Q2 2022 CES Energy Solutions Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the CES Energy solutions second quarter 2022 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 zero.
I would now like to turn the conference over to Tony Allott Chino 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 in our second quarter MD&A and <unk>.
Press release dated August 11, 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 <unk>.
Second quarter MD&A at this time I would 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 record financial results released yesterday, followed by our divisional updates for Canada, and the U S. Along with a brief update on our international businesses.
Then pass the call over to Tony to provide a detailed financial update we will take questions and then we will wrap up the call.
The second quarter of 2022 was a breakout quarter for CES energy solutions for the fourth consecutive quarter. We set an all time record for quarterly revenue was $433 $7 million Q.
Q2 also set a new all time record for quarterly EBITDAX was 61 million.
This beat our former record result of $54 8 million during Q3 of 2014.
I will remind everyone that this result was achieved during a historically slowest quarter due to break up in Canada.
Another result, I will highlight is the reversal of margin compression discussed extensively throughout Q1 and Q2.
Our Q2 EBITDA margin of 14, 1% was the highest margin level. Since 2017, I will note that Q2's, typically have better margin percentage due to the product mix in the Canadian drilling fluids group because of spring break up this is because most of the rigs that worked through breakup, our water based rigs, where our where we are not passing through high value low margin base oil and <unk>.
Yeah.
Through our books.
I would now like to again highlight several significant corporate milestones, which were achieved during Q2 of 2020 to asthma.
As mentioned this was our fourth consecutive record setting revenue quarter in a row with $433 7 million, beating our Q1 2022 record by 8% in our prior call Q2 result by a remarkable 71%. This was our seventh quarter in the last eight quarters, where we increased revenue quarter over quarter EBITDA.
EBITDA was $61 million in Q2 beat our formerly former quarterly record results from almost eight years ago in Q3 of 2014 by 11, 5% quarter.
Quarterly EBITDA grew by 91% year over year from Q2 of 'twenty one.
Q2, EBITDA percentage of 14, 1% was the highest quarterly result, since Q1 of 2021 we achieved 14, 6%.
SG&A as a percentage of revenue came in at 10, 6%. This was the lowest percentage since Q1 of 2015 when it was 10, 1%.
Yeah.
I will now move on to summarize some of the progress made in Q2.
Throughout the past three quarters, there has been a focus by everyone at CES to manage the inflation and supply chain challenges affecting our business.
We're respectful and cooperative communication with our customers and our vendors. We are proud to demonstrate with our Q2 results that we have made significant progress on this issue. We have managed to largely maintain our existing customer base. While at the same time, adding a few new customers in order to help grow our revenues across the board and at acceptable margins.
As a very general update on the current state of the supply side of the business I want to note that we are not through the woods yet.
Although we have work to update our pricing diversify our providers and identify the most reliable logistics strategies. There are still many persistent problems being encountered on a day to day basis. Our teams are managing these issues and finding solutions are substitution in order to ensure timely delivery of products and services to our customers inflation and availability.
<unk> to be major challenges to our business.
Overall, CES experienced unprecedented revenue growth over the past four quarters. If you look at Q2 2022 revenue on an annualized basis. It leads you to an annual revenue of over $1 $7 billion I'll remind everyone on the call that our previous best run rates for revenue were between 1.2 and $1 3 billion.
In 2018 2019 in 2021 I will also remind everyone again that Q2 is typically our slowest revenue months during the year.
This massive growth in our business is being managed and adapted to buy all of us at CES. Our outlook remains positive for the remainder of 2022 as well as 2023, although the industry activity growth rate appears to be leveling off to some degree. This is obviously, a very comfortable and profitable level for CES and for our industry. We look forward to.
<unk> to deliver strong results during the second half of 2022 and beyond.
Now I will summarize the Q1 performance in Canada, the Canadian drilling fluids Division achieved our highest quarterly revenue since Q3 of 'twenty 13, and the highest second quarter revenue ever.
