Q3 2022 CES Energy Solutions Corp Earnings Call
Welcome to the CES energy solutions third quarter, 2022 results conference call and webcast.
As a reminder, all participants are in a listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
He joined the question queue you May Press Star then one on your telephone keypad.
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I would now like to turn the conference over to Tony Allott, Chino Chief Financial Officer.
Please go ahead.
Thank you operator.
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 third quarter MD&A and press release dated November 10, 2022, and in our annual information form dated March 10 2022.
In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies and for a description and definition of these.
Please see our third quarter MD&A at this time I would like to turn the call over to Kevin Sayer President.
Thank you.
Thank you Tony welcome everyone and thank you for joining us on this remembrance day holiday as we honor those who gave their lives for our freedom.
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 I will then pass the call over to Tony to provide a detailed financial update we will take questions and then we'll wrap up the call.
I am proud to report that the third quarter of 2022 was another breakout quarter for C. E. S energy solutions for the fifth consecutive quarter quarterly revenue increased and for the fourth consecutive quarter. It increased to a new record level. This time at $525 million with an associated EBITDA margin of 14%.
I would now like to highlight several significant corporate milestones, which were achieved during the Q3 of 2022.
Strong results have enabled us to raise our dividend by 25% to eight cents per share per year paid poorly.
Revenue in the third quarter reached another record setting.
Level, beating our previous record last quarter by 21%. This was our eighth quarter in the last nine quarters, where revenue increased quarter over quarter.
All four of the company's major business lines contributed by posting their highest revenue levels ever.
EBITDAX of $73 million in Q3 smashed our former quarterly record results from last quarter by just over 20% and by 74% year over year from Q3 of 2021.
SG&A as a percentage of revenue came in at a very prudent nine 2%. This was the lowest percentage ever and beat our former low of 10, 1% from Q1 of 2015 by almost 10%.
We are currently providing drilling fluids products.
Service to 23, 2% of the land drilling rigs currently drilling in North America as we continued to be the number one drilling fluids company in the North American land market.
I will now move on to summarize some of the progress made in Q3 of 2022 as for the first time ever we reached the milestone of being a $2 billion plus annualized run revenue run rate business. These past three years have presented unprecedented challenges to our business our industry, our employees and to the world.
Covid remote working inflation logistical challenges product shortages and labor shortages have all made their mark on everything in our world.
In spite of these headwinds CES energy solutions and our employees have steadfastly March forward in growing the company's revenue and EBITDA to all time highs.
At CES, we believe a more stable market may be in front of us.
We have grown the company to a much higher revenue level and are now beginning to see the free cash flow harvest that comes with the more steady market versus the incredibly rapid growth of the past couple of years are.
Our working capital growth.
Our working capital level has increased to $666 million during the quarter to support this rapid growth. However, this is a 32% of our current annualized run rate revenue and well within our targeted historical range now.
Now begins the time for us to harvest mature built into the business with our Capex light asset light high surplus free cash flow business model.
Tony will speak more to capital allocation plans during his portion of the call today.
Yes.
I will note that these comments do not mean that all as easy as always challenges remain throughout the business.
Shortages of certain Chemistries elevated shipping and logistics costs labor shortages, FX fluctuations and competitor pricing pressures are all present in our business lines. However, we believe we have the best team in the industry to help manage our way forward and excel in any environment, we believe that the strategic utilization of the free cash flow we have.
Started generating and will continue to generate will improve our balance sheet, while enabling consistent shareholder returns.
Our outlook remains bullish for the remainder of 2022 as well as 2023, although industry activity growth rate appears to be leveling off to a more manageable level. This is obviously, a very comfortable and profitable level for CES and for our industry. We look forward to continuing to deliver strong results during Q4 of 2022 and three.
Oh 2023.
I will now move on to summarize Q3 performance in Canada.
The Canadian drilling fluids division achieved our highest quarterly revenue ever in Q3 as mentioned on our last couple of calls we've been able to hold higher than trained 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 81 of the 211 jobs under.
In Canada for a market share of 38, 4%. This rig count has been steady throughout Q3 and into Q4, Chris.
Christmas in Canada, historically affects the rig count by about half for the second half of December and we would expect no difference. This year, we expect the industry to increase in early Q1 back to levels slightly higher than in Q1 of 2022.
Pure Kim our Canadian production chemical business also achieved its highest quarterly revenue ever we continue to see growing contributions from our frac chemical and stimulation groups as this sector of the Canadian oilfield remains very active now and for the foreseeable future.
Yeah.
