CES Energy Solutions Corp

TSX:CEU

Earnings Call Analysis

CES Energy Solutions Posts Record Q3 Revenue and EBITDA Growth

In Q3 2024, CES Energy Solutions achieved record revenues of $607 million, a 13% year-over-year increase, and an EBITDA of $103 million, up 28%. The EBITDA margin improved to 16.9%, exceeding guidance of 15.5% to 16.5%. Free cash flow was $40.1 million, contributing to a total debt to trailing EBITDA ratio of 1.14x, well within their target range of 1x to 1.5x. The company plans to increase capital expenditures to $85 million in 2024, anticipating consistent revenue growth, while continuing a quarterly dividend of $0.03 per share, amounting to $27 million annually.

Record-Breaking Financial Performance

During the third quarter of 2024, CES Energy Solutions achieved remarkable financial results, posting record quarterly revenues of $607 million. This figure represented a 13% increase compared to the same quarter last year, positioning the company with a strong revenue run rate of approximately $2.4 billion annually. The adjusted EBITDAC also reached an all-time high of $103 million, marking a substantial 28% increase from $80 million in Q3 2023. Notably, the EBITDAC margin of 16.9% exceeded the company’s prior guidance range of 15.5% to 16.5% and reflects a significant improvement from last year’s margin of 15.0%.

Record Cash Flow and Shareholder Returns

In terms of cash flow, CES reported a record $88 million in funds flow from operations, a considerable rise from $62 million in Q2 and $58 million a year prior. Despite some fluctuations in cash flow from operations due to strategic investments in working capital, CES generated free cash flow of $40 million for the quarter. The company continued its aggressive capital return strategy, buying back 9 million shares at an average price of $7.68 per share, which is 47% of their current plan within just 3.5 months.

Growth Across Key Markets

Both the U.S. and Canadian markets reported record revenues, driven by increased service intensity and demand for production chemicals. In the U.S., revenue hit a record $403 million, while Canada followed suit with $204 million in revenue, reflecting growth in both regions. The active rig count in Canada rose by approximately 10% to 15% year-over-year, indicating optimistic future growth alongside the completion and commencement of infrastructure projects, potentially providing additional revenue streams.

Proactive Capital Expenditure Plans

CES is committed to supporting its growth by slightly increasing its capital expenditures (CapEx) to $85 million in 2024, expecting to revert back to $75 million in subsequent years. This investment strategy aims to support anticipated revenue growth over the next three quarters while positioning the company for further expansion opportunities in targeted business lines and geographies.

Strong Operational Metrics

CES maintained impressive operational efficiency, reporting a cash conversion cycle of just 101 days, which is below the prior year's 110 days. This operational prowess reflects a focused effort on optimizing working capital. The debt-to-trailing-twelve-months EBITDAC ratio rose slightly to 1.14x, still well within the company’s target range of 1x to 1.5x, indicating a prudent approach to leveraging whilst returning value to shareholders.

Market Positioning and Future Outlook

The company operates with an industry-leading North American land market share of over 25%, with a particular focus on innovative solutions and product lines. CES management expressed optimism regarding the uptick in drilling activity projected for 2025, driven by enhanced market conditions and customer demands for improved operational efficiencies. The integration of their recent acquisition, Hydrolyte, is expected to enhance the company’s capabilities and broaden its market influence.

Conclusion and Investor Confidence

Overall, CES Energy Solutions showcased impressive growth and financial resilience in Q3 2024, creating a narrative of strength backed by robust operational performance, strategic capital allocation, and favorable market conditions. The company’s commitment to shareholder value through its share buyback programs and consistent dividends reflects a management team confident in its growth trajectory and sustainability of earnings amidst a dynamic industry landscape.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone, and welcome to the CES Energy Solutions Third Quarter 2024 Results Conference Call and Webcast. [Operator Instructions] The conference call is being recorded. [Operator Instructions]

I would now like to turn the conference over to Mr. Tony Aulicino, Chief Financial Officer. Please go ahead, sir.

[Anthony Aulicino, executive]

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 third quarter MD&A and press release dated November 6, 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. And for a description and definition of these, please see our third quarter MD&A.

At this time, I'd like to turn the call over to Ken Zinger, our President and CEO.

[Kenneth Zinger, executive]

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'll then pass the call over to Tony to provide a detailed financial update. We'll take some questions, and then we'll wrap up the call.

I'll start my comments today by highlighting some of the major financial accomplishments we achieved in Q3 of 2024. These 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 NCIB plan at an average price of $7.68. This represents 47% of the current program in just 3.5 months.

