Q4 2023 CES Energy Solutions Corp Earnings Call
Operator: Good morning, everyone, and welcome to the CES Energy Solutions fourth quarter 2023 results conference call and webinar. 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 1 on your telephone keypad. Thank you for your continued assistance during the conference call. You may signal an operator by pressing the star and zero.
Good morning, everyone and welcome to the C. E S annuity solutions fourth quarter 2023 results conference call and webcast. 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.
Did you in 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 Our Latino Chief Financial Officer. Please go ahead.
Anthony Michael Aulicino: I would now like to turn the conference over to Tony Aulicino, Financial Officer. Please go ahead.
Anthony Michael Aulicino: 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 annual information form, fourth quarter MD&A, and press release dated February 29, 2024. In addition, certain financial measures that we will refer to today are not recognized under current generally accepted accounting policies.
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 annual information form fourth quarter MD&A and press release dated February 29, 2024. In addition, certain financial measures that we.
We will refer to today are not recognized under current general accepted accounting policies and.
Anthony Michael Aulicino: And for a description and definition of these, please see our fourth quarter MD&A. At this time, I'd like to turn the call over to Ken Zinger, our president and CEO. Thank you, Tony.
For a description and definition of these.
Please see our fourth quarter MD&A.
At this time I'd like to turn the call over to Ken Zinger, our president and CEO.
Thank you Tony welcome everyone and thank you for joining us for our fourth quarter and year end 2023 earnings call.
Kenneth E. Zinger: And thank you for joining us for our fourth quarter and year-end 2023 earnings call. On today's call, I will provide a brief summary of our strong financial results released yesterday, followed by an update on capital allocation, and then our divisional updates for Canada and the U.S., followed by an announcement regarding Richard Baxter, President of AES. I will then pass the call over to Tony to provide a detailed financial update. We'll take questions, and then we'll wrap up the call.
On today's call I will provide a brief summary of our strong financial results released yesterday.
Led by an update on capital allocation and then our divisional updates for Canada and the U S. Followed by an announcement regarding Richard Baxter Presidency, I'll be yes, I will then pass the call over to Tony to provide a detailed financial update we'll take questions and then we'll wrap up the call.
Kenneth E. Zinger: I will start my comments today by highlighting some of the major financial accomplishments we were able to achieve in Q4 2023, as well as for full year 2023. The Q4 highlights include Q4 revenue of $553.5 million, our second highest quarter revenue ever, just 2% shy of last year's Q4 and our third highest revenue quarter ever. Our all-time highest quarterly EBITDA of $84.6 million, beating our previous record level of $80.2 million set in Q4 of last year by 5.5%. And our highest quarterly EBITDA margin in over eight years of 15.3%. This compares to 15% in the prior quarter and 14.3% in the same quarter last year. Annual highlights for 2023 include
I will start my comments today by highlighting some of the major financial accomplish accomplishments, we were able to achieve in Q4 2023 as well as for full year 2023. The Q4 highlights include Q4 revenue of $553 5 million, our second highest quarter Q4 ever just 2% shy of last year's Q.
And our third highest revenue quarter ever.
Our all time highest quarterly EBITDA of $84 $6 million, beating our previous record level of $82 million set in Q4 of last year by five 5%.
Our highest quarterly EBITDA margin in over eight years of 15, 3%. This compares to 15% in the prior quarter and 14, 3% in the same quarter last year.
Annual highlights for 2023 include.
Kenneth E. Zinger: All-time record revenue of $2.16 billion versus our prior record from 2022 of $1.92 billion, or an increase of 13% year-over-year. All-time record EBITDA of $315.8 million versus our prior record from 2022 of $257 million, or an increase of 23%. Our highest annualized EBITDA margin since 2017 of 14.6%, which came in just above our stated target range of 13.5% to 14.5%, significantly reduced the cash conversion cycle from 120 days in 2022 to 112 days in 2023. 2023 full-year free cash flow of $211.6 million, representing a 20% cash on cash yield at our current market capitalization.
All time record revenue of 2.16 billion versus our prior record from 2022 of $1 92 billion or an increase of 13% year over year, all time record EBITDA of $315 8 million versus our prior record from 2022 of $257 million or an increase of 23% our highest.
Annualized EBITDA margin since 2017, a 14, 6% which came in just above our stated target range of 13 five to 14, 5%.
Significantly reduced cash conversion cycle from 120 days in 2022 to 112 days in 2023.
2023.
Full year free cash flow of $211.6 million, representing a 20% cash on cash yield at our current market capitalization.
Kenneth E. Zinger: Annual return of $93.5 million to shareholders through $22.5 million in dividends and $70.9 million in share repurchases, which represents 8.6% of common shares outstanding at January 1st, 2023. And finally, the announced 20% increase in the quarterly dividend to $0.03 per share, which represents a 12% payout ratio. Our capital allocation plans for 2024 remain the same as stated in Q3 2023. We will continue to support the business with the necessary investments required to enable acceptable growth and return, and an increased dividend to $0.12 per year. We intend to fully utilize our NCIB expiring in July of 2024 to repurchase the full 18.7 million shares allowable under the program, and then we will renew the NCIB immediately thereafter.
Annual return of $93 5 million to shareholders through 'twenty $2.5 million in dividends and $70 9 million in share repurchases, which represented eight 6% of common shares outstanding at January one 2023.
And finally, the announced 20% increase to the quarterly dividend to three cents per share, which represents a 12% payout ratio.
Our capital allocation plans for 'twenty 'twenty four remain the same as stated in Q3 2023, we will continue to support the business with the necessary investments required to enable acceptable growth and returns.
An increased dividend of <unk> 12 per year, we intend to fully utilize our N CIB expiring in July of 'twenty 'twenty four.
To repurchase the full 18.7 million shares allowable under the program then we will renew the B N CIB immediately thereafter.
Kenneth E. Zinger: We will use the balance of remaining free cash flow to continue paying down debt towards the lower end of our 1 to 1.5 times debt to EBITDA target rate. I'll now move on to summarize Q4 performance by division. Currently, our rig count in North America stands at 220 rigs out of 860 running, representing our highest ever North American land market share at 25.6%. The Canadian Drilling Fluids Division continues to lead the WCSB in market share. Today, we are providing service to 83 of the 234 jobs listed as underway in Canada for a 35.5% market share. However, drilling activity in Canada so far in Q1 2024 has been slightly lower year-over-year.
We will use the balance of remaining free cash flow to continue paying down debt towards the lower end of our one to one of the half times debt to EBITDA target targeting.
I'll now move on to summarize Q4 performance by Division.
Currently our rig count in North America stands at 220 rigs out of the 860 running representing our highest ever North American land market share at 25, 6%.
The Canadian drilling fluids Division continues to lead the WCS be end market share today, we are providing service to 83 of the 234 jobs listed is underway in Canada, or a 35, 5% market share drilling.
Drilling activity in Canada, so far in Q1, 'twenty 'twenty four has been slightly lower year over year. However, we remain excited about the prospects for 'twenty 'twenty four and anticipate it will be a little stronger year. Overall, we also expect that 'twenty twenty-five will follow with another increase in activity in Canada. This is due to the expected completion and startup of.
Kenneth E. Zinger: However, we remain excited about the prospects for 2024 and anticipate it will be a slightly stronger year overall. We also expect that 2025 will follow with another increase in activity in Canada. This is due to the expected completion and start-up of infrastructure projects and their associated takeaway capacity, which should tighten differentials and improve operator economics for this market. Pure Chem, our Canadian production chemical business, set new records again for quarterly revenue and EBITDA in Q4.
<unk> projects and their associated takeaway capacity, which should tighten differentials and improve operator economics for this market.
Sure Kim our Canadian production chemical business set New records again for quarterly revenue and EBITDA. In Q4, we have continued to see growing contributions from our slot fracs chemical stimulation and H scavenger groups as we further penetrate each of these end markets and gain market share while utilizing only our current infrastructure and some.
Kenneth E. Zinger: We have continued to see growing contributions from our FRAC chemical, stimulation, and H2S scavenger groups as we further penetrate each of these end markets and gain market share, while utilizing only our current infrastructure and supply chain to support them. The main gains in our outperformance are from the primary business, which continues to take market share and grow meaningfully. We believe that we are now firmly the number one provider of production chemistry and service to the conventional land market in Canada. AES, our U.S. drilling fluids group, is providing chemistries and service to 137 of the 626 rigs active in the U.S. land market, for our highest ever quarterly market share of U.S. land at 21.9 percent. This is in a market where the number of rigs working in the quarter was roughly flat from the previous quarter, but down significantly year over year. We currently enjoy a basin-leading 104 out of the 314 rigs working in the Permian Basin, equating to our highest ever market share in this basin of 33.1 percent.
Fly chain to support them the main games and our own performance are from the primary business production treating which continues to take market share and grow meaningfully. We believe that we are now firmly the number one provider of production chemistry and service to the conventional land market in Canada.
