Q1 2022 CES Energy Solutions Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the C. S Energy solutions first quarter conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance.
During the conference call you May signal, an operator by pressing star and zero I would now like to turn the conference over to Tony I'll Luchino Chief Financial Officer. Please.
Please go ahead.
Thank you very much officer or 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, we met our actual results may differ materially from the expected results.
Various risk factors and assumptions these risk factors and assumptions are summarized in our first quarter MD&A and press release dated May 12, 2022, and in our annual information form dated March 10 2022.
In addition, certain financial measures we will.
<unk>, which 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 first quarter MD&A.
I'd like to turn the call over to Ken Zinger, our president and CEO .
Thank you Tony on today's call I will 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 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.
I'm very proud to present, our first quarter 2022 financial results. We view the first quarter of 2022 is a tremendous success for CES energy solutions. We once again set a record for quarterly revenue was $401 million Q1 also represented a strong EBITDA result of $42 $5 million and the onset of.
Have a reversal of the margin compression discussed during our last call.
Q1 represented a significant shift shift from historical supply chain stability for the past decade, there has largely been stability in the supply chain for our company and for our industry. There have been very few radical changes in the availability and pricing around key inputs into our business as mentioned on the Q4 call I had never seen cost.
<unk> as severe as in Q1 2022. This led to an extremely challenging time for ourselves and for our customers. We advised investors on the Q4 call that we were experiencing severe margin erosion and that we were working towards passing unemployment costs to our customers, albeit with a lagging effect.
Throughout the past six months through tireless efforts of all involved we have managed to turn the tide on this issue. We have worked diligently and constructively with our vendors and our customers in order to get pricing corrections implemented.
Our Q1 results were an evolution the margin compression persisted throughout January and February and then started to reverse in March as more and more increases were communicated excepted and most importantly implemented we see these improvements continuing throughout Q2 and beyond.
Although risk exists in the market due to the macro financial situation in the world, where inflation and cool, but have the ability to affect demand for energy I believe our industry and business remains in a strong position due to the financial discipline maintained by energy producers everywhere with regard to budgets and production increases not to mentioned.
All the sanctions currently being implemented on a significant volume of production from certain oil and gas producing countries I am extremely optimistic about the opportunities directly in front of US we are aligned with our customers and we are poised for profitable growth in 2022 and beyond.
Although initially challenging we view the first quarter of 2022 as a tremendous success for CES, we once again.
Alright.
I'll now move on to summarize Q1 March <unk>.
Canadian drilling fluids continued to be a strong contributor for C. As in Q1 as mentioned on our last call, we were able to hire and maintain sufficient stocks throughout our PQ. One drilling season today, we are providing service to 35, but the 90 jobs underway in Canada.
Q2 rig activity appears to be on track to be the highest since 2017.
With bidding season is well underway in Canada recent awards and indications from existing customers that was very confident we will maintain our historically strong Canadian market share going forward in 2022 and beyond.
Your Cam our Canadian production chemical business had a solid quarter in Q1, both financially and operationally each month in the quarter was once again very near an all time record revenue level with March setting that standard margins in Q1, we're consistently improving as price increases were successfully realized to offset cost side.
We continue to see growing contributions from Archrock and chemical chemical from our Frac chemical and stimulation groups as well.
The other three Canadian business lines, including shall go clear on equal all continued to contribute to the financial and strategic success of the two primary kept Canadian business lines.
In the United States a S. R drilling fluids group once again delivered very strong financial results as well as solid market share as I always note. We are not chasing market share on either side of the border and continue to have a focus on opportunities with sustainable margins and revenues.
In Canada, we worked extensively with our customers in the U S to ensure we manage margins as closely as possible today, we are providing chemistry and service to 119 rigs in the United States. This is up from 109 during our last call. This includes a basin, leading 27% market share in the Permian, which is up slightly from 26.
Since our last call with.
With plans for a small cap ex spend to increase barite grinding capacity now approved and underway in Texas. The doors open to continue to strategically grow in the United States market.
Last up is Jacob catalyst our U S production chemical business. This division continues to post great results in a very competitive environment, our manufacturing capabilities in Kansas make us a reliable choice for our customers. This becomes even more important in a market like this where security of supply has emphasized.
As prices have ramped up over the past few quarters, our customers have focused on maximizing existing production. This is lead led to treatment volumes above historical levels throughout our production chemical businesses cost of goods fluctuations continue to be at the forefront of concerns at our manufacturing facility in Kansas Overburden and his team are managing the changing.
With due attention in order to.
Manufactured finished goods for all divisions that are competitive cost competitive and most importantly leaders in performance.
Now for a quick update into our recent forays in international markets. We are actively pursuing several opportunities in the middle East and I will comment further on these should any come to fruition.
We remain focused on gross prospects in this region and are spending significant time and energy evaluating multiple potential opportunities in Nigeria. Our partner company Pearl continues to grow their business and continues to order replacement chemistries as they expand their inventory.