Free cash flow of $40.1 million during the quarter, and $152.3 million year-to-date at September 30.

Total debt to trailing 12 months EBITDA rose slightly to 1.14x from 1.12x at the end of last quarter, but well below the 1.49x reported at year-end 2023, and at the lower end of our targeted range of 1x to 1.5x.

Cash conversion cycle came in at a record 101 days, well below our targeted range of 110 to 115 days.

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 $0.03 per share or approximately $27 million per year with an intention to adjust the dividend once per year, while reporting 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 2024 to $85 million in order to support the revenue growth we believe is coming over the next 3 quarters. We anticipate CapEx will revert back to the $75 million level in 2025.

We will continue to look for strategic tuck-in acquisition opportunities into related business lines or geographies where we believe we can add value and grow returns.

Based on our current outlook, we intend to once again purchase the maximum number of shares possible under the NCIB of $19.2 million. We will continue to target a debt level in the 1x to 1.5x debt to trailing 12 months EBITDA range.

I will now move on to summarize Q3 performance by division. Today, our rig count in North America stands at 196 rigs out of the 782 listed is running, representing an industry-leading North American land market share of over 25%.

In Canada, the Canadian Drilling Fluids Group continues to lead the WCSB in market share. Today, we are providing service to 77 of the 212 jobs listed is underway in Canada or a 36.3% market share.

The active drilling rig count in Canada, so far, in the second half of 2024, has been trending consistently higher by approximately 10% to 15% year-over-year. We remain excited about the prospects for 2024 and 2025, and continue to anticipate that activity will be a little stronger during these years than was experienced in 2023 due to the completion and start-up of infrastructure, projects and their associated takeaway capacity.

PureChem, our Canadian production chemical business, had very strong results once again in Q3. All of the business lines within PureChem continued to grow significantly as we continue to take market share, win bids, optimize formulations and fine-tune the overall growth.

The revenue and earnings from our primary business production treating continue to drive the growth in Canada as we consistently strive to deliver superior products and service combined with competitive market pricing.

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 U.S.A. land market today for a continued #1 market share of U.S. land rigs at just over 21%.

The number of rigs drilling in the U.S.A. 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 basin-leading 94 rigs out of the 304 listed as working in the Permian Basin or 31%. The Permian industry rig count has also been roughly flat quarter-over-quarter, and we have the same optimism about increased activity in Q1 as with the broader U.S.A.

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 the Hydrolite acquisition continues to progress well. Operating as AES 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.

Finally, the Jacam Catalyst division continued to lead the company with its growth in Q3. We are consistently winning more business, growing revenue and taking market share at Jacam Catalyst. We remain confident that we have not only achieved the largest market share in the Permian Basin, but that we are growing that share every day.

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 to participate in more RFP opportunities. Although, a small piece of our business today, we believe we are on a path to grow this attractive segment.

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 of CES. It is rewarding to note that, due to the growth we are experiencing and anticipating in all parts of our business, we have increased our total number of employees at CES from 2,236 on January 1, 2024, to 2,488 at the end of Q3. This represents an increase of 252 employees so far this year or approximately 10%.

In conclusion, I would like to thank all of our employees in every division. And speaks once again to the quality of the people we employ everywhere in every division here at CES.

With that, I'll pass the call over to Tony for the financial update.

[Anthony Aulicino, executive]

Thanks a lot, Ken. CES' financial results set new records for revenue, adjusted EBITDAC and funds flow from operations, underpinned by continued high quality of earnings as illustrated by our 16.9% EBITDAC margin, which is well above our guided 15.5% to 16.5% range in this operating environment.

CES 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.

These record results benefited from strong financial contributions from all parts of the business, and were bolstered by a favorable product mix, continued high levels of service intensity, and the adoption of innovative technologically advanced products that have spawned attractive derivative follow-on offerings.

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.

In Q3, CES generated revenue and adjusted EBITDAC of $607 million and $103 million, respectively, representing a 16.9% margin. Q3 revenue of $607 million represented an annualized run rate of approximately $2.4 billion, and a 13% increase over prior year of $537 million.

Revenue generated in the U.S. achieved an all-time record at $403 million and represented 66% of total revenue. This revenue figure exceeded the $391 million in Q2 and $361 million a year ago.

Our revenue generated in Canada also achieved an all-time record at $204 million, up from $162 million in Q2, and $175 million a year ago.

The company continued to see high levels of service intensity and production chemical volumes driven by ever more complex drilling programs.