Now for the United States.
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 focus on opportunities with sustainable margins and revenues today, we are providing chemistry and service to 147 of the 770 rigs in the United States for a 19, 1%.
Market share. This total is up from 136 rigs and 17, 8.8% market share at the time of our last call in August .
This includes a basin, leading 29.8% market share in the Permian, which is up from 27 and a half on our last call.
Our second barite grinding facility, which we are constructing in the Permian basin continues to be on schedule and on budget. We also began shipping in bird from a second Permian facility in Midland during the quarter. This was achieved with minimal capex and offers a logistical that logistical benefit to our customers on the east side of the Permian Basin.
Finally, I am proud to report the J Cam catalyst our U S production chemical business also achieved their highest quarterly revenue ever our manufacturing facility in Kansas continues to be the backbone that supports the entire business, while operating at a very comfortable output level of about 60% of what we believe to be the maximum capacity. This number varies.
Just on the ratios of the different chemistries being manufactured with some being quicker and easier than others, but safe to say, we see no capacity issues in the foreseeable future.
Now for a quick update on our recent four or AIDS into 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 conclusion I would once again like to highlight that all four of our major divisions achieved record revenues during the third quarter of 2022. This is truly an historic accomplishment that we are extremely proud of the busy market is obviously one of the drivers of this success, but this also showcases the great teams, we have everywhere in the organization the results in Q.
Three were not due to one division or area excelling. This was a balanced effort across the company in which every business group contributed it speaks once again to the quality of the people employed everywhere in every division here at CES energy solutions I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success of CES It as rewards.
To note that due to the growth we are experiencing we have increased our total number of employees at CES from 1800 14 at the beginning of this year to the current level of 20 105 today.
This is an increase of 291 employees in less than a year or approximately 16% as always I want to finish this portion of the call by thanking all of our customers for their trust and commitment to see us in good times and in bad weather.
With that I'll turn the call over to Tony for the financial update.
Thank you Ken as.
As highlighted by changing as far as beyond the call <unk> financial results for the quarter and represent all time high record levels of revenue adjusted EBITDA and funds flow.
These impressive results were realized amid continued quarterly growth in industry activity targeted pricing increases and disciplined spending during the quarter <unk> generated revenue of $525 million and adjusted EBITDA of 73 million, representing a 14% March.
This record quarterly revenue of $525 million represents a sequential increase.
Of 21% from the previous high water Mark of $434 million in Q2, and an increase of 67% from $314 million in Q3 2021.
Revenue generated in the U S was $350 million or 67% of total revenue for the company that revenue number is up from $300 million in Q2, and $197 million a year ago as both of our major U S divisions demonstrated record revenue levels during Q3.
Revenue generated in Canada was 175 million in the quarter.
Rong Li from $134 million in Q2, as expected seasonally with spring breakup and compared to $117 million a year ago Canadian revenues benefited from increased drilling and completions activity year over year growth and higher production volumes in general.
Our adjusted EBITDA of $73 million in Q3 represented a 20% increase from the $61 million generated in Q2, and 74% increase from 42 million generated in Q.
Q3, 2021, adjusted EBITDA margin in the quarter was 14% and in line with the 14, 1% margin in Q2 as the company continued to realize increased pricing and the scale associated with higher activity levels.
Gross margins were slightly compressed by a combination of a temporary spike in the U S dollar.
The latter half of the quarter in particular.
And also some product mix dynamics.
Call that our Canadian operations price in Canadian dollars, but most of their product related costs are in U S dollars.
Thereby resulting in margin compression until pricing is adjusted for the FX rate settles back down as it has already.
We also had some high revenue products with associated lower gross margins.
Minimal SG&A.
On a consolidated basis, our low SG&A burden and described was able to offset the gross margin compression to deliver EBIT margins in the 14% range.
At CES, our main financial priority continues to be cash flow generation I am proud to report that during Q3, our <unk> was $49 million a $6 million increase over Q2, and a 40% increase over the 35 million generated in Q3 2021.
We have maintained a prudent approach to capital spending through the quarter with a net capex spend of $15 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, we expect cash capex in 2022.
June to be approximately $50 million comprised of $25 million for maintenance and 25 billion for growth initiatives.
We exited the quarter with a net draw on our senior facility of $221 million versus 182 million on June 30.
The increase was directly correlated to the working capital investments associated with the increased financial scale of the company and related revenue growth working capital surplus was also impacted by the significant depreciation of the U S dollar quarter over quarter, which contributed 28 million to the increase.