I will point out again that this is an early stage growth opportunity is not yet anywhere near a meaningful contributor to the overall business at this time.
In conclusion I want to once again extend my appreciation to each and every one of our 1900 20 employees for their commitment to the business culture and success at CES as well I want to of course, thank all of our customers for their trust and commitment as well.
With that I'll turn the call over to Tony for the financial update Thanks, a lot Ken.
I am very happy to report that the price increase efforts described by Ken and executed by all divisions have resulted in tangible improvements in margin and have set us on the path to normalized levels much earlier than we initially expected.
We took the view last quarter to communicate and anticipated Q1, EBITDA level that was expected to be approximately 20% lower than our Q4 level based on January and February figures available at that time and extrapolating through the balance of the quarter.
However through a coordinated effort, we were able to achieve implementation of price increases in the latter part of the quarter that led to a quarterly EBITDA reduction of only 11% versus the anticipated 20%.
As many of you may have already calculated we exited the quarter with an implied EBIT margin in the 12, 5% to 13% range versus the 95% range in January and February .
This was all in the context of record quarterly revenue complemented by strong activity levels and margin trends that we expect to continue in the year.
During the near term instead of having to wait for the second half of the year as we had previously expected.
During the quarter CES generated revenue of $401 million and adjusted EBITDAX of $42 5 million, representing a 10, 5% margin.
The record quarterly revenue of 401 million, representing a sequential increase of 9% from $368 million in Q4, and an increase of 54%.
$261 million in Q1 2021.
Revenue generated in the U S was $249 million were 62% of total revenue for the company and up from $234 million in Q4, and $169 million a year ago.
I would note that Aes continues to effectively operate on the right jobs and with the right customers as they've now reached pre COVID-19 levels and are realizing operational and financial torque in that business.
<unk> Lee Jae Kim catalyst are stable U S production chemicals business, which helped carry the company through the lows of 2020, and then power us through the growth over the past year has maintained its trajectory and is now also exceeded pre pandemic levels through increased volumes.
And improved pricing.
Revenue generated in Canada was $152 million in the quarter up from $134 million in Q4, and compared to 93 million a year ago.
Median revenues benefited from increased drilling and completions activity, coupled with higher production volumes and frac related chemicals sales as revenue levels and production chemicals also surpassed pre COVID-19 levels and drilling fluids benefited from strong winter drilling activity.
Our adjusted EBITDA of $42 5 million in Q1 represented a 24% decrease from the $34 million generated in Q1, 2021 and compares to $47 8 million in Q4.
Adjusted EBITDA margin in the quarter was 10, 6% compared to 13% in Q4.
Although we established updated pricing throughout Q4 and Q1, there was a delay between the time that those price increases were agreed to in the time at which those price increases took effect in order to adequately offset increased underlying raw material costs CES continues to expect a strong 2020 to drill.
By elevated revenue levels and a return to more normal margins.
At CES, our main financial priority continues to be cash flow generation I am proud to report that during Q1 <unk> was $33 million in line with Q4, and representing a significant increase over the $26 million generated in Q1 of 2021.
We have maintained a prudent approach to capital spending through the quarter with our net capex spend of $9 million, representing 2% of revenue. We will continue to adjust plans as required to support existing business and growth throughout our divisions and at this time, we expect cash capex in 2022.
To be approximately $40 million compared to <unk>.
Comprised of $20 million for maintenance and $20 million currently earmarked for growth.
We exited the quarter with a net draw on our senior facility of $148 $7 million.
Versus $110 million on December 31.
The increase was directly correlated to the working capital build associated with significant revenue growth and supply chain driven inventory purchases.
The acquisition of proved flow and the settlement of our quarterly dividend.
At CES, we are using our senior facility as a tool to support the expansion phase of the company to finance working capital increases associated with high quality revenue growth.
Inversely as collections catch up to revenue growth and revenue growth rates taper surplus free cash flow accelerates and the draw declines.
As you will have witnessed sharing more acute revenue.
Decline phases, and the facility rapidly improves from drawn toward a net cash position as it did during 2020, when we went from being drawn $93 million at Q1 to a cash position of $18 million by the end of the year in.
In anticipation of increasing activity levels in February we exercised $30 million.
Available accordion capacity for a total facility size of approximately 265 million CAD equivalent to support the growth of the company.
Our balance sheet benefits from the attractive structuring and maturity schedules of our credit facility and senior notes. We ended Q1 with a total debt of $487 million comprised of $288 million in senior notes.
Maturing in October 2024, and a net draw on the senior facility of $148 7 million.
I'd note that our Q1 working capital surplus of $506 million exceeded our total debt and $487 million since.
Since quarter end <unk> has continued to participate in strong activity levels in the current net draw on our senior facility grew modestly to $162 million.
We are increasingly optimistic about the industry outlook and <unk> ability to continue its strong financial performance. This combination is key to informing our capital allocation decisions, which we evaluate on a quarterly basis.
In terms of capital allocation considerations.
<unk> one <unk>.
