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Edited Transcript of KLXI earnings conference call or presentation 7-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 KLX Inc Earnings Call

Wellington Mar 7, 2017 (Thomson StreetEvents) -- Edited Transcript of KLX Inc earnings conference call or presentation Tuesday, March 7, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Perlman

KLX Inc. - Assistant Treasurer

* Amin Khoury

KLX Inc. - Chairman and CEO

* Mike Senft

KLX Inc. - VP and CFO

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Conference Call Participants

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* Gautam Khanna

Cowen and Company - Analyst

* Sheila Kahyaoglu

Jefferies LLC - Analyst

* Richard Safran

Buckingham Research Group - Analyst

* Myles Walton

Deutsche Bank - Analyst

* Michael Ciarmoli

SunTrust Robinson Humphrey - Analyst

* Shannon Burke

Gabelli & Company - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Candace Gribbin, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the KLX fourth-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, ladies and gentlemen, the conference is being recorded on this day, March 7, 2017. Thank you. I would now like to introduce KLX's Assistant Treasurer, Michael Perlman. Mr. Perlman, you may begin your conference.

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Michael Perlman, KLX Inc. - Assistant Treasurer [2]

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Thank you, Candace. Good morning, and thank you for joining us. Today, we are here to discuss our financial results for the fourth quarter and full year ended January 31, 2017.

The Company's earnings news release, which was issued earlier this morning, presents our fourth-quarter and full-year results. The Company's financial results for the prior year ended January 31, 2016, have been presented excluding and including last year's impairment charge associated with the Energy Services Group. For comparative purposes, for this morning's discussion, last year's charge will be excluded from our results unless otherwise indicated.

By now, you should have received a copy of the news release we issued earlier today. If you haven't received it, you'll find a copy on our website.

We will begin with remarks from Amin Khoury, Chairman and Chief Executive Officer of KLX. Also on the call this morning are Tom McCaffrey, President and Chief Operating Officer, and Mike Senft, Vice President and Chief Financial Officer.

For today's call, we prepared a few slides to help you follow our discussion. You can find our presentation on the investor relations page of the KLX website at KLX.com. In addition, copies of the slides will be posted on our website for you to refer to after the call.

Any forward-looking statements that we make are subject to risks and uncertainties. And as always, in our prepared remarks and our responses to your questions, we will rely on the Safe Harbor exemption under the various Securities Acts, and our Safe Harbor statement 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 instruction. Please limit your questions to no more than two at a time. Now, I'll turn the call over to Amin Khoury.

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Amin Khoury, KLX Inc. - Chairman and CEO [3]

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Thank you, Michael, and good morning, everyone. We are pleased to report our fourth-quarter results and the progress we continue to make in each of our businesses. As we announced in January, our Aerospace Solutions Group, or ASG, won approximately $300 million of fourth-quarter new-program awards, which, together with other awards won earlier this year, are valued at approximately $500 million in total, all of which represent significant market share gains. These recently won programs are expected to significantly support ASG's growth trajectory beginning in the second half of 2017.

During the fourth quarter, our Energy Services Group segment, or ESG, generated revenues of approximately $44 million. That was down 16.3% versus the same period in the prior year, but up nearly 9% sequentially. ESG's fourth-quarter revenues would likely have been higher absent extreme weather conditions in several of our key markets. Importantly, cash burn rate, defined as EBITDA before non-cash compensation expense, less capital expenditures, decreased to a $10.6 million cash burn, an improvement of $38 million, or nearly 80%, as compared with the fourth quarter of the prior year, reflecting the significant cost reductions implemented during the past year.

We are continuing to develop a solid reputation in the oil field services sector and have become a preferred service provider to some of the fastest-growing energy companies operating in North America. We're optimistic about ESG's outlook, as US onshore production activity continues to improve, and we expect to be able to report strong quarterly earnings comparisons to prior-year results beginning in the first quarter of 2017 and throughout the coming year.

