CES Energy Solutions Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 3 speakers on the call.

Operator

Good morning, everyone, and welcome to the CES Energy Solutions Third Quarter 20 24 Results Conference Call and Webcast. As a reminder, all participants are in a listen only mode and the conference call is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Tony Alectino, Chief Financial Officer.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for attending today's call. I'd like to note that in our commentary today, there will be forward looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our Q3 MD and A and press release dated November 6, 2024 and in our AIF dated February 29, 2024. In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies.

Speaker 1

And for a description and definition of these, please see our Q3 MD and A. At this time, I'd like to turn the call over to Ken Zinger, our President and CEO.

Speaker 2

Thank you, Tony. Welcome everyone and thank you for joining us for our Q3 2024 earnings call. On today's call, I will provide a brief summary of our financial results released yesterday, followed by an update on capital allocation and then our divisional updates for Canada and the U. S. I'll then pass the call over to Tony to provide a detailed financial update.

Speaker 2

We'll take some questions and then we'll wrap up the call. I'll start my comments today by highlighting some of the major financial accomplishments we achieved in Q3 of 2024. These highlights include all time record quarterly revenue of $607,000,000 which was 13% higher than Q3 of last year and almost 3% higher than our prior quarterly record. All time quarterly EBITDA of $103,000,000 which was ahead of last year's Q3 by 28%. EBITDA margin of 16.9% versus 15% in Q3 of 2023.

Speaker 2

To date, we have repurchased 9,000,000 shares of the 19,200,000 shares allowed under our current NCIB plan at an average price of $7.68 This represents 47% of the current program in just 3.5 months. Free cash flow of $40,100,000 during the quarter and $152,300,000 year to date at September 30. Total debt to trailing 12 months EBITDA rose slightly to $1,140,000 from $1,120,000 at the end of last quarter, but well below the 1.49 reported at year end 2023 and at the lower end of our targeted range of 1 to 1.5 times. Cash conversion cycle came in at a record 101 days, well below our targeted range of 110 to 115 days. I'm happy to confirm that our previously announced capital allocation plans remain the same as stated on the last call.

Speaker 2

We will continue to pay our quarterly dividend of $0.03 per share or approximately $27,000,000 per year with an intention to adjust the dividend once per year while reporting Q4 results in March of each year. We will continue to support the business with the necessary investments required to provide acceptable growth and returns. This includes a slight increase of our CapEx in $20.24 to $85,000,000 in order to support the revenue growth we believe is coming over the next three quarters. We anticipate CapEx will revert back to the $75,000,000 level in 2025. We will continue to look for strategic tuck in acquisition opportunities into related business lines or geographies where we believe we can add value and grow returns.

Speaker 2

Based on our current outlook, we intend to once again purchase the maximum number of shares possible under the NCIB of $19,200,000 We will continue to target a debt level in the 1 to 1.5 times debt to trailing 12 months EBITDAC range. I will now move on to summarize Q3 performance by division. Today, our rig count in North America stands at 196 rigs out of the 782 listed as running, representing an industry leading North American land market share of over 25%. In Canada, the Canadian Drilling Fluids Group continues to lead the WCSB in market share. Today, we are providing service to 77 of the 212 jobs listed as underway in Canada or a 36.3% market share.

Speaker 2

The active drilling rig count in Canada so far in the second half of twenty twenty four has been trending consistently higher by approximately 10% to 15% year over year. We remain excited about the prospects for 2024 2025 and continue to anticipate that activity will be a little stronger during these years than was experienced in 2023 due to the completion and startup of infrastructure projects and their associated takeaway capacity. PureChem, our Canadian production chemical business had very strong results once again in Q3. All of the business lines within PureChem continued to grow significantly as we continue to take market share, win bids, optimize formulations and fine tune the overall growth. The revenue and earnings from our primary business production treating continue to drive the growth in Canada as we consistently strive to deliver superior products and service combined with competitive market pricing.

Speaker 2

In the United States, AEF, our U. S. Drilling fluids group is providing chemistries and service to 120 of the 568 rigs listed as active in the USA land market today for continued number one market share of U. S. Land rigs at just over 21%.

Speaker 2

The number of rigs drilling in the USA was roughly neutral quarter over quarter as we believe we are now at or near the bottom of active rig counts. In fact, we expect a small uptick in activity beginning in Q1 and better overall activity in 2025 than was experienced in the second half of twenty twenty four. We continue to enjoy a basin leading 94 rigs out of the 304 listed as working in the Permian Basin or 31%. The Permian industry rig count has also been roughly flat quarter over quarter and we have the same optimism about increased activity in Q1 as with the broader USA. As well service intensity continues to demonstrate its presence in our numbers for drilling fluids throughout North America.