We 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 number two we remain very comfortable with our current dividend.
Which represents a yield of approximately two 7% at our current share price and is supported by a very prudent payout ratio in the mid teens.
Number three we will use surplus free cash flow to reduce drought levels as inflows offset post working capital build outflows over the coming quarters.
And lastly throughout the year, we will buy back at least enough shares to offset a modest equity compensation related dilution.
As we become more comfortable with our outlook and surplus free cash flow generation, we will revisit becoming more active in our CIP program, depending on valuation levels implied by our stock price and we will be prepared to be opportunistic.
At this time I would like to turn the call back to Ken for comments on our outlook.
Thank you Tony as we both noted Q1 was extremely challenging time in our industry from a margin perspective, however from a revenue perspective. It was a huge success as we're progressing through this recent extreme volatility on the supply chain and pricing front, we are very optimistic about margin and activity levels throughout the remainder of 'twenty two and beyond.
While this may not while this has not been an easy period to navigate we are working through it and making necessary changes to our pricing structure. Our team is laser focused on the issue at hand, and we already see early indications of moving past. This very temporary issue, we anticipate continuing a relatively rapid recovery to more normal margins in the coming months.
Im very confident that 2022 is going to be a great year for CES energy solutions. Thank you.
You all for your time I will now pass the call over to the operator for questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad you will here at Cowen acknowledging your request if.
Youre using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We'll pause for a moment as callers join the queue.
The first question comes from Andrew Bradford with Raymond James. Please go ahead.
Okay.
Thanks for taking my questions.
Number one.
So I was just wondering if you can help us get our arms a bit more around the question on working capital and inventories.
Because over the last two or three quarters now you've been Neal.
I want to say padding, but you've been adding into your inventories in order to secure supply for key for key products.
And.
Where are we like what should we look at the quarter ending inventory levels like where are we in in that.
That sense is this sort of a normalized level now or a new normal.
Do you anticipate that security supply is becoming could become less of an issue as the year progresses, and therefore, you see a bit more flow out of inventories.
So I'll start off with that last part and Ken elaborate afterwards as well.
What I am hearing from the team is that.
That.
Rapid unexpected unprecedented.
The level of increases in pricing for inventory has subsided hasnt disappeared, but it has not subsided.
We have some other comments on that but just to back up to the more of the financial lines. On your question, we have gone through an unprecedented.
Growth rates in revenue quarter to quarter over the last five to six quarters and Thats really whats driven the.
The large buildup in working capital not just for inventory build but also very importantly from an AUR perspective, where it takes time to collect that revenue from a couple of months ago and sometimes longer than that.
We can offset and catch up with our collections to catch up to the increasing levels of revenue so as that revenue quarter over quarter revenue growth rate starts to taper and as I mentioned and that will also bring working capital levels down to a more normalized.
And more importantly bring quarter over quarter increases in working capital investment.
A more normalized level and thats when youll see working capital start to stabilize and Youll see surplus free cash flow after working capital investment starts to go positive in a big way.
Kevin any other comments on the inventory question, Yes, I mean, I think the overall.
What we saw in Q1 in January February December January February was unprecedented it hit every we didn't have a single product in our product line that didn't get touched by inflation.
And most too in an extreme way so we worked through that but.
But within that you've got Chinese port closures still persisting because of the Covid stuff, that's going on and you've still got back backlogs in the chicken shipping industry, where ships cannot get into ports to load and unload containers are sending their full which is all causing us.
For 10 years, we've run just in time inventory I'm speaking to inventory only for 10 years, we run just in time inventory and that's just simply not possible anymore. So we're carrying more inventory than we have in the past theres inflation on all of the inventory, we have including the liquid invert base oils, and Canada all that stuff.
Thats affecting working capital as well.
But overall I think the worst is behind US, we're just trying to get our feet on the ground again here figure out the new not figure out we have a new plan to go forward and see how that plan is working because things are changing all the time.
Thank you for that.
Shifting gears a bit.
Kind of like what happened in March because a lot of oilfield service companies.
When we talk to for sure have been struggling to kind of keep up with cost input increases and you're arguably.
Most product heavy.
Oilfield service company that probably most people on this call.
And with a lot of different inputs coming at you as cost increases through the quarter and I imagine that created some challenges and I think that's what you were talking about on the last call but.
Sort of how did you get in front of it from either.
Cost side or a customer side to get those margins to kind of start working for you while costs were going up as rapidly as they were even through March.
Yeah, I don't think it was.
I think it was possible to do anything about the cost side. It was more dealing with customers in a productive way.
And it wasn't it didn't suddenly happened in March I'll point that out that we were talking about this in Q4.
We were giving smaller price increases because historically in the industry. A few products 123 kind of get hit and then can you get can get hit because of a temporary problem, Texas ice storm whatever you can have a couple of things go up and you can deal with those kinds of price increases relatively quickly you can get them passed quickly.