And working capital balances on revaluation of those balances held in the U S.
We ended Q3 with $566 million in total debt comprised primarily of $288 million in senior notes maturing in October 2024, and a net draw on the senior facility of $221 million as previously mentioned.
Our total debt to adjusted EBITDA declined to two five times at the end of Q3 from two seven times at Q2, and three zero times at Q1, demonstrating our continued deleveraging trend.
I would also note that our Q3 working capital surplus of $666 million exceeded total debt of 566 million or $100 million and represented 32% of our annualized quarterly revenue well within our targeted range of 30% to 35%.
At this time I believe it is very important to highlight the relative financial positioning of the company.
CES is annualized Q3 revenue grew to $2 1 billion from 1.0 billion, just five quarters ago commensurate with a near doubling of industry activity and.
Crude pricing and maintenance of a strong market share we were able to strategically use our balance sheet to support this growth by increasing our credit facility size to approximately $425 million from $315 million in order to provide ample liquidity to support our current revenue levels and beyond.
As these strong industry levels have begun to stabilize at a more muted growth rates. We believe that CES is incremental working capital requirements should declined materially and usher in an era of strong surplus free cash flow generation fueled by these record setting revenue and EBIT tax levels.
For immediate context.
Current net draw on our senior facility is approximately $218 million versus 221 million on September 30th.
However, it should be noted that since September 30th she estimated semiannual high yield coupon payment of $9 2 million quarterly dividend payment of $4 1 million and spent $2 1 million on share repurchases.
<unk> PS scheduled cash outflows CES has begun to realize the surplus free cash flow generation that Ken described.
This surplus free cash flow generation is being realized through most of our divisions and is also being enhanced by measurable working capital optimization.
We believe that CBS will generate material surplus free cash flow amid a constructive industry outlook and has supported that view.
I am pleased to announce that on November 10th the company's board of directors approved a 25% increase.
The dividend from $1 six per share to <unk> <unk> per share Accordingly, CFS will pay a cash dividend of <unk> <unk> per share on January 13th shareholders of record at the close of business on December 30th representing a dividend yield of two 5% on an annualized basis.
Yesterdays closing price and a modest implied payout ratio up 13% of LTM distributable earnings.
During the quarter <unk> repurchased 550000 common shares for $1 2 million or $2 20 per share under our end Civ program. Subsequent to September 30th CES repurchased 844500 additional shares at an average price of $2.
<unk> 45 per share for a total of $2 $1 million, bringing the total year to date amount of repurchase common shares to $1 8 million at an average price of $2 32 per share for a total of $3 6 million.
We continue to be optimistic about the industry outlook and <unk> ability to continue its strong financial performance.
Combination is key to informing our capital allocation decisions, which we evaluate on a quarterly basis.
And in terms of capital allocation considerations we.
We prioritize capital allocation towards supporting existing and new business through investments in working capital and modest capex projects that deliver irr's.
Our internal hurdle rates.
We remain very comfortable with the conservative increase our dividend and we will continue to revisit our policy on a quarterly basis, we will use surplus free cash flow to reduce trough levels as opposed to begin to materially offset outflows and we plan to buy back at least enough shares to offset our modest equity compensation related to <unk>.
And we will consider opportunistic purchases in the context of surplus free cash flow generation leverage and implied valuation models at this time I'd like to turn the call back to Ken's comments on our outlook.
Thank you Tony as you and I. Both noted the Q3 results represented significant record results for revenue and EBITDAX. We were also able to maintain a strong margin of 14% while simultaneously expanding our market share throughout the north American land market. Thank.
Thank you to all of our employees for contributing to these spectacular results that Tony and I have had the privilege of presenting here today I will now pass the call over to the operator for questions.
Thank you we will now begin the question answer session.
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The first question comes from Aaron Macneil with TD Securities.
Go ahead.
Hey, good morning, all thanks for taking my questions I.
I know in the past you've said you've got a lot of <unk>.
<unk>.
We need to spend.
To take on higher volumes of work.
Honestly Chris.
They are now.
Youre building in secondary dragging facility Im sure Youre doing other smaller things around the edges, but I think.
Generally speaking does that still hold or are you below your theoretical capacity or do you think it will.
Need to see an uptick in growth spending to accommodate.
Further growth from this point.
Good morning, Erin Thanks for the question.
Yes, we think we're in good shape, we've been we've been adding two facilities a little bit here and there as it makes sense, but these capex expenditures are minimal and.