As mentioned on our last couple of calls we have been able to hold hire and train sufficient staff to operate efficiently. Although this is a challenge in some areas we remain confident in our ability to find and retain people.
Today, we are providing service to 78 of the 203 jobs underway in Canada for a market share of 38, 4%.
This rig count is up from an average of 43 rigs during Q2.
Our Q3 Canadian rig activity appears to be on track to being the highest since Q3 of 2018 and may even exceed that level with bidding season, mostly completed in Canada recent awards from new and existing customers have us maintaining our historically strong Canadian market share for the remainder of 2022 and beyond.
Pure Kim our Canadian production chemical business.
Managed our highest quarterly revenue ever as well. This business was is poised to consistently improve on this revenue level as the decline in Canadian oil field activity due to breakup gets back to more optimal levels. In Q3, we are consistently seeing growing contributions from our frac chemical and stimulation groups as this sector of the Canadian oilfield appears entre.
To be very active in Q3 and for the foreseeable future.
The other three main Canadian business lines, including C. Alco clear an equal all continued to contribute to the financial and strategic success of the two primary Canadian business lines.
Now for the United States.
Yes, our U S drilling fluids group also achieved their highest quarterly revenue ever 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. We worked extensively with our customers in the U S to ensure that we manage margins as effectively as possible today, we are at.
Providing chemistries and service to 136 of the 764 rigs in the U S for a market share of 17, 8%. This is up from 119 rigs and 16.9% at the time of our last call. In May. This includes our basin, leading 27, 5% market share in the Permian, which is up from 27% on our last.
Carl.
With an expansion aimed at increasing barite grinding capacity underway in Texas. The doors open to continue to strategically grow and expand this business in a profitable way in the United States.
Finally, I'm proud to report the J Cam catalyst our U S production chemical business also achieved their highest quarterly revenue ever the division.
<unk> continues to post great results in a highly competitive environment, our manufacturing facility in Kansas continues to be the backbone that supports the entire business in spite of the supply chain challenges that continue to persist in our industry with W. T I prices at elevated weighted levels over the past few quarters. Our customers are focused on maximizing existing production. This has led to.
Volumes above historical levels throughout our production chemical businesses. This along with an ever increasing customer base had been the main drivers for the incredible financial results realized by J Cam catalyst.
Now for a quick update into our recent forays into the international markets. We continue to actively pursue several opportunities in the middle East and I will comment further on these should any come to fruition. We remain focused on growth prospects in this region and are spending significant time and energy evaluating multiple potential opportunities in.
Syria, our partner company Pearl continues to grow their business and continues to order replacement chemistries as they spend their inventory I will point out again that both of these are early stage growth opportunities and are not yet a meaningful contributor to the overall business.
In conclusion I want to once again extend my appreciation to each and every one of our employees for their commitment to the business culture and success of CES. It is rewarding to note that due to the growth that we are experiencing we have increased our total number of employees at CES from 1800, 14th on January 1st of this year to the current level of 2015.
Three today, an increase of 239 employees in just eight months or approximately 13, 2% more as always I want to finish this portion of the call by thanking all of our customers for their trust and commitment to CES in good times and in bad with that I will turn the call over to Tony for the financial update.
Thanks, a lot Ken.
The record financial results highlighted by can underpin C S as expansion euro over the past year.
Unprecedented expansion has been experienced in revenue EBITDAX and fund flows from operations amid a return to strong margins during the quarter C S generated $434 million.
And adjusted EBITDA of $61 million, representing a 14, 1% margin. This record quarterly revenue of 434 million represents a sequential increase of 8% from the previous high watermark of 401 million in Q1, and an increase of 71% from 254.
In Q2 2021.
Revenue generated in the U S was $300 million or 69% of total revenue for the company that revenue number is up from $249 million in Q1, and $175 million a year ago as both of our major U S divisions demonstrated all time high record revenue levels during Q2.
