Q4 2021 CES Energy Solutions Corp Earnings Call
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I would now like to turn a corpse over to Tony <unk> Chief Financial Officer. Please go ahead.
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.
And our fourth quarter MD&A and press release dated March 10, 2022, and in our annual information form dated March 10, 2022. In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies and for a description.
And definition of these please see our fourth quarter MD&A at.
At this time I would like to turn it over to Ken Zinger, our president and CEO . Thank.
Thank you Tony.
On today's call I'll provide a brief summary on our financial results released yesterday, followed by our divisional updates for Canada, and the U S. Along with a brief update on our international businesses. Finally, I will touch on a small but strategic acquisition that we recently closed on I will then pass the call over to Tony to provide a detailed financial update and an update.
On capital allocation, we will take questions and then we'll wrap up the call.
Before I summarize the fourth quarter in 2021 financial results I want to start by noting how proud I am of our entire team at CES. During this dynamic period in our industry, everyone has shown great resilience and commitment through these challenging times.
During my 37 years in this industry I've never seen a market move as quickly to the upside nor as significantly as in the past three months having.
Having said that I want to emphasize that in the 16 year history of CES, we have never been as well positioned in every way to capitalize on its potential upcoming super cycle in our industry.
The rapid pace of growth has led to constant reviews of sourcing logistics and sales prices I want to thank everyone for all the extra hours and energy that had been required to do our best to adapt react and shift as quickly as possible once again, demonstrating our nimble and entrepreneurial culture.
Despite the global supply chain challenges that have affected every person in business, we have been able to continue to supply our customers with the products and services they require without fail, albeit at rising prices due to inflationary pressure that is present in every part of our business and personal lives today.
The fourth quarter was a tremendous success for CES energy solutions, we had a record quarterly revenue of $368 million, along with near record EBITDAX of $47 7 million.
We continued to achieve strong market shares in all of our major divisions in targeted geographic areas.
Throughout Q4, CES was able to manage sourcing of products as well as the associated inflation pressure occurring due to improving commodity prices and activity levels. At the same time, we were able to largely manage margins in real time through price increases and strategic planning overall, the fourth quarter was a great way to close out what ended up being a great year in 2021.
<unk>.
This brings me to the 2021 year end results and summary in a year that had many fits and starts 2021 ended up being a rebound year for CES after a challenging year experienced by the entire world in 2020.
2021 was a year spent navigating supply chain headwinds through early detection and strategic investments. These investments allowed CES to service, our existing customers without pause and to utilize our inventory and supply chain to win some new clients as well throughout the year, we continued to invest in people technology and infrastructure.
Through March with modest targeted capex, while once again, demonstrating the capex light asset light characteristics of the business model throughout the cycle.
All of this led to revenue of $1 2 billion and EBITDAX of $156 million.
Both of these metrics approached a record levels achieved back in 2018 in 2019.
Notably these results along with our future outlook afforded us the confidence to reinstate our dividend back in August of last year and also to repurchase three 9% of our outstanding shares.
Overall I am beyond excited about the opportunities in front of us due to the very constructive oil and gas dynamics that are shaping up for 2022 and beyond having said that there is still significant near term headwinds facing us. Although we have been able to push through price increases during Q4 and into Q1 the rate and scale in which these increases are impacting us has proven extremely.
<unk> to predict and manage.
Like everything these raw material cost increases have been erratic and in some cases extreme.
We are working with our teams and our customers to pass these costs along.
But like some of our competitors have noted there is a lag between the green the price increases and returning to normal margins and a lot of cases, we are getting fresh increases from suppliers before we were even able to get the prior increases approved by the customer the Russian invasion in the Ukraine combined with almost a decade of energy policy mismanagement by Western politicians has created.
The perfect storm, where everything is moving in an unpredictable manner as some of our larger competitors have previously reported we expect the margin pressure will likely continue to exist well into the first half of 2022.
Although this margin compression will inevitably lead to Q1, EBITDA being lower than Q4 s. We believe this strategy will bear fruit as we achieved the remaining increases in margins normalize.
We continue to work diligently with our suppliers and our customers to stay on top of pricing and worked together during these unprecedented times.
Okay.
I will now move on to summarize Q4 performance in Canada Canadian drilling fluids made another strong contribution for CES in Q4 as mentioned in Q3, we were able to hire and maintain sufficient staff through our peak Q1 drilling season today, we have a 36, 4% market share in Canada, providing service to 74 of the 203 job.
<unk> underway today. This is down from the Q1 peak count of 87 rigs out of 232 working during the second half of February rigs are steadily falling off now as we fade into break up here in Canada.
Sure Kam, our Canadian production chemical business had a solid quarter in Q4, both financially and operationally each month in the quarter was once again at or very near an all time record revenue level margins. During Q4 were consistent as price increases were passed on to offset cost side pressure. We continue to see growing contributions from our frac chemical and stimulation groups.
The other three Canadian business lines, including C. Alco clear an equal all continue to contribute to the financial and strategic success of the two primary <unk> Canadian business lines.
In the United States Aes, our U S drilling fluids group once again delivered very strong financial results as well as solid market share as I always note, we're not chasing market share on either side of the border and continue to have a focus on opportunities with sustainable margins and revenues as in Canada, our customers in the U S generally worked with.
In Q4 to ensure that we kept up with the current cost of goods increases. So that we can manage margins in real time today, we have a market share of approximately 17% in the U S. With 109 jobs underway. This includes a basin, leading 26% market share in the Permian.
I'll note that while Canada is slowing down due to breakup aes is continuing to gain momentum as the U S drilling market continues to steadily climb upwards due to the high commodity price environment.
Last up is Jacob catalyst, our U S production chemical business.