A S. R. U S drilling fluids group, providing is providing chemistries and service to 137 of the 626 rigs active in the U S land market.
For our highest ever recorded quarterly market share of U S. Land at 21, 9%. This is in a market where the number of rigs working in the quarter was roughly flat from the previous quarter, but down significantly year over year. We currently enjoy a basin, leading 104 out of the 314 rigs working in the Permian base.
Equating to our highest ever market share in this space of 33, 1% are.
Kenneth E. Zinger: Our second barite grinding facility located in the Permian Basin now enables us to supply 100% of our barite needs going forward, supporting increased market penetration and further margin improvement. Our soft entry into the Haynesville market is on track, and we are slowly establishing customers and working through fine-tuning our supply chain to the area. Obviously, with the lower natural gas prices currently, activity is muted in the area at 43 rigs currently versus 68 a year ago. Our strategy is to establish success with an operator or two so that whenever they start picking up rigs again, we can position ourselves to be on them. We see our new Permian-based grinding facility providing us with the edge to allow us to gain market share here.
Our second barite grinding facility located in the Permian Basin now enables us to supply 100% of our barite needs going forward.
Supporting increased market penetration and further margin improvement are soft entry into the Haynesville market is on track and we are slowly establishing customers and working through fine tuning our supply chain to the area, obviously with the lower natural gas prices currently activity is muted in the area at 43 rigs currently versus 68 a year ago.
Our strategy is to establish success with an operator or two so that whenever operators start picking up rigs again, we can position ourselves to be on them, we see our new Permian based brining facility, providing us with the edge to allow us to gain market share here.
Kenneth E. Zinger: Finally, J-CAM Catalyst continues to observe outsized growth in revenue and EBITDA as compared to the competitive landscape. We continue to see growth in all aspects of this business unit. Service intensity combined with consistent market share gains are driving the growth. We have continued the recent trend of winning more business in this division, and based on internal analysis combined with available third-party data research, we believe that we have comfortably achieved the number one market share in the Permian Basin. We also believe, based on the same intelligence, that we are the clear number two production chemistry and services provider in the North American land market. At this time, I would like to publicly announce that Richard Baxter, the president of our U.S. Drilling Fluids Group, AES, is retiring from his current position as planned in April of this year. This date, which aligns with the solar eclipse, was chosen by Richard over a year ago, and we have been planning for it since then. At the time of planning his retirement date, we also named his successor internally. Richard has spent the past couple of years grooming him to take over this role.
Finally, J Cam catalyst continues to observe.
Outsize growth in revenue and EBITDA as compared to the competitive landscape. We continue to see growth in all aspects of this business unit service intensity combined with consistent market share gains are driving the growth. We have continued the recent trend of winning more business in this division and based on internal analysis combined with available third party data research we believe.
That we are comfortably achieved the number one market share in the Permian Basin and we also believe based on the same intelligence that we are the clear number two production chemistry and services provider in the North American land market.
At this time I would like to publicly announce that Richard Baxter, the president of our U S drilling fluids group Aes is retiring from his current position as planned in April of this year.
This date, which aligns with the solar eclipse was chosen by Richard over a year ago, and we have been planning towards that since then at the time of planning. The retirement date. We also named as a successor internally. Richard has spent the past couple of years grooming him to take over this role.
Richard joined F. M I, the private drilling fluids company that we bought 14 years ago back in October of 1997. This makes him one of our longest serving employees with 27 years of the company's 18 of those with C. S. He was promoted to president of B S. 10 years ago in January of 2014 after the prior owner.
Kenneth E. Zinger: Richard joined FMI, the private drilling fluids company that we bought 14 years ago, back in October of 1997. This makes him one of our longest-serving employees, with 27 years at the company, 18 of those with CES. He was promoted to president of AES 10 years ago in January of 2014 after the prior owner of FMI retired. Richard has worked tirelessly to build AES from a smaller market participant at that time with a 7% market share in 2014 into the owner of the clear number one U.S. land market share that AES enjoys today with 21.9%. Richard is responsible for the unique culture and success that AES enjoys today and will be truly missed in his current role by the employees throughout the company, the executive team at CES, as well as the board. Richard is planning to take about a month off to enjoy retirement and then get right back to it. The plan is for him to remain at AES in a strategic executive advisor role and a title of President Emeritus.
Beth M I retired.
Richard has worked tirelessly and building a yes from a smaller market participant at that time with a 7% market share in 2014 and to the owner of the clear number one U S land market share that aes enjoys today with 21, 9%.
Richard is responsible for the unique culture and success that <unk> enjoys today and will be truly missed in his current role by the employees throughout the company the executive team at CES as well as the board Richard is planning to take about a month off to enjoy retirement, and then get right back to it the planets for him to remain at Aes and our strategic executive advisor role.
All in the title of President Emeritus he will remain on staff and we'll spend his time working on projects to improve technologies develop new products and systems and generally optimize our product offerings and systems, while supporting his groomed successor as need be.
For those of you who don't know Richards has a masters of science in petroleum engineering by education, but he is a scientist at heart. He is responsible for many of the proprietary systems and technologies. The company. Currently utilize uses utilizes I want to thank Richard for sharing his life with US all here at CES. He has truly been a committed honorable and <unk>.
Its worthy business partner and most importantly, a friend for the past 14 years I look forward to spending a few more years with him in his new role and I will appreciate all further years, he chooses to share with us.
Kenneth E. Zinger: He will remain on staff and will spend his time working on projects to improve technologies, develop new products and systems, and generally optimize our product offerings and systems while supporting his groomed successor as need be. For those of you who don't know, Richard has a Master's of Science in Petroleum Engineering by Education, but he is a scientist at heart. He is responsible for many of the proprietary systems and technologies the company currently utilizes. I want to thank Richard for sharing his life with us all here at CES. He has truly been a committed, honorable, and trustworthy business partner, and, most importantly, a friend for the past 14 years. I look forward to spending a few more years with him in his new role, and I will appreciate all further years he chooses to share with us. Going forward, the new president at AES will be Mr. James Strickland.
Yeah.
Going forward, the new President at Aes will be Mr. Jean Strickland James joined E. S 13 years ago back in 2011. He was hired as an account manager in the northeast USA. He joined US from M Ice Walko Schlumberger, where he had spent the prior eight years as a drilling fluids engineer offshore James.
<unk> spent these past 13 years working his way up through a variety of positions and locations of the U S to his current role as senior Vice President, which he has held for the past eight years myself the board and the executive management have complete confidence in James ability to fulfill his new role as we have watched them evolved into it over the past few.
Years, and look forward to walking him officially into it in about six weeks.
As always I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success at CES I'm proud to say that we employed 2200 36 people at CES at the end of 2023 versus 20 122 at the beginning of 2023, representing an increase of five 4% year over year obviously.
Kenneth E. Zinger: James joined AES 13 years ago, back in 2011. He was hired as an account manager in the Northeast USA. He joined us from MI SWACO Schlumberger, where he had spent the prior eight years as a drilling fluids engineer offshore. James has spent these past 13 years working his way up through a variety of positions and locations at AES to his current role as senior vice president, which he has held for the past eight years. Myself, the board, and the executive management have complete confidence in James' ability to fulfill his new role as we have watched him evolve into it over the past few years and look forward to walking him officially into it in about six weeks. As always, I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success at CES.
This number of employees represents a massive accomplishment from what started back in 2001 is a company with three guys in Threep pickup trucks.
In conclusion, I would like to note that the results in Q4 and throughout 2023 were once again not due to any one division or area. Excelling. This was a balanced effort across the entire company in which every business group contributed it speaks once again to the quality of people employed everywhere in every division here at CES energy solutions with.
With that I'll turn the call over to Tony for the financial update Thank you Ken.
Yeah.
C S as financial results for the fourth quarter and full year set record levels of adjusted EBITDAX and demonstrated a continuation of strong revenue and free cash flow. Despite muted rig counts demonstrating the unique resilience of CES as consumable chemicals business model.
Kenneth E. Zinger: I'm proud to say that we employ 2,236 people at CES at the end of 2023 versus 2,122 at the beginning of 2023, representing an increase of 5.4% year over year. Obviously, this number of employees represents a massive accomplishment from what started back in 2001 as a company with three guys and three pickup trucks. In conclusion, I would like to note that the results in Q4 and throughout 2023 were once again not due to any one division or area excelling. This was a balanced effort across the entire company, to which every business group contributed.
These impressive results were achieved through strong contributions across all parts of the business amid a constructive supply demand environment, increasing levels of service intensity and leading market share positions throughout the business.
2023 revenue of 2.2 billion represented a new record and a 13% increase over $1 9 billion in 2022, while adjusted EBITDAX of 316 million reached record highs and represented a 23 increased 23% increase.
