CES Energy Solutions (OTC:CESDF) Corp. (CES) reported a record-breaking financial performance in the third quarter of 2024 during its earnings call on November 6, 2024. The company announced a significant increase in revenue and EBITDA, with quarterly revenue reaching $607 million, a 13% rise from the previous year, and EBITDA climbing to $103 million, marking a 28% increase. The company's EBITDA margin stood strong at 16.9%. CES also highlighted its successful share repurchase program, buying back 9 million shares at an average price of $7.68, and reported a solid free cash flow of $40.1 million for the quarter.
Key Takeaways
- Record quarterly revenue of $607 million, up 13% year-over-year.
- All-time high quarterly EBITDA of $103 million, a 28% increase from Q3 2023.
- EBITDA margin of 16.9%.
- Repurchased 9 million shares under the NCIB plan at an average price of $7.68.
- Free cash flow for the quarter at $40.1 million.
- Capital expenditures expected to increase to $85 million in 2024 for growth.
- Total (EPA:TTEF) debt at $439 million with a debt-to-EBITDA ratio of 1.14 times.
- North American market share exceeds 25% with 196 active rigs.
- U.S. drilling fluids group revenue hit a record $403 million, 66% of total revenue.
- Workforce increased to 2,488 employees in 2024.
- Funds flow from operations at $73 million for the quarter.
- Acquired Hydrolyte on July 1 for $15 million.
- Share price reported at $6.44.
- NCIB program has purchased 68 million shares at an average price of $3.32 since July 17, 2018.
- Working capital surplus of $633 million, exceeding total debt by $194 million.
- Improved cash conversion cycle to 101 days.
- Record trailing 12-month ROACE of 25.6%.
Company Outlook
- Anticipated increased activity in 2024 and 2025 due to infrastructure projects and rising service intensity.
- Plans to continue strategic acquisitions and business segment optimization.
- CES remains active in the NCIB, making opportunistic purchases based on market conditions.
Bearish Highlights
- Funds flow from operations decreased to $73 million, down from $83 million in Q2 and $100 million in Q3 2023.
- Free cash flow for the quarter was $40 million, compared to $55 million in Q2 and $76 million in Q3 2023.
- Total debt increased to $439 million, up $34 million from the previous quarter.
Bullish Highlights
- Revenue from the U.S. drilling fluids group and Canadian operations achieved record levels.
- The company has a strong working capital surplus and an improved cash conversion cycle.
- CES maintains a commitment to prudent leverage levels, with a debt-to-EBITDA ratio of 1.14 times.
Misses
- A decrease in funds flow from operations and free cash flow compared to previous quarters.
Q&A Highlights
- CES expressed confidence in its financial strategy and operational performance.
- The company discussed the successful integration of Hydrolyte and its contribution to the company's growth.
- Management addressed questions regarding capital allocation, emphasizing their focus on growth and shareholder returns.
CES Energy Solutions continues to navigate the market with a strong financial position and strategic growth initiatives. The company's next earnings update is expected in March, where further developments and performance metrics will be discussed.
InvestingPro Insights
CES Energy Solutions Corp.'s (CESDF) impressive third-quarter results are further supported by recent InvestingPro data and tips. The company's strong financial performance is reflected in its market capitalization of $1.47 billion USD, indicating significant investor confidence.
InvestingPro data shows that CES Energy Solutions has maintained a robust revenue growth, with a 5.94% increase over the last twelve months as of Q3 2024. This aligns with the company's reported record quarterly revenue of $607 million. Moreover, the company's profitability is underscored by its attractive P/E ratio of 10.83, suggesting that the stock may be undervalued relative to its earnings potential.
One InvestingPro Tip highlights that CES Energy Solutions has raised its dividend for 4 consecutive years, which is consistent with the company's strong cash flow generation and commitment to shareholder returns. This is further supported by the reported dividend yield of 1.34% and an impressive dividend growth of 17.76% over the last twelve months.
Another relevant InvestingPro Tip indicates that the company is trading near its 52-week high, with the current price at 95.06% of its 52-week peak. This reflects the market's positive reception of CES Energy Solutions' recent performance and outlook.
For investors seeking more comprehensive insights, InvestingPro offers 14 additional tips for CES Energy Solutions, providing a deeper analysis of the company's financial health and market position.
Full transcript - CES Energy Solutions Corp (CESDF) Q3 2024:
Operator: 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. [Operator Instructions] I would now like to turn the conference over to Mr. Tony Aulicino, Chief Financial Officer. Please go ahead, sir.
Tony 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 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.
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'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 nine 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 30th, total debt to trailing 12 months EBITDA rose slightly to 1.14 times from 1.12 times at the end of last quarter, but well below the 1.49 times reported at year-end 2023 and at the lower-end of our targeted range of one times to 1.5times. 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 three 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 one time to 1.5 times 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 (NYSE:AES) our U.S. drilling fluids group is providing chemistries and service to 120 of the 568 rigs listed as active in the USA. land market today for a continued number market share of US land rigs at just over 21%. 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 up-tick 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 USA. 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.
Tony Aulicino: 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 US 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 US 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 1.14 times at the end of the quarter compared to 1.12 times at June 30 and 1.49 times 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 1 to 1.5 times 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 30th, 2023 one 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 1st. 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:
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.
Tony Aulicino: 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.
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