Unless we got really busy in a play that we're not focused on right now are in a place were not focused on right now there's no need for a big Capex spends I noted the facility in Sterling as you know somewhere between 55 and 60% of capacity as we estimate it but that's a variable number depending on which chemistries were making at the time.
And even if we got to a number that caused us to want to spend some money in in Sterling, It's not building new buildings and putting in new infrastructure, it's adding some kettles, adding some blending facilities, adding some reactors. So the spends are quick and not significant.
And then along with that you know the one place where actually there's two places where we are starting to get stressed the Kermit facility in Texas was was getting pretty close to where we are gonna have to start spending some money on it. So we strategically decided to just shifts some of the production away from that facility and move it over to the east side of the of the Permian Basin.
In Midland.
We had a facility there that we were able to get going on pretty short notice and at very low cost. It was something that was sitting there and ready to go that we're using for backup and we've shifted you know about.
Right now I think we're about 10% of what we have going in the Permian we've shipped it over there, but we can move that to more like 20 or 30% as we see fit or as we get more exposure to that side of the basin.
We're hopeful also that it'll generate some growth in our market share there as well because it's now we're gonna be logistically advantageous on that part of the play as well.
And then the other one of course is the is the barite grinding facility you know we're pretty much.
We built our art facility to provide about house of its production when it was fully optimized to us in half we're gonna wholesale in order to keep it going and keep our costs down. This is the corpus facility.
That one was as we are now using 100% of our capacity on that one and that's the reason that we started.
Building, the new facility in the Midland or in the Midland area and the Permian Basin, a few months ago. It's approaching completion, we hope to have it done sometime in Q2 and at that point.
It's probably the last piece of big infrastructure, we need for the foreseeable future, especially considering the the outlook on rig counts for 2023, unless something drastically changed when oil went way up.
Okay.
Okay.
Maybe as a follow up you mentioned in the Middle East expansion.
Is there a potential to put capital to work there or engage in M&A to sort of take that business to the next level and I guess.
Quite to J Cam in catalyst in the past it completely changed the makeup of the business like.
I guess do you think something like that is in the cards and what sort of traction would you have to see in order to kind of pursue a larger lumpier capital outlay in.
Markets outside of North America.
Yes, we've been you know we've had a lot we've been spending time on this and we've got some opportunities that are.
Moving at what seems like a snail's pace, but are getting closer to fruition. We're getting some verbal awards and we're just trying to to latch onto a piece of business that's significant.
In order to move forward at that point I think you know we would look at it in the M&A piece to buy a piece of business. If we felt it got us some people on the ground in some infrastructure on the ground, but it definitely would not be a swing for the fences kind of acquisition, we'd want to get into the market get settled to understand the market better and then at some point down the road if something came avail.
But we might look at it but you know.
The capital expenditure till you actually get in there and get putting up some some real revenue and EBITDA.
Won't be significant or at least that's not our plan right now.
Understood. Thanks, Ken I'll turn it over.
And the next question comes from Jonathan Goldman with Scotia Bank.
Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
Just a question on current supply and demand dynamics in the industry could you maybe talk about what.
Are you seeing in terms of supply and the drilling biochemicals whether that.
Supportive right now or it's too much to less kind of any color around that would be great.
Sure Good morning, Jonathan.
I think you know much like it has been for the last couple of years. There is stress on some of the supply chain. It's not on every product anymore. I mean, there was a period in Q1, where everything was was in short supply and everybody was scrambling and everything was going up in price because of that short supply, but the market's adopt.
I think right now there's a four four major product lines that were.
Struggling with and you know we made some of them, we may be able to offset through some agreements. Some of them. We may have to create alternative chemistries are alternate alternative treatments for them.
But I don't think that stop ever goes away, there's always one or two things that are in trouble around the world.
So.
As far as it being positive or negative for our business I mean, we're one of the higher volume providers out there. So obviously you know we have to be more ahead of this and buy more inventory. So if there's nothing going on that gives us pause that we're not going to be able to find a solution or get the chemistry.
But there is potentially some strategic purchasing that needs to happen. So maybe some increase in inventory on some things if we get an opportunity to buy them, but I will say that at this point with none of those things has happened. It's just the it's just the usual struggle that's going on right now that's.
That's been going on for as long as I've been in the business.
No that makes sense and I guess I don't know if you know the answer to that but you know if that's kind of a.
A condition industry wide everyone's kind of dealing with the same.
Why dynamics getting the same sort of inputs or unique.
By each provider.
No I think it's it's the prior.