But when youre going to a customer for the first time in 10 years with an entire price list in the middle of a project and telling them that you have to get increases in a significant way on every single one I mean their natural tendency is to go to a bid to check the market to make sure you're not just taking advantage of a situation. So that takes time to get first of all to convince them.
I am personally sat in somewhere I lost track and I'm trying to put it out in my mind, because none of them are fun, but somewhere between 50 and 100 meetings with customers explaining to them why maybe came up with presentation showing them worldwide shipping costs showing them inflation everywhere contain our costs.
Shortage of supply.
All the problems that we were seeing and showing them. The delta that was creating on our cost of goods and then from there. It just became kind of a trust thing to get them to understand that we werent trying to Rob them. We were just trying to get our margins back and a lot of those.
Those discussions that we had in December and January before the call.
<unk> started to take effect either in January or February a lot took till March or April .
But it just took time to get them in I mean, the cadence there is as a full run rate you have the meetings you educate them you get them first of all to commit to not going to an RFP and re bidding are all the work.
And get them to understand the increase in menu all agree on what that increase is and Thats. A couple of weeks and then from there like on the drilling side, it's you've got to finish the well you're on because you don't.
They never allow you to do an increase in the middle of an ASC or a well. So you finished the while you are on which can take anywhere from a data to three weeks call. It.
More time before it gets implemented the menu implemented on the next price list, which is great, but that just goes into that math that well that's getting drilled then that's another three weeks of delay.
And then you invoice that well and then you realize those that increase so it's a it's a six to eight week kind of thing Best case, you Gotta be ahead of it before you start seeing results and then in that in that time frame.
You got to have the right conversations early and we got lucky on some and some we had to revisit because we went in to ask for something for an increase and then it turned out that during the two months it takes to get that increase actually to come to the books.
We were wrong and things went up even more than that so we had to go back to them again and go through that whole process again, so it's not a quicker easy trans transitioning didnt suddenly happened in March we just suddenly started to see the effect on the books in March and then again in April So we're confident we've caught up.
It's not to say that there is not still a risk in the marketplace because there is but I.
I would view or I mean, no one has a crystal ball, but at this point it looks like things are more.
They're going to be more related to individual products or.
Geographies, where we're getting products from so I think it's going to be a little easier to manages what we're not going to have to do with these entire priceless changes, it's going to be more 1234 products kind of thing.
I guess, a long answer to a short question, but the short answer is we're on it a long time before March and Thats why we saw the effect in March.
Yes, I don't think the question length of Salt.
Short answer anyway, so okay. Thanks, a lot for that.
And then.
Maybe just.
Just on staffing.
You sort of mentioned growth and then even if you just sort of keep your market share within different geographies and it sounds like Youre growing and then some.
I know.
Uh huh.
Experience matters in the field.
For you guys.
So how do you.
We're also hearing from a lot of other service companies.
How staffing levels or even finding labor.
<unk> is extraordinarily challenging now.
I Wonder if you can just sort of speak to your experiences and how youre dealing with that.
Yeah, I mean, we're experiencing the same thing it's tough we're finding people I mean, we have a great culture, we have.
People that work here that try and recruit others.
We've been able to find people that have experience in the industry, which probably is causing part of the problem that some of those other service lines Youre talking about are having because we typically hire guys off drilling rigs so.
That.
We have our guys will get to go home every night the drilling rig guys generally don't so we don't pay as much as they do but we get the guys have a better lifestyle. So we end up having an ability to get guys from rigs and that probably causes the rig guys problems recruiting all the time as far as experience goes if they worked on a rig for a while they've got enough experience to have a base.
Slide knowledge and then we just spread are we've got a lot of stock field hands on a lot of longtime guys that we can spread around to help out. So we haven't had a lag or a pushback from customers.
In this market yet on on staffing our our experience but.
We did in back in 2013 2014 in 2012, I mean, there was years back there where it just got so busy and so crazy you had guys run on their own all over the place. It didn't have experience. So that can be tough, but we do have hotspots, where we struggled to get people in Canada, It's places like Edson and even Grand Prairie.
And in the United States, the Permian Basin, obviously with all the activity that's happening there.
It can be tough to find people, but I wouldn't say, we're thriving but we're getting by.
Okay.
And just.
Thank you and just last one for me is that.
Is.
If you think about how you are growing within your existing geographies and customer base.
Is there are you.
Are you closing in on capacity in any of your facilities.
That might require.
Some additional.
We call growth capital or expansion capital.
Over the next say.
As far as you can see for it and say you know until the end of the year.
No.
We saw that last summer in Ms. SKU. So we did the expansion there we saw that earlier this year and maybe we're even a little bit late on the barite, because we saw that coming and we've already we're already producing that thing at capacity and selling every drop coming out of it. So we're actually pushing pretty hard to get the new Texas facility put together.
So we can be have excess supply again.
But those are the two those were the two pinch points those are been covered.
Beyond that no.
I'm a sales guy so I'm very optimistic that we're going to do really well in this market and.
I am comfortable that we have the <unk>.