I would note that Aes continues to effectively operate on the right jobs and with the right customers and is realizing operational and financial torque. Similarly, Jacob catalysts 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.
Last year has maintained its trajectory.
And has also realized increased volumes and improved pricing.
Revenue generated in Canada was 134 million in the quarter down from $152 million in Q1 as expected on a seasonal basis with spring breakup and compared to 78 million a year ago.
Adrian revenues benefited from increased drilling and completions activity year over year, coupled with higher production volumes and frac related chemical sales as canal.
Our adjusted EBITDA of $61 million in Q2 represented a 44% increase from the 43 million generated in Q1 and has nearly doubled to 32 million generated in Q2 2021 and.
Adjusted EBITDA margin in the quarter was 14, 1% compared to 10, 6% in Q1.
As the company delivered on margin expansion via increased pricing adoption and scale associated with higher activity levels.
At CES, our ultimate financial priority continues to be cash flow generation.
I am very proud to report that during Q2, our F. F O was $43 million or $10 million increase over Q1, and nearly double the $23 million generated in Q2 of 2021.
This figure is particularly important because as our unprecedented revenue growth rates paper Andrew.
And related working capital investment level subside.
Higher <unk> level will enable us to deliver increasingly higher levels of surplus free cash flow.
We have maintained a prudent approach to capital spending through the quarter with a net capex spend of $11 million, representing just under 3% of revenue.
We will continue to adjust plans as required to support existing business and growth throughout our divisions and at this time commensurate with record revenue levels, we expect cash capex in 2022 to be approximately $50 million comprised of $25 million for maintenance and <unk>.
5 million currently earmarked to support growth.
We exited the quarter with a net draw on our senior facility of $182 million versus 149 million on March 31, and $110 million on December 31.
The increase was directly correlated to the working capital investments associated with growing to these record revenue levels. We continue to make sizable advance inventory purchases to secure higher levels of critical products and also realized elevated levels of accounts receivable commensurate with sharply.
Increasing revenue quarter over quarter.
To support the current growth phase of the company and in anticipation of potential increased activity levels. We have exercised in aggregate $80 million of available senior facility capacity year to date for a total facility size as of today of approximately 315 million CAD equivalent.
Since June 30th SCS continued to participate in strong industry activity levels and the current net draw on our senior facility is approximately $195 million.
We ended Q1 with $521 million in total debt comprised of $288 million in senior notes maturing October 2024.
And a net draw on our senior facility of $182 million as previously mentioned.
I would also note that our Q2 working capital surplus of $575 million exceeded total debt of $521 million.
By approximately $53 million and that our debt to EBITDAX ratio actually declined from 3.0 times at the end of Q1 to two seven times at the end of Q2.
To support the growth of the business and related working capital needs, we routinely evaluate our capital structure in an effort to support our business model and strategic plan.
In keeping with this philosophy, we are pleased to announce that we have entered into support agreements with noteholders, representing the majority of our outstanding senior notes to amend certain aspects of the trust indenture to better align it with the increased financial scale of the company.
The existing indenture was created in 2017 when C. S generated $1 billion in revenue versus the more than $1 7 billion in revenue implied by Annualizing, Our Q2 results.
These increased revenue levels necessitated an update to the indenture to support the potential future needs of a much larger company. This amendment when implemented will provide flexibility to support the current and future requirements of the company's growing business and permit CES to incur indebtedness under.
Any of its credit facilities up to the greater than $400 million.
And 30% of consolidated tangible assets.
This additional potential availability also very importantly provides flexibility as we look to refinance our senior notes over the coming year or so.
We are increasingly optimistic about the industry outlook and see us visibility to continue its strong financial performance. This combination is key to informing our capital allocation decisions, which we evaluate on a quarterly basis as a team.
In terms of capital allocation considerations, and we prioritize supporting existing and new business through investments in working capital and modest capex projects that deliver IRR above our internal hurdle rates.
We remain very comfortable with our current dividend, which represents a yield of approximately two 3%.