This division had another great quarter as it continued to profitably gain market share in a very competitive environment. The Permian region continues to backstop. The business. However, we have additional strong contributions from the rest of Texas as well as the Rockies.
Although we face significant supply chain challenges in this division as well our manufacturing capabilities make us a reliable supplier to the basins we service.
Overall J Cam catalyst was also able to control costs and pass through increases to protect the margins during Q4.
I will now moving on to a quick update on the international markets. We have completed the Omand drilling project. We are participating in and are currently pursuing another project there with our local provider.
Partner, sorry, not provider at the same time, we are also pursuing several other opportunities in the middle East I will comment further on these showed any come to fruition. We remain focused on growth prospects in this region and are spending significant time and energy evaluating some potential opportunities in Nigeria, our partner company Pearl has had some market penetration and.
There are again looking to order additional material likely in Q2 as with El Mann business. This is a growth opportunity in the early stages of a long runway to making a meaningful contribution.
Finally, I have an update on recent on our recent business development. During Q1, we complete completed a relatively small but strategic acquisition of the assets a pro forward solutions profile as an offshore Gulf of Mexico production Chemical company based in Southern Louisiana. The company was started and managed by veterans in the offshore Gulf of them.
Mexico market.
Josh Desk Hotel, John Davidson, and Andre Clemens and their team have successfully penetrated into the elite deepwater market through expertise differentiated service unique chemistries and most importantly hard work, we will leverage profile solutions reputation expertise and market share.
With our extensive manufacturing capabilities technical resources and infrastructure to accelerate our growth and our significant but untapped market for CES.
The acquisition closed on February 1st and we are confident it will be accretive to EBITDA and cash flow. The accomplishments of proposed solutions are notable due to the uniqueness in the market of a smaller drilling company actually penetrating the technically challenging offshore market, which is usually reserved for the majors I would like to welcome the pro flow solutions team to the C. S family.
We look forward to a bright future together.
In conclusion I want to personally thank each and every one of our <unk> thousand 840 employees for their commitment to the business culture and success of CES.
As well I want to of course, thank all of our customers for their trust and commitment to CES in good times and bad with that I'll turn the call over to Tony for the financial update thank.
Thank you Ken.
2021 represented a pivotal year for CES as we move beyond the challenges of 2020 and used our established infrastructure strong industry presence dedicated workforce and unique culture to return to strong financial results approaching record historical levels revenue of $1 2 billion.
Ended at 35% increase over $888 million in 2020, while adjusted EBITDA of 156 million represented a 53% increase over $102 million in 2020. These significant.
<unk> improvements were underscored by impressive gains and funds flow from operations or <unk> of $117 million in 2021 up from $72 million in 2020 and market share gains throughout the company with U S drilling fluids, averaging 19% in 2021 versus 16%.
In 2020, and 13% in 2019, our cash Capex of $29 4 million in 2021 represented a level within our original $30 million guidance and consistent with our unique capex light asset light consumable chemicals.
This model throughout the cycle.
During 2021, CES repurchased approximately 10 million common shares for $16 $2 million or $1 60 per share under our <unk> program and reinstated a dividend of $6.04 per share.
Our fourth quarter represented record revenue exceeding the company's previous high watermark in Q1, 2020, and another consecutive quarter of solid adjusted EBIT DAC as surplus free cash flow generation.
<unk> to be strong amid an increasingly constructive supply and demand backdrop for the global North American and North American energy industry.
In Q4, CES generated revenue of $368 million and adjusted EBITDAX of approximately $48 million, representing a 13% margin. The continued positive momentum demonstrated in the quarter has been supported by improvements in rig activity higher production volumes selective pricing increases.
And strategic procurement initiatives that are expected to continue into 2022.
This Q4 revenue of $368 million represents an increase of 73% from $213 million in Q4, 2020, and a sequential increase of 17% from $314 million in Q3 2021.
Revenue generated in the U S was $234 million or 64% of total revenue for the company and up from $197 million in Q3, I would note that aes continues to effectively operate on the right jobs and with the right customers as they approach pre COVID-19 levels and realized.
<unk> operational and financial torque and that business. Similarly, Jacob catalysts, our U S production chemicals business, which helped carry the company through the lows of 2020 has maintained its trajectory and has now exceeded pre pandemic levels through increased volumes and improved pricing.
Revenue generated in Canada was $134 million in the quarter versus $76 million, a year ago and $117 million in Q3 Canadian revenues benefited from increased drilling and completions activity, coupled with higher production volumes and frac related chemical sales.
As revenue levels and production chemicals also surpassed pre COVID-19 levels and drilling fluids continued its steady upward March.
Okay.
CES is adjusted EBITDAX of approximately $48 million in Q4 represented a 94% increase from the $25 million generated in Q4, 2020, and a sequential increase of $6 million or 14% from the $42 million generated in Q3.
Adjusted EBITDA margin in the quarter was 13% representing a nice improvement from the 11, 6%.
Recorded in Q4 2020 and in line with the 13, 4% achieved in Q3 2021.
As the company benefited from stronger competitive positioning initial pricing increases and increased drilling and production levels. This margin was accomplished despite increasing raw material costs that have accelerated over the recent months in particular as noted by Ken already.
Although we have established updated pricing through Q4 and continue to do so in Q1. There is a lag between the time price increases are established and the time. It takes for those price increases to take effect in order to offset increased underlying raw material cost increases as.
As Ken explained this lag has become more pronounced over the past few months for us as well as for many of our North American peers. As a result see US continues to expect a strong 2022. However, we expect it to be backend loaded into the second half of the year.
And based on where we stand today, we expect price increases to gain traction as we move into Q2 and beyond however in the meantime, due to this extraordinary current environment, we expect and estimate that EBITDAX for Q1 could be approximately 20% lower than <unk>.