Backbone to support it.
Perfect. Thank you very much guys. That's it for me.
Thanks, Andrew.
The next question is from Aaron Macneil with TD Securities. Please go ahead.
Hey, good morning, all thanks for taking my questions.
Good morning, Erin good morning.
You mentioned the changes to your pricing structure in your prepared remarks and.
And I guess I'm, just wondering does that indicate that youre.
Contract structure has changed and if it has could you maybe elaborate on it and I guess, what I'm really wondering is are you able to now pass on.
More operational or inflationary price risk on to your customers and in the form of <unk>.
Different or improved contract terms.
Well I would say I mean in the U S. We have much.
More formal contracting than we do in Canada.
In the U S. There is openings to to have discussions with customers about anything including price increases.
We've done a lot of we've always had a portion of our business where customers are interested in small quick pay discounts or or buying some inventory to hedge some cost and those opportunities still exist on both sides of the border. So I don't think theres been a step change there or anything it's just it's always been there.
Okay, and then as a follow up are you at the point where.
Youre actually able to improve your margins with with pricing or are you really just focused on maintaining preexisting.
<unk> structure.
Well I think back in 2014, when things were really smoking we had some good margin numbers back then 2013 as well.
Got closer to 15%.
So it's not an attainable.
This market has got some work to do to get to where we were as far as activity and shortage of supply but for sure. When there is an opportunity to differentiate yourself from your competitors. There is an opportunity to get better pricing I don't know that we're there today right now we're focused on getting back into our historical range, but is there an opportunity later this year if some of these <unk>.
We are seeing and if as far as activity goes.
Them come to fruition, then yeah I think so.
Some of our competitors will struggle like we compete against a lot of small companies that.
I don't have the same capacity to get inventory that we do they don't have the same training capabilities that we do they don't have the same lab lab capabilities to bring solutions to the table that we do and as things get really busy all of those things become really important and start to really differentiate ourselves. So yes, I think there is an opportunity, but we're not focused on that at this.
Jim.
Understood Tony I've got one for you to the 12, 5% to 13% margin.
You just discussed.
In terms of exiting the first quarter.
I guess I'm wondering are you, suggesting that you can realize that type of margin in Q2 given.
Given the seasonal slowdown in Canada.
So.
So other than the seasonality that we experience always in Q2, the answer would be no. We would expect margins and EBITDA to be lower in Q2 than in Q1.
I think in this case it's different.
We're not going to promise anything but.
Let's just be clear we were in the 12% to 13% range in March and we expect to try to continue that into Q2.
Understood.
That margin okay.
Okay.
That's great.
Turn it back thanks.
The next question is from Tim Barnett shallow with <unk> capital markets. Please go ahead.
Hey, good morning, everyone.
Just a follow up morning, gentlemen, Bradford.
So up on <unk> question.
Talking a little bit about the restaurant inventories will add my calculation ESI would have probably been in the low <unk> range for some time here and historically, maybe in the 55 to 60 day range with an arm probably species and ability.
To do just in time inventory, but presumably as most of the.
The most acute friction on supply chain subside costs could deflate over time.
At least for some key inputs is there a risk that there could be cash losses on inventory analysis at some point in the cycle if cost pressures are alleviated rapidly or their contractual pricing commitments or other factors that might smooth that out and allow you to potentially pass higher cost inventory through to customers.
No look the factor matter is there are always risks.
I would say to help you understand what we've been doing.
Is that a carte Blanche that we provided procurement groups with.
Starting in the fall of 2020.
That started to tighten up.
And that started to tighten up.
Towards the end of last year, and it's pretty tight now where we still are looking at strategic surplus inventory purchases just like we did significantly in 2021.
But there we put underway more scrutiny and there are way more rare. So there's always that risk Tim but just so you know you'll see us doing less of the big bulky on inventory purchases.
Unless we're very very comfortable and we will do the risk assessment on what would happen if things went down.
But again.
The levels of surplus inventories that we're going to be carrying from hereon in are going to be lower than we've seen over the past year.
Yes, I'll add to that that I don't think theres any new new risk in that profile.
Those risks have always existed and they continue to exist I know, we're carrying a little more inventory than we historically have but.
But we've always had that risk and the fit in the market.
Like is the lesson from this that you will be carrying more inventory going forward and building like.
More more storage capacity and stuff like that just in case, you see shocks in the market, which.
It seemed more likely on a go forward basis or do you think you'll get back to where you were in terms of inventory.
I think we're going to be somewhere in between for the balance for the next couple of quarters and get back to the normal level towards the end of the year.
Okay.
Alright, I appreciate it I'll turn it back.
The next question is from John <unk> with Canaccord Genuity. Please go ahead.
Yeah. Thanks, good morning, everybody.
Good morning, John Good morning.
Hey.
Switching gears here to production chemicals, Yeah, there was some commentary in the MD&A about.
U S treatment points, obviously being flat year on year, but.
Volume and revenue per treatment point increase can you give us a little bit more color about that dynamic.