Anthony Michael Aulicino: It speaks once again to the quality of people employed everywhere in every division here at CES Energy Solutions. With that, I'll turn the call over to Tony for the financial update. Thank you, Ken.
Over $257 million in 2022.
Okay.
Adjusted EBITDA margin for the year was 14, 6% and up from 13, 4%. In 2022. These achievements were underscored by 212 million of free cash flow of $101 million reduction of our long term debt.
Anthony Michael Aulicino: CES's financial results for the fourth quarter and full year set record levels of adjusted EBITDAC and demonstrated a continuation of strong revenue and free cash flow despite muted rig counts, demonstrating the unique resilience of CES's consumable chemicals business model. These impressive results were achieved through strong contributions across all parts of the business amid a constructive supply and demand environment, increasing levels of service intensity, and leading market share positions throughout the business. 2023 revenue of $2.2 billion represented a new record and a 13% increase over $1.9 billion in 2022, while adjusted EBITDAC of $316 million reached record highs and represented a 23% increase over $257 million in 2022. Adjusted EBITDA margin for the year was 14.6% and up from 13.4% in 2022.
And the $93 $5 million return of capital to shareholders through 'twenty, $2 5 million in dividends and $70 9 million and share repurchases.
Focusing on the fourth quarter C. S generated revenue of $553 million and record quarterly adjusted EBITDAX of $80 6 million, representing a 15, 3% margin Q4 revenue of 553 million maintained our annualized revenue run rate level of <unk>.
Point $2 billion and came in 3% ahead of $536 million in Q3.
And was consistent with $563 million in Q4 of 2022.
Revenue generated in the U S was $361 million or 65% of total revenue.
This revenue was in line with $361 million in Q3, and slightly below the 378 million a year ago.
Revenue generated in Canada set a record at $192 million in the quarter up from $175 million in Q3 and compared to $184 million in 2022.
Anthony Michael Aulicino: These achievements were underscored by $212 million of free cash flow, a $101 million reduction in our long-term debt, and a $93.5 million return of capital to shareholders through $22.5 million in dividends and $70.9 million in share repurchase. Focusing on the fourth quarter, CES generated revenue of $553 million and a record quarterly adjusted EBITDA of $84.6 million, representing a 15.3% margin. Q4 revenue of $553 million maintained our annualized revenue run rate level of $2.2 billion and came in 3% ahead of $536 million in Q3, and was consistent with $563 million in Q4 of 2022. Revenue generated in the U.S. was $361 million, or 65% of total revenue. This revenue was in line with $361 million in Q3 and slightly below $378 million a year ago. Revenue generated in Canada set a record at $192 million in the quarter, up from $175 million in Q3 and compared to $184 million in 2022.
U S and Canadian operations saw increased levels of service intensity and production chemical volumes driven by complex drilling programs and customer emphasis on optimizing production through effective chemical treatments countering declines in industry rig counts and showcasing.
The unique resilience of our consumable chemicals business model.
Adjusted EBITDA of $84 6 million set a record in Q4 and represented 5% increase from the $80 3 million generated in Q4, 2022, and a sequential increase of $4.4 million or 5% from the 80.2 million generated in Q3.
Adjusted EBITDA margin in the quarter increased to 15, 3% compared to 15.0% in Q3 and 14.3% in Q4, 2022 and was reflective of a favorable product mix strategic procurement initiatives and maintaining prudent SG&A levels.
During the quarter see us generated $39 $9 million in cash flow from operations compared to $99 9 million in Q3 and in line with the $38.8 million in Q4 2022.
Anthony Michael Aulicino: U.S. and Canadian operations saw increased levels of service intensity and production chemical volumes driven by complex drilling programs and customer emphasis on optimizing production through effective chemical treatments, countering declines in industry rig counts and showcasing the unique resilience of our consumable chemicals business bond. Adjusted EBITDA of $84.6 million set a record in Q4 and represented a 5% increase from the $80.3 million generated in Q4 2022 and a sequential increase of $4.4 million, or 5%, from the $80.2 million generated in Q3. The adjusted EBITDAC margin in the quarter increased to 15.3% compared to 15.0% in Q3 and 14.3% in Q4 2022. And it was reflective of a favorable product mix, strategic procurement initiatives, and maintaining prudent SG&A levels. During the quarter, CES generated $39.9 million in cash flow from operations compared to $99.9 million in Q3 and in line with $38.8 million in Q4 2022.
Q4 included a typical seasonal working capital build of $28 $9 million, leading up to the Canadian winter drilling season, similar to the $28 1 million in Q4 2022.
Funds flow from operations, which excludes the effect of seasonal working capital changes was $68 2 million for the quarter, representing an 18% increase over $57 9 million in Q3 and in line with the 66.9 million in Q4 2022.
The more illustrative full year cash flow from operations totaled $302 million compared to a use of $2 7 million during 2020 to FCA as CES invested in working capital to support significant growth during that year.
The year over year improvement was driven by strong financial performance with higher contribution margins on associated activity levels relative to the comparable period combined with lower required investment in working capital.
During the year CES achieved free cash flow of $212 million compared to a use of $64 million in 2022.
Anthony Michael Aulicino: Q4 included a typical seasonal working capital build of $28.9 million dollars, leading up to the Canadian winter drilling season, similar to the $28.1 million in Q4 2022. Funds flow from operations, which excludes the effect of seasonal working capital changes, was $68.2 million for the quarter, representing an 18% increase over $57.9 million in Q3 and in line with the $66.9 million in Q4 2022.
Which was reflective of the strong cash flow generation capability of the business now.
Now that revenue growth rate levels have stabilized and we are realizing the significant benefits of our working capital optimization efforts.
<unk> continued to maintain a prudent approach to capital spending through the quarter with Capex spend net of disposals of $15 $9 million a.
Representing 3% of revenue for an aggregate spend of $61 million in 2023.
Anthony Michael Aulicino: The more illustrative full-year cash flow from operations totaled $302 million compared to a use of $2.7 million during 2022 as CES invested in working capital to support significant growth during that year. The year-over-year improvement was driven by strong financial performance with higher contribution margins on associated activity levels relative to the comparable period, combined with a lower required investment in working capital. During the year, CES achieved free cash flow of $212 million compared to $64 million in 2022, which was reflective of the strong cash flow generation capability of the business.
We will continue to adjust plans as required to support existing business and growth throughout our divisions and.
And for 2024, we expect cash capex to be approximately $70 million split evenly between maintenance and expansion capital to support sustained revenue levels and accretive business development opportunities.
During Q4, we were active in our in CIB purchasing five 3 million common shares at an average price of $3 61 per share for a total of $19 $1 million. We continued our buyback activity into 'twenty 'twenty four purchasing three 5 million shares.
Anthony Michael Aulicino: Now that revenue growth rates have stabilized, and we are realizing the significant benefits of our working capital optimization, CES continues to maintain a prudent approach to capital spending through the quarter with CAPEX spend net of disposals of $15.9 million, representing 3% of revenue for an aggregate spend of $61 million in 2023. We will continue to adjust plans as required to support existing business and growth throughout our divisions. And for 2024, we expect cash capex to be approximately $70 million, split evenly between maintenance and expansion capital to support sustained revenue levels and creative business development opportunities. During Q4, we were active in our NCIB, purchasing 5.3 million common shares at an average price of $3.61 per share for a total of $19.1 million.
At an average price of $3 61 per share for a total of $12 6 million.
We exited the year with total long term debt of $391 million, representing a reduction of $101 million from $491 million a year ago.
Included in long term debt is $141 million and net draw.
On our senior facility compared to 92 million at September 30th and 208 million at December 31 2022.
And in the $250 million Canadian term loan, which was used to settle the company's senior notes in November of last year.
We ended the year with $470 million in total debt, representing a decrease of $88 million year over year.
Total debt is comprised primarily of the $250 million Canadian term loan facility.
$141 million net draw on the senior facility and $73 million in lease obligations.
Anthony Michael Aulicino: We continued our buyback activity into 2024, purchasing 3.5 million shares at an average price of $3.61 per share for a total of $12.6 million. We exited the year with total long-term debt of $391 million, representing a reduction of $101 million from $491 million a year ago. Included in long-term debt is $141 million in net draw on our senior facility compared to $92 million at September 30th and $208 million at December 31st, 2022 and the $250 million Canadian term loan which was used to settle the company's senior notes in November of last year. We ended the year with $470 million in total debt, representing a decrease of $88 million year over year.
Total debt to adjusted EBITDA remained at a prudent level of 1.49 times.
At the end of the quarter compared to 2.17 times a year ago, demonstrating our continued deleveraging trend we are very comfortable with our current debt level and leverage in the one to one five times range, thereby facilitating strong return of capital to shareholders and prioritizing sustainable dividend.
And share buyback levels.
I would also note that our working capital surplus of $633 million exceeded our total debt of $470 million by $163 million and and demonstrated continued improvement year over year.
Continued focus on working capital optimization.