Speaker 2

We continue to utilize our scientists, laboratories and facilities to develop new innovative solutions to optimize performance for our customers. The integration of Hydralyte acquisition continues to progress well. Operating as AES Completion Services, we've already started to see significant contributions from the team and look forward to continuing to maximize value from this accretive tuck in acquisition. Finally, the JACAM Catalyst division continued to lead the company with its growth in Q3. We are consistently winning more business, growing revenue and taking market share at JACAM Catalyst.

Speaker 2

We remain confident that we have not only achieved the largest market share in the Permian Basin, but that we are growing that share every day. As well, we have now achieved commercial and operational success with a technically sophisticated product line for the offshore market in the Gulf of Mexico. This achievement opens the door to some higher margin business as well as establishing credibility to participate in more RFP opportunities. Although a small piece of our business today, we believe we are on a path to grow this attractive segment. As always, I want to extend my appreciation to each and every one of our employees for their commitment to the business, culture and success of CES.

Speaker 2

It is rewarding to note that due to the growth we are experiencing and anticipating in all parts of our business, we have increased our total number of employees at CES from 2,236 on January 1, 2024 to 2,488 at the end of Q3. This represents an increase of 252 employees so far this year or approximately 10%. In conclusion, I'd like to thank all of our employees in every division and speaks once again with the quality of the people we employ everywhere in every division here at CES. With that, I'll pass the call over to Tony for

Speaker 1

the financial update. Thanks, Joaquin. CES' financial results set new records for revenue, adjusted EBITDAC and funds flow from operations underpinned by continued high quality of earnings as illustrated by our 16.9 percent EBITDAC margin, which is well above our guided 15.5% to 16.5% range in this operating environment. TS continued to effectively deploy strong surplus cash flow to aggressively return capital to shareholders, while also investing in strategic CapEx and working capital to support our record $2,400,000,000 revenue run rate and position the company for identified growth opportunities. These record results benefited from strong financial contributions from all parts of the business and were bolstered by a favorable product mix, continued high levels of service intensity and the adoption of innovative technologically advanced products that have spawned attractive derivative follow on offerings.

Speaker 1

We continue to serve the ever increasing needs of our customers while realizing attractive economics due to our unique vertically integrated business model and effective supply chain management. In Q3, CES generated revenue and adjusted EBITDAAC of $607,000,000 $103,000,000 respectively, representing a 16.9% margin. Q3 revenue of $607,000,000 represented an annualized run rate of approximately $2,400,000,000 and a 13% increase over prior year of 537,000,000 dollars Revenue generated in the U. S. Achieved an all time record at $403,000,000 and represented 66% of total revenue.

Speaker 1

This revenue figure exceeded the $391,000,000 in Q2 and $361,000,000

Speaker 2

a year ago.

Speaker 1

Revenue generated in Canada also achieved an all time record of $204,000,000 from $162,000,000 in Q2 and $175,000,000 a year ago. The company continued to see high levels of service intensity and production chemical volumes driven by ever more complex drilling programs. Customer emphasis on optimizing production through effective chemical treatments benefited both countries and countered declines in U. S. Industry rig counts, showcasing the resilience of our business model.

Speaker 1

Adjusted EBITDAQ of $103,000,000 set a new all time high and represented a 28% increase from $80,000,000 in Q3 2023 and compared favorably to the $95,000,000 generated in Q2 of 2024. Adjusted EBITDAQ margin in the quarter of 16.9% came in 1.9% ahead of prior year's margins of 15.0% and in line with 17.3% in Q2 of this year. These margins were reflective of continued high service intensity levels, attractive product mix and continued adoption of innovative technologically advanced products, all supported by improving cost structure and a vertically integrated business model. During the quarter, CS generated a record $88,000,000 in funds flow from operations compared to $62,000,000 in Q2 $58,000,000 a year ago. The increase in funds flow from operations was the direct result of higher revenue and significant margin expansion.