Yeah for sure. So couple of things just factually and you know us well there is a seasonality effect.
Or especially in Canada lets talk about Canada, first where there is a breakup and in a lot of cases, the customers are motivated to take on significant.
And chemical levels in their tanks before breakup and you'll see some of that so what that means mathematically John as you deliver a lot more stuff for each of those times are those treatment points, we could deliver that customer in Canada. So that's that explain.
<unk>.
Divergence of way more revenue, even with flat treatment points in a place like Canada and in the U S. It's been a confluence of factors number one is that for the last several years.
The magnitude of.
The wells and the production levels have gotten higher and higher.
Especially with with multi multi well pads and in the number of times youre going to each of those locations decreases because you're providing more volumes every single time and then the other thing thats.
Sort of working in our favor is the price that you're getting for that same volume every time youre going to that that treatment point, where that visit is higher and therefore your revenue per treatment point is going to be higher.
Got it. Thank you and then just thinking about drilling fluids inventories at the industry level any insight there.
In terms of how that's progressing and what that could mean as we roll through the balance of the year.
I think that there is a.
The pricing increase the increases that we've seen in a lot of ways on some of the commodity products are being driven by shortages in the market.
And those those shortages exist at the manufacturers they exist because the products that we've been by getting shifted to other.
Industries and in order to get them, we got to pay the price levels that are the other industries are paying and in some cases, we can't even get them because they're contracted.
All the potential for shortages in the industry I think is Israel.
I don't have a waiting to put on that but definitely with the commodities things like buried.
And there's been a massive shift in barite pricing and availability.
Internationally and locally so that there is risk there if you don't have adequate supply.
And I don't think its a risk that anybody can offset we do our best on barite, we buy ship loads at a time when we are sitting on inventory all the time, so we're as well prepared as anybody can be.
But nobody can take six months or one of those kinds of shortages. So it's it's just going to depend on sort of how busy we get them.
I guess, yes, there's going to be rest of the industry that they may have to switch things like diesel like diesel right. Now is in short supply in the U S. It's a major component of the invert. So in the U S. 90% of our drilling is done with invert drilling fluids, if we end up with some sort of diversion.
Diesel gets shifted to something else and we can't get it as a makeup product or it gets so expensive that it becomes an economic then companies are going to have to look at drilling with something else like a water based fluid of some kind. So all of those risks exist maybe they are a little more exasperated right now, but it's they've always been there I guess, but right now they are.
Definitely under pressure in that part of the reason, we're carrying a little more inventory as we're not going to get probably anybody any through any kind of a long term shortfall, but we'll do our best to be the last one standing.
Great color appreciate it one last one.
Just the profile profile tuck in in the quarter can you give us some more color around that transaction.
We actually bought that in.
In February and.
We bought it it was more of a reputational acquisition than anything I mean strong business strong technology they have.
Our presence in deepwater Gulf, which is something thats extremely hard to get as a small company.
It's something that we've tried to do in a small way are taken step towards over a couple of years, but the barriers to entry are so great. We are just going to take a long time to ever get there. So we knew of these guys. We knew of the success they were having they needed a bigger partner they were using wholesalers largely to supply their chemistry, so they needed some R&D help.
And some supply chain help and we needed entrants help so we went together.
And.
Found a deal that works for both of US and now we are when it comes to doing bids for the majors like the Exxon and the chevron's. They wanted to in order to do a bid for you or them you can't do it regionally you gotta be able to supply them chemical everywhere that they drill and now we can that was the the one hole that when they consider North America, They consider North America being Canada.
States, including the Gulf of Mexico, So it didn't help us internationally, obviously, but it does help us with the big bids for North America.
Got it.
Strategic is it I guess.
Got it great that's it for me.
Thanks very much.
Thanks, John .
The next question is from Jonathan Goldman with Scotiabank. Please go ahead.
Good morning, guys. Thanks for taking my questions.
The first one is there any way you can frame how much the sales growth in the quarter was driven by volumes of price realization in the way you want to talk about it and maybe how those dynamics have played out so far in the second quarter.
It's tough to bifurcate those too.
So in terms of quarter over quarter, let's think about it in Canada.
Very similar in terms of activity levels. So.
A good part of the Canadian growth would have been price related.
And when you look at the U S. When you look at the underlying drivers in the quarter over quarter comparison, and the number of rigs we run in the drilling fluids business.
And you look at the increased activity levels.
And that were experienced in in.
And production chemicals.
Then then I would say that in the U S. It may have been driven a bit more by by volumetric drivers as well as price and in Canada was probably pretty even with both of them.
That's great. Thanks for the color and then just one more for me just given all the macro and geopolitical developments over the past few months can you share any insights on conversations with your customers in terms of <unk>.
Increasing activity levels any longer term plans on increasing production to have those conversations shifted at all just given everything that's been happening.
We don't yet at the level, we're talking to guys I wouldn't say that we're getting the inner strategy of any big oil and gas producers, but from a drilling manager group yes.