It has led to a year over year reduction in cash conversion cycle to 112 days from 120 days and a reduction in working capital as a percentage of annualized quarterly revenue to 29.0% from 39%.
Anthony Michael Aulicino: Total debt is comprised primarily of the $250 million Canadian term loan facility, a $141 million net draw on the senior facility, and $73 million in lease obligations. Total debt to adjusted EBITDAC remained at a prudent level of 1.49 times at the end of the quarter compared to 2.17 times a year ago, demonstrating our continued deleveraging trend. We are very comfortable with our current debt level and leverage in the one to one and a half times range, thereby facilitating a strong return of capital to shareholders and prioritizing sustainable dividend and share buyback levels. I would also note that our working capital surplus of $633 million exceeded our total debt of $470 million by $163 million and demonstrated continued improvement year over year. Continued focus on working capital optimization has led to a year-over-year reduction in the cash conversion cycle to 112 days from 120 days and a reduction in working capital as a percentage of annualized quarterly revenue to 29.0 percent from 30.9 percent.
Each percentage improvement at these revenue levels represents approximately $22 million on our balance sheet and I commend the entire CES team for realizing approximately $50 million in total value creation through an exceptional working capital culture during 2002.
Three.
This very strong surplus free cash flow trend is indicative of the of the cash flow generating potential and see us in this environment, which is further demonstrated by our current net draw which has declined by $21 million to a total of up to $120 million as of February 29.
We have dedicated our efforts to profitably growing market share improving margins and delivering consistent free cash flow at steady record setting revenue levels underpinned by a prudent capital structure.
These consistent near record levels have allowed us to deliver on our commitment to returning capital to shareholders. During the quarter, we returned $25 $1 million.
Anthony Michael Aulicino: Each percentage improvement at these revenue levels represents approximately $22 million on our balance sheet, and I commend the entire CES team for realizing approximately $50 million in total value creation through an exceptional working capital culture in 2023. This very strong surplus free cash flow trend is indicative of the cash flow generating potential of CES in this environment, which is further demonstrated by our current net draw, which has declined by $21 million to a total of $120 million as of February 29.
Through $19 $1 million in share buybacks and $6 million in dividends for the full year, we returned $93 $5 million through $70 9 million in share repurchases and $22.5 million in dividends, representing 44% of free cash flow.
In accordance with that view I am pleased to announce that on February 29, the board of directors improved approved a 20% increase to the quarterly dividend from $2.05 per share to 3.0 cents per share.
Anthony Michael Aulicino: We have dedicated our efforts to profitably growing market share, improving margins, and delivering consistent free cash flow at steady record-setting revenue levels underpinned by a brooding capital structure. These consistent, near-record levels have allowed CES to deliver on its commitment to returning capital to shareholders. During the quarter, we returned $25.1 million through $19.1 million in share buybacks and $6 million in dividends.
This represents a dividend yield of 2.8% on an annualized basis based on yesterday's closing price and a modest payout ratio of approximately 12%.
At current levels of activity market share and service intensity CFS remains in a position of strength and flexibility supporting our capital allocation priorities as outlined by Ken.
Anthony Michael Aulicino: For the full year, we return $93.5 million through $70.9 million in share repurchases and $22.5 million in dividends, representing 44% of free cash flow. In accordance with that view, I am pleased to announce that on February 29th, the Board of Directors approved a 20% increase to the quarterly dividend from 2.5 cents per share to 3.0 cents per share. This represents a dividend yield of 2.8% on an annualized basis based on yesterday's closing price and a modest payout ratio of approximately 12%.
At this time I would like to turn the call back to the operator to open it up for questions for Kevin and I to address.
Secondly, 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 hear a tone acknowledging your request.
Are using a speakerphone please pick up your handset before pressing any key.
To withdraw your question. Please press Star then two.
First question comes from Aaron Macneil with TD Cowen. Please go ahead.
Hey, good morning, all and thanks for taking my questions Richard appearing listening it sounds like your retirement will be short lift that congratulations nonetheless.
Operator: At current levels of activity, market share, and service intensity, CES remains in a position of strength and flexibility, supporting our capital allocation priorities as outlined by Ken. At this time, I'd like to turn the call back to the operator to open it up for questions for Ken and I to address. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad.
And you mentioned the outsized growth in the service intensity for Jacob catalyst in your prepared remarks, and I can appreciate that you don't have all the specific details at your fingertips.
At a very high level is the treatment point data that you published quarterly becoming.
A more reliable barometer of segment performance or is there still this ongoing shift in well mix from verticals Horizontals.
Aaron MacNeil: You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the call button. Unknown Attendee, Endri Leno, Keith MacKey, Philip Scherman, CES Energy Solutions Corp. Express Star, then. The first question comes from Aaron MacNeil. CD Cohen.
And.
How would you sort of guidance on.
Overall volume.
Expectations are changes.
For both Canada, and the U S in 2024 versus <unk>.
Yeah.
Yeah.
Yeah, I mean, the shift is still happening in the treatment point data as a guideline that we use as well, but it's not as concise as it once was right it used to directly.
Kenneth E. Zinger: Please go ahead. Good morning all, and thanks for taking my questions. Richard, if you're listening, it sounds like your retirement will be shortlist, but congratulations nonetheless, and can you mention the outsized growth and the service intensity for J-Chem Catalyst in your prepared remarks? And I can appreciate that you don't have all the specific details at your fingertips, but at a very high level, is the treatment point data that you publish quarterly becoming... a more reliable barometer of segment performance? Or is there still this ongoing shift in well mix from verticals to horizontals? And how would you sort of guide us on that? Transcripts provided by Transcription Outsourcing, LLC, for both Canada and the U.S. in 2024. Unknown Attendee.
Early directly relate to volumes and I would say it does not do that anymore. We have to take that in combination with that a lot of other information as far as trends go I mean service intensity on the production chemical side applies specifically in a few ways and one of them is on volumes on initial production. So.
We are seeing volumes going up quantifying that can be a little difficult and I'm, giving you guidance towards volumes in 'twenty four I mean, I would just point to overall industry activity as much as production chemical is more stable and more a good portion of it is related directly just to the production. There is a portion that is really.
Initial production, which relates to drilling rigs. So if you follow the drilling rig numbers you can see I would suggest you can see the increase in the production chemical side to some degree, but it's a pretty complicated I don't have an easy answer for this is a complicated answer even for us and we're forecasting.
Kenneth E. Zinger: Yeah, I mean, the shift is still happening in treatment point data. It's a guideline that we use as well. But it's not as concise as it once was, right? It used to directly or fairly directly relate to volumes. And I would say it does not do that anymore.
Okay fair enough I figured I'd try.
Just a point of clarification on the Haynesville entry.
Are you currently working in basin today.
Kenneth E. Zinger: We have to take that in combination with a lot of other information. As far as trends go, I mean, service intensity on the production chemical side applies specifically in a few ways. And one of them is on volumes for initial production. So we are seeing volumes going up. Quantifying that can be a little difficult, and giving you guidance on volumes in 24.
Yeah.
What would you see it as a successful entry by year end 'twenty four in terms of number of active rigs or any other metric.
Yeah.
So we have been working on one rig I believe the rig is down today on a window, but it's coming back.
So you've sort of been establishing everything that we need to establish getting some baseline on supply chain, primarily is our biggest concern because we have worked in the haynesville.
Kenneth E. Zinger: I mean, I would just point to overall industry activity as much as production chemicals are more stable and a good portion of it is related directly just to production. There is a portion that's related to initial production, which relates to drilling rigs. So if you follow the drilling rig numbers, you can see, I would suggest you can see the increase in the production chemical side to some degree. But it's pretty complicated. I don't have an easy answer for that.
In the past and things there havent changed.
I mean, they've changed but they haven't changed so much that we haven't kept up with it. So we have the one rig and I would say a successful picture for US is for every five additional rigs if we could get one of them that would be a way it initially.
So you got China fight over that.
Hi, guys.
No I mean, I think we have a strong enough advantage with our bare a position and those wells are the mix on those wells is is pretty heavy to to bear right because of the density involved which steers us to strengths on an invert products that we manufacture ourselves, including the rheology modifiers as well as the barite that were grinding ours.
Kenneth E. Zinger: It's a complicated answer, even for us when we're forecasting. Fair enough. Figured I'd try it.
Kenneth E. Zinger: Just a point of clarification on the Haynesville entry; are you currently working in Basin today, and what would you see as a successful entry by the year 2024 in terms of the number of active rates or any other metrics? So we have been working on one rig. I believe the rig is down today on a window, but it's coming back.
So we believe we have an ability to maintain.
Pricing in the area, we don't have to go undercut anybody and we can still make decent margins.
