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.