In Q4 2021.
At CES, our main financial priority continues to be surplus free cash flow generation.
Im proud to report that during Q4, our <unk> was $34 million in line with Q3, and representing a significant increase over the $17 million generated in Q4 of 2020.
<unk> has continued to maintain a prudent approach to capital spending through the quarter with net capex spend for the quarter of $12 million, representing 3% of revenue. We continue to adjust plans as required to support existing business and growth throughout our divisions and for 2022 weeks.
Specced cash capex to be approximately $40 million of which $20 million is estimated as maintenance and $20 million is earmarked for growth.
We exited the quarter with a net draw on our senior facility of $110 million versus $51 million on September 30th and net cash of $18 million on December 31, 2020.
The increases were primarily driven by working capital builds associated with strong increases in revenue combined with strategic surplus raw material purchases driven by the unique global supply chain environments are working capital surplus of $460 million exceeded total debt net of cash.
$439 million at December 31, 2021 since year end CES has continued to realize strong demand and also invest in surplus inventory and the current natural owners senior facility is approximately $133 million.
Our balance sheet benefits from the attractive structuring and maturity schedules of our credit facility and senior notes.
We ended Q4 with $439 million and total debt net of cash comprised primarily of $288 million in senior notes, which mature in 2024 and a net draw on our senior facility of $110 million.
We use our senior facility as a shock absorber to support the growth phases of the company to finance working capital increases associated with strong revenue growth. Conversely, when revenue growth tapers surplus free cash flow accelerates and the draw levels decline.
During more acute revenue declined phases the facility moves from drawn to net cash very quickly as it did during 2020, when we went from being drawn $93 million at Q1, 2020 to a cash position of $18 million by the end of that year.
Yeah.
In anticipation of increasing activity levels in February we exercised 30 million of available accordion capacity for a total new facility size of approximately $265 million in CAD equivalent.
Providing ample liquidity versus current and anticipated draw levels. The increase supports the current growth phase of the company and provides flexibility as we look to refinance our bond over the coming couple of years.
We are increasingly optimistic about the industry outlook and <unk> ability to continued strong financial performance. This combination is key to informing our capital allocation decisions, which we revisit on a quarterly basis in.
In terms of capital allocation considerations, we continue to prioritize capital allocation toward supporting existing and new business through investments in working capital and modest capex projects that deliver IRR is above our internal hurdle rates, we remain very comfortable with our current dividend.
Which represents a yield of approximately two 4% at our current share price and is supported by a very prudent payout ratio in the high teens.
We continue to buy back at least enough shares to offset compensation related dilution as we become more comfortable with our outlook and free cash flow generation, we will revisit becoming more active in our NCI program depending.
Depending on valuation levels implied by our stock price and we will be prepared to be opportunistic if the if the opportunity presents itself.
We continue to use remaining surplus free cash flow to reduce leverage to further strengthen our balance sheet opportunistically purchase our bonds and prepared to refinance our 2024 bond at an appropriate size in the coming years.
At this time I would like to turn the call back to Ken for comments on our outlook.
Thank you Tony as you noted Q1 to date has been an extremely challenging time in our industry.
While we are working through this recent extreme volatility on the supply chain and pricing front at least activity is robust. Although it has not been an easy period to navigate we will work through it and frankly speaking this is a much better problem to have than the ones. We are facing in March of 2020. Our team is laser focused on the issue at hand, and we anticipate a relatively rapid recovery.
More normal levels in the coming months I'm truly excited about the remainder of 'twenty to 2022 and into the future.
We are facing a multitude of opportunities throughout our business lines and geographical markets to improve group free cash flow for our shareholders.
We are very bullish on the forecasted activity in our industry for the short and mid term.
The last three months has proven nothing else, it's that the oil and gas industry will continue to play a huge part in the future of energy security throughout the world for decades to come I am very confident that our company is uniquely positioned to support this reality and prosper accordingly for the benefit of all stakeholders and I look forward to working with our customers and dedicated employees.
To capitalize on this very attractive opportunity. Thank you for your time and I'll now pass the call over to the operator for questions.
We will now begin the question and answer session to join the question queue. You May Press Star, then 100 telephone keypad Julia Harotonian lodging your request.
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The first question comes from Aaron Macneil with TD Securities. Please go ahead.
Hey, good morning, all thanks for taking my questions, maybe I'll just start with one.
Morning.
The obvious one in terms of order of magnitude on the margin pressures you are seeing in Q1, I guess, what I'm wondering is can you give us some examples of what youre seeing in terms of specific inputs and.
I guess, you've been building inventories previously so I'm just wondering if this maybe took you by surprise or if this is something you saw.
Well I think it is.
It's a.
Complicated answer Aaron it depends.
Which product lines, we're talking about and which part of our business we're talking about.
We've been building inventory, but we do burn through inventory relatively quickly so.
We are seeing effects of price increases after we build inventory.
But to give you some examples of the extreme nature of the of the increases we've seen.
Some of our major our highest use product in drilling fluids is a product called <unk>, which is a commodity.
It's been constant at a set price for the last.
10 years, its kind of cost everybody. The same thing and the industry is comfortable with it like all of these products that product has seen a 50% increase in the last six months call. It.
We've seen we have other products that are high use.
Polymers that are used in the food industry or in other industries that have moved as much as 200%. So I mean, the increases we're talking about in the scope of what we're doing when we're talking about margin I mean, we've been passing through significant increases to customers throughout Q4 and throughout Q1, it's just the magnitude of the increases can.
And bind with.
The timing on getting the increases put through is we are just having a hard time keeping up with it in some cases, we're passing through increases are working and negotiating with customers to move it through increases and while doing that before we even get the first increase in place. We have already received a second increase and we're receiving these.