At our current share price and is supported by a very prudent payout ratio.
We will use surplus free cash flow to reduce draw levels as inflows offset working capital build outflows.
Through the year, we plan to buy back at least enough shares to offset our 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 NCI B program, depending on valuation levels implied by our stock price and we'll be prepared to be opportunistic.
At this time I'd like to turn the call back to Ken for comments on our outlook.
Thank you Tony as you and I. Both noted Q2 was a major turning point for our business with three of the four main business lines, achieving their highest revenue quarters ever and the fourth one having their highest revenue Q2 ever.
In spite of this massive growth our executive management team, including burn Disney Richard Baxter, Tony and I, our divisional managers and everyone who works at CES have adapted and ensured that our service and performance for our customers has not missed a step the financial results for Q to speak to the quality of the business, we are running as well as the quality of people who make it.
I'll go around everyday I am honored and thrilled to be the CEO and co founder of this business, which employs all these great people. These are truly exciting times here at CES.
You to everyone for your time and thank you to all of our employees for contributing to these spectacular results that Tony and I have had the honor of presenting here today 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'll hear a tone acknowledging your request.
Youre using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We will pause for a moment of collars trying to queue.
The first question is from Aaron Macneil from TD Securities. Please go ahead.
Hey, good morning, all and thanks for taking my questions Ken on the production chemicals, I know treatment points aren't up perfect operational metrics.
Canadian treatment points were down sequentially experience revenue record revenue. So maybe can you just give us a sense of you know.
Is this a function of higher volume higher pricing.
Mix chemistry like.
I don't know where that maybe I'll just turn it over to you.
Sure Yeah, I mean, that's the treatment points used to be a great indicator of volume expectation.
And chemistry supply expectation, but with horizontal drilling in the volumes that are passing through fewer and fewer wells, it's becoming less and less of a good indicator I mean, we continue to track it ourselves.
But the Canadian on the Canadian side, we have other lines that are index based that flow through big volumes, and so that drags down that that increases the volume we put through to a lower number of.
Treatment points.
And on the U S side is kind of the same story, we're running more and more volume through.
Through our more concentrated amount of of wells.
Which creates the increased revenue levels on the decreased number of treatment points.
Does that help.
Yes no.
I can appreciate that I guess, maybe like.
What are you seeing change sequentially quarter to quarter or is it just new wells being drilled in.
Is that.
The driver of the business or is it market share.
I mean market share.
I think we're I mean, it's hard to tell on the production side, but we're pretty confident we're still growing in market share and definitely from a volume perspective are drawing are growing in market share.
But I think what's driving revenue is we've got these high volume flow through stuff, but it's also I mean, it's a two pronged approach is driving our revenue and it's driving our our earnings because all of it has net EBITDA contribution that meets our minimum threshold. So it's all positive but it's some of this high volume stuff is based on <unk>.
Index and because it's high volume it takes no almost no people to manage it we just pass it through our facilities react it and ship it out to site.
And it it goes at a lower gross margin, but it comes in at the appropriate net margin.
Got it okay.
Tony I know, it's small dollars but.
What is the increase in growth capital relate to realm.
Relative to the prior guidance.
You know I know, it's small dollars, but is there anything else on your wish list.
So I want to clarify.
Yes, I would clarify that it's actually earmarked Erin what we found is that although we're operating at a very comfortable.
As the throughout the company there are.
Specific hotspots, where we need to add a little bit potentially in terms of very local isolated additional capacity. So it would be things like spending a bit of money on land tanks and unrelated related equipment to to get up to very comfortable.
Capacity levels in those very particular areas and that's typically in Texas in our drilling fluids business and our production chemicals business in order of priority.
Okay, and maybe one more question for me any progress on the <unk>.
Offshore business that you've recently acquired or is it still too early.
Okay.
It's still early we've it's been I would say it's been static to what we had acquired of that so its accretive and its been a positive story, we worked through a lot of hiccups on getting.
