Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- CES Energy Solutions Corp (CESDF, Financial) achieved all-time record revenue for Q2 2024 of $553.2 million, a 7% increase from the previous year's Q2 record.
- The company reported its second-highest quarterly EBITDA ever at $95.4 million, marking a 29% increase from Q2 2023.
- CES Energy Solutions Corp (CESDF) maintained a strong EBITDA margin of 17.3%, tying the highest quarterly EBITDA margin achieved in nine years.
- The company generated free cash flow of $54.8 million during the quarter, driven by strong financial metrics.
- Total debt to trailing 12 months EBITDA dropped to a new low of 1.12 times, showcasing effective debt management and financial health.
Negative Points
- The number of rigs drilling in the USA was slightly down quarter-over-quarter by about 3%, indicating a potential slowdown in drilling activity.
- The Permian industry rig count is down 4% from the previous quarter, which could impact future revenue from this key region.
- Despite strong financial performance, CES Energy Solutions Corp (CESDF) faces challenges in maintaining high service intensity levels amid declining rig counts in the US.
- The company has not seen significant action yet from the Champion X deal, which could affect future market share gains.
- International expansion opportunities remain uncertain, with no concrete developments in entering new countries or markets.
Q & A Highlights
Q: Tony, you said previously that you'd provide go forward margin guidance on the Q2 conference call. Maybe I missed it in the prepared remarks, but is that still something that you're planning to provide?
A: Yes, absolutely. We focus on a lot of financial attributes of the company, as and that all gets distilled by the most important element, which is cash flow generation, but a lot of that is driven by the impressive margin progression. So, yes, happy to speak to I'll start off. Our previous ranges were 13.5% to 14.5% about a year ago. That moved up to 14% to 14.5%. And then over the last four quarters, we delivered four quarters ago, 15.0%, followed by 15.3%, followed by 17.3% last quarter, and again, this quarter at the same level. And again, it's been driven by what Ken and I have been talking about. This environment of high service intensity plays to the company's strengths. A bigger portion of the products that our customers are buying from us are the more specialized products that command higher profit margin and EBITDA margin profiles because of our vertically integrated business model. Our procurement team has continued to be very effective, and you can see that in our gross margins. And then the last one that is a little bit more unpredictable is the adoption of our technologically advanced new products that our customers need in this new era of more complicated drilling and production requirements. And that's one of them that can move any given month, any given quarter. But in light of what we've done, we'll be responsible and answer that question by looking at the average over the last four quarters. That is an average of just over 16%. And I want to make sure that we provide a range that's responsible. And we believe that responsible range right now in the context of everything that's happening is 15.5% to 16.5%.
Q: Oh, that makes sense. And so, you sort of touched on this, but I assume that because you've given that range, it's something you think you can achieve with a pretty high confidence interval? Or I guess, the question I'm trying to ask is, do you think you could continue to exceed that like you have over the last two quarters? Or do you expect margins to trend down?
A: So, we don't expect them to trend down based on everything we know about our business and that we're seeing in the industry. And just like we've always said, every time we put out a range or talk about what we intend on doing, we would love to be in a position to exceed that range. But we don't want everybody to hang their hat on a range that's higher than that, at least not at this time.
Q: Understood. And maybe just switching gears, I can appreciate that M&A is opportunity-driven, but has your attitude towards M&A changed, just given that you've sort of gotten the debt where you want it to be, you're generating free cash flow well in excess of the MCIB and the dividend commitments. Is that something that we can see more of or can expect to see more of?
A: Yes. So, to be fair, there has been a bit of a change. When we look at M&A, we look at a lot of opportunities. And whenever we get serious, we'll share those opportunities, we'll talk to the Board about them. But there's two key elements when we look at M&A, and they're defined by the how and the why. So, the how is, well, how do you finance something regardless of size and that distills down to our capital structure and our valuation multiple. We have our capital structure house in order in a very effective way, I believe. We got that bond done, maturity of 2029, good cost of capital on the debt side, good maturity schedule. So that's one element and the other element is valuation multiple. Although we've grown from the sub 4 times a year ago, if I look at the analyst estimates from yesterday before everybody started increasing, we're still trading sub 6 times, probably 5.5 times to 6 times right now, and that's without the increases that I know are coming for 2025. But that multiple is a little bit better, so that how gets checked off now, right? And the most important thing though is the why, the strategic merit. We're not going to do a deal just to get bigger and anything we look at has to have very high levels of strategic merit. And as Ken has mentioned a bunch of times, we look pretty hard at small tuck ins that are strategic, but we're not very interested in seriously pursuing any swing for the fences deal despite the fact that our balance sheet is way better and our multiple is a bit better as well.
Q: Hi, good morning. You've certainly been buying back a decent amount of stock over the last few quarters and you talked about buying 1.5 million shares under the new plan. Can you talk about what level maybe you might be more sensitive to repurchasing shares at, Tony? I think you mentioned in the prepared remarks you're looking to exhaust the 19 million share plan over the next 12 months. How do you think about whether or not that is the best use of capital? Is there a specific number or in terms of multiple, is there an intrinsic value you look at? Just curious how we should be thinking about that as the stock price fluctuates?
A: Yes, like we'll share our philosophy which is our version of what various investors will have as their purchase philosophies. We look at the company, you've seen the financial profile, you've seen the results. We've consistently put up ROCE and ROIC levels in the mid to high range of 20% to 25%. EBITDAC margin has strengthened significantly and consistently from the 14% range to the 17% plus range. Our cash on cash yield right now based if you extrapolate our free cash flow and look at our market cap is in the double-digits in that 11% plus or minus range. And when you look at our current multiple, I think I calculated last night based on estimates that were available of 5.67 times and that's going to go down based on some of the research that Ken and I have been reading last night and this morning. So, in our view, if we can pick up a company that we know very well like ours in the context of the current industry conditions in the anywhere near this range, as we've said before, we're not even going to talk about taking our foot off the pedal on buybacks until we're well into the sixes or the sevens in terms of EV to EBITDA range.
Q: And you mentioned buying stock of a company you know. As you mentioned, you also bought another company that in Q3 anyways. Can you talk maybe a little bit more about the EBITDA impact, if any, of the acquisition of HydroLite, which kind of gives us a little bit more of the type of multiple that you
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