That's the one good thing about it not good but when there is a shortage out there if we can't get it then no one is getting it and if we need it than our competitors need. It. So it's just a matter of who gets more first then and what price you pay for it really.
No that makes sense, it's been second one I guess theres been some appetite.
Sorry, Jonathan Theres been some opportunities that we've taken advantage of wear.
Were you just couldn't get a chemistry and so you had to pivot and we've done some pivots and that's the other thing that we can bring to our customers and I think it speaks to the market share that we're putting up I know I talked about not talking about market share all the time, but the market share that we're currently participating in is very impressive and I think part of it is due to our adapt.
Ability when these problems come up that people struggle with salt struggled with solving where they cant get supply or they can't get a chemistry and literally cannot get a chemistry, we're very quick to pivot and find a solution that will work at some other price and some other method and I think some other companies struggle with that and that's part of the reason, we're having such success in the market.
No definitely I mean that shows through in the numbers to holding onto those significant share gains in two.
<unk> 2020.
The second one for me on the working cap.
DSO is deemed to be high just relative to 2018 to 2020 levels. I mean, obviously, there's some supply dynamics in there and inflation as well.
I just want to know if there's any specific dynamics behind higher DSO level, and maybe what the trajectory of that would look like going forward.
Yeah.
Yes, I can answer that one not so that's twofold and one of them one of them is really good problem and the other one is and it's one that's starting to dissipate.
First the.
The first dynamic is that revenue has been growing on a monthly and quarterly basis had a tariff rate.
So when you do the math for your DSO calculation, you're using <unk> as part of your denominator and.
And revenue as your sorry.
As part of your numerator and here.
Revenues part of your your your denominator, so when you're when you're making the calculation to actually collecting an amount of money today that is.
That is reflective of revenues that were at lower levels.
A couple of quarters ago, or a couple of months ago. So youre artificially.
Inflating the DSO calculation and the other big part is is that.
At that time.
We are using for calculation.
A lot of it is in the U S and because of the FX.
Effects rates in the U S and the spike.
The us dollar, especially towards the end of Q3.
The value of not a are in Canadian dollars spiked up as well again, making that.
Look higher than it otherwise would have so we expect there are some things that we're doing on the working capital front.
<unk>.
To systematically reduce that DSO number.
The other thing Youre going to see is as the revenue plateaus and started to Youll see youll see that that number of improving and also as FX flattens and it's actually changed in the other way it will improve on the DSO numbers.
That makes sense, thanks, guys I'll turn it over.
The next question.
It's from Tim Monticello with ATB capital markets.
Please go ahead.
Hey, good morning, everyone.
Hum.
The first question was just on margins revenue is very strong points.
I guess lower margin volume work that came through in the quarter.
But at the same time.
I think you would agree that you're probably seeing an easing.
In inflationary pressures and maybe that's not true, but if it doesn't please let me know.
So I'm just curious on like a same product basis, what youre seeing for margins and how we should be thinking about margins going forward.
Well I'll jump at that one first.
I think.
It depends if you're talking about gross margin or EBITDA margin net margin.
We're very focused on.
Net margin, we're less focused on gross margin we've got.
Got some business lines that historically have been.
A little bit smaller so one or two of them are new pieces of business that we picked up in one or two of them are new business lines that we've sort of Vicksburg old business lines that we started making a bigger denton.
In these business lines have fewer touch points on our side.
It's more big volume kind of pass through less service oriented business.
And so you know all we care about them that businesses is net margin EBITDA margins. So we know how to get to that and unfortunately that dilutes gross margin a little bit, but that's not something.
We're concerned about we're trying to get free cash flow and we're trying to generate earnings for our shareholders. So the gross margin number is.
Is gonna move where it moves as we continue to focus on on net margin and then as far as inflation goes yeah.
Yeah, like where it depends on the product in the day, and obviously FX moved a lot during the quarter.
And that's a that helps us on our overall numbers, but it does hurt us in Canada, where our cost of goods goes up and that affects the margin that gets put out.
And it's hard to adjust to when something like that is moving 5% up and back down again in a quarter kind of thing. So we're we're watching it all the time and we were comfortable with the net margin and the EBITDA margin that we're creating and that's what we're focused on is free cash flow to shareholders.
Did your expansion.
The slides that you're talking about.
Carry the same type of working capital intensity is higher margin.
Volumes that you put into it.
At the different business lines. So.
One without.
Without identifying what they are a couple of them due in a couple of them don't.
And it's the.
One of them is very high volume.
And.
So I would say it.
We make sure that we work into our cost of goods the cost of carrying the inventory.