Like everybody is in.
In the World right now that they come through and they are just announced we get no time to react to them and we don't carry we have a large volume of products and product lines that we use everyday we don't have ample volume of every single one of them or else, we'd have $1 billion of inventory.
So we get hit by a lot of these right away in real time, and then try and pass through as quickly as we can and we have a dedicated strategy for this for years.
We've been a company with the culture of our company and the people running our company and the executives in the company are mainly from private businesses.
We understand that the majors move in different ways than the small guys do and and the majors have always been quick to send out pricing increases and demand increases but.
We've been the beneficiary of that for the last 25 years by working with the customers instead and helping them get through the.
The shock of the increase.
I would say in most cases, we are able to pass everything on like the margin compression. We've seen it does not anywhere near represent the magnitude of the increases we've had to pass on and to give you some rough numbers, 60% to 70% of the customers we've been able to pass through relatively real time.
Our last 20% to 30% of the customers Thats been we have contracts in place that we have to sit down and talk about.
No one really saw.
I would say what's happened in the last couple of months coming and so getting getting around these contracts that we put in place for term through in Q1, especially.
It has been a bit of a challenge with some of the operators. So we're doing what we can we're trying to work with them. We're not demanding anything we work for them. We appreciate the business they give us and we're trying to find a way to get to where we need to get to and we're getting there. We've got more increases in place right now and frankly.
With the oil price kind of settling out here.
It hasnt settled out, but with the volatility going up more to the downside right now.
We're starting to see some stabilization so hopefully that will pass through now having said that I saw stabilization in Q3. So Q4, when we reported last time, so who knows like.
Things just move so quickly and so dramatically, it's really hard to keep up with it.
And Darrin I think it's important to.
To elaborate on.
On the other part of your question was related to inventory that we've been building and whether or not this took us by surprise. So so we were able to very effectively.
Use our balance sheet and buying more inventory that we needed at the time during the last year, frankly, and we benefited from being able to have that supply on and to meet existing.
Customer requirements and gain new customers at a lower inventory level than what we're starting to be the prevailing market rates and we continued to do very well right through Q3 Q4, and then what happened as Ken mentioned was over the last few months as pricing really accelerated again.
A lot of those products.
What ended up happening is we had to replenish some of those inventory categories at the new prevailing market levels and because of standard costing you end up having to adjust up your cost of goods that end up eroding your margins.
And that continues until the new price increases that are underway start to take hold with new work.
For us to reverse that trend in margin compression.
Okay perfect.
It's a lot more detail thanks, expecting so I appreciate all the.
All candor aided coding one more follow up for you on inventories.
I can appreciate the strategic nature of inventory builds.
All time highs for for.
For inventory and a big use of your cash, but maybe you can just give us a sense of where we go from here and there.
Thank you optimistic rapid growth scenario under a more moderate growth scenario or any other scenario that you think is relevant.
So number one we expect to grow in a commensurate level with the industry activity.
Growth assumptions that you would've seen year over year again, there is a big question Mark about what happens in North America and in U S and in the Permian in particular to potentially increase those activity levels further, but just parking that we.
We see growth today, the way, we did a couple of months ago.
We expect the growth levels that you've seen in inventory builds over the last two quarters to temper.
Understood and maybe one I'll sneak one more in.
A bit of a tangent, but we've seen several large cap and supermajors announce Permian growth plan specific Permian growth plans, and so I know youre not going to get into names, specifically, but I seem to recall that you guys were making good inroads with that sort of customer profile in the past.
I guess I'm just wondering how we should think about how those growth plans might impact <unk>.
Maybe more broadly in terms of your how your public versus private customer mix is shifting over the last little while.
Yeah I'll start on that.
Just high level I read what you read from an industry perspective, and let's talk about the U S. Because most of that over 50% of that is in the Permian.
You look at different estimates even before the <unk>.
The current geopolitical situation.
Even looking at those estimates youre looking at 25% plus increases in activity and as we said as Ken said during the last call. We expect to grow in lockstep, if not better and in terms of private versus public.
The teams did a great job Vernon.
At J Cam catalyst and Richard and the team at Aes to grow with the guys, especially in drilling that that were more active than the others, which were the privates and the fact that we've been able to mainstream maintained strong market share indicates that we've been able to grow with those guys. However over.
The.
The recent months and even few weeks you've seen publicly what we've started when we started to hear privately which is even those big public guys that we have relationships with are starting to change their tone and looking to increase activity levels.
Higher than they were talking about literally two or three months ago, So where where it was private company focused three months ago, it's becoming a combination of private and public including some of the guys that you are probably thinking about.
Great. Thanks for all the answers I'll turn it over.
The next question comes from KOL Pereira from Stifel. Please go ahead.
Good morning, everyone.
So just wanted to build off of Aaron's question It sounds like.
Materials cost inflation is obviously the biggest culprit, but I mean can you talk about maybe how supply chain or delivery issues labor inflation fuel inflation or having them and a material impact on margins as well.
Yes, I mean, obviously like the rest of the world those things are going up for us as well.
I would say the inventory build that we participated in last year towards the end of last year.
<unk> was more directed at securing supply to make sure. We didn't run short of things and we accomplished that with the inventory and we continue to accomplish that because it's really a whack a mole scenario as we lose the ability to deliver product from overseas that we would traditionally have bought there and have to shift to more expensive.
North American suppliers, who are at capacity, but letting us in at a higher price. So.
Thing is all across the board, we're getting hit I mean, I think I can speak to <unk>.
Container freight I mean that there is another number that's astronomical 500% increase since January of 2021.
478% is what we calculate we're spending more now on on a container.