Kenneth E. Zinger: So we've sort of been establishing everything that we need to establish, getting some baseline on supply chain primarily is our biggest concern because we have worked in Haynesville, you know, in the past, and things there haven't changed. I mean, they have changed, but they haven't changed so much that we haven't kept up with them. So we have the one rig, and I would say a successful pitcher for us is for every five additional rigs. If we could get one of them, that would be a win initially.
Okay. Thanks, guys.
The next question comes from Cold Pereira with Stifel. Please go ahead.
Hi.
Good morning.
I think he may have dropped operator do you want to go to the next person in queue.
The next question comes from Jonathan Goldman with Scotiabank. Please go ahead.
Hi, Good morning, guys. Congrats on the quarter I really three years, the culmination of hard work.
My first question is on the U S market share it's been increasing since the beginning of last year. It looks like that in a quarterly record in Q4.
Kenneth E. Zinger: So you're not trying to fight the current, but No, I mean, I think we have a strong enough advantage with our Barite position, and those wells are the mix on those wells is pretty heavy for Barite because of the density involved, which steers us to strengths on invert products that we manufacture ourselves, including the rheology modifiers, as well as the Barite that we're grinding ourselves. So we believe we have an ability to maintain prices to match the area. We don't have to undercut anybody, and we can still make decent margins. Thanks, guys. This question comes from Cole Pereira with Stiefel. Please go ahead.
My model goes.
Are there any unusual dynamics to call out in the quarter or maybe asked another way why wouldn't the current share is sustainable or possibly go higher going forward.
We believe it is sustainable and we believe it will go higher and.
Good morning, Jonathan Nice to hear from you.
Okay.
I'll take the answers disbursed that's good too.
I guess my second question then is on the strong margin trends again, it looks like.
At least the highest margin for Q4 since 2014.
The press release called out a number of factors you know the higher service intensity mix cost management.
Would you characterize those factors as structural.
And again same question on the margin.
Side of the typical seasonality you think this is a new level, that's sustainable going forward or should expectations rebates higher at least.
Cole J. Pereira: Hi morning. I think you may have dropped, operator. Do you want to go to the next person in the queue?
I think we've guided in the past in this 13 five to 14 and a half range I I'd say that probably 14 to 15. This is reliable now there'll be times like this where there's outliers, where we'll get a little high and there's going to be times, probably wherever we can be on the low side or in the lower end of that range.
Jonathan Goldman: The next question comes from Jonathan Goldman with Scotiabank. Please go ahead. Hi, good morning, guys. Congratulations on the quarter, really three years the culmination of hard work. My first question is on US market share. It's been increasing since the beginning of last year, and it looks like a quarterly record in Q4, as far back as my model goes.
We don't anticipate going under the 14 anymore.
Kenneth E. Zinger: Are there any unusual dynamics to call out in the quarter? Or maybe ask another way, why wouldn't the current share be sustainable or possibly go higher going forward? www.ces-energy.org. We believe it is sustainable, and we believe it will go higher. And good morning, Jonathan. Nice to hear from you. I'll take the answers just first.
And as far as what's driving it it's like.
We could make a list a mile long are the things that are driving it but its attention by everybody to all the details and its looking at everything we're doing it says it's as simple as you know.
No. Our Capex number this year allows us to do some spending on stuff that internally improves margins without having to go do any big acquisitions. It's just simple things like totes, where we used to have volumes that only justified single use codes or volumes that justified storing even within our own facilities in <unk>.
Kenneth E. Zinger: That's good. I guess my second question then is on the strong margin print, again, it looks like, It's the highest margin for a Q4 since 2014, your press release called that a number of factors, you know, the higher service intensity mix cost management. Would you characterize those factors as structural?
<unk>.
But now we're doing enough volume and in our different divisions that were putting in permanent upright tanks to store it theyre not big capital expenditures, but they instantly improve bottom line profitability. We got cash conversion cycle. We got that everybody is focused on getting billing done faster and we can't change how the operator pays us Bobby.
Kenneth E. Zinger: And again, same question on the margins. You know, outside of the typical personality, do you think this is a new level that's sustainable going forward, or should expectations be based higher? I think we've, you know, I've guided in the past in this 13 and a half to 14 and a half range. I'd say that probably 14 to 15 is reliable.
Kenneth E. Zinger: Now, there'll be times like this where there are outliers where we'll get a little high. And there will probably be times where we can be on the low side or in the lower end of that range. But we don't anticipate going under the 14 anymore.
We are taking care of everything we can on our side of that equation.
More emphasis on on working capital and keeping inventory levels at appropriate levels. So just it's kind of it's a lot of things going on and a lot of effort by a lot of people and it's paying big dividends and we're going to continue to push on that one other thing to consider Jonathan on the structural aspect of.
Kenneth E. Zinger: And as far as what's driving it, it's like, we could make a list a mile long of the things that are driving it, but it's attention by everybody to all the details. And it's looking at everything we're doing. It's as simple as, you know, our CapEx number this year allows us to do some spending on stuff that internally improves margins without having to go do any big acquisitions. It's just simple things like, you know, totes where we used to have volumes that only justified single-use totes or volumes that justified storing even within our own facilities in totes that now we do enough volume in our different divisions that we're putting in permanent They're not big capital expenditures, but they instantly improve bottom-line profitability. We have a cash conversion cycle, we have that everybody's focused on getting billing done faster, and we can't change how the operator pays us, but we are taking care of everything we can on our side of that equation. More emphasis should be placed on working capital and keeping inventory levels at appropriate levels.
Of that margin it happened to be a very strong $15 three was 15.0.
As Ken mentioned, we're talking now about 14 to 15 versus 13, 5% to 14 half it's not lost on us that there has been.
Headwinds in the sector through the year right rig count has gone down we continue to put up big numbers and and part of that is structural nuts and by structural I mean, the fact that our business model is quite different than most oss peers, where ours is not a day rate model.
It's a consumables chemicals business model and you've seen drilling rates go higher you've seen well complexities go higher and longer.
And those all bode very well for our model. Because these are these companies are using more of our product in a shorter period of time and the farther out they go into more complicated they tend to use the the more.
Kenneth E. Zinger: So just, it's kind of, there are a lot of things going on and a lot of effort by a lot of people and it's paying big dividends, and we're going to continue to push on that. One other thing to consider, Jonathan, on the structural aspect of that margin. It happened to be a very strong 15.3. It was 15.0.
The more specialized products and chemicals that we provide that happened to have better margins associated with them. So that's that's one part of the structural narrative. The other part is we talk a lot about expansion capex and and that's half of our $70 million just wanted to emphasize that when we talk about expansion capped.
That's not necessarily just <unk>.
Anthony Michael Aulicino: As Ken mentioned, we're talking now about 14 to 15 versus 13.5 to 14.5. It's not lost on us that there have been headwinds in the sector through the year, the rig count has gone down, but we continue to put up big numbers, and part of that is structural. By structural, I mean the fact that our business model is quite different from most OFS peers, where ours is not a day rate model, and it's a consumables and chemicals business model. You've seen drilling rates go higher, you've seen well complexities go higher and longer, and those all bode very well for our model because these companies are using more of our product in a shorter period of time, and the farther out they go and That's one part of the structural narrative.
Capex that spend to.
Gain more revenue, that's a big part of it but the other big part of it that each of the divisions have done an amazing job at that Ken highlighted as well as no they'll spend that expansion capex on not necessarily growing revenue, but by doing some of those operational efficiency activities that Ken mentioned.
Does that end up increasing EBITDA and gross margin. So those two things together, they're not perfectly going to keep us up at this level always but those are two significant elements of the structural capability of the company with these margins.
That's great color guys I really appreciate that and then I guess, one thing related to that structural improvement.
And Ken you touched on it.
Thank you for working cap improvement.
We've undershot your working cap incremental investment right now for several quarters I think Tony you mentioned, 29% this quarter.
Anthony Michael Aulicino: The other part is we talk a lot about expansion CapEx, and that's half of our $70 million. I just want to emphasize that when we talk about expansion CapEx, that's not necessarily just CapEx that's spent to gain more revenue; that's a big part of it. But the other big part of it that each of the divisions have done an amazing job at, which Ken highlighted as well, is they'll spend that expansion CapEx on not necessarily growing revenue but by doing some of those operational efficiency activities that Ken mentioned that end up increasing EBITDA and gross margins. So those two things together, they're not perfectly going to keep us up at this level always, but those are two significant elements of the structural capability of the company with these That's a great color guys, I really appreciate that.
Given all the initiatives <unk> implemented that the structural and at the very least we made a lot of progress do you think it's fair to think of a lower investment rate for working cap going forward.
Yeah.
I'll start with that the reality is prior to us putting up these numbers the record level was in run rate scenario for this company was 116 days.
And.
31% I believe we're a we're in sort of uncharted territories in a good way and yeah wed love to continue to Pierce through 29% that might be possible I wouldn't hang my hat on that yet.