On today's call, we will review the current market environments for both our ASG and ESG segments, our 2016 fourth-quarter and full-year performance, finally, we will discuss our outlook. Let's now review the aerospace market environment. During 2016, air traffic continued to grow at a healthy pace, reaching a 10-month high of 8.8% in December. For the full-year 2016, global traffic growth increased 6.3%. At the same time, the airlines have continued to successfully manage capacity, which helped drive load factors to an all-time high in November, its highest annual average on record of 80.5%. This combination of robust traffic growth, high load factors, portends a significant increase in future aircraft maintenance activity.

I'm going to ask Mike Senft to continue on for a few moments. I've got a cold, and it's affecting my speech. Mike, if you wouldn't mind continuing for a little while here.

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Mike Senft, KLX Inc. - VP and CFO [4]

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No problem, Amin. Good morning, everyone.

With respect to original equipment manufacturing, or OEM, activity, we expect market conditions to remain muted in 2017 as demand for aircraft systems to support new aircraft manufacturing appears to be approximately flat. However, a portion of KLX's business which supports commercial aerospace manufacturing customers is expected to deliver solid growth in 2017, driven by 2016 new-program wins and market share gains, beginning particularly in the second half of 2017. In addition, the growth which we experienced in our aftermarket business in the second half of 2016, driven by increased aircraft maintenance activity, is expected to continue in 2017, since a larger portion of the approximately 11,000 aircraft delivered since the beginning of 2009 began to require mandated heavy maintenance.

With respect to the current market environment for our ESG segment, industry conditions are expected to continue their nascent recovery during 2017. The improving market outlook is supported by current stable commodity prices and the current expectation of a 30%-plus increase in capital spending by the major North American exploration and production companies.

Let's now turn to slide 2 and discuss our fourth-quarter 2016 consolidated results. Fourth-quarter 2016 revenues of $382 million increased 6.6% as compared with the prior-year period, reflecting a 10.6% year-over-year increase in ASG revenues, partially offset by a 16.3% decline in ESG revenues. Operating earnings were $36.5 million, reflecting a $34.3 million increase compared to the same period last year, which included first-year public company and spinoff-related costs. Adjusted net earnings, and adjusted net earnings per diluted share, were $27.6 million and $0.53 per share, respectively.

Let's now turn to slide 3 and review fourth-quarter ASG results. For the fourth quarter, our ASG segment reported revenues of $338.4 million, an increase of 10.6% as compared to the prior year. Revenues from our commercial aerospace manufacturing customers increased modestly, reflecting the initial impact of the market share gains, while consolidated ASG aftermarket revenues were up approximately 18%, primarily due to the contribution of the military aftermarket portion of revenues from the recent Herndon acquisition and increased aircraft maintenance activity.

ASG operating earnings of $55.3 million and operating margin of 16.3% improved by $11.4 million and approximately 200 basis points, respectively, as compared to the same period in the prior year, which included first-year public company and spinoff-related costs. The current quarter operating results include approximately $1 million of Herndon integration-related costs and expenses.

Let's turn to slide 4 and review fourth-quarter 2016 results for our ESG business. As compared to the prior year, fourth-quarter 2016 ESG revenues of $43.6 million declined $8.5 million, or 16.3%, while operating loss improved by 54.9% to an $18.8 million loss. Despite the 16.3% decline in revenues, cash burn rate improved by $38.2 million, or $78.3 million (sic - see press release, "78.3%"), to negative $10.6 million. On a sequential quarterly basis, revenues increased by $3.4 million, or 8.5%, and would have likely been higher absent extreme weather conditions in several of our key markets.

Let's now turn to slide 5 and review our full-year ended January 31, 2017, financial results. FY16 revenues of $1.5 billion decreased 2.3% as compared with the prior year. The consolidated results reflect a $64.9 million, or 4.9%, increase in ASG revenues, offset by a $101.7 million, or 39.9%, decline in ESG revenues.

2016 operating earnings were $139.2 million, and operating margin was 9.1%. 2016 adjusted net earnings, and adjusted net earnings per diluted share, were $103.2 million and $1.98 per share, respectively, which includes the benefit of the amortization of deductible goodwill and non-cash compensation expense. Cash flow provided by operations was $152.9 million, and free cash flow was $115.4 million, or approximately 112% of adjusted net earnings, and approximately 211% of GAAP net earnings.

