Q3 2024 CES Energy Solutions Corp Earnings Call
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Speaker Change: Good morning, everyone and welcome to the CES Energy solutions third quarter 2024 results conference call and webcast. As a reminder, all participants are in a listen only mode and the conference call is being recorded after the presentation. There will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone.
Speaker Change: He pad.
Speaker Change: Should you need assistance during the conference call you may signal, an operator by pressing the star key followed by zero.
Speaker Change: I would now like to turn the conference over to Mr. Tony I'll, Let Gino Chief Financial Officer. Please go ahead Sir.
Speaker Change: Thank you operator, good morning, everyone and thank you for attending today's call.
Speaker Change: 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.
Speaker Change: These risk factors and assumptions are summarized in our third quarter MD&A and press release dated November six 2024 and in our Aif dated February 29 2024.
In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies.
Speaker Change: And for a description and definition of these please see our third quarter MD&A.
Speaker Change: At this time I would like to turn the call over to Ken Zinger, our president and CEO.
Ken Zinger: Thank you Tony welcome everyone and thank you for joining us for our third quarter 2024 earnings call on today's call I will provide a brief summary of our financial results released yesterday, followed by an update on capital allocation and then our divisional updates for Canada and the U S. I will then pass the call over to Tony to provide a detailed financial update will take.
Ken Zinger: Some questions and then we'll wrap up the call.
Ken Zinger: I'll start my comments today by highlighting some of the major financial accomplishments, we achieved in Q3 of 2024.
Highlights include all time record quarterly revenue of $607 million, which was 13% higher than Q3 of last year, and almost 3% higher than our prior quarterly record.
All time quarterly EBITDA of $103 million, which was ahead of last year's Q3 by 28%.
EBITDA margin of 16, 9% versus 15% in Q3 of 2023.
To date, we have repurchased 9 million shares of the $19 2 million shares allowed under our current <unk> plan at an average price of 67% 68.
Speaker Change: This represents 47% of the current program and just three five months.
Speaker Change: Free cash flow of $40 $1 million during the quarter and $152 3 million year to date at September 30.
Speaker Change: Total debt to trailing 12 months EBITDA rose slightly to 114 from $1. One two at the end of last quarter, but well below the $1 49 reported at year end 2023, and at the lower end of our targeted range of one to one of the house types.
Speaker Change: Our cash conversion cycle came in at a record 101 days well below our targeted range of 110 to 115 days.
Speaker Change: I'm happy to confirm that our previously announced capital allocation plans remain the same as stated on the last call. We will continue to pay our quarterly dividend of <unk> <unk> per share or approximately $27 million per year with an attention to adjust the dividend once per year, while reported Q4 results in March of each year.
We will continue to support the business with the necessary investments required to provide acceptable growth and returns. This includes a slight increase of our capex in 2000 $24 million to $85 million in order to support the revenue growth fleet growth. We believe is coming over the next three quarters, we anticipate capex will revert back to the 75.
Speaker Change: <unk> level in 2025.
We will continue to look for strategic tuck in acquisition opportunities interrelated business lines or geographies, where we believe we can add value and grow returns.
Speaker Change: Based on our current outlook.
Speaker Change: Based on our current outlook, we intend to once again purchased the maximum number of shares possible under the CIB of $19 $2 million, we will continue to target a debt level in the one to one of the half times debt to trailing 12 months EBITDA range.
Speaker Change: I will now move on to summarize Q3 performance by Division.
Speaker Change: Today, our rig count in North America stands at 196 rigs out of the 782, let's say this running representing an industry, leading north American land market share of over 25%.
Speaker Change: In Canada, the Canadian drilling fluids group continues to lead the WCS be in market share today, we are providing service to $77 212 jobs solicitous underway in Canada, or 36, 3% market share you're active drilling rig count in Canada. So far in the second half of 2024 has been trend.
Speaker Change: <unk> consistently higher by approximately 10% to 15% year over year.
Speaker Change: We remain excited about the prospects for 2024, and 2025 and continue to anticipate that activity will be a little stronger and easier than was experienced in 2023 due to the completion and startup of infrastructure product.
Speaker Change: <unk> and their associated takeaway capacity.
Ken Zinger: Ken our Canadian production chemical business had very strong results. Once again in Q3 all of the business lines within fuel Chem continued to grow significantly as we continued to take market share win bids optimized formulations and fine tune. The overall growth the revenue and earnings from our primary business production treating.
Speaker Change: To drive the growth in Canada, as we consistently strive to deliver superior products and service combined with competitive market pricing.
Speaker Change: In the United States Aes, our U S drilling fluids group is providing chemistries and service to 120 of the 568 rigs listed as active in the USA landmark to date for our continued number one market share of U S land rigs at just over 21%.
Speaker Change: The number of rigs drilling in the USA was roughly neutral quarter over quarter. As we believe we are now at or near the bottom of active rig counts in fact, we expect a small uptick in activity beginning in Q1 and better overall activity in 2025 than was experienced in the second half of 2024, we continue to enjoy a decently.