Speaker 1

Including investments in working capital, CES generated $73,000,000 in cash flow from operations compared to $83,000,000 in Q2 and $100,000,000 in Q3 2023. The decrease in cash flow from operations was the result of strategic investments in working capital to support record revenue levels and also support upcoming seasonal activity increases in Canada in particular. And that was all partially offset by the record improvements to the cash conversion cycle as Ken had mentioned. Free cash flow was $40,000,000 for the quarter, which compared to $55,000,000 in Q2 and $76,000,000 in Q3 2023. Free cash flow continued to demonstrate CS' high quality of earnings as measured by a free cash flow to adjusted EBITDAAC conversion rate of approximately 39% for the quarter or 44% for the trailing 12 month period.

Speaker 1

CES continued to maintain a prudent approach to capital spending through the quarter with CapEx spend net of disposal proceeds of $24,000,000 We will continue to adjust plans as required to support existing business and attractive growth throughout our divisions. And for full year 2024, we expect cash CapEx to be approximately $85,000,000 weighted more towards specific expansion capital to support incremental accretive business development opportunities and also to support current record revenue levels. Looking forward, we expect this level to decline back to the $70,000,000 to $80,000,000 range and estimate that to come in at about $75,000,000 for 2025. During the quarter, we aggressively pursued our current NCIB program, purchasing 6,000,000 common shares at an average price of $7.67 per share for a total cash outlay of $46,000,000 Subsequent to September 30, the company purchased an incremental 3,300,000 common shares at an average price of $7.76 per share for a total of $25,600,000 Year to date, we purchased almost 14,000,000 shares, representing 6% of outstanding shares as at December 31, 2023, at an average price of $6.44 per share. It should be noted that since inception of the NCIB program on July 17, 2018, this company has purchased 68,000,000 shares, representing 25% of outstanding shares at the time of the inception of the program for an average price of $3.32 per share.

Speaker 1

With the current strength in the business and at current share price levels, we intend to remain active in our NCIB over the coming year and will also implement opportunistic purchases in the context of the market. We ended the quarter with $439,000,000 in total debt, representing an increase of $34,000,000 from the prior quarter. Total debt is primarily composed of the $200,000,000 senior notes, a net draw on the senior facility of $137,000,000 $94,000,000 in lease obligations. Total debt to adjusted EBITDAAC of 1.14 times at the end of the quarter compared to 1.12 times at June 30 and 1.49 times at the end of 2023, demonstrating our continued commitment to maintaining very prudent leverage levels. We are very comfortable with our current debt level, maturity schedule and leverage in the 1 to 1.5 times range, thereby enabling strong return of capital to shareholders and prioritizing a sustainable dividend and share buybacks.

Speaker 1

I would also note that our working capital surplus of $633,000,000 exceeded total debt of $439,000,000 by $194,000,000 and demonstrates continued improvement compared to the prior year. Continued focus on working capital optimization has led to a year over year improvement in cash conversion cycle, taking us to a notable 101 days at the end of the quarter compared to 110 days at September 30, 2023, 1 year ago and 111 days in Q2. This also translates to a reduction in operating working capital as a percentage of annualized quarterly revenue to 26% from 30% a year ago and compares to 28% in June June. Each percentage improvement at these revenue levels represents approximately $24,000,000 in incremental cash on our balance sheet. Internally, we have continued to focus on return on average capital employed metrics at the divisional levels.

Speaker 1

This approach has led to a cultural adoption of key ROACE maximizing factors such as profitable growth, strong margins, working capital optimization and prudent capital expenditures. I'm proud to report that the resulting consolidated trailing 12 month ROACE is now sitting at a record level of 25.6 percent, up from 20.6% a year ago. As Ken mentioned, CS closed the acquisition of Hydelay on July 1. The aggregate purchase price was $15,000,000 consisting of $10,200,000 in cash consideration and $4,800,000 in deferred consideration. The company's Q3 results demonstrate very strong revenue levels and surplus free cash flow generation trends in the current environment and is indicative of the cash flow generating characteristics of CES.

Speaker 1

This is further illustrated by our current net draw of $175,000,000 which has increased by $38,000,000 from the end of the quarter primarily as a result of inventory purchases to support seasonal activity pickup in Canada, aggressive NCIB spending and our quarterly dividend payment. At this time, I'd like to turn the call back to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. This concludes our question and answer session. I would like to turn the conference back over to Mr. Ken Zinger for any closing remarks.

Operator

Please go ahead, sir.

Speaker 2

Well, thank you to everyone who took the time to join us here today. We continue to be very optimistic about the future here at CES Energy Solutions. We look forward to speaking with you all again during our Q4 update in March. Thank you. Thank you, operator.

Operator

This brings a close to today's conference call. You may now disconnect your lines. Thank you for your participation and have a pleasant day.

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