Jonathan Goldman: And I guess one then related to that structural improvement and, and Kenny, you touched on this. You've undershot your working cap incremental investment rate now for several quarters. I think Tony, www.ces-energy-solutions-corp.com has made a lot of progress. Do you think it's fair to think of a lower investment rate for working cap going forward?
But hopefully I'll be proven wrong, and it's not a it's not a magical technology sciences.
Everybody understanding how working capital works, how valuable it is and as Ken said doing all the little things too to assist us in keeping and getting the the working capital down I still can't believe it's down from 120 to 112 ish.
Anthony Michael Aulicino: You know, I'll start with that. The reality is, prior to us putting up these numbers, the record level in the run rate scenario for this company was 116 days. And 31%, I believe.
But we're going to continue to try to stay here and peers Aloha.
I mean, the numbers speak for themselves, maybe just one more housekeeping one require pack line.
Anthony Michael Aulicino: We're in sort of uncharted territories in a good way. And yeah, we'd love to continue to pierce through 29%. That might be possible. I wouldn't hang my hat on that yet. But hopefully, I'll be proven wrong. It's not a magical technology or science.
The headlines about the Red Sea shipping disruptions.
Have you guys noticed any impact.
Margins are call in.
In 2024, do you anticipate that being a headwind at all.
No we havent nothing major I mean, you always have challenges that way, but there's been no major incidents.
Anthony Michael Aulicino: It's everybody understanding how working capital works, how valuable it is, and as Ken said, doing all the little things to assist us in keeping the working capital down. I still can't believe it's down from 120 to 112 ish.
Those are still moving around a little bit you get the odd bit of pressure here and there, but nothing nothing like 2022 nothing that we observe is that as a huge headwind for us things have been pretty stable and that's a big part of the reason the conversion cycle is where it is I mean, we've been able to work in a in a stable environment for a little over a year now which really allowed.
Kenneth E. Zinger: But we're going to continue to try to stay here and penetrate below. Transcripts provided by Transcription Outsourcing, LLC. Have you guys noticed an impact on margins or costs in 2024? Do you anticipate that being a headwind at all? No, we haven't. Nothing major.
Us to fine tune inventories and billing.
Yeah.
Perfect. Thanks for all the color guys I appreciate it.
The next question comes from Colby <unk> with Stifel. Please go ahead.
Kenneth E. Zinger: I mean, you always have challenges that way, but there's been no major incidents. Prices are still moving around a little bit. You get the odd bit of pressure here and there, but nothing like 2022, nothing that we observe as a huge headwind for us. Things have been pretty stable, and that's a big part of the reason the conversion cycle is where it is. I mean, we've been able to work in a stable environment for a little over a year now, which really allows us to fine-tune inventories and billing. Thanks to all the color guys; I appreciate it. The next question comes from Cole Pereira with T4, please go ahead. Hi, can you guys hear me?
Hi can you guys hear me.
Yeah welcome back good morning, Paul.
Thanks, So yeah on the on the new margin guidance, so would it be fair to assume that that assumes.
A flattish rig count in North America, and you know not going to hold you to this but conceptually if we see a meaningful rise in the rig count higher operating leverage could drive that figure higher as well.
Correct.
But that's what we would anticipate.
Gotcha.
And then Tony just on on the NCI B.
You guys are obviously very active with it this year, how do you kind of think about that level of utilization going forward. Once you refresh the plan acknowledging that it's obviously valuation dependent.
Cole J. Pereira: Yeah, welcome back. Morning. Thanks. So, yeah, on the new margin guidance, would it be fair to assume that that assumes... Kind of a flattish rig count in North America, and I'm not going to hold you to this, but conceptually, if we see a meaningful rise in the rig count, higher operating leverage could drive that figure higher as well. Right. That's what we would anticipate. Gotcha.
Yeah. Our current plan based on everything we know about what we believe this company is going to do and even where valuation is today.
Going to lead us to renewing that.
And CIB on July 21st for 10% again.
Got it Okay. That's all for me, Thanks, I'll turn it back.
Kenneth E. Zinger: And then Tony, just on the NCIB. You guys are obviously very active with it this year. How do you kind of think about that level of utilization going forward? Once you refresh the plan, acknowledging that it's obviously, you know, valuation-dependent? Yeah, our current plan, based on everything we know about what we believe this company is going to do, and even where valuation is today, is going to lead us to renewing that NCIB on July 21 for 10%. Okay, that's all for me. Thanks. I'll turn it back. The next question comes from Tim Monachello with ATB Capital. Please go ahead. Hey, good morning, everyone.
The next question comes from Tim Monotone with ATV capital markets. Please go ahead.
Hey, good morning, everyone.
Born with empty Tim.
Quest.
Question on the Capex there Tony you.
You did about 79 of maintenance Capex it sounds like the Capex. This year is going to be split 50 50.
Has there been any change in I guess, the capital intensity of the business or why are you seeing maintenance capital goes up.
Significantly in 'twenty.
24, or so what we found is especially in areas of the business that has seen growth.
We were a bit light on the last year year and a half on what otherwise should have been a bit of a higher maintenance capex level in 2023, and maybe part of 'twenty. Two so it's a bit of catch up yeah, I would say that there was issues in with heavy equipment getting big trucks.
Tim Monachello: Good morning, Tim. Um, quick question on the CapEx there, Tony. You did about 17 million in maintenance capex. It sounds like the capex this year is gonna be split 50-50. Has there been any change in, I guess, the capital intensity of the business, or why are you seeing maintenance capital move up? Unknown Attendee, Endri Leno, Keith MacKey, Philip Scherman, CES Energy Solutions Corp. What we found is, especially in areas of the business that have seen growth, we were a bit light on the last year and a half on what otherwise should have been a bit of a higher maintenance cap So it's a bit of a catch up.
We needed more we knew we needed more we just couldn't get more so we are finally catching up to some of that and then the impacts we have 1000 pickup trucks in this company and you know what fleet discounts have done across North America as the majors sort of ran short on truck trucks last year. So we've had seen a big spike in the price of those things on the lease rates for those things.
So there's been a whole bunch of stuff that we're playing catch up on that partially because we couldnt get them before and that other stuff. That's just it's inflation that everybody is seeing in their own lives.
Got it so like on a go forward basis, I think it's maybe in between that sort of 2017.
$35 million.
On a normalized basis.
Anthony Michael Aulicino: Yeah, I would say that there were issues with heavy equipment and getting big trucks. We, you know, we needed more, we knew we needed more, but we just couldn't get more. So we're finally catching up to some of that. And then the impacts, you know. We have 1000 pickup trucks in this company, and you know what fleet discounts have done across North America as the majors sort of ran short on trucks last year. So we've seen a big spike in the price of those things and the lease rates for those things. So there's been a whole bunch of stuff that we're playing catch up on, partially because we couldn't get it before and then other stuff that's just inflation that everybody's seeing in their own lives. I got it.
Yeah look closer to $2 35, 17 times.
Okay at least at these $2 2 billion dollar revenue levels for sure.
Okay. That's helpful and then.
Our modeling at least yes, youre going to have a lot of ample free cash flow to pay your dividend.
And find your your Capex in and probably do some share repurchases. If you want to you throughout the year and then past that you'll probably have to have extra Q2.
The balance sheet.
Do you envision just continuing to you rich.
<unk> leverage right.
Levels on an absolute basis or do you have like a.
Sort of a base level, where you think your capital structure is.
Tim Monachello: So like on a going forward basis. The End. Yeah, like closer to the 35 than the 17, at these $2.2 billion revenue levels, for sure. Okay, that's helpful.
Benefiting from some leverage.
Yeah at this at this point, we stand by the one to one five times range, we're very comfortable where we are if we were a little bit higher that would be fine for the right reasons as well.
Anthony Michael Aulicino: And then, you know, our modeling at least suggests you're gonna have a lot of ample free cash flow to pay your dividend and fund your CapEx. Transcripts provided by Transcription Outsourcing, LLC. 2013 Transcription Outsourcing, LLC.
If we got down to the 1.0 times level based on our current revenue run rate cash flow generation.
Then than we would have some good hard decisions to make but I think we're still unless.
Yes things change significantly good couple of years away from that to two years away from that.
Anthony Michael Aulicino: All rights reserved. 2013 Transcription Outsourcing, LLC, www.ces-energy.org. Um, do you envision just continuing to reduce Leverage Levels on an absolute basis, or do you have like a base level where you think your capital structure uh... benefiting from some web? Yeah, at this point, we stand by the 1 to 1.5 times range. We're very comfortable where we are.
Okay.
Based on our planned dividends and planning on looking at the dividend every year and touching it.
And in.
In the first half of the year and in buying back 10% of the stock on an annual annualized basis as it makes sense.
Okay.
That's helpful.
And then I mean, he is don't speak specifically to the production chemicals market share, but the numbers sort of tell a story that that market share has been growing significantly.