Coming from China than we were so it's it's everything fuel and the trucks. It's shortage of trucks I mean, we're talking about this yesterday with the guys. We're having a hard time getting half ton three quarter ton one ton trucks, we've got accelerated.
We've got hyper spending on maintenance for the vehicles, we have in the fleet that would normally in a normal market had been flipped over already and we'd be out of them, but we can't find new ones.
Labor costs.
You know I can't tell you how many raises we've approved lately trying to keep people working for us as everyone gets opportunities to work elsewhere.
Or proactively to try and keep people in their chairs.
Yes fuel costs.
The container cost speaks to the biggest story, which is that when I look at our price list in any part of the business. It's not the same as it was six months ago. Our cost of goods has moved up on every single item that we touch and we've been passing those on at the fastest rate, we can but I think as we get into Q1 reporting.
You'll hear more and more I mean, thats a problem across across the world and across the industry. So.
Yes, the pressures everywhere.
Okay got it that's great color. Thanks.
Analogic, there's obviously a lot of volatility in unknowns in the market right now, but as we think about the lag between pricing and cost inflation is it fair to say that if we're thinking about margins getting back to Q4 levels by Q3 2022, and then maybe some expansion thereafter that is is that sort of a reasonable time.
Line.
Yes, I think that's what we're that's what that.
That's how we see it yeah, that's exactly how we're targeting it may be even.
I don't want to over promise, but may be even quicker double to see just depends if the increases keeps happening I mean, we every time, we think we have it under control and when we get our next increase put through we'll be ahead of the game something else happens and we get behind again so.
Right now looking at what we're looking at that's that's how we see it as well and just to step back on that margins are important obviously, but.
But the even more important thing to not lose sight of is as activity levels.
Levels are going up and revenue levels are going up and although margins are going to be compressed during at least Q1 and get better as Ken mentioned towards the end of the air the level of surplus.
<unk> surplus free cash flow in <unk> that that we're going to be generating which is what we focus on primarily is going to continue to grow through the year.
Okay perfect. Thanks.
And so just going back to your comments on barite is it fair to say then that the.
Cost inflation as maybe worse in drilling fluids and production chemicals or is it fairly even between both and is there any real material differences between Canada and the United States.
Yeah.
I mean, there is some material difference between Canada, and the United States just due to.
Logistics and supply.
Being closer to the port in Houston, and take some of that debt.
That cost off.
And the fact that we have barite grinding in corpus.
It gives us a big advantage there as well so definitely a difference there.
But no there is I mean, it's across the business I noted that I guess I can give you I've got some cost impacts here I'll give you some of the production Chem side, the big one being EMEA I mean, thats a high high use product that we have probably our highest and that if you can get it which has been a huge challenge that we've navigated to manage to keep up to it.
I mean, we're seeing a 125% increase on that product.
I can go down the list here on both sides of the business and I don't see numbers that are.
Less than kind of twenties on percentage increases everything is up.
I mean, I've been I'm getting good at saying this because I've been having 1 million meetings with procurement departments at our customers.
And they.
They don't want to hear the increases.
Theyre everywhere, it's there's just no and there it's been whack a mole, where we're just trying to keep up with them keep coming and they come out of left field is a lot of time.
Food industry is a problem I mean capacity for <unk> and specialty polymers.
Guar is up.
Fr is up PHP as her up.
All the Chemistries in our raw materials are up it's just.
It's we're just trying to keep up with it.
And I would say that we do have I would.
Go so far as to say that we do a better job of procurement or as good a job of procurement as anybody in the industry.
And that's what we're seeing for the smaller customers or smaller suppliers I'm sure Theyre, having nightmares and wholesalers are probably having nightmares because I don't know how theyre, putting them through it fast enough either.
And to note. It note to that everyone is doing it like it's across the industry, we're not the only one.
Yes, yes for sure I appreciate the color there.
For me I'll turn it back thank you.
The next question comes from John Gibson with BMO capital markets. Please go ahead.
Good morning, all.
I think we've touched on the margins and cost increases and a few here but.
Maybe I'll shift gears, a little bit just looking at the acquisition you did in the quarter.
I'm wondering how much of your existing business and infrastructure could overlap with with the offshore space.
Yes.
While the infrastructure, we were set up in Louisiana already with a small piece theyre doing some shelf work, but this acquisition gets us access to deepwater I mean, theyre on 'twenty, one platforms something that.
Frankly, we aspire to do and we've been working towards but getting a getting in with our customers to get an opportunity on one of those things is is a very very very rare occurrence and thats. What we like most about this acquisition and these are guys with credibility. They have a real company they've been doing good work for a big customer a couple of big customers offshore.
So it actually complements what we have there and we complement them as well because they were using a wholesaler to buy their material. We now can produce we are working towards crossing out all the products that they are buying from the wholesaler are almost there.
So we'll be able to supply them with their own chemistry, and as they look to evolve new chemistries and new solutions. They have now have a big infrastructure behind them with labs, and Phd chemists and all the things that the <unk>.
Yes named brings with it and the.
Other thing it does it gives us credibility some of the majors when they do their rfps in the United States. They want to be able to get service everywhere in North America and that includes Gulf of Mexico. So when you can't check the box that you can service rigs or you have some existing business in the Gulf of Mexico, you can bid on those projects or if you can you don't get looked at with real <unk>.
Ability so that was another big reason, we like this because now we have credibility and we now meet.
Every standard required to bid on every piece of work that comes up in North America.
And on top of that we think we can grow. This we think the companies that they work for we will continue to grow that will continue to grow our.
Resume and we will be able to apply that to other customers.
Okay, great. Thanks.
Looking at your international platforms, I know modern Nigeria, how are the first few quarters gone in terms of expectations versus.
What you originally expected and do you expect maybe a material contribution from these businesses in 2022 or 2023.