Speaker Change: <unk> 94 rigs out of the 304 listed is working in the Permian basin or 31%.
Speaker Change: The industry rig count has also been roughly flat quarter over quarter and we have the same optimism about increased activity in Q1 is what the broader USA.
Speaker Change: As well service intensity continues to demonstrate its presence in our numbers for drilling fluids throughout North America, we continue to utilize our scientists laboratories and facilities to develop new innovative solutions to optimize performance for our customers the integration of hydro <unk>.
Speaker Change: It's not the hydroid acquisition continues to progress well operating as EES completion services. We've already started to see significant contributions from the team and look forward to continuing to maximize value from this accretive tuck in acquisition.
Speaker Change: Finally, the Jacobs catalyst Division continued to lead the company with its growth in Q3, we can we are consistently winning more business growing revenue and taking market share at Jacobs catalyst we remain confident.
Speaker Change: Confident that we have not only achieved the highest largest market share in the Permian basin, but then we are growing that share everyday as well we have now achieved commercial and operational success with a technically sophisticated product line for the offshore market in the Gulf of Mexico. This achievement opens the door to some higher margin business as well as establishing credibility.
Speaker Change: I need to participate in more of our RFP opportunities.
Speaker Change: Although a small piece of our business today, we believe we are on a path to grow this attractive segment.
Speaker Change: 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 and his reward rewarding to note that due to the growth we are experiencing.
Speaker Change: And anticipating in all parts of our business. We have increased our total number of employees at CES from 'twenty 236 on January one of 2024 to 2400 88 at the end of Q3.
Speaker Change: This represents an increase of 252 employees. So far this year are approximately 10%.
Speaker Change: In conclusion, I would like to thank all of our employees in every division.
Speaker Change: And it speaks once again to the quality of the people we employ everywhere in every division here at CES.
Speaker Change: With that I'll pass the call over to Tony for the financial update next lock in.
Speaker Change: <unk> financial results setting new records for revenue adjusted EBITDA and funds flow from operations underpinned by continued high quality of earnings as illustrated by our $16, 9% EBITDA margin.
Speaker Change: Which is well above our guided $15 to 16, 5% range in this operating environment.
Speaker Change: <unk> continued to effectively deploy strong surplus cash flow to aggressively return capital to shareholders. While also investing in strategic Capex and working capital to support our record $2 $4 billion revenue run rate and position the company for identified growth opportunities.
Speaker Change: <unk>.
Speaker Change: These record results benefited from strong financial contributions from all parts of the business and were bolstered by favorable product mix continued high levels of service intensity and the adoption of innovative technologically advanced products that had spawned attractive derivative follow on offerings.
Speaker Change: We continue to serve the ever increasing needs of our customers, while realizing attractive economics due to our unique vertically integrated business model and effective supply chain management.
Speaker Change: In Q3, CES generated revenue and adjusted EBITDAX of $607 million and $103 million, respectively, representing a 16, 9% margin.
Speaker Change: Q3 revenue of 607 million represented an annualized run rate of approximately $2 4 billion and a 13% decrease over prior year of $537 million.
Speaker Change: Revenue generated in the U S achieved an all time record.
Speaker Change: $403 million and represented 66% of total revenue.
Speaker Change: This revenue figure exceeded the $391 million in Q2 and $361 million a year ago.
Speaker Change: Revenue generated in Canada also achieved an all time record of $204 million from $162 million in Q2, and $175 million a year ago.
Speaker Change: The company continued to see high levels of service intensity and production chemical volumes driven by ever more complex drilling programs.
Speaker Change: Customer emphasis on optimizing production through effective chemical treatments benefited both countries and countered declines in U S industry rig counts showcasing the resilience of our business model.
Speaker Change: Adjusted EBITDA of 103 million set a new all time high and represented 28% increase from $80 million in Q3, 2023, and compared favorably to the $95 million generated in Q2 of 2024.
Speaker Change: Adjusted EBITDA margin in the quarter of 16, 9% came in one 9% ahead of prior year's margins of 15.0% and in line with 17, 3% in Q2 of this year.
Speaker Change: These margins were afflicted with continued high service intensity levels and attractive product mix and continued adoption of innovative technologically advanced products all supported by a prudent cost structure and the vertically integrated business model.
Speaker Change: During the quarter <unk> generated a record $88 million in funds flow from operations compared to $62 million in Q2 and $58 million a year ago.
Speaker Change: The increase in funds flow from operations was the direct result of higher revenue and significant margin expansion.
Speaker Change: <unk> investments in working capital CES generated $73 million in cash flow from operations.
Speaker Change: Paired to $83 million in Q2, and the $100 million in Q3 2023.
Speaker Change: The decrease in cash flow from operations was the result of strategic investments in working capital to support record revenue levels and also supports our upcoming seasonal activity increases in Canada in particular and that was all partially offset.
Speaker Change: The record improvements to capturing version cycle as Ken had mentioned.
Speaker Change: Free cash flow was $40 million for the quarter, which compared to $55 million in Q2 and $76 million in Q3 2023.