Anthony Michael Aulicino: If we were a little bit higher, that would be fine for the right reasons as well. If we got down to the 1.0 times level, based on our current revenue run rate and cash flow generation, then we would have some good, hard decisions to make. But I think we're still, unless things change significantly, a good couple of years away from that. Transcribed by https://otter.ai. Let's hope so.
You guys have been tightened around at least for a while now.
What what do you attribute that success.
Success in the market too, obviously very competitive space and you guys are doing really well there so.
<unk>.
You know you think can continue to grow market share like you lose you there Ken so what's the success, we attribute to do attributed to.
Okay.
We're awesome Tim.
I guess, it's pretty simple it's everything right. It gets we have a good cost base. We manufacture were responsive we have facilities that can build blend.
Tim Monachello: And then, I mean, you don't speak specifically to the production chemicals market share, but the numbers sort of tell a story that that market share has been growing. I'm going to talk about it for a while now. You know, what do you attribute that success in the market to? Obviously, it is a very competitive space, and you guys are doing really well there. So, you think you continue to grow market share, like you alluded to their 10, so we know what the success of Tribute is. We're awesome, Tim. It's pretty simple.
Uh huh.
Figure out how to fix problems and react.
And we have people that are qualified in the field that are best in class.
And we have infrastructure everywhere to support it. So it's it's it's that and everything those people do that make this all go around and we're just going to I don't see any reason, we wouldn't continue to grow at the same kind of rates that we've been growing at.
And we have that decentralized model of course, and it allows our decision making in places like Midland, where we have a huge market share and the guys down there can make big decisions quickly and react to any problems that may come up for a customer quickly.
Kenneth E. Zinger: It's everything, right? We have a good cost base. We manufacture. We're responsive. We have facilities that can build, blend, and figure out how to fix problems and react.
Kenneth E. Zinger: And we have people that are qualified in the field that are best in class. And we have infrastructure everywhere to support it. So it's, it's, it's that and everything those people do that makes this all go around.
And with our infrastructure and our manufacturing capability it makes us almost unique.
It definitely creates a barrier for companies smaller than us I mean, we continue to go head to head with champion and Baker like always but it makes it harder on the private companies. They don't have the kind of infrastructure in <unk>.
Kenneth E. Zinger: And we're just going to, you know, I don't see any reason why we wouldn't continue to grow at the same kind of rates that we've been growing at. We have that decentralized model, of course, and it allows our decision making in places like Midland, where we have a huge market share, and the guys down there can make big decisions quickly and react to any problems that may come up for a customer quickly. And with our infrastructure and our manufacturing capability, it makes us almost unique. It definitely creates a barrier for companies smaller than us. I mean, we continue to go head to head with Champion and Baker, but it makes it harder on the private companies. They don't have the kind of infrastructure and scientists' backup that we do. I got it.
And scientists backup that we do.
Got it and you've got ample capacity in <unk> catalysts to continue this pace.
We have nothing but capacity and we have the ability I mean, all this when we talk about expansion cats, Amit and maintenance cap I mean, we're constantly evolving.
The Sterling facility so when it when it makes sense to put in another reactor we had another reactor when it makes sense to put in more storage or put in more storage. These arent big steps that <unk> taken we can adopt that that facility is as much as we need to and it's sitting on 100 acres are on rail. So we got tons of room to expand it and same with the car.
<unk> Grand Prairie is a little bit landlocked, but it's not a blending facility. It's primarily I mean, it is for fr, but other than that it's just a distribution hub. So we got space everywhere. We've got the ability to turn up volume you know one of the Capex spend this year is going to be for an issue.
Kenneth E. Zinger: And you have ample capacity and J cam catalyst to continue the space. We have nothing but capacity, and we have the ability. I mean, all this, when we talk about expansion caps and maintenance caps, I mean, we're constantly evolving the Sterling facility. So when it makes sense to put in another reactor, we add another reactor. When it makes sense to put in more storage, we put in more storage. These aren't big steps to take, and we can adapt that facility as much as we need to. And it's sitting on 100 acres there on rail, so we've got tons of room to expand it. And, same as Carlisle, Grand Prairie is a little bit landlocked, but it's not a blending facility. It's primarily, I mean, it is for France, but other than that, it's just a distribution hub. So, you know, we've got space everywhere. We've got the ability to turn up the volume.
Scavenger facility, we can increase the throughput on that place by like 40% in the summertime by spending some money on chillers to control the temperature to make the reactions go faster. So we're going to we didnt need that extra capacity. So we didn't spend the money a couple of years ago, but we identified this winter that as soon as it gets warm up we might have.
But problems so we're in or in keeping up with our supply. So we're going to spend a couple of million dollars erinn and tune that facility up a little bit as well, but lots of levers to pull still to keep capacity in line.
Okay got it.
I appreciate it congrats on a nice quarter again, you guys are starting to make this look easy and I'm sure it's not.
I'll turn it back.
The next question is locked in.
The next question comes from Keith Mackey with RBC. Please go ahead.
Kenneth E. Zinger: You know, one of the CapEx spends this year is going to be for our NISQ scavenger facility. We can increase the throughput on that place by like 40% in the summertime by spending some money on chillers to control the temperature to make the reactions go faster.
Hi, good morning.
Maybe just following on to the to the line of questioning around in your growth opportunities.
Production chemicals, certainly has gone very well and I know part of that has been the <unk>.
Introduction or success of some more frac chemicals and things like that you've also discussed our entry into the Haynesville.
Kenneth E. Zinger: So we're going to, you know, we didn't need that extra capacity, so we didn't spend the money a couple of years ago, but we identified this winter that as soon as it gets warm out, we might have a problem. So we're keeping up with our supply. So we're going to spend a couple of million dollars there and tune that facility up a little bit as well. But there are lots of levers to pull still to keep capacity in line. I got it. I appreciate it. Congratulations on a nice quarter. Again, you guys are starting to make this book easier. Thanks a lot, Tim. The next question... Keith Mackey with Arby's. Please go ahead. Hi, good morning.
And then certainly there is also some I'm sure inorganic potential can you can maybe just give us a bit of a ranking.
To the extent you can add in terms of the growth potential and impact.
Of the various opportunities that you see to keep the growth.
To keep the growth levels at around the same levels that you've been seeing.
Yeah, I mean I.
We'd prioritize organic and we've been doing that for the last.
Since 2016, there's plenty of opportunities where sort of we've got a ranking of different parts of the chemical business that we may enter into on both sides of the border and we try and get into them and not complicate things by being everything to everyone, but rather choose the ones we want to participate in get into it in a meaningful way.
Keith Mackey: Just following on, line of questioning around your growth opportunities. Production Chemicals certainly has grown very well, and I know that part of that is the introduction or success of some more frack chemicals and things like that. You've also discussed the entry into Haynesville. And then certainly there's also some, you know, I'm sure, inorganic potential. Can you maybe just give us a bit of a ranking?
Maximize profitability of it and then move onto the next so we've got a couple of other lines that we can potentially get into that we're getting close to entering now and then the ones that we are in we just continue to push on that I'd say that Frac chemistry is still a small piece of what we do just to clarify that it's we bolted on them.
Kenneth E. Zinger: to the extent you can in terms of the growth potential and impact of the various opportunities that you see to keep the growth, the growth levels at around the same levels that you've been seeing. Yeah, I mean, we prioritize organic growth, and we've been doing that for the last, really since 2016. There are plenty of opportunities where we have a ranking of different parts of the chemical business that we may enter into on both sides of the border. And, you know, we try and get into them and not complicate things by being everything to everyone but rather choose the ones we want to participate in, get into them in a meaningful way, maximize the profitability of them, and then move on to the next. So we've got a couple of other lines that we can potentially get into that we're getting close to entering now. And then the ones that we are in, we just continue to push on.
We're playing.
Playing in the market, where it makes sense and we've got some good customers, but it's not in the big scheme of things its production chemical treating is what's driving this business. It's.
It's a big portion I don't know what exactly the percentages, but 75% of the business on the production Chem side is just production chemistry, not even the ancillary commodity stuff. So it's.
Answer your question I guess, it's organic although you know we've.
Been looking at a lot of M&A over the last two years, we continue to look at a lot of M&A and where we're prioritizing M&A is in North America, it's organic except for vertical integration. If there was an opportunity there.
And we've talked a lot about in the past about the middle East and in South America being markets, we want to explore at some point as well.
Kenneth E. Zinger: I'd say that frack chemistry is still a small piece of what we do, just to clarify that. We've bolted it on, and we're playing in the market where it makes sense, and we've got some good customers. But it's not in the big scheme of things.
Perfect I appreciate that and certainly there is a lot of pending E&P consolidation in the Permian.
As as time progresses as I'm sure you've learned a little bit about what you know what.
What might happen there, but can you just run through maybe your exposure.
Kenneth E. Zinger: It's production chemical treating is what's driving this business. You know, it's a big portion. I don't know what exactly the percentage is, but 75% of the business on the production chem side is just production chemistry, not even the ancillary commodity stuff. So it's, To answer your question, I guess it's organic.