Yes, I mean, it really depends on what.
We've got some exciting stuff going on over there I would say first of all I'll start with expectation.
We had high hopes for the Oman stopped continuing but as far as how it has gone to date. It went accordingly, it's just the project.
Is over and we are in between staff now and looking for another project to get on I think we will get one.
But we do have some big opportunities in the middle East that we're chasing and if one of those connects I mean, it will be immediately.
Meaningful it's just we don't have insight yet as to whether or not we're going to win those we feel comfortable or confident but nowhere near ready to say, we're about to have a big home run in the middle East. We will let you guys know as soon as we hear something that is positive and as far as Nigeria. It's proceeding as planned I mean, there is a small company were help getting going.
<unk>.
Byrne and Dave Horton participated in a webcast with them and their customers to show all the expertise that CES Springs two.
<unk> Africa with the supply that we're giving the service company there.
And it went really well so they're placing more orders are starting to get some to break into some submarkets, but.
That's a very early stages of operation. So neither one is meaningful in any way, but they are the doorways to get somewhere so.
We're focused on it.
Looking at every opportunity that comes along and we think we've got a couple that look really good.
Great. Thanks, and then last one for me can you maybe talk about competitor bidding across North America are you seeing.
Any predatory bids or is everyone kind of on board fees.
Significant cost increases we are seeing.
Well as I mentioned I've spent a lot of time in the last couple of months talking to procurement guys and managers and if you believe everything they say every other company is not increasing prices and if we don't.
Not put the increase through on our side. Then then we won't keep the work, but we do have insight into those companies and we're seeing it everywhere I think guys are waiting to be predatory if we try and hammer something through with the customer.
Sure somebody would step in and say I'll do it for less or I'll keep my prices stable, but their ability to do that we will be limited to all it means is they will get the work and then in the month will have to raise their prices too. So the moves have been so dramatic it's just it's impossible to absorb this stuff and no one is.
Okay great.
All for me and I'll turn it back thanks.
Yeah.
The next question comes from Andrew Bradford with Raymond James. Please go ahead.
Thanks, Good morning, guys.
Good morning.
Thanks.
Yeah.
I'm wondering if that's so with all of it like I do want to come back in March.
Sorry to do this.
Done a good job explaining.
The macro setting that you're in.
But some of the numbers that are getting throw around it it's hard to get context for this so when you talk about barite up 50% in some polymers.
Play a factor.
Two or three times.
So.
Bring it up to your home you bring it up to sort of the to.
The line items that we see in the financial statements so like.
It would be possible to describe this like how much of your unit costs moved higher.
Assuming a steady mix or if you even if you just wanted maybe talk about in drilling fluids for instance.
Same when all that you might be.
Working on in a given play.
On a per day basis like how much of a percent increase have you seen in your cost that you are trying to pass through to.
To your customers.
I think over the long haul.
So when we go to the customer with the increase letters. We also bring the backup along with US which shows the net impact of the particular increases to the overall well cost.
That we charge.
And generally speaking.
Speaking, 15% to 25% is the number that gets added.
Okay. Okay.
That gives a good context I appreciate that.
And secondly early early in the.
In the preamble.
Tony you were describing the lag how it.
Like between these.
These input costs and realizing on the pricing I think you did a good job explaining us because.
Youre getting prices that are moving while youre in discussions about other input cost changes.
But.
I'm just wondering is there a lag itself changed because it.
Is it.
The amount of time it takes to get the price increases through different like shorter or longer or is it just that you got this rapid fire.
Situation.
Various prices moving on U.
As you are trying to get price increases through.
I think it's more of the latter like I think it has been the rapid fire nature of it and the extreme nature of it that's been the problem the lag it varies by customers and by business line.
We got some increases in a lot of cases, we've given three price increases to customers already.
Everytime thinking we have corrected the problem and then every time finding out we had not shortly thereafter, because something else went up so.
Now I'll talk to the drilling fluids side I mean, the lag can be significant rate. It can be six weeks two months to get something pushed through.
When you bid on a pad for instance, and they go in and drill all the surface holes on a on a four well pad and then they drill all the rest of the wells in order intermediates and then main hold some time or the entire thing anyways when that pad starts <unk> submitted a bid price.
For sure. The <unk> is built off that in the operator always asks.
Yeah.
I went to I won't say always but almost always ask for you to hold the prices for the pad while that pad can take you months to drill depending on the wells, sometimes six weeks and thats not including the week or two it takes to get to them explain the increases get them to work it through their procurement departments and accept the increases and then you're set up for that increase.
And six weeks, but in the Meanwhile, we've got all this inventory going out the door, where we know what replacement cost is much higher than that so that's what I when I talk about strategy that's.
That's our strategy is to support our customers in that fashion to help them.
And I would say 90% of them are are appreciative of that and that that will pay dividends in bidding season in the spring time in Canada and in the United States, It's paying dividends right now.
And then there's that outlier, 10% that you just can't make copy. So you just got to keep hammering on it and finding a solution that works for both of you.
Thanks for that.
And then my last question just relates to.
Capital spending.
<unk>.
I noticed that you had.
Capital growth capital spending our expansion capital is quite light still compared to.
Or where it was prior to tweet.
2015.
But.
You know there is still sort of a lump that came through in the fourth quarter.
I think that that relates to two the mesquite facility. So is that correct.
That is correct yes.
Okay.
And.
Is that.
Alright.
I was just going to say that relates to the EMEA product that I talked about.
That's a high use that's used in scavenger.
And that upgrade and miscue was because last year. When we saw the shortages coming we just didn't have enough inventory on the ground to get our safety stock level beyond about five days and we knew we were headed for trouble. So we we put a bunch of money into the <unk> facility to get our storage level capability and blending capability.