Plans to incrementally grow this year I don't think Theres any plan for massive growth and I think that's driven by the fact that theres no rigs to do that with so in the context of getting people and getting equipment.
They'll continue to try and maximize that as long as they can be efficient with it.
But we haven't I haven't heard of anybody.
Sure.
Don't want to say I haven't heard of any of the mid the big guys talking about doubling plans everyone's been pretty consistent with slight growth is what we're seeing and we've had a couple of wins. So we're we're anticipating that or more.
Hope that makes sense. Thanks for the vessels guys I'll get back in queue.
Thanks, Jonathan.
The next question is from Keith Mckey with RBC capital markets. Please go ahead.
Hi, good morning, and thanks for taking my question just the first one.
So you've got about I think 27% market share in the Permian, which maybe implies 90 90 ish jobs just curious how.
That equates to a utilization of your facility number so like how many jobs do you think the kermit plant in surrounding plants can handle.
Overall.
Great question.
So to.
So the way the plant is currently constructed with the.
The sort of ability it has today as it sits.
We're probably about 75% of the way to full there.
However.
The mode to expansion on that is pretty simple so its people and some tanks. So it's not a long term planning.
Upgrade on that plant that is not a we don't have reactors. There. Its just invert blending we have enough mixing capacity there just to put more storage in and with more shifts and more people. We can we can make we can make a significant difference in the output. So.
It's.
The <unk> plant that we're putting in in Texas, I mean that one takes long term planning you have to do a bunch of site work.
And you have to buy the equipment, which takes a long time to get in this market. It just so happened that we were we had some equipment. So leftover from when we built corpus. So we didn't have to go through that long term lag, but the invert blending plant is a pretty short term in a month we could.
Did that whenever we're ready to do it.
Got it that's helpful. So as far as the capacity goes than like your.
Getting getting tighter, but with some potential to expand if needed but.
With the current number being at.
75%.
On the blending side.
Does that enter into the pricing discussions at all as far as industry capacity goes.
Are you able to move pricing based on that at all or is it or does that not really enter into the discussion.
Well, it's not something we discuss with our clients I don't think we don't try and use that as leverage.
But we do internally discuss.
As we get to higher utilization levels, and then look at our internal cost of doing that we make sure of that.
Pass that through to the new customers as we pick them up if we need to.
Yes.
Other thing to consider Keith phase related to that the higher level of utilization.
Have in places like permits and even our corpus Christi very grinding facility and the new one that's coming on in Texas.
That actually lowers our operating costs per unit, which.
<unk> maintains our improved profitability because of that increased efficiency.
Got it and just finally to follow up on the on the pro flow.
I understand that it is.
It makes you more eligible to bid on some for some of these larger supermajors.
Have you had any discussions.
With those companies related to that yet do you think this will materially impact your ability to gain share with those companies or have you already been making headway and theres, maybe a little bit more to go but it's not a but it's not a.
Big drivers so how would you characterize that.
I think I would I'll go first on this one I think like 25% of the reason for doing it was that 75% was because of the people at <unk> and the success, they're having there and accelerating our own growth in that area. So it may.
It will help us get on the bids I don't know if it helps us win them, but it helps us get on them.
And but in the Meanwhile.
<unk> got a profitable business thats going great with a whole bunch of good people and they have area expertise and they have a couple of customers that trust them that we are going to do our best to support them on to help them get all the business from those guys in.
And find others. So just got onto that Ken Scott is 25% plus a 75% they've got to squeeze in a little bit.
As well the fact of the matter is that the.
The transaction when we talked about it with firm and with Richard and with the board and Ken It stands on its own from an accretion perspective.
When we looked at.
Their financial performance.
Historical year to date.
Most recent quarter and looking into 2022, we very deliberately structured that deal. So that does it match, what we always talk about which which our IRR targets and was accretive even even at that small signs.
Okay. Thanks, very much for the color appreciate it.
The next question is from Michael Robertson with National Bank Financial. Please go ahead.
Hey morning, all.
Congrats on a solid quarter and thanks for taking my question I just had a.
Just one follow up.
Touched on a lot of this already but.
Good to hear that the rapid price increases are subsiding.
On the cost side I was just wondering.
What you guys are seeing.
From a shipping standpoint.
And whether there's been some cooling a moderation there as well just wondering given all the debt from the Lockdowns in China right now.
Yes, I think.
We talked to think a bit about it before where we went from.
In 2020, I think it was European 2000, 2500 for a container out of China that got to be like $30000 at the Pic 32000, I think was a big number I heard that number's backed off now its not nowhere near back down to two but depending on the day and the and the shipper you can find them in the kind of halfway in between those two numbers now.
<unk>.
But if there is risk that it's going to go back up because right now theyre shortages right with the ports being closed there is getting to be a backlog again, there is going to do with backlogs in the U S. So we're preparing for prices to go start chasing backup to those higher numbers again.
Got it so not exactly a stable profile there yet.