To the point, where we could produce the volumes that they required instead of having to buy them from a third party. So for my the way we look at it internally. So it's been very positive it's been a learning experience and it's gone really well and we're set up around that.
A big RFP right now that if we were to win it would be.
A nice piece of business for us.
Okay perfect. That's all from me I'll turn it over thanks.
The next question is from Jonathan Goldman from Scotiabank. Please go ahead.
Hey, good morning, guys.
Good morning in terms of the price pass throughs achieved to date are there any differences in the progress between the U S and Canada or between drilling clearly be chemicals.
Sorry that was I didn't catch that Jonathan repeat that Jonathan you were breaking up a little bit.
Yeah, no problem. So in terms of the price pass throughs that you achieved to date.
Any differences in the progress between the U S. We can on those pipes vaccines or between drilling fluids and chemicals.
I think high level, it's been.
It's been pretty equal on both sides of the business and both sides of the border we've been pretty.
<unk>.
Organized and how we've gone about that and then set thresholds for each group and each group is kind of at those levels.
But you know.
It's been a little bit.
Okay.
It's hard to say its been its been about the same both sides of the border and across both business lines is the way I would describe it there's some slight slight differences, but they're not enough to mention I mean overall, it's pretty much the same.
Okay that makes sense and then just moving on to the gross margin improvement I wanted to get a sense of how much was driven by pricing gains and the receipt and cost inflation.
Versus operating leverage and color around that would be helpful.
Sure Yeah.
Our costing continued to move up and continues to move up so pricing gain has been all of it however, when youre looking at it I know gross margin is a number.
We keep talking about and I think that's important to understand that the business has these high volume.
Pass through components on the production Kevin sides.
And maybe even a little bit on the Frac side, where we have minimal net thresholds we need.
But they come on it without much work from us, we're more supplying and doing a little bit of blending in and occasionally a little bit of reacting, but there's very little service component to it. So we're able to pass those owed at much lower gross margins than historically and that that part of the business is becoming much bigger than it has been in the past. So it makes the girls.
Margin look.
Last like if you look at 17 to 19, we're kind of in that 26 25, 26% gross margin range, but I don't we're not going to I don't know that we will see that again and I don't know that we need to see it a while I know, we don't need to see it again, we're focused on net margin and we can accommodate that with the lower gross margin than historically was possible.
No that makes sense that total picture accounts. That's it for me. Thanks, guys can I turn it over.
Thanks, Jonathan.
The next question is from Tien monarch, Hello from <unk> capital markets. Please go ahead.
Hey, good morning, everyone.
Cynthia.
On Jonathan's question on pricing.
Yes that does.
The pricing dynamics in the consumable space are very different than any other equipment based sectors you don't have scarcity.
Our supply what can you do there.
Any sort of a concerned effort.
No youre concentrated competitors.
To raise pricing.
That said the backdrop for E&ps.
Lower commodity prices, we saw in Q2, so how has that impacted your ability to move pricing.
And I guess, what's your outlook for pricing as we go through the remainder of the year.
I think we're still confident and we've had we've had a lot of success I mean I know.
The numbers show a move in an EBITA margin from 10, and a half to 14, one but the increases we've given to our customers are significant.
They've been accepted by the customers because they're necessary I mean, we can show them the cost of goods on things and how it's been affected and then theres a little bit of concern on the customer side as there should be an unsecured as supply because as much as things are a little bit better now.
Is still key components of almost every chemistry, we use that are really hard to get there is three or four major chemistries, while three for sure and a fourth one that's kind of borderline, where it's where we're running on fumes on them and we're able to keep up and we've been able to promise it but some of our competitors have had trouble keeping up to it. It's resulted in a couple of wins for us.
So there is there is that of that ability to show customers. The shortages in the market and use that to get the price increases. Unlike I say we've gotten.
Much as this doesn't look like much we've gotten significant price increases like.