Let's turn to slide 6 and discuss full-year results for our Aerospace Solutions Group, or ASG. Our ASG segment reported revenues of $1.4 billion, an increase of 4.9%, driven principally by the contribution of Herndon's military aftermarket business and increased aircraft maintenance activity. Operating earnings improved by 8.8% to $230.2 million, and operating margin was 16.7%. The full-year 2016 operating results reflect the margin-dilutive impact of the Herndon acquisition, and approximately $6 million of integration-related costs and expenses.

Let's turn to slide 7 and review full-year 2016 results for our ESG business. For the full year, ESG revenues of $153.2 million declined $101.7 million, or 39.9%, as compared to the prior year, while operating loss improved by $17.2 million, or 15.9%. The improvement in operating results reflects the intensive effort to consolidate facilities and align our headcount with demand.

Notwithstanding the 39.9% decline in revenue, cash burn rate improved by $85.1 million, or 54.2%, to negative $72 million. By the fourth quarter, ESG's cash burn rate had improved to negative $10.6 million.

Let's briefly review our financial position on slide 8. As of January 31, 2017, our cash balance was approximately $277 million. Total long-term debt of $1.2 billion, less cash, resulted in net debt of $923 million, and the Company's net-debt-to-net-capital ratio was 29%.

For the year ended January 31, 2017, cash flows provided by operating activities were $152.9 million, and the free cash flow was $115.4 million, or 211.4% of net earnings and 111.8% of adjusted net earnings. Capital expenditures were $3.6 million for the fourth quarter and $37.5 million for the full year ended January 31, 2017.

The Company repurchased approximately $30 million of KLX common stock during the fourth quarter. For the full year, we repurchased an aggregate of $40 million of KLX common stock at an average price of $41.20 per share. The Company expects capital expenditures of approximately $60 million for the full-year 2017, primarily related to tenant improvements at our new 500,000 square foot ASG Miami distribution facility.

At January 31, 2017, there were no borrowings outstanding under the Company's $750 million credit facility. We will continue to explore every avenue to deploy our capital in ways that maximize long-term shareholder value, including through internal investment and acquisitions, but only to the extent these investments represent superior returns as compared to investing in our own stock through further share repurchases.

Let's now turn to slide 9 and briefly review this morning's raised guidance for 2017. Revenues are expected to be up approximately 10%. Operating earnings are expected to increase approximately 45%.

Earnings before income taxes are expected to more than double. Adjusted net earnings are expected to increase approximately 40%. And our free cash flow conversion rate is expected to be approximately 230% of net earnings and 125% of adjusted net earnings.

On a segment-level basis, ASG revenues are expected to increase by a mid-single-digit percentage, reflecting slower growth in the first half of the year, followed by an acceleration of growth in the second half of the year, as new programs won during 2016 begin to materially contribute to our growth rate. ESG revenues are expected to increase approximately 30%, and ESG EBITDA is expected to reach breakeven on a quarterly basis in the third or fourth quarter of 2017. With that, I will now turn the call back over to Michael for the Q&A portion of this morning's call.

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Michael Perlman, KLX Inc. - Assistant Treasurer [5]

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Thank you, Mike. I will now turn the call over to Candace for the Q&A portion of today's call, who will provide instructions on how to ask a question. Candace?

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

Gautam Khanna, Cowan and Company.

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Gautam Khanna, Cowen and Company - Analyst [2]

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Thanks. Good morning, guys.

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Amin Khoury, KLX Inc. - Chairman and CEO [3]

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Good morning, Gautam.

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Gautam Khanna, Cowen and Company - Analyst [4]

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I wanted to ask if you could just elaborate on what you're seeing in the commercial aerospace aftermarket right now subsequent to the quarter, and then what the trends were organically in the aftermarket in Q4?

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Amin Khoury, KLX Inc. - Chairman and CEO [5]

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It's not possible to give you an exact answer, but we estimate that our aftermarket growth rate organically in the fourth quarter was between 3.5% and 4%.

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Gautam Khanna, Cowen and Company - Analyst [6]

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And how is it tracked subsequent to the quarter? Does it remain at that type of level?