Up to meet the what we saw as an upcoming demand.
And as we talked about last quarter, there was a real problem with supply in one of our major our biggest competitor in Canada was unable to supply and we had to pick up some of their work and do some stick handling to try and support them as well as existing customers. So.
That's what that piece of Capex was and that was well spent money.
Okay. Okay.
Any color you can provide on the $20 million plan for <unk>.
'twenty two.
Yes, I'll start on that so we were very deliberate in our language so that $20 million of growth Capex $20 million is earmarked for growth Capex.
And that's a little bit of a combination of catching up on some are required.
Improvements in increases to support the growth that we're seeing in general for the year, but a nice little chunk of it in the <unk>.
Six to $7 $6 million to $8 million range Canadian.
Is the potential expansion of our barite grinding capabilities.
And we're looking to do that in Texas, and being very strategic to help aes capitalize off of the growth that they've been seeing and that we expect them to see in 2022 and every time, we're able to do that and run more product through those facilities were able to do so more and more efficiently by.
Putting more volume through which we're expecting to see and which we're starting to see right now and as we do that we're able to spread.
The unit costs.
Over a.
Have a bigger volume over fixed costs, thereby reducing our unit costs. Then again is one of our one of our levers to improve Cogs and a very important product like barite.
Okay, all right cool.
What capacity is near Corpus Christi.
No.
Yes, I mean, we've been running at Max capacity here. The last few months, it's about 35000 tons.
This this additional.
Facility, when we get around to having a completely planned out and ready to come online it'll add about 15000. So it will add about a 50% bump to that volume.
Sorry.
Is this just sort of thinking about adding an additional train to the corpus Christi facility or is this going some some.
Location.
We're investigating that right now probably makes sense to do it somewhere else, but we're investigating that right now.
And at one time, you were thinking about quitting.
Adam Berry capacity in the northeast.
And I assume that's not on the table.
That's correct.
Yes.
I think that's it for me. Thank you very much guys.
Thanks, Andrew.
The next question comes from Tim Mono channel from ATB capital markets. Please go ahead.
Hey, good morning, guys.
Good morning, Tim not sure no surplus margin peripheral margin horses.
I'll give it another tick.
It seems that the reported numbers and the guidance for Q1, and perhaps Q2 beat.
Lower is both a combination of real cash impact as pricing.
For products.
Is that you're buying is outpacing what you can sell them for but there is also an impact.
It has to do with the accounting around the standard cost accounting and you might actually have some inventory here.
That is a lower cash cost and you're selling it through higher but reporting at a higher cost so I'm curious.
What the split would be and what the comparative impact on EBITDA will be compared to cash flow.
Again, it's tough to give you a specific percentage but.
Let me.
And again I don't want to get into the details to provide more information that we need to but to summarize at the impact to the accounting or to the to.
So the margin the accounting margin in the Cogs.
We'll be higher than the impact to cash flows cash flows won't be affected as much as EBITDA well.
Like is it close or is it like an order of magnitude do you think.
I don't think its an order of magnitude, but it's not that's not equal.
Okay.
And then I just wanted to touch on the acquisition.
First acquisition.
The company has done in a long time and stepping into the.
The offshore market.
And obviously.
Do you think that you can probably leverage the infrastructure you have behind you and the scale.
So I'm curious if you.
If you could provide I guess some near term.
Boundaries of that around the financial impact this could have maybe some longer term ones, where you think it could go.
Yes, so so as we said as Ken said this is a very strategic but small acquisition.
It's.
It's not going to move the needle from a.
A quantum perspective on revenue and EBIT <unk> today.
To say that it's not generating acceptable and frankly accretive margins and cash flows because it is.
The bigger thing is is what Ken said, putting the machine behind it and Vern and his team working with the pro flow team to expand that business and grow into something so it's not going to be significant from a consolidated perspective this year, but we expect it to two.
Start contributing nicely towards the end of this year and into 2023 and beyond.
Sure market is a great market and these guys did a fantastic job.
Developing a reputation that that vern and the current profile flow team are going to work to improve with the support of the entire company.
Okay. That's helpful.
And then I guess when you look at the periphery with your business.
I will start to look at I guess adjacent.
Markets are service lines.
What else are you at.
<unk> given some ideas maybe different markets that are attractive.
So the markets that are attractive frankly in that ancillary.
Ancillary spaces are ones that frankly, we've already worked and so Mike <unk>, who runs our C. Alco Division, who you know has already been manufacturing products that get sold into the cosmetics industry fragrance industry automotive lubricant industry. So we're starting with what we.
No well and how we can grow that.
And so that's where we're focusing initially however, as we've talked about a little bit before we are taking a very strategic and deep dive approach to take a look at the overall market opportunities in those adjacent markets. So looking at the personal care market and looking at the bio surfactant market.
And a few others, but these arent flash in the Pan projects, we're taking very deep dives to understand those and frankly, probably doing the same work that you've done which is looking at some of the very big guys that are our competitors, especially in Europe that serve our energy end markets, but are actually selling into some of them.
<unk> end markets that I mentioned.
Those are the types of markets and you've probably looked at the other end markets that guys like Clarient and solvay are selling into and we're doing exactly the same thing.
Okay.
That's really helpful guys.
I'll turn it back I appreciate the detail.
The next question comes from Keith Mackey with RBC. Please go ahead.
Hi, good morning.
Okay.
Good morning, good morning.
Yeah. So Ken you mentioned that the current environment must be pretty tough on smaller providers is certainly certainly challenging for for all.
Does the does the current environment, where you've got smaller competitors.
And you've got some customers unwilling to accept price increases and I'm sure you'll always have that but does that dynamic have you thinking about.