I don't want to put a number on it but significant price increases and we feel like through the rest of the year activity will allow us to continue to do that I'll say on the on the supply and logistics side. The biggest change that's happened.
It hasn't really I mean, we've been able to get space on ships now container space coming from overseas where.
Three four months ago. It was a 50 60 day weight that we're being awarded the containers right away. The only problem is the ports are still completely congested. So even though we can get the container onto the ship easier now we still can't get it onto the ground in Canada and the U S. Any quicker. It sits in Port 30, 40 days before it gets offloaded. So.
And that challenge remains so we are still having to carry a little more inventory than probably would be optimal but where it.
It's an ongoing struggle in.
During the board call yesterday, Vern Disney kind of hammered on this over and over again every single day I use the term whack a mole too many times during the Q1 call and got made fun of vote for.
For it but that's what it's like I mean, it's still one thing after another happening and we're still we've got a great team there everyone's keeping up with it and we will continue to but all of that leads to I think pricing power because we're going to have to recover that stop.
Okay, Yeah that's.
That's really helpful. The rest of my questions have been answered well nice quarter guys.
Thanks, Dan.
The next question is from John Gibson from BMO capital markets. Please go ahead.
Good morning, all and congrats on the great quarter here, just a few on your Canadian business.
The revenue number in Q2 is one of the highest in history. Despite spring breakup.
Rig counts remain at below sort of pre COVID-19 levels, what is driving this exactly the bigger jobs and higher pricing.
Getting better in general.
Yeah, a little bit of it's a higher pricing in quite a bit of it was the product or the well mix.
I wouldn't say, we had any any problems during Q2 that led to the high revenues, but we definitely were on better quality work I mean, there were pretty dominant in Canada on the heavy oil side of the business and those jobs generate a lot of cash flow.
They drill quickly and they makes a lot of chemical for anti accretion and for whole cleaning because they drilled them so fast nowadays.
So all of that just leads to better revenue.
Great and then last.
One just more broadly how have market dynamics shifted in the drilling fluids market in Canada over the past few months.
As far as.
Like I don't think it's been a huge shift I actually think we gained a little bit of ground.
But.
I think the top three are still the top three theres a couple of smaller private companies that are out there.
We're getting a little bit of work now, but our market shares as strong as it normally is.
Our top two competitors are probably as strong as they've normally been.
The biggest dynamic that's happening is a couple of these little companies or are causing us problems bye bye.
Trying to steal our people so.
We've been fighting that over and over again, so far we.
We lose a person here and there but for the most part we've retained everybody and then the other sort of dynamic that's at play in Canada and in the Permian is just finding people to work at the plants and truck drivers and trucks that are available I mean, all that stuff continues to be a.
A challenge, but all things that we're working through.
Great I appreciate the color I'll turn it back.
The next question is from Josh Young from Bison. Please go ahead.
Hey, guys Ken Bristol.
Ken first of all congratulations on you guys have great results and it's impressive that you stepped in and.
It seems like things are going pretty pretty smooth I was going to ask about the offshore. It sounds like you you answered that a high level I guess.
What does this look like for you guys in terms of potential opportunity going forward, how big of an opportunity is it and then how much might you have to invest in order to address that opportunity.
Sure Yeah, I mean, we're looking at we're trying to find a safe way to enter the market beyond what we've already done I mean, we have the one partner that we're working with over there that we're continuing to do a little bit of work with and then we've got a second opportunity.
We had two other opportunities one I think that's.
That's kind of fading away and then a second one that's we're right in the middle of talking to them about so if that one works out it could be I would call. It meaningful it's not going to solve a homerun, but it would get us on the ground and it would get us on the ground with the people and infrastructure, we need it but it is probably going to cost us a little bit of money, it's not going to be a big amount of money either.
But.
There's definitely opportunity there were definitely spending some time on it and it's.