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.

Adjusted EBITDAC of $103 million set a new all-time high and represented a 28% increase from $80 million in Q3, 2023 and compared favorably to the $95 million generated in Q2 of 2024.

Adjusted EBITDAC margin in the quarter of 16.9% came in 1.9% ahead of prior year's margins of 15.0% and in line with 17.3% in Q2 of this year. These margins were reflective of continued high service intensity levels, an attractive product mix and continued adoption of innovative technologically advanced products, all supported by a prudent cost structure and a vertically integrated business model.

During the quarter, CES generated a record $88 million in funds flow from operations, compared to $62 million in Q2 and $58 million a year ago. The increase in funds flow from operations was the direct result of higher revenue and significant margin expansion.

Including investments in working capital, CES generated $73 million in cash flow from operations, compared to $83 million in Q2 and $100 million in Q3, 2023. The decrease in cash flow from operations was the result of strategic investments in working capital to support record revenue levels, and also support upcoming seasonal activity increases in Canada in particular. And that was all partially offset by the record improvements to the cash conversion cycle, as Ken had mentioned.

Free cash flow was $40 million for the quarter, which compared to $55 million in Q2 and $76 million in Q3, 2023. Free cash flow continued to demonstrate CES' high quality of earnings as measured by a free cash flow to adjusted EBITDAC conversion rate of approximately 39% for the quarter, or 44% for the trailing 12-month period.

CES continued to maintain a prudent approach to capital spending through the quarter with CapEx spend, net of disposal proceeds of $24 million.

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, weighted more towards specific expansion capital to support incremental accretive business development opportunities, and also to support current record revenue levels.

Looking forward, we expect this level to decline back to the $70 million to $80 million range and estimate that to come in at about 80 -- sorry, $75 million for 2025.

During the quarter, we aggressively pursued our current NCIB 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 3.3 million common shares at an average price of $7.76 per share for a total of $25.6 million.

Year-to-date, we purchased almost 14 million shares, representing 6% of outstanding shares as at December 31, 2023, at an average price of $6.44 per share.

It should be noted that, since inception of the NCIB program on July 17, 2018, this company has purchased 68 million shares, representing 25% of outstanding shares at the time of the inception of the program, for an average price of $3.32 per share.

With the current strength in the business and at current share price levels, we intend to remain active in our NCIB over the coming year, and we'll also implement opportunistic purchases in the context of the market.

We ended the quarter with $439 million in total debt, representing an increase of $34 million from the prior quarter. Total debt is primarily composed of the $200 million senior notes, a net draw on the senior facility of $137 million and $94 million in lease obligations.

Total debt to adjusted EBITDAC of 1.14x at the end of the quarter compared to 1.12x at June 30, and 1.49x at the end of 2023, demonstrating our continued commitment to maintaining very prudent leverage levels. We are very comfortable with our current debt level, maturity schedule and leverage in the 1x to 1.5x range, thereby enabling strong return of capital to shareholders and prioritizing a sustainable dividend and share buybacks.

I would also note that, our working capital surplus of $633 million exceeded total debt of $439 million by $194 million, and demonstrate continued improvement compared to the prior year.

Continued focus on working capital optimization has led to a year-over-year improvement in cash conversion cycle, taking us to a notable 101 days at the end of the quarter compared to 110 days at September 30, 2023, 1 year ago, and 111 days in Q2.

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. Each percentage improvement at these revenue levels represents approximately $24 million in incremental cash on our balance sheet.

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 ROACE maximizing factors such as profitable growth, strong margins, working capital optimization and prudent capital expenditures.

I'm proud to report that, the resulting consolidated trailing 12-month ROACE is now sitting at a record level of 25.6%, up from 20.6% a year ago.

As Ken mentioned, CES closed the acquisition of Hydrolyte on July 1. The aggregate purchase price was $15 million, consisting of $10.2 million in cash consideration and $4.8 million in deferred consideration.

The company's Q3 results demonstrate very strong revenue levels and surplus free cash flow generation trends in the current environment and is indicative of the cash flow generating characteristics of CES. This is further illustrated by our current 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 pickup in Canada, aggressive NCIB spending and our quarterly dividend payment.

At this time, I'd like to turn the call back to the operator for questions.

[Operator]

[Operator Instructions] 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.

[Kenneth Zinger, executive]

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.

[Anthony Aulicino, executive]

Thank you, operator.

[Operator]

This brings a close to today's conference call. You may now disconnect your lines. Thank you for your participation, and have a pleasant day.