But all of these business lines that are more pass through revenue, our pretty quick pay kind of scenarios, where we have deals on these business line that are commensurate with the the risk we're taking on the inventory.
Okay.
And are you seeing any pricing net pricing traction with customers or is that sort of plateauing or plaza.
I think we've had we've.
We've had tremendous pricing.
Success with customers like the last week I mean, there's customers. We've gone two five times in the last year with significant increases there is some that had been two or three.
It's it was a fight in Q1, when our margins weren't good and it's a fight today when our margins are better but not as good as everybody would probably like to see it it's a competitive space.
I would say the operators the oil companies are.
In our <unk>.
Different situation with with equipment, where there's a finite supply and so they kind of take it on the chin and have to accept what they have to accept to get what they need.
With us they may choose to spend their time fighting with us so.
It's an ongoing battle in it I don't know when its going to and hopefully things just stabilized. So we don't have to keep doing it.
Okay, that's really helpful.
Just one question you had was just around.
Capital allocation.
Good to hear that the harvest mode is underway.
The dividend increase.
Most of it some volatile in respect just given the size of the free cash flow that you're probably going to see next year. So I'm just curious what the playbook is with you.
Those to shareholders, what they should expect next year.
In terms of.
Our growth and returns to shareholders and deleveraging our their goalposts that youre looking for and keep your eyes, where you're kind of going to move more aggressively.
Towards distributions to shareholders.
Yeah.
Can start on that one so we've been pretty consistent in terms of.
The buckets of the.
From a capital allocation.
Point taken.
That increase in the dividend although.
Conservatives, probably lessened we could've done.
It's very symbolic we wanted to wait until we saw that.
Free cash surplus free cash flow waterfall starting to happen.
I will say is that you will see some natural deleveraging.
As in the background, where he will continue to buy some shares we will continue to look at our dividend in terms of at what point do we have very serious discussions about.
Really amplifying some of those other return mechanisms.
<unk> when we get towards that two times on debt to EBITDA level and if we're in that one and a half to two times, we're going to take a serious look at it.
Gently using some of those under Levered. So Tim we were starting to see the free cash flow as a bunch of you on the call and predicted and I think what we need is another good quarter of understanding get understanding the trajectory before we can be more definitive on allocation.
Okay. That's really helpful. And then just last one for me I'm just curious around.
Commissioning that nuclear facilities that can unleash.
Yes another.
Or more job capacity.
And some market share in the Permian or is that.
Just basically building capacity for future growth and allowing for third party sales.
That wasn't we didn't build it because we see a whole pile of business suddenly coming our way that we're gonna have to support we built it to support the business we have but yeah. It's just it's a big strategic advantage one of the main barite grinders in the United States just sold there Theyre barite facility's grinding.
These two another major barite supplier in the United States. So the access to barite is dropping down to a very few number of people, who can actually grind and supply and that is something we're basic in so that's something that we're going to participate in and I think there'll be tailwind from that for sure. That's why we're doing it.
Got it thanks, a lot I'll turn it back.
The next question comes from Keith Markey with RBC capital markets.
Telehealth.
Hi, Good morning, maybe Tony if we could just start out on working capital again, you mentioned that you are.
Undergoing some some working capital optimization initiatives can you, maybe just give us a little bit more context on what those might be and if they will have an impact potentially on that 30% to 35% of revenue range that you've historically been in.
Yeah. So so those are.
It's just a focus from the top on working capital as we talked during the last few quarters.
We were unable to focus as much as we wanted on working capital optimization, just because we were growing as much as we get growing annualized revenue from 1 billion to 2 billion and just under four corners.
So.
Relative to start there is some blocking and tackling triaging of.
Hi.
Larger accounts, focusing on a R and streamlining the billing and collection methodology. There is some technology that we've employed there too to marry our ERP for example to the customers.
Payables hurdles from a technical perspective.
There has also been very focused hiring.
Capabilities to accelerate that.
So that's on the <unk> and DSO side and on the on the Tsi side.
We're looking at inventory levels.
And.
We did have to buy more than we need it and carry higher inventories than we have historically, so you could give us a buffer during the really challenging supply chain period that we've gone through the last couple of years, we're not out of the woods yet.
We are getting a little bit more efficient and those carrying levels in terms of volumes. So.
Is that going to give us a breakout of that 30% to 35%.
I really don't know yet, but you got to appreciate that when youre doing $2 billion of revenue and $2 one on an annualized basis.
Any basis points improving.
And that 30% to 35% metric is going to pay dividends and I think youre going to see a solid number there going forward and hopefully improvements.