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Amin Khoury, KLX Inc. - Chairman and CEO [7]

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It was about the same in the third and fourth quarters. I don't know what the answer is to the question as to how it's tracking in the first six weeks of this year. We report that after the first quarter.

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Gautam Khanna, Cowen and Company - Analyst [8]

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Okay. And -- (Multiple Speakers)

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Amin Khoury, KLX Inc. - Chairman and CEO [9]

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It looks like there is a nice increase in aircraft maintenance activity, which is positively impacting our aftermarket business, and we've had two quarters in a row now of decent growth -- organic growth in the aftermarket.

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Mike Senft, KLX Inc. - VP and CFO [10]

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We've not seen any change in trends, Gautam. It's Mike.

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Gautam Khanna, Cowen and Company - Analyst [11]

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Okay. That's good to hear. Also, I just wanted to ask about the ASG margins.

If you stripped out the integration costs that you called out in the fourth quarter as well as the third, it looks like the margins were down sequentially about 60 basis points. I don't want to draw more significance -- read more significance into that than there is, but maybe could you talk about why -- was there a mix drag or something that we should be mindful of?

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Mike Senft, KLX Inc. - VP and CFO [12]

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It's Mike again. It's not a drag per se. It's just there's very modestly lower revenue, so there's an absorption factor there that's pretty minor, and then we had some end-of-year cleanup things that we did. It was very one-off. There's nothing unique in the numbers, to your point.

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Gautam Khanna, Cowen and Company - Analyst [13]

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Okay. And end-of-year cleanup of like inventory -- (Multiple Speakers)

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Amin Khoury, KLX Inc. - Chairman and CEO [14]

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The fourth quarter, seasonally, is always a little worse in the third quarter. We had plant shut down to deal with and all that stuff. But we did guide to approximately flat Q4 versus Q3. That's about we've got.

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Gautam Khanna, Cowen and Company - Analyst [15]

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Got it. Going forward, should be expect that the ASG margin rate improves on a sequential basis, or how should we think about, like you mentioned, the new contract wins flowing in later in the year. Are those at the segment average? Are they above the segment average margin? Just if you can give us some profile for the year that we should expect.

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Amin Khoury, KLX Inc. - Chairman and CEO [16]

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I think the most important thing for next year is the completion of the integration of Herndon. It not only eliminates costs that we're occurring -- we've got another $4 million or $5 million or whatever it is to complete that integration, and also to get rid of the drag and to get the synergies, which is -- excuse me, about $10 million overall, a portion of which we've achieved.

In terms of getting to a substantially higher EBIT margin, we need the aftermarket to continue to kick in and to represent a higher portion of overall revenues as a percentage of the total. So some improvement in the operating margin, particularly in the second half of the year.

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Gautam Khanna, Cowen and Company - Analyst [17]

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Okay. That's very helpful. I will turn it over, guys. Thank you.

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Operator [18]

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Sheila Kahyaoglu, Jefferies.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [19]

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Good morning, guys.

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Amin Khoury, KLX Inc. - Chairman and CEO [20]

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Good morning, Sheila.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [21]

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Hi. Just to take off of Gautam's question a little bit, you would expect commercial OE sales to be higher in the second half of next year, so you would still expect higher profitability in the second half as well?

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Amin Khoury, KLX Inc. - Chairman and CEO [22]

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Yes.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [23]

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Okay, understood. Then within ESG, can you just talk a little bit about what happened in Q4 and what you are seeing, maybe what the weather impact was, or if you could parse what happened with pricing a little bit?

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Amin Khoury, KLX Inc. - Chairman and CEO [24]

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We did say that we expected Q4 to be about the same as Q3. And I think the operating earnings number is $1 million different, so I don't think there is much talk about. It was essentially flat with Q3, and in fact, our cash burn rate went down. So it's not about pricing. It's just about a little bit less activity because of extreme weather in certain parts of the country.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [25]

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Okay. And as we think about 2017, your current assumptions don't necessarily -- it just assumes some volume incremental, but you don't have any -- how are you thinking about price as it factors into 2017?