Speaker Change: Free cash flow continued to demonstrate C. S. Its high quality of earnings as measured by a free cash flow to adjusted EBITDA conversion rate of approximately 39% for the quarter were 44% for the trailing 12 months period.
Speaker Change: <unk> continued to maintain a prudent approach to capital spending through the quarter with Capex spend net of disposal proceeds of $24 million.
Speaker Change: We will continue to adjust plans as required to support existing business and attractive growth throughout our divisions and for full year 2024, we expect cash capex to be approximately $85 million.
Speaker Change: We had more towards specific expansion capital to support incremental accretive business development opportunities.
Speaker Change: And also to support current record revenue levels.
Speaker Change: Looking forward, we expect this level to decline back to $70 million to $80 million range. It has to meet that to come in at about 87.
Speaker Change: $75 million for 2025.
Speaker Change: During the quarter, we aggressively pursued our current in CIB program purchasing 6 million common shares at an average price of $7 67 per share for a total cash outlay of $46 million subsequent to September 30, the company purchased an incremental.
Speaker Change: Three 3 million common shares at an average price of $7 76 per share for a total of $25 $6 million year.
Speaker Change: Year to date, we purchased almost 14 million shares representing 6% of outstanding shares.
Speaker Change: As at December 31, 2023 at an average price of $6 44 per share it.
Speaker Change: It should be noted that since inception of the NCI program on July 17, 2018. This.
Speaker Change: This company has purchased 68 million shares representing 25% outstanding shares at the time of the inception of the program for an average price of.
Speaker Change: $3 32 per share.
Speaker Change: With the current strength in the business and its current share price levels, we intend to remain active and are in CIB over the coming year and we will also implement opportunistic purchases in the context of the market.
Speaker Change: We ended the quarter with $439 million in total debt, representing an increase of $34 million from the prior quarter total Dennis primarily composed of the $200 million senior notes and net draw on our senior facility of $137 million and 94 million.
Speaker Change: In lease obligations.
Speaker Change: Total debt to adjusted EBITDA of 114 times at the end of the quarter compared to 112 times.
Speaker Change: At June 30, and $1 four nine times at the end of 2023.
Speaker Change: Demonstrating our continued commitment to maintaining a very prudent leverage levels, we're very comfortable with our current debt level maturity schedule and leverage in the one to one five times range, thereby enabling strong return of capital to shareholders and prioritizing a sustainable dividend and share.
Speaker Change: Buybacks.
Speaker Change: I would also note that our working capital surplus of $633 million.
Speaker Change: <unk> total debt of 439 million by $194 million.
Speaker Change: And demonstrates continued improvement compared to the prior year.
Speaker Change: Continued focus on working capital optimization has led to a year over year improvement in cash conversion cycle.
Speaker Change: Taking us to a notable 101 days at the end of the quarter.
Speaker Change: Compared to 110 days.
Speaker Change: Got it.
Speaker Change: At September 32023, one year ago, and 111 days from Q2.
Speaker Change: This also translates to a reduction in operating working capital as a percentage of annualized quarterly revenue to 26% from 30% a year ago and compares to 28% in Q2.
Speaker Change: Each percentage improvement at these revenue levels represents approximately $24 million and incremental cash on our balance sheet.
Speaker Change: Internally, we have continued to focus on return on average capital employed metrics at the divisional levels. This approach has led to a cultural adoption of key R. O. A C E maximizing factors such as profitable growth strong margins working capital optimization.
Speaker Change: And prudent capital expenditures I'm proud to report that the resulting consolidated trailing 12 month ROE CE is now sitting at a record level of 25, 6% up from 26% a year ago.
Speaker Change: As Ken mentioned <unk> closed the acquisition of hydro leg on July 1st.
Speaker Change: The aggregate purchase price was $15 million, consisting of $10 2 million in cash consideration and $4 8 million of deferred consideration.
Speaker Change: The company's Q3 results demonstrate very strong revenue levels.
Speaker Change: And surplus free cash flow generation trends in the current environment and is indicative of the cash flow generating characteristics of CFS.
Speaker Change: This is further illustrated by a net draw of $175 million, which has increased by $38 million from the end of the quarter, primarily as a result of inventory purchases to support seasonal activity pick up in Canada aggressive ncnb spending in our quarterly dividend payment.
Speaker Change: Yes.
Speaker Change: At this time I'd like to turn the call back to the operator for questions.
Speaker Change: We will now begin the question and answer session to join the question queue. You May press. The Starkey followed by the number one on your telephone keypad, you will hear a tone acknowledging your request.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing any Keith.
Speaker Change: And so what's your all your question. Please press Star then two.
Speaker Change: And we will pause momentarily to assemble our roster.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Mr. Ken Zinger for any closing remarks. Please go ahead Sir.
Ken Zinger: Well. 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. We look forward to speaking with you all again during our Q4 update in March. Thank you.
Speaker Change: Thank you operator.
Speaker Change: This brings to close to today's conference call you may now disconnect your lines.
Speaker Change: You for your participation and have a pleasant day.