I think to add to that maybe just the 30% to 35% number that we throw out is it a race or a range that we've been in always other than significant downturns.
So it's oh.
As long as things keep stable the improvements will probably stay within that ratio or that that percentage, but maybe we get to the lower side of it.
Got it thanks for the thanks for the comment.
Now now Ken one of your bigger.
Bigger customers is talking about doing more exploration in the in the Utica shale.
Starting with an initial program about 2020 wells.
Which might be a rig.
Can you just talk a little bit more about what youre seeing in that area, maybe in the context of your current U S job mix and and what you think your capacity could be if the if we start to see a lot more activity in that area.
Sure Yeah, I mean, the customer you speak of we've been in contact with as well.
Obviously, it's early days nothing has been awarded but historically, we do a high percentage of their business and so I'd be surprised.
If we don't participate in some way and that as far as infrastructure and people in the area. You know its been a depressed market due to a lot of reasons gas prices and takeaway issues, primarily but it may be that seasonal uptick we haven't noticed yet our activity has been pretty constant up there.
But as far as capacity goes I mean, we have a high level of capacity in the area. We have two facilities in the area that we have historically serviced the Marcellus and Utica with.
When we bought <unk> back in 2010 2009 that was their busy area that was the reason that we bought them. It wasn't the Permian the Permian that's something we did after the fact is we saw attention shifting there they were dominant in that in that market. So should that market get more active again, we will definitely be and we already have.
The infrastructure and people to manage it.
Okay. Thanks, that's it for me I'll turn it back.
Thanks Keith.
The next question comes from John Gibson with BMO capital markets.
Please go ahead.
Okay.
Good morning, I just had one.
On market share I know it jumps around quarter to quarter, but the job count figures you touched on in Q4.
<unk> jump next quarter and.
So obviously you're up in Q3 I'm wondering if there's anything that's changed with your competitors that.
Could allow for a sustained higher market share across out of Canada or the U S. In 2023.
Yeah, Yeah, I mean, I think it's probably a lot of it has to do with customer mix.
The customers, we have getting busier, but it's also a little bit to do with all the supply stuff and the people shortages that are going on I mean I I.
I don't like to brag too much about our people, but we really I can't think of an example, where we've let people down and I'm going to probably get a whole bunch of calls from customers now telling me things, but as far as I know, we haven't let anyone down we haven't missed any balls and we provide a good service and our customers that we're working for are getting busier and getting the rigs and so yeah like when.
The first quarter that I reported was in in March this year for Q4, and I think we were.
21% of the U S market and today, we're over 23.
The North American market and today, we are over 23, it's been a steady grind up we're always working but I will say that you know.
You're talking about margin or the other I've had some questions today about margin.
Lately, we've had to knowingly submit bids for some work for customers. We were working with them that didn't meet the criteria that they wanted for low pricing and we've lost a couple of pieces of business because we're just not willing to take what they're getting so anybody who thinks that we're leaving money on the table or we should be getting a lot more.
These are the kinds of examples that we're dealing with daily where.
Customers are telling us what they are willing to pay and if we're willing to work for it we will but there is a line where we can't get proper returns we will walk away.
Great I appreciate the color and congrats on the quarter.
Thank you.
And the next question comes from Josef Schachter with Schachter Energy research.
Please go ahead.
Good morning, Kevin Tony.
Congratulations on the great quarter, and a dividend increase.
Lot of my questions have been answered.
The one left I had was the international offshore business.
You, you're almost talked about it every quarter.
The impact from onshore offshore have.
Have you seen any more improvement in that in the most recent quarter and in terms of our business that you're booking for Q4 and going forward.
Yes, I think we I mean, we're focused on on the prophylaxis acquisition. We did back earlier this year and then one of the reasons for that is that offshore market is different than the land market in North America, There's only a couple of providers out there both on drilling rigs and on production Kim and I think that those those companies.
Better overall numbers are margins and reflect better overall margins in numbers largely because of that space, where they don't really haven't much competition. So the two of them are able to to get a much better return.
And so that's why we want to enter the market, but having said that it's a it's a tough road to get there we continue to have a.
So solid growth with the company that we acquired and together we've just submitted another big bid. So hopefully we can pick something up but that that kind of business is hard to break into and it's it's a long road to get there on the drilling fluids side, you know we've done some jackups over the years, but we don't do any of that floater business. So that's just like.
