Good day, ladies and gentlemen, and welcome to the KLX Energy Services First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded. I’d now like to introduce your host for today's conference, Mr. Michael Perlman, Treasurer and Senior Director of Investor Relations at KLX Energy. Sir, please go ahead.

Thank you, Liz. Good morning and thank you for joining us. Today, we are here to discuss KLX Energy Services financial results for the first quarter period ended April 30, 2019. The Company’s earnings news release which was issued earlier this morning, presents these results. If you haven’t received it, you’ll find a copy in our website. We will begin with remarks from Amin Khoury, Chairman and Chief Executive Officer of KLX Energy Services. Also on the call this morning is Tom McCaffrey, Senior Vice President and Chief Financial Officer. For today’s call, we have prepared a few slides to help you follow this discussion. You can find a presentation on the Investor Relations page of the KLX Energy Services website at klxenergy.com. In addition, copies of the slides are posted on our website for you to refer to. Before we begin, we have some additional information to cover. Any forward-looking statements that we make are subject to risks and uncertainties. And as always in the prepared remarks and our responses to your questions, we will rely on the Safe Harbor exemptions under the various securities acts, and our Safe Harbor statements in the Company’s filings with the Securities and Exchange Commission. We will address questions following our prepared remarks. At that time, the operator will provide Q&A instructions. Now, I’ll turn the call over to Amin Khoury.

Thank you, Michael, and good morning, everyone. Thanks for joining us today to discuss our first quarter financial results. First quarter 2019 revenues were up 1.3% as compared to the immediately preceding quarter. While our Rocky Mountains and Northeast/Mid-Con segments performed substantially better than our peers and slightly better than our expectations for the quarter, our Southwest segment performed somewhat worse than our expectations. Specifically, Rocky Mountains and Northeast/Mid-Con segments delivered organic revenue growth of approximately 4.5% and 2.5% respectively, offset by a 14% decline in organic revenues in the Southwest segment. Revenue growth in the greater Rocky Mountains and Northeast/Mid-Con segments was driven by market share gains in both of these geo segments. While the revenue decline in the Southwest geo region reflected very slow activity levels by certain of our Southwest customers, particularly during the first two months of the quarter, and lower utilization of our wireline asset as a result of the weak pricing environment. The pricing environment was such that we chose not to deploy these assets. Fortunately, pricing has firmed during April and May as activity has picked up and these assets are coming back on line. Importantly, all geo segments experienced strong revenue growth in April. In fact, April, the third month of the quarter, experienced the revenue increase of approximately 24% as compared to February, the first month of our quarter. Moreover, April adjusted EBITDA was more than double February adjusted EBITDA, and April adjusted EBITDA margin was greater than 23%. Notwithstanding the challenging market conditions in the first quarter, the Company generated peer-leading adjusted EBITDA margins of approximately 18%. As we begin the second quarter, revenues and profitability have continued to improve during the month of May such that the Company is expecting an approximate 25% increase in the second quarter 2019…

Thank you, Amin. I'll now turn the call over to Liz for the Q&A portion. Liz will provide instructions on how to ask the questions. Liz?

[Operator instructions] Our first question comes from the line of Brad Handler with Jefferies. Your line is open.

A few questions on my end, please, maybe a couple of tricky ones just because [indiscernible] that they involve, try and understand other behavior. But, could you -- your comments about March being a little bit weaker strike to me like being a little in contrast to what we heard from many other of the service providers that by March have seen a pretty significant turnaround, including in the Permian. And I'm trying to understand better if you can, maybe whether it’s specific type of customer that is still moving more slowly or perhaps something more specific to you that kind of caused that lag?

Actually, March was pretty good in both our greater Rockies and Northeast/Mid-Con segments, but it was pretty weak in the Permian where certain of our customers just did a lot less in terms of what our expectations were, and what a lot of the rest of the industry did. The combination of lower activity, particularly in the first part of the month of March, which I think I did mention during our call, combined with what we believe is irrational pricing activities by some of the even more important public companies in the wireline business, caused us to make the decision to actually take those assets offline rather than beat the assets up and lose money while performing those services. So, it appears to us that the irrational pricing has subsided or is subsiding those assets are coming back on stream. But, it was the combination of weaker activity by certain of our customers in the Permian together with really poor pricing environment for wireline in the Permian during the quarter.

Okay, understood. I just wanted to get a little extra color. So, thank you. In the first quarter, if I turn to the Northeast/Mid-Con segment, we were obviously pleasantly surprised by the margins delivered there. Can you comment a little on the sustainability of that or is there something a little anomalous that maybe we should tamper our expectations for margin through the rest of the year in that geo market?

There was nothing unusual in the quarter. I mean, we had a positive contribution in the fourth quarter from the sale of some assets which positively impacted that segment. Those gains were actually offset by other expenses in the fourth quarter. But in the first quarter, there were no unusual items. It was just solidly profitable quarter with nice organic growth and just a well run business. I think, we’re really pleased with the Red Bone acquisition and the strength of the relationship which the Red Bone folks who have been in that region for 30 years have with the customers. We’re really impressed with the pull-through of services from the flow of execution of the start-up of our wireline assets. It is just going really well and it’s running the business well and the services that we’re providing are delivering a high margin, that’s also true in the Rockies, margins not to the same extent and we’re still making improvements and changes there. But, I think these high margins in the mid to high-20s are sustainable in both those segments. In the Permian, I'm not so sure because of the irrationality of some of the pricing by competitors.