It's a little frustrating things move very very slowly, but hopefully we'll have something to talk about at some point in the future just can't promise anything because this could still go to zero and then as far as Pearl goes in in Africa, I mean there.
They are great partner, they theyre doing great work there for the customers they have but their startup so they've got to grow that business and as they grow we'll grow with them.
Got it Okay. That's really helpful. And then just on margins I think I saw that you guys are.
Historic maximum margin. So obviously, you guys had a record quarter on overall numbers, but.
I think your margins were a little higher than the last cycle is there a line of sight to be able to get up to that sort of I think I remember seeing close to 20% margin.
Is that achievable or was that.
<unk>, that's unlikely to be repeated.
I think that's unlikely to be repeated and unless something really changed I mean anything is possible in an elevator wty environment.
Especially where the supply chains getting squeezed if people can't get stuff, but I mean, you've got to have.
You've got to have the right market for that and I would also say that at the time, we did that we didn't have a ton of Av.
For Frac and stimulation and some of the production can work for the high volumes in the index pricing dragging down overall margins.
But if any of those things gotten short supply I mean, we could go higher I know in 2017, we kind of did high fourteens all the way through it.
And we think that at some point, that's probably achievable, but it's more about.
About getting the right number of people and continue continuing to increase the revenue through the company and find all the efficiency in that because.
That's where we can really make hay.
Great. Thank you.
The next question is from Michael Robertson from National Bank Financial. Please go ahead.
Hey, congrats on a record quarter, there gents and thanks for taking my questions.
Just had a a couple of follow ups.
<unk>.
Comments you made earlier can.
Kevin you spoke to the <unk>.
13% increase in the head counts.
Since the start of the year.
Based on where you guys see activity levels trending I guess for the back half of 2022 here how do you feel about your current.
Head count levels and do you see that.
Trending materially higher.
Year goes.
I think if you if you look at the U S rig count I mean, it grew by 50 I think this year that required a lot of people. The production Cam revenues, obviously went way up that required. Some people. If you look at the forecast that mean the forecast we're looking at that come from all the analysts.
Show that softening to the second half of the year. So it will probably move at the same pace as that I would say it would be much slower we.
We don't we don't like as of today.
Horsepower to the level, we're operating at and we're comfortable with it we might have to add a few more people to get to the higher levels, but it definitely won't be in that same realm. It won't be 230 people.
Got it got it thanks headset that's helpful color.
The other thing I wanted to touch on this I appreciate it might be a very difficult thing to answer given that the moving parts, but if you look at.
The.
Current levels of inventory.
Obviously, there is a component there that's higher volumes due to higher activity levels also there is a component.
We price related.
Was just sort of trying to get a high level of appreciation.
How you sort of see that.
Carrying amount trending I guess in the back half of the year, whether you feel like you're nearing a peak or if there is more to do there.
Well I'll take a cut stab at it first and then let Tony has stopped but.
For me I mean, we're seeing a leveling here we've been going through some.
Extreme growth for the last two quarters call. It maybe even three but these last two have been been heavy and then on top of that we were just in Q2 than in Canada. So in Q3 in Canada. We always are building inventories ahead into Q4 and Q1. So we've got the added pressure of that however, we've got a softening.
Demand side.
We think we're going to have growth through Q3, and Q4, but it's definitely not going to be the same level as Q1, and Q2 or Q1, <unk> Q2, and Q2 to Q3, So I think that that's going to back off a bit but Tony has got some metrics you can probably share with you yeah and.
You've actually all of the analysts have done a good job of spending time to understand working capital working capital investment inventories a massive part of that when you look at it our company typically if you go back historically, we have to invest in the business as revenue grows and if you go back historically that investment typically represents.
30% to 35% of annualized revenue, so multiply annualize that any given revenue by quarter.
Quarterly revenue by four you get your annual annualized revenue.
And you multiply that by 30% to 35% and Atkins you ballpark, what the working capital.
<unk> should be on our balance sheet at the end of that period.
