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Key Energy Services, Inc. (KEG)

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Key Energy Services, Inc. (KEG)

Q2 2018 Earnings Call

August 09, 2018 11:00 am ET

Executives

Katherine I. Hargis - Key Energy Services, Inc.

John Marshall Dodson - Key Energy Services, Inc.

David Brunnert - Key Energy Services, Inc.

Analysts

John Daniel - Simmons & Company International

Mike Urban - Seaport Global Securities LLC

Daniel Burke - Johnson Rice & Co. LLC

Presentation

Operator

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Key Energy Services Second Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

And I would like to turn the conference over to Senior Vice President and General Counsel Katherine Hargis. Please go ahead.

Katherine I. Hargis - Key Energy Services, Inc.

Thank you, Jennifer, and thank you all for joining Key Energy Services for our second quarter 2018 financial results conference call. This call includes forward-looking statements. A number of factors could cause actual results to differ materially from the expectations expressed in this call, including risk factors discussed in our 2017 Form 10-K, our first quarter 2018 10-Q, and other reports most recently filed with the SEC which are available on our website at www.keyenergy.com.

This call may also include references to non-GAAP financial measures. Please refer to our previously posted earnings release which can be found on our website for a reconciliation of any non-GAAP financial measures provided in this call to the comparable GAAP financial measures. For reference, our general investor presentation is available on Key's website at keyenergy.com under the Investor Relations tab.

With that, I'm going to turn the call over to Marshall Dodson, Key's CFO and Interim CEO.

John Marshall Dodson - Key Energy Services, Inc.

Thanks, Katherine, and good morning, everyone. Also joining me on this call this morning is David Brunnert, Key's Chief Operating Officer. The second quarter of 2018 was a milestone quarter for Key, marking the first quarter in a couple of years where we generated free cash flow, organically built cash and improved liquidity. We generated a 15% quarter-on-quarter increase in consolidated revenues, taking them to $144 million, resulting in an operating loss of $8.9 million with $12 million in adjusted EBITDA for the second quarter of 2018. This represents an improvement of $11.3 million from the first quarter of 2018.

I am pleased with the inflection and the positive adjusted EBITDA this quarter. Everyone at Key has been driving hard to achieve this goal, and I'd like to say thank you to the men and women of Key for the hard work they put in every day providing safe and efficient service to our customers, which allowed us to achieve this result.

I'm not going to run through each of the segments, then hand it over Dave to cover a few points and come back and wrap things up. We grew revenue in all of our segments this quarter and all segments also experienced margin expansion, as we move past the start of inefficiencies and costs of the prior six to eight months and also have benefited from a full quarter of improved pricing.

In our Rig Services segment, we generated $80.5 million of revenues in the second quarter, an improvement of $10.2 million or 14.4% over the first quarter. This revenue increase was driven by a 7% improvement in quarterly rig hours and a 7% improvement in pricing. Pricing improved in all markets to various degrees, but did very regionally due to local supply demand dynamics.

Adjusted EBITDA margin in the second quarter was 20%, a 700 basis point improvement from the first quarter. Gross margin in this segment, which excludes G&A, also improved and was 24% for the second quarter of 2018. Looking ahead, we expect revenue growth in the low- to mid-single digits next quarter, driven mostly by activity with some price improvement. We don't expect to see much additional impact from price until the fourth quarter.

Our margins next quarter will be impacted by some transitory costs, largely due to large workers' compensation charges stemming from a vehicular incident last month along with some customer transition. With those impacts, we might see margins fall around 100 basis points when otherwise we would expect an improvement of around 100 basis points. Those impacts will be behind us for the fourth quarter at which time we should also see some price benefit.

Our Fluid Management Services segment also saw a revenue improvement in the second quarter, increasing by $800,000 or 3.7%. That revenue improvement generated 150% incremental adjusted EBITDA margin, increasing adjusted EBITDA to $3.4 million. Our truck activity fell 6,500 hours or 3% in the second quarter, as we repositioned assets and exited some markets to take advantage of better areas and also generated more non-trucking revenues.

Price improved 3% on the lower hours with the balance of the revenue increase coming from non-truck revenues. Our margins also benefited by moving past some of the cost impacts in the prior quarter. Next quarter, we expect revenue to be up a couple percent, but with similar dynamics in the second quarter where we expect the reduction in truck hours offset by price in non-truck revenues. Those combined effects will translate to a revenue increase that improves margin by 100 to 200 basis points.

Read the rest of this transcript on seekingalpha.com