<unk> business I think there's strong margins, because there's fewer competitors and we'd like to get into it but there's also big costs on the drilling fluids side any way to getting into that space on the production Cam side, It's it's lower class more supply agreements once you figure out the problems and then some some intermittent servicing when they when there is an issue.
So we feel like it's if we're going to get into one side or the other the production Tim is going to be the one we're going to have a better time with.
In terms of the area that it's working is that mostly Gulf of Mexico or is that also looking at the north sea or you know offshore Brazil, how how big.
You know of a place you know.
Format till they have right now in terms of market access.
It's just the Gulf of Mexico.
Our international business is a different animal and that's you know we're taking steps there in the middle east to try and gain some land business. There first but I would suggest that unless it was a very good customer who had a very high level of confidence in us it would be really tough to get anything off shore that would be like a third step after we got offshore in the Gulf.
Super Okay, Kent, Tony Thanks, very much and congratulations again.
Thank you Joseph.
And the next question comes from Michael Robertson with National Bank financial.
Please go ahead.
Good morning, Gents, congrats on a solid quarter and thanks for taking my question.
Just just one for me at this point.
Obviously, you guys have been focused on your sort of core.
Markets given the supportive nature of that backdrop, but I was wondering if there was any updates or if youre, making any inroads in.
Sort of non traditional spaces.
Like cosmetics or what have you.
Yes, we are.
We have been looking at those opportunities and I would say, we've probably spent the last year doing deep dives in.
In specific end markets that are included.
In fact in personal care.
Taking a look at some of the chemistry behind carbon capture as well.
What I'd say Michael is we are an information gathering mode.
And thats starting to shift to a better appreciation.
Our divisional.
Groups and our technology folks on what we can actually do so.
I think it's been a real eye opener to to find examples where we can use our chemistry, but we haven't seen any any significant progress in terms of revenue generating abilities. Yet there are a couple that we're going to go down that path.
And this is like a multiyear journey, where we will start off organically and maybe in a few years, if we might run in those markets Youll see something bigger.
Oh, that's interesting color commentary, we'll keep an eye out for updates on that down the road again I. Appreciate you taking my question I'll turn it back.
Once again, if you have a question. Please press Star then one.
The next question comes from Richard Evans, with Meera River Capital management.
Please go ahead.
Hi, I just wanted to follow up a little bit on the working capital side, you seem to be targeting 30% to 35% working capital to sales.
But if we look at your biggest U S direct payer they managed to run the business closer to sort of 20, 20% of sales, which is quite a lot of cash I'm just wondering why.
Do you feel you need to be sort of 10 points structurally higher on working capital to sales and later.
Yeah.
Richard I'd have to look at their specific numbers, what we're talking about has been.
Has been our historical level.
We have some great peers out there.
You don't mind I assume youre talking about is fairly champion X is that right.
No.
Yes, and they're a great company however.
One of the things, that's a little bit different about our two businesses.
Uh huh.
The end markets that we serve almost all of their chemistry get sold into the production chemical end market.
And.
We've been on record in the past is saying.
As approximately 50% drilling fluids and 50% production chemicals.
As many of the analysts on this call know.
The working capital requirements and the cash conversion cycle associated with the drilling fluids industry is much higher and much longer than the.
And the production chemical cash conversion cycle.
The main reason Richard.
Okay.
On the flip side on the flip side, because it's very important because what we're talking about it's important it's cash on the flip side, the cash investments requirements Capex requirements.
Our much lower for the drilling fluids business and the production chemicals business and as Ken said earlier industrial we're squarely focused on.
Okay, well why is somebody less familiar with the industry want why is the working capital higher.
Our drilling versus production.
Yes, it really simply.
And again, that's the first question from every analyst when they start covering us.
Arent reasons, but the main one is the following.
We.
Okay.
Well site production chemical job and we'll we'll either jet or will drop off towards.
<unk> with a bunch of chemistry, and we dropped that off and we build the clients immediately.
And then we wait.
And drilling fluids, we continue to bring product to the well site has theyre drilling the well and completing the well.
But that process can take a few weeks.
And it's only at the end of those few weeks.
We sit down with the customer to reconcile exactly what was used and at that point, we're able to build on that.
That's different.
Okay, great. Thanks for clearing that up.
As there are no further questions Mckee knew this concludes the question answer session.
I would like to turn the conference back over to Ken Zinger for any closing remarks.
Okay.
Thank you with that ill wrap up this call by saying, Thank you to all of our customers and to 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 Q4 2022 update in March of next year.
Thanks to all for your time today.
Okay.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant day.
Yeah.
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Uh huh.
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