To that and any any risks or opportunities that you see as the consultant.
Customers continue to consolidate.
Yeah, So just from a.
From a thematic perspective.
Our business model is.
<unk> built two two to prosper in that environment of increased consolidation where companies get bigger more results oriented more technology driven more supply chain driven there is there is only a hand of.
Kenneth E. Zinger: Although, you know, we've been looking at a lot of M&A for the last two years, we continue to look at a lot of M&A. And, you know, where we're prioritizing M&A is in North America, it's organic, except for vertical integration, if there is an opportunity there. And we've talked a lot in the past about the Middle East and South America being markets we want to explore at some point as well. Perfect. I appreciate that.
And full of us that have the capabilities infrastructure scientists engineers chemists and facilities that are that we do so.
We believe that the small group of us will be in higher demand by what's going to be continually bigger.
Anthony Michael Aulicino: And certainly, there is a lot of pending E&P consolidation in the Permian. As time progresses, transcripts provided by Transcription Outsourcing, LLC, customers continue to consolidate. Yeah, so just from a thematic perspective.
Bigger.
Combined entities, that's number one and number two is.
We are not.
Anthony Michael Aulicino: Our business model is built to prosper in that environment of increased consolidation where companies get bigger, more results-oriented, more technology-driven, more supply chain driven. There's only a handful of us that have the capabilities, infrastructure, scientists, engineers, chemists, and facilities that we do. So we believe that this small group of us will be in higher demand by what's going to be continually bigger, bigger combined entities. That's number one.
We are definitely focusing on the fact that you will see some consolidation happen and there will be times, where theyre going to come back out to bids we believe that based on our track record.
We've been.
Lucky and fortunate by design, where we've either been neutral to positive in all of the M&A that have affected our customers and the other thing is it's really unique I've learned in my room watching the guys in their relationships with customers because of the good work that we've done with these.
Anthony Michael Aulicino: And number two is where we are not. We are definitely focusing on the fact that you will see some of this consolidation happen, and there will be times where they're going to come back out to bid. We believe that, based on our track record, we've been lucky and fortunate by design, where we've either been neutral to positive in all of the M&A that have affected our customers. And the other thing is, it's really unique.
Drilling engineers and production engineers throughout their careers. They are the guys and gals that ended up moving and being in positions of decision, making at these these new combined entities.
Anthony Michael Aulicino: I've learned in my role by watching the guys and their relationships with customers because of the good work that we've done with these drilling engineers and production engineers throughout their careers. They're the guys and gals that end up moving and being in positions of decision-making at these new combined entities. And they are good allies, and they understand our capabilities.
And these are good allies and they understand our capabilities. So it's a long winded answer, but we know that it's been neutral to positive for us and we expect it to be more positive going forward given given their requirements and our capabilities.
Now I'll throw in like even when it's too big companies that we don't work for which has happened from time to time.
Kenneth E. Zinger: So it's a long-winded answer, but we know that it's been neutral to positive for us, and we expect it to be more positive going forward given their requirements and our capabilities. Yeah, I'll throw in like even when it's two big companies that we don't work for, which has happened from time to time. It's still an opportunity because we weren't working at either one. But now, when they put it all together, they're going to take a hard look at how they're spending their money. And it generally leads to an RFP and gives us an opportunity to potentially get in where, as individual companies, they would probably have continued doing what they were doing. Fair enough, I appreciate the answers, and that's it for me.
It's still an opportunity because we weren't working at either one but now when they put it together, they're going to take a hard look at how they're spending their money and that generally leads to an RFP in and gives us an opportunity to potentially get in where as individual companies that would've probably continue doing what they were doing.
Fair enough I appreciate the answers then that's it for me Thanks a lot.
Thanks Keith.
Once again, if you have a question. Please press Star then one the next question comes from Josef Schachter with Schachter Energy Research. Please go ahead.
Good morning, Ken and and Tony.
<unk> great.
Great results.
Keith Mackey: Thanks, Keith. Once again, if you have a question, please press star, then 1. The next question comes from Joseph Schachter with Schachter Energy. Please go ahead. Money Can, congratulations on the www.ces-energy.org website. Number one, you have the offshore business that you were. Has that gotten to the point where you see scaling that up or getting involved with more entities? Or is that still...
52 week high on the stock this morning.
465, so congratulations on that I wanted to continue that.
Yeah.
Work on this growth potential side.
Number one you have the offshore business that you were working on.
Has that gotten to the point, where you see.
Filling that up or getting involved with more entities or is that still something that's a work in progress and then getting to still understand that business.
Joseph Schachter: It's a work in progress, and I'm getting there. It's so that's been a work in progress. We've been working through the supply chain side of that. They have some pretty specific rules and regulations that are sort of NASA grade quality, which takes time to recreate.
It's it so that's been a work in progress we've been working through the supply chain side of that they have some pretty.
Specific rules and regulations that are sort of Nassau grade quality, which takes time to.
Recreate but we've worked through that now we've got the supply chain, we've got an appropriate lab.
Kenneth E. Zinger: But we've worked through that now. We've got the supply chain, we've got an appropriate lab, and we've got some people that we've hired. And I'll just say that we haven't had a huge step change in revenue from that division to date, but we're optimistic that we're close to some. How's that?
And we've got some people that we've hired and I'll just say that we're getting where we haven't had a huge step change in revenue out of that division to date, but we're optimistic that we're close to some how's that.
Kenneth E. Zinger: Can that be a significant stage upward in revenues and profitability? of from the Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES, Well, I mean, M&A is always a way to step quicker.
Can that be.
A significant stage.
And revenues and profitability.
From the from the size. It is today or would you need to do M&A to terminate it.
Enter a decent size division.
Well I mean, M&A is always a way to step quicker, but no we're going to continue to grow by ourselves. That's unless we saw somebody that had something unique or different that we didn't have as far as our retail presence I think.
Kenneth E. Zinger: But no, we're going to continue to grow by ourselves. That is, unless we see somebody that has something unique or different that we don't have as far as a retail presence. I think we've got enough of a reputation now.
We've got enough of a reputation now were well respected in the industry. We have unique capabilities that some of our competitors don't even have so the only reason I can see us doing M&A in any of these spaces from here would be some sort of unique technology or vertical integration.
Kenneth E. Zinger: We're well respected in the industry; we have unique capabilities that some of our competitors don't even have. So the only reason I can see us doing M&A in any of these spaces from here would be some sort of unique technology or vertical integration. The question is, with the LNG on the West Coast moving forward, to build out. Northwest Alberta. X and Manpower Movement.
Sure.
The next question is with the LNG on the West Coast moving forward.
And potentially an announcement of train two.
Do you see having to build out in northwest, Alberta, and northeast B C.
Are we looking at something significant in terms of.
Capex in manpower movements into those areas.
Joseph Schachter: Um, yeah, I mean, we have the intention that when the activity demands it, so, For 25 years, MI's Flumberjay had an invert blending facility in Spruce Grove, Alberta. A couple of years ago, I think it was during 2020 or 2021. They chose to exit the market completely and dismantle that facility. We bought that facility for pennies on the dollar, and we moved it into our NISQ storage area, and it's sitting there right now, waiting, and it's intended to go to Northeast BC when the demand is there. So at some point, we will truck that facility up there and weld it back together. But as far as a significant capex spend is concerned, it won't be significant.
Yeah, I mean, we have the intention that when the activity demands it.
For 25 years, I am I slumber, J had invert blending facility and spruce Grove, Alberta couple of years ago, I think it was during 'twenty 'twenty or 2021.
They chose to exit the market completely and dismantle that facility, we bought that facility for pennies on the dollar.
And we moved it into our NICU storage area and it's sitting there right now waiting and it's intended to go to northeast B C. When the demand is there. So at some point, we will truck that up there and welded back together, but as far as a significant capex spend that it's not it won't be significant.
Kenneth E. Zinger: Again, thanks very much and congratulations on the award. Thank you. This concludes the question and answer session. I would like to turn the conference back over to Ken Zinger.
Well again, thanks, very much and congratulations on the quarter and the year.
Okay. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Ken Zhang for any closing remarks. Please go ahead.
Kenneth E. Zinger: Closing. Thank you. With that, I'll wrap up this call today by saying thank you to everyone who took the time to join us here today. We continue to be very optimistic about the future here at CES Energy Solutions, and we look forward to speaking with you all again during our Q1 2024 update in May. Thank you. This concludes today's conference call. You may disconnect your line. Thank you for participating and have a pleasant day. www.ces-energy.org www.ces.gov.au www.ces-energy.org
Thank you with that I'll wrap up this call today by saying Thank you to everyone who took the time to join US here today, we continue to be very optimistic about the future here at CES energy solutions, and we look forward to speaking with you all again during our Q1 'twenty 'twenty four update in May Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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