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Amin Khoury, KLX Inc. - Chairman and CEO [26]

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Well, we did say that we expect to get to EBITDA neutrality by the third or fourth quarter of the coming year, so we expect the combination of volume and price to improve profitability as we go through the year, and hopefully, we'll get to EBITDA breakeven by the back half of the year.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [27]

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Okay. Understood. I will just jump back in the queue then. Thank you.

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Amin Khoury, KLX Inc. - Chairman and CEO [28]

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Thank you.

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Operator [29]

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Richard Safran, Buckingham Research.

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Richard Safran, Buckingham Research Group - Analyst [30]

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Hey, thanks. Good morning. Amin, first, I hope you feel better. Take care of that cough.

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Amin Khoury, KLX Inc. - Chairman and CEO [31]

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It's three weeks now, and I'm having a tough time getting rid of it, Richard, but I got a little help from Michael this morning.

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Richard Safran, Buckingham Research Group - Analyst [32]

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Okay. Good. The first question I had was on the military aftermarket. I realize it's small right now. We see meaningful declines here. But I wanted to ask for your outlook here.

I know how you're thinking about it given the $577 billion being proposed by the new Trump Administration and the emphasis on readiness. Do you think this generally supports your outlook for military aftermarket? Do you see that piece of the business growing in line or better than the commercial piece? Just want to know what you're thinking right now.

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Amin Khoury, KLX Inc. - Chairman and CEO [33]

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We did win an important new contract in the fourth quarter that was in the Corpus Christi Army Depot. That was very happy occasion for us, so we see some growth there. We did get renewals from two other major military aftermarket contracts, the biggest ones that we've had, so that was important. Our expectation is that the business will grow in 2017 because of basically new business -- military aftermarket new business.

With respect to the Trump Administration, there, I think it might take a little longer than 2017, but our expectation is that manufacturing of F-18s and F-16s and other programs that have been dramatically declining in the past and have contributed to a reduction in our military manufacturing support business, I think in 2018, I think the outlook there, assuming the Trump Administration carries through, is for higher revenues to support military manufacturing, higher revenues in the military aftermarket, and higher BizJet revenues with a number of new aircraft being introduced.

So as we think about the next couple of years, we have pretty high level of confidence that our quarterly comparisons for the next couple of years are going to be pretty darn good.

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Richard Safran, Buckingham Research Group - Analyst [34]

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Okay. Thanks for that. Now, second question, Amin, I wanted to try and ask. You've been asked about this before, I wanted to try it a little differently. I wanted ask you about the confidence you have in the 2017 guide and visibility.

Now, you've previously -- you've discussed you've had some challenges with visibility, but you have a lot of confidence in your outlook here. I think I understand the situation. There are a lot of aircraft due for maintenance checks given their age, but customers have been giving you short lead time for parts demand.

But we are starting to see a pickup in MRO activity, and we've got that noted from a number of other companies when they're reporting results. Could you help us in terms of how we can get the same level of confidence in your guide and your outlook and the predictability of your earnings? Maybe just discuss how market factors you look at contribute to the confidence you have in the guide.

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Amin Khoury, KLX Inc. - Chairman and CEO [35]

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Sure. A really important consideration is $500 million of new business that we booked last year. It basically is all market share gain. So we are expecting a really hefty growth rate in the second half of the year -- organic growth rate in the second half of the year from these new programs.

So it is true that we don't have whole lot of visibility in the aftermarket portion of our business, that is the non-military or commercial aftermarket portion of our business. We don't have a lot of visibility -- excuse me. But we've had a couple of nice quarters now of organic growth driven by increased aftermarket activity at the airlines and MROs.

We don't see any reason to believe that should not continue given that so many of the new 11,000 airplanes delivered over the last seven or eight years are now getting to the point where they require heavy maintenance. We think that's what's driving aftermarket demand. That was true in the third and fourth quarters of this year. We don't see a reason not to expect that to continue in 2017.

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Richard Safran, Buckingham Research Group - Analyst [36]

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Well, thanks very much. Take care.

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Amin Khoury, KLX Inc. - Chairman and CEO [37]

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Thank you.

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Operator [38]

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Myles Walton, Deutsche Bank.