Okay, understood. Thank you for that. And maybe I’ll just slip in one more and turn it back. You were very clear in about certainly cash flow positive in the fourth quarter and your expectations into 2020, it sounds like are very clear directly. I guess, maybe -- it seems like I’m pressing and sounds that I’m not listening, it’s just that I’d like to get a sense if you have another opportunity that comes up that would require additional investment and I don’t know if it’s adding more units and more proceeding or something that would undermine that. Are you trying to tell us that you're not going to do that that the direction is, okay you’ve got enough for now and you're going to generate that free cash, perhaps pay down debt but that’s the direct for the several quarters following the current investment program, is that just a very -- that's what...

I think we should take these acquisition opportunities in two different places. Okay? First would be the acquisition of small add-ons. I don’t actually see us doing much of that in the balance of the year. And if we were to do it, we would do it with shares of the Company stock only, which would increase shares outstanding, increase EBITDA. We would only do that if those transactions were accretive to both our leverage ratios and our earnings per share. In terms of major transactions to add important new services as required by our customers, I think, there, we need to think about industry consolidation. There are way too many small cap companies with capitalization at $1 billion or $1.5 billion or under $1 billion and really no quality midsized -- midcap companies in this industry. The industry is desperately in need of real consolidation. It is clear to us that the number of companies that provide services -- public companies providing services, right now, will be smaller 12 months from and smaller yet 24 months from now. Those transactions are going to have to happen by combining the equity in two public companies, and whereas us we would not combine with a company, which had a weak balance sheet or excess indebtedness. So, it is -- if you're talking about a major transaction of some sort to acquire a significant business, which would substantially increase the equity market capitalization of the company, it would have to be an all-stock transaction, which is accretive to the shareholders and which doesn't crap up the balance sheet with a whole lot of debt on the acquired company. If it’s a smaller transactions, those transactions would likely be with private equity firms who have no other way to liquefy those assets except in steps, so to speak. And because there is essentially no credit availability for folks to buy these assets, we have found tremendous willingness by private equity folks who've owned these assets for many years, funds have been outstanding for too long, the investors in those funds have been maybe not so patient as it could be, depending upon which private equity firm. And they are willing to sell those assets in all stock transactions on an accretive basis. So, that's the way we think about the short-term and the long-term small transactions, large transactions.

[Operator Instructions] Our next question comes from the line of John Watson with Simmons Energy. Your line is now open.

Thank you. Good morning.

Good morning, John.

Amin, I appreciate the color on wireline pricing. I was wondering if you could give us an update on the coiled side. How is pricing progressing there, and does that have any impact on the Q1 margins in the Southwest region?

No, pricing was pretty good. Our utilization could have been a little better because certain of our customers -- we didn’t have the utilization that we had hoped to have. That is going very well now and our utilization is excellent, right now. But there was some weakness in utilization, not so much in pricing. And with respect to the roll out, pricing is pretty good in the new regions where we’ve rolled it out specifically in the Mid-Con and the Rockies.

Okay. Thanks for that. And given that dynamic as well as what you mentioned previously for wireline, can you help us think about how Southwest margins might increase in 2Q? I'm just trying to think through the magnitude for that region versus the other two.

Sure. I mean, we’re not going to obviously give guidance by segment.

Sure.

We expect a substantial improvement in margin in the Southwest segment in the second quarter. That is already beginning to happen. We put an awful lot of pressure on that group to hire and train all of these teams, and they did a fantastic job of execution on the rollout of the coiled tubing services in two other regions. But on the other hand, the combination of having to do that together with the weakness in wireline pricing in particular and the slow regaining of activity by certain customers, caused the segment to deliver I would say poor operational performance, maybe 10% EBITDA margin is not what we’re used to. So, but our expectation is of course substantially improved margin in the second quarter.

Okay, great. This is more of a crystal ball question, feel free to serve it. If I look at the2Q guidance and then the full year guidance, the protection is for improvement in the back half of the year, as you’ve mentioned previously. Am I correct in assuming that you would expect 3Q to be above 2Q and then for a dip different 4Q due to some level of seasonality, or am I bringing into that incorrectly?

Q2 will be very strong, I think 25% increase in revenue over Q1 and a 55% increase in EBITDA as compared to Q1 is a really big deal. And delivering Q2 is really important. During Q2 and Q3, we’re rolling out both coiled tubing, which is pulling through a lot of our other services and we’re rolling out the flow back filtration and testing business in several regions, and we expect really strong revenue growth in Q3 as you just pointed out. I think, there is likely to be small dip in Q4 due to seasonality, but there's a lot more assets coming on line in Q3, which will offset that in part.

Got it. Thank you. And just one last one for me. Integration costs, can you help us think about the magnitude in 2Q and 3Q? I know they’re decreasing but just any quantitative color you could provide would be helpful.

It should be pretty small, John. I mean, we took a brunt of it right here in Q1; there will be some. I mean, we will complete -- it's just little less than 90 days to complete the integration of an acquired business which I think is pretty amazing in itself. But we will complete the integration of Red Bone before the end of Q2 and then we will turn to Tecton and we will do that integration in Q3. Neither one of those integrations should be particularly costly. We will call out the number. It won't be anything like Q1.

I’m not showing any further questions in queue at this time. I would like to turn the call back to Mr. Perlman for closing remarks.

Thank you everyone participating on this morning’s call. We look forward to speaking to you again next quarter. Have a good day.

Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have great day.