State the color.
Yeah.
Well, thank you again.
Once again, if you have a question. Please press Star then one.
The next question is from Josef Schachter with Chapter Energy Research. Please go ahead. Thank.
Thank you very much good morning, Ken Good morning, Anthony.
I'm wondering mark do you get do you guys get any product.
That goes through your system answer your product line.
Europe , given the problems, we're seeing now in Germany, where.
There may be cut off from.
From Ukrainian or natural gas or they may have to shut down some of their chemical manufacturing businesses.
That impact you at all or is Asia more.
Our sourcing price for you than than in Europe in Germany.
Yeah, I'll start off with that one Joseph so just to answer that question.
It's going to be two fold answer so no we do not buy.
From Germany or from Europe . However, yes, we are affected because some of the some of the markets that are served by.
By countries in Europe , including the Ukraine.
Do <unk>.
Manufacture and.
Shelf product into competing end markets.
We get those same chemicals or where raw materials from other places.
Because certain items.
That are used in for example, agricultural as well as our industry has.
Have come off the market from places like the Ukraine that has affected the price that we pay for that same type of product that we're getting from Asia. So directly no we don't but indirectly yes, absolutely we do get affected for some products.
So there's definitely been a shift.
And a couple of product lines, where because of the lack of the cost of manufacturing in the in Europe , they've shut down or slowed down some plants and so.
Those products are still required Europe . So now they are pulling them from north American plants, where we have agreements and we buy product from and it's stealing available production from us and putting pricing pressure on us. So once again indirect but it's having a direct effect on us.
So when you end up in the last call.
You guys are talking about having to have multiple conversations about that with you.
Your customers are about the prices coming in right. Now that you said you were talking about are those kinds of conversations that are happening once a month. Once every two months related to costs that are that are inputs and is there a possibility where.
You know companies, let's say accelerate their programs later in the year and we go from 700 rigs to 750 or 800 in the states and from 200 to 250 in Canada, where they may want to do more long term contracting and where.
You can have a kind of short term escalators built in.
A pass through basis, but not pushing margin, but they just say if you get a 15% bump in our product immediately accept it because you've got a long term contract and they see that.
And they're willing to accept it on there that kind of basis, because they know theyre going to get what they need when they need it.
Yes, I mean, we've talked about that and we've had that discussion with customers. We have a couple of pricing arrangements like that I mean, the risk arrangements like that is you've got to show them your cost of goods generally to get them to buy into the whole process.
And then your once they have that they may be.
Use it to beat you over the head. So we typically don't we try not to disclose that so.
We've put some surcharge call it on a couple of products where.
It's tied to an industry and if those products if that industry increases those products and increased by that same percentage, but.
We try not to get too deeply embed with with the cost of goods and supply chain.
Okay.
If there is a pick up.
I think put out a report, saying they thought they were going to get the $13 million from the $11 8 million.
Does that really impact you in terms of staffing as you mentioned is better because you got people from Russia rigs you've got capacity in your plants are there any bottlenecks or do you need to kind of open up if there's going to be that bad.
Aggressive maybe security of supply move where companies increase their budgets 10, 20%.
To increase production by 10, 15%.
Well I'll tell you we're going to.
It is going to call it where punch drunk now for everything that's happened over the last year. So we're used to it and we'll manage it when it comes.
We do a good job, we've gone to talking to customers monthly if you're asking about the cadence.
Customers, who will accept it we're trying to go into the monthly with the presentation showing them just general industry information on cost of goods and when guys come to us with with plans for we just picked up some new work here in Canada, that's a significant.
Piece of business and they laid out their plans for us for the year and it's all obviously in addition to what we had already planned and built into our forecast. So it's just more that kind of thing getting together with them early finding out what their plans are and then figuring out a way to solve it.
Our procurement people are the best in the business I think and.
We'll find a way to do it but we have to know about it we did the last second stuff is what kills us yeah.
And are those kinds of conversations happening more in Canada are you seeing them also happening in the states.
Canada and the U S. It's been a strategy.
Not every operator wants to be household or bothered with it.
But.
I would say half or maybe even a little more are after everything that's happened in the last three months are open to it I'm sure it'll fade away. If there is some stability in the market again, it gets boring but.
Got it.
As quick a cadence on every couple of weeks on some of the business and generally once a month.
The worst case once a quarter just some kind of an update talking about where prices are where they are going through.
Much appreciate it thanks for the color. Thanks for the information on the good quarter. Thank you guys.
Thanks Joseph.
This concludes the question and answer session I would like to turn the conference back over to Ken Zinger for any closing remarks.
Thank you for everybody for joining us for the call today.
As I've mentioned, a few times, we're very optimistic about where the quarter.
It took us in the coming quarters are going to take us. We're in a very good position and we are optimistic optimistic about our future.
We look forward to speaking with you again during our Q2 update in August Thanks for your time.
This concludes today's conference call.
<unk> disconnect your lines. Thank you for participating and have a pleasant day.
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