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Myles Walton, Deutsche Bank - Analyst [39]

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Thanks. Good morning.

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Amin Khoury, KLX Inc. - Chairman and CEO [40]

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Good morning, Myles.

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Myles Walton, Deutsche Bank - Analyst [41]

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I was wondering, maybe Amin or Mike, to follow up on Richard's question as it relates to not just [fiscally] in 2017, but it sounds like you've got probably more visibility coming into 2018, two years out, than you've had in a long time with the new wins. If I read the press release right around that January award, it suggested $60 million of run rate after a 12-month transition. So is it fair to assume that you're already comfortable at a high-single-digit organic rate in ASG in 2018 given those contracts?

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Amin Khoury, KLX Inc. - Chairman and CEO [42]

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Yes.

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Myles Walton, Deutsche Bank - Analyst [43]

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Okay.

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Amin Khoury, KLX Inc. - Chairman and CEO [44]

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Primarily in the second half of the year. The reason that we are confident about 2018 as well, which you just mentioned, is that the growth rate in the second half -- organic growth rate from all the new programs is very healthy, and that continues right into 2018.

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Myles Walton, Deutsche Bank - Analyst [45]

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2018. Okay. And then Mike, you mentioned the capital deployment, but I was wondering if you could flesh it out a little bit. Obviously, you've got $180 million, $185 million of deployable free cash flow implied in the guidance for 2017. You did a little bit of repo in 2016. Can you just walk through what we think about the landscape, or Amin, about the landscape for M&A and share repurchase and how that balances today versus about six months (Multiple Speakers)?

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Mike Senft, KLX Inc. - VP and CFO [46]

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I would be happy to, Myles. Thank you for asking. I think we are actually quite encouraged by the M&A landscape in the sense that there are a number of transactions that we understand we may get a chance to look at in the coming months, and we'll be as discrete about them as we were in sorting through all the opportunities that led us to Herndon. I think you can tell from how we've integrated Herndon, we're exceptionally pleased with how that acquisition has worked out so far.

It's still early days. But to Rich's earlier question, we see the ramp-up opportunity there continuing to be quite compelling, and we would hope that we find another acquisition that would provide the same incremental growth platform, but we will be extremely disciplined about putting money to work at multiples and with returns that meet the thresholds that become accretive for us on a pro forma basis. We're very focused on that.

And in the meantime, again, as you noted, we did increase or accelerate our share repurchase program in the fourth quarter. We had a $100 million original authorization that we've called out. We've used roughly half of that at this point.

We have significant cash flow capacity, and I think it will just be a question of sorting through what we think are a number of great opportunities. We believe very much in our stock price and the value that the stock currently represents, and we want to make these acquisitions if they pan out, so we'll definitely be going down a parallel path on that.

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Myles Walton, Deutsche Bank - Analyst [47]

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The only other one, if I could, is the increase in CapEx for 2017. It sounds like it's on the ASG distribution in Miami, but I'm curious, at what point should we expect ESG requirements for CapEx to start to ramp as you guys get more positive in that side of the business? Thanks.

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Mike Senft, KLX Inc. - VP and CFO [48]

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One of the great things I think we did to support the ESG business was aggressively buy those assets that we called out in 2015 at very low prices relative to replacement value. We believe at this point in time that with very few exceptions, we've got an inventory of equipment that is the envy of much of our competitors.

And we keep it in exceptionally good shape right now. We don't have to put a lot of capital in it because we know how to store it and maintain it. And we think it's ready to go out in the field as the business opportunities present themselves. So we are not budgeting a material ramp-up in CapEx to meet what we see as being a substantial incremental business opportunity as 2017 plays out.

As to 2018 and beyond, again, that would be a high-quality problem. If we reach the point where we have to spend more money on ESG because the growth is that good by the end of 2017, we'll be happy to update you on that, and it will be a very good conversation.

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Myles Walton, Deutsche Bank - Analyst [49]

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Thanks again.

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Operator [50]

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Michael Ciarmoli, SunTrust.

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Michael Ciarmoli, SunTrust Robinson Humphrey - Analyst [51]

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Hey, good morning. Thanks for taking my questions, guys.