As it pertains to two specific metrics that we always try to improve I think Ken outlined it very well and we're buying more stuff now than we would.
Otherwise to get ready for a busier season in Q and Q3, Q4, Q1, and you're seeing that and it's more expensive. So when you look at our metrics like DSI. For example, we're buying more expensive stuff and you're comparing that when you're doing your DSD.
My calculations to Cogs, that's based on.
Inventory, that's a bit lower priced and that's why you've seen DSI blow out a bit and similarly with a R.
We're doing great in terms of growing that revenue month to month quarter to quarter, but the corollary with that is we're collecting the revenues that we generated a month or two months ago versus the revenues.
We're generating today, so when you're doing those DSO calculations.
Your being affected by by that trend and your Dsos will be a bit higher that will normalize as this touring grew.
Growth rate level starts to stabilize but we're going to continue to see that in the near future and then youll see that stabilization and that massive surplus free cash flow.
Got it.
Really helpful detail I appreciate the color there.
Congrats again on a record quarter.
Thanks very much.
Once again, if you have a question. Please press Star then one.
The next question is from Josef Schachter from Schachter Energy Research. Please go ahead.
Good morning, guys and thanks for taking my question I'm pretty thoroughly and your commentary already.
More of a high level going into the end of the decade.
Now that we have all these LNG opportunities LNG, Canada, maybe a phase two.
And then.
Train two and then you've got to.
<unk>.
The Enbridge project and then we got Cedar.
Do you need to expand your business in northeast B C.
And so that you'll be able to handle the potential significant growth.
Those projects start moving forward.
A few years ago, we built a big facility in Grand Prairie.
And it supports our production Cam business and it supports our drilling fluids business and our Frac business up there in our stimulation business up there and that we have room to grow more within that facility I think if if if some of these things that that looked like they're going to finish I actually get to the finish line, perhaps we would do more on the infrastructure front directly in northeast.
However to get from here to some sort of moderate activity on all of that stuff, we're more than capable with the existing infrastructure we have.
Okay, and then the states with LNG projects being announced left and right.
Need to do anything to get into the.
A bigger presence in some of those based on food you've got great presence of course in the Permian and the oil side do.
Do you need to do anything to really lift your scale on the for the natural gas growth potential between now and the end of the decade there.
I'd I'd answer it the same way I mean, we've got historic warehouses and infrastructure all over the U S. So we're in all the major plays where we're close to the Haynesville, which I think would be the biggest wanted to be affected by that.
And it would take.
We have enough infrastructure to support the.
The same sort of level of moderate activity. So if we just if we if the margins got better in those basins and we decided to make a full.
A full push to get into them, we would have the infrastructure required to do that and then once we got in there it would be like the Permian. We continue to build out infrastructure is required, but we can definitely get to a moderate level with what we have.
And last one for me in terms of.
Youre science side or are there any new things that you are coming up with on the product side, there could be meaningful with even higher margins with them.
The product lines you have now.
Well, we're always try and Joseph that's for sure and Yeah. We've got a whole bunch of initiatives in play for different plays different products different problems, but nothing we want to tell our competitors about today.
And the other aspect of that Joseph that we've spoken to before is.
Is that technical and scientific expertise allows us to do something else, that's very valuable which is switching. So if we have situations where there is a product that's very very expensive or are very difficult to get we have the brainpower and the technology to be able to do swapping to.
A more reliable supply or even a more economical solution to our customers that helps them and helps us deliver.
Both from a supply chain perspective, as well as a profit perspective.
Super Thanks, so much I kind of Tony and again, congratulations on a great quarter and looks like a fabulous year.
Yes.
Thank you.
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 well with that.
I'm going to wrap up this call by saying, Thank you to all of our customers and our employees for helping us produce another record quarter, we're not only pleased with our current position in the market, but also very optimistic about our future. We look forward to speaking with you all again during our Q3 update in November thanks to all for your time today.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Okay.
Yeah.
Okay.
Yeah.