M&A, a little bit more and potentially getting on the front foot as an opportunity in the in the current challenge to exercise your your footprint and capacity to consolidate the market a little bit more in either Canada. The U S drilling fluids, our production chemicals.
Yes, I think thats something we are always looking at and its definitely something thats crossed our minds as we've gone through this.
But no matter, what we have to get <unk>.
Pricing up.
This isn't.
We haven't felt pressure from anyone.
I shouldn't say that but.
It's specifically hasnt been a problem with smaller companies are having more choices by the operator.
To drag our margins down it's just been trying to get increases through and it's the same problem all of us are facing I mean, maybe come breakup.
In Canada and as the bid season opens up in the summer down in the U S. Maybe there will be some pressure there and that would be a time to take a deeper dive on it we've always got a couple of smaller companies that were watching that our competitors.
But I.
I don't know that it solves the problem at current.
The problem at current is dramatic increases and everything.
Okay.
Yeah got it and was the Q1 acquisition sorry, if I missed it was that cash or shares.
This cash.
Smaller acquisition, but it was cash okay and is that is that embedded in the $40 million or should we be thinking about that as a small incremental.
Yes.
So you should be thinking about that as a small incremental and when you see our Q1 financials, you'll have more granularity when we talk about Capex. We don't talk we don't include M&A in that number.
Got it.
Got it.
And Tony you exercised the accordion feature on the bank line this quarter.
As as working capital has come up I know you've talked about that leveling off potentially as as the.
Steepness in revenue and the revenue growth also also levels off but how should we read the exercise of the accordion feature is it nice to have necessity or or just a little bit more more detail there would be helpful.
I think you should read it as responsible financial management.
And it's my job and my team's job to make sure that the company has the liquidity that they want and it's our job from a governance perspective to make sure that we have ample ample liquidity, which is demonstrated by our current and anticipated drawn versus the total 260 now.
All of that to $62 five that we have access to and it's really being able to have that level of comfort to have the ability to support.
The business I E. If there is an opportunity to make a strategic.
Purchase of something from an inventory perspective, we do not want to stifle.
The capabilities of the procurement teams across Canada, and the U S number one and number two also.
And you've asked questions before I believe about the bond refinancing that we don't have to do for a couple of years. However.
We likely will be reducing the size of that bond and and when we do we'll be in whatever.
Position, we're going to be in from a drop perspective, and it's responsible to make sure that if we want to reduce the size of that bond and we wanted to put some of that that delta onto our line that we have ample opportunity to add capacity to do that.
So that it'll be at a lower level and it's going to get repaid, whereas with the bond it's fixed.
Does that answer your question Keith.
Operator, I think we may have lost Keith if he joins back again, please moment to the county, Tony Sorry, sorry.
I was on mute thanks for that.
Yes, no worries.
Just finally, what margin does that Q1 EBITDA guidance imply.
Look I if I told you that then you would you would know exactly what we think revenue is going to be and I don't want to do that but I would I would continue to do what youre doing in terms of.
Assumed activity level increases in Q1 versus Q4.
I gave you again its not its not carved in stone, but we wanted to be transparent and tell you. What we think which is approximately a 20, what could be a 20% decrease in EBIT dock and <unk>.
Level from Q4 2021, so you can do the math on that and then after that Keith I'd encourage you to use your your revenue levels to back into a margin I don't think margins as important as cash generation and our ability to work through this current <unk>.
Extraordinary environment that we believe is temporary and we're going to start getting out of it in Q2 and beyond.
Got it thanks for the color I'll turn it back.
Once again, if you have a question. Please press Star then one the next question comes from Joseph <unk> from Sacha Energy Research. Please go ahead.
Thanks, very much good morning, Kevin and Tony.
Congratulations first on a great year.
Great performance.
Throughout the quarters.
My first question is for Tony.
We see the receivables almost doubled in the year on a 35% increase in revenues.
Seen customers delaying their payment schedules is that one more thing that's going to require you to have a little more flexibility on working capital.
No not at all that's not happening at all like you nailed it the reason for that big increase in <unk>.
And working capital was commensurate with the big Big increase in revenue year over year.
Okay. So there is no lag in terms of payment schedules at all.
No not that we're seeing.
Okay.
Two questions Ken on the macro side.
Your expertise as you mentioned in polymers.
The industry of course, you know what.
Where do you find oil looks like real estate location.
Location, where you have reservoirs that are performing right now.
A lot of companies are talking about increasing productivity with polymer floods are you in that business and with the science skills you have in your labs across the country our count in the states is that what you see.
<unk>, becoming significant to you in the years ahead.
It's something that we're always looking at we participate in a small way the problem with that space is the big companies generally work with the big companies on that like we don't manufacture polymers, we buy polymers for manufacturers. So the big guys like SNF.
Go direct on that business to the to the oil company, it's hard to get it in the middle of that.
Okay.
The next one is.
<unk> seems to be opening doors to Iran and Venezuela.
Essentially moving sanctions out there.
There's probably going to be a lot of need there or is that something that you might look at once the rules are out.
The operating rules are out.
The opening is.
That something that given it could be a very high margin business that you might look at.
I think like we've always talked about we'll look at everything.
Hard to believe that's the solution to this is to to work with in those jurisdictions, but that's.
If the opportunities are there we will evaluate them measure the risk and then make a decision.
Okay. That's it from me thanks again.
Thanks Joseph.
This concludes our question and answer session I would like to turn the conference back over to Ken Zinger for any closing remarks.
Well, thank you everybody I'm going to wrap up the call today by saying, Thank you to our customers our employees for helping us produce another great quarter, we're really pleased to be in a strong financial position and returning cash to shareholders coming out of Covid. We look forward to speaking with you again during our Q1 update in May Thank you everybody.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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