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Amin Khoury, KLX Inc. - Chairman and CEO [52]

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Good morning, Michael.

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Michael Ciarmoli, SunTrust Robinson Humphrey - Analyst [53]

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Just to stay on what Myles was asking, the CapEx you are deploying to the Miami distribution facility, can you elaborate there? It's been some years since I've been in that facility. But what exactly is that spend doing? Is it more technology investment? Or maybe just shed some light there.

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Amin Khoury, KLX Inc. - Chairman and CEO [54]

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It's a combination of technology, but we're building a brand-new 500,000-square-foot dedicated facility. The way we have grown, we are in three different buildings and facilities right now, and it contributes to inefficiency in our operations. And we are hopeful and expect that by consolidating all of those facilities and improving our operational efficiency, that we will get some margin improvement out of it as well.

It's just a matter of satisfying demand. We've added a lot of new business. It is becoming evident to the entire marketplace that we are offering a truly superior and differentiated service as compared to the competition.

The outlook for new business continues to be strong, and we are addressing that by building a new $0.5 million (sic - "0.5 million") square-foot facility with -- I think groundbreaking is expected next month. So that's what the CapEx is about.

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Michael Ciarmoli, SunTrust Robinson Humphrey - Analyst [55]

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Got it. And then just if you would, you called out all the new wins. Can you quantify the annual run rate revenues for all those new wins? I know we talked about the one, implying $60 million, but how should we think about it when all these problems fully come online?

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Amin Khoury, KLX Inc. - Chairman and CEO [56]

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I'd rather not do that yet. We want to see just how the new programs do come online. But we have enough confidence to say that we will have a very strong organic growth rate, particularly in the back half of 2017.

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Michael Ciarmoli, SunTrust Robinson Humphrey - Analyst [57]

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Got it. That's fair. And then just the last one for me. I know the aftermarket is a bit tricky given the lack of visibility, but I know there was a point in time, I guess it was maybe last year, you guys had talked about airlines running the older planes, not going through with the heavy maintenance shop visit. Can you guys offer any color on what you're seeing from those older planes that are -- are retirements happening, or are airlines spending, if you have the visibility into that dynamic?

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Amin Khoury, KLX Inc. - Chairman and CEO [58]

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Yes, they are still retiring those older aircraft at a very high rate, and we expect a couple of the big airlines, like American and Delta, to continue that program. That contributes to a lower growth rate in our aftermarket business. Fortunately, so many of the 11,000 aircraft that have been delivered over the last seven years or so have begun to require mandated heavy maintenance. That has given us a positive boost overall in spite of the retirements in the third and fourth quarters, and we expect that to continue in 2017.

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Michael Ciarmoli, SunTrust Robinson Humphrey - Analyst [59]

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Got it. That's perfect. Thanks a lot, guys. Feel better, Amin.

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Amin Khoury, KLX Inc. - Chairman and CEO [60]

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Thank you.

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Operator [61]

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Shannon Burke, Gabelli & Company.

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Shannon Burke, Gabelli & Company - Analyst [62]

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Good morning. Thank you for taking my question.

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Amin Khoury, KLX Inc. - Chairman and CEO [63]

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Good morning, Shannon.

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Shannon Burke, Gabelli & Company - Analyst [64]

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On the aero side, I was just hoping, could you break out the aftermarket for the full year as a percent of sales? And going forward, where do you see that tracking?

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Amin Khoury, KLX Inc. - Chairman and CEO [65]

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It's changed quarter by quarter, so I will break it out for the fourth quarter for you, but that will give you a good indication of what we expect in 2017. In the fourth quarter, the aftermarket was 40% of our revenue. Approximately 40%.

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Shannon Burke, Gabelli & Company - Analyst [66]

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That includes commercial and military?

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Amin Khoury, KLX Inc. - Chairman and CEO [67]

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That's correct.

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Shannon Burke, Gabelli & Company - Analyst [68]

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Okay, great. Thank you so much. Then could you also quantify the organic growth in the aerospace segment versus what Herndon contributed?

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Mike Senft, KLX Inc. - VP and CFO [69]

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Yes, I think Amin -- Shannon, this is Mike Senft. I think Amin noted earlier that we saw that at roughly at a 3.5% to 4% level on an organic aftermarket basis.

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Shannon Burke, Gabelli & Company - Analyst [70]

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Okay. So does that include -- that doesn't include OEM, just the --

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Mike Senft, KLX Inc. - VP and CFO [71]

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Correct.

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Amin Khoury, KLX Inc. - Chairman and CEO [72]

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That's correct.

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Shannon Burke, Gabelli & Company - Analyst [73]

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Could you include --

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Amin Khoury, KLX Inc. - Chairman and CEO [74]

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If you remember, last year, we had negative organic growth in the first half of the year compared to the record first and second quarters that we had in the prior year. Then in the second half of the year, we basically made up for that.

So we had some contribution from our OEM customers, nice contribution on the OE side. Even BizJet was not down compared to the second half of the prior year. So we had little bit of contribution form all parts of our business in the second half of the year, which made up for the negative growth in the first half of the year.

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Shannon Burke, Gabelli & Company - Analyst [75]

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Okay, great. Thank you so much. That's all I had. Feel better. Thank you so much.

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Amin Khoury, KLX Inc. - Chairman and CEO [76]

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Thank you.

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Operator [77]

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Richard Safran, Buckingham Research.

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Richard Safran, Buckingham Research Group - Analyst [78]

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Hi, thanks. Just a quick question here on share gains. I don't think you addressed this, but the $500 million awards, obviously, very impressive. Looking forward, is the low hanging fruit for market share gains with good margins gone? Do you still see opportunity there?

And separately, at ESG, one of the things you've been talking about is the competitive dynamic there at ESG, how you are coming out of a meaningful downturn in the energy business, I believe, in a better competitive position there. And I was just wondering how you're thinking about that right now. Is that a fair characterization, and do you see share gain opportunities there as well?

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Amin Khoury, KLX Inc. - Chairman and CEO [79]

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Yes. Let's take the question in two parts. Take the ASG piece first. We haven't had a year like this in a very long time (Technical Difficulty) program, all of which represent market share gain. I think it is becoming evident to the industry overall that our superior service is truly differentiated from the competition.

We are seeing a lot of opportunity. We expect more orders and share gains during 2017, knocking on wood here as I'm saying that. We do have a lot of confidence that we are going books more gains (Technical Difficulty).

The -- respect to the second part of the question, I'm going to ask Mike to jump in because I'm starting to cough. Mike?

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Mike Senft, KLX Inc. - VP and CFO [80]

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Rich, on the ESG side, I think that we believe that coming out of this downturn, because of the opportunity we had to really piece by piece integrate the seven businesses, we have been very assiduous about capital control, trying to reduce losses, what have you. But we come from a strong base from a capitalization perspective, so we been able to invest in the business from an operational perspective while a lot of competitors were scrambling, frankly, just to keep their lips above the water.

So we do believe we have created a differential organization that is fully integrated, that moves equipment where the demand is best served, that allows each of our geo managers to serve their customers at an absolutely optimal level with best equipment and best people. And that's really important because if you consider the implications for health, safety, and environmental on this industry, executing at this level is crucial to get new business.

In addition, we have, as I think we've called out in the past -- and we're very proud of the amount of R&D that we have currently developed in terms of new tools. We have really focused on bringing in best-in-class engineers that can work directly with our field personnel to develop innovative new tools that separate our service from other competitors.

Again, other people didn't have the capital to do this. They didn't have the initiative to do this because they were scrambling. I think it allowed us a real opportunity to differentially position the ESG business, and I think you'll see that starting to pay off as industry activity ramps up.

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Richard Safran, Buckingham Research Group - Analyst [81]

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Thank you very much.

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Amin Khoury, KLX Inc. - Chairman and CEO [82]

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Thanks, Mike.

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Operator [83]

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At this time, I like to turn it back to Mr. Perlman for closing remarks.

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Michael Perlman, KLX Inc. - Assistant Treasurer [84]

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Thank you for joining us today. We look forward to speaking to you on first-quarter call a few month's time.

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Operator [85]

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Thank you. This concludes today's conference call. Thank you again for attending, and have a good day.