CES Energy Solutions Corp. (CEU) Earnings Call Transcript & Summary

Hello and welcome to the CES Energy Solutions Corp. 2021 Annual Meeting of Shareholders. Please note that today's meeting is being recorded. During the meeting, we will have a question-and-answer session. [Operator Instructions] It is now my pleasure to turn today's meeting over to Matthew Bell, Corporate Secretary. Mr. Bell, the floor is yours.

Thank you for joining us today. My name is Matthew Bell, and I'm the Corporate Secretary for CES Energy Solutions Corp., and I will act as secretary for the meeting. Before we begin, we would like to provide a quick overview of the Lumi virtual meeting platform. You should now see the agenda on your screen. At the top of your agenda page is a legend showing 4 different icons that you may click on to access different parts of the platform. [Operator Instructions] The voting icon will only be displayed once the polls are open. Thank you, and I will now turn it over to our Chairman, Mr. Kyle Kitagawa.

Good morning and welcome to the virtual Annual General Meeting of holders of common shares at CES Energy Solutions Corp. My name is Kyle Kitagawa, and I am the Chairman of CES Energy Solutions. For convenience, we have divided today's meeting into 2 parts. First, we'll deal solely with the legal requirements for the meeting. After we will conclude the legal part of the meeting, Tom Simons, President and CEO, will provide a corporate update, followed by a question-and-answer session. In order to ensure that meeting covers the required business in an efficient manner, we have prearranged with designated shareholders and proxyholders to move and second the motion of the business. I will now call to order the Annual General Meeting of Shareholders of CES Energy Solutions. I will preside as Chairman of the meeting. Mr. Bell will act as secretary of the meeting, and Ms. Jennifer Oliver of Compushare (sic) [ Computershare ] will act as scrutineer. The notice calling this meeting of shareholders was mailed to shareholders in advance of the meeting as dated May 12, 2020. I would request the secretary keep the proof of mailing and notice of proxy, information circular, form of proxy of registered shareholders of the corporation with the records of this meeting. The bylaws of the corporation provide that a quorum exists if at least 2 holders representing 5% of the shareholders entitled to be voted at the meeting are present in person or represented by proxy. It has been confirmed by scrutineers that quorum has been met, and 71.79% of the issued and outstanding common shares are being represented at this meeting. Accordingly, I declare that the meeting is regularly called and properly constituted for transaction of business. I will now explain the voting procedures to be used at today's meeting. We have received all proxy voting results for today's resolutions in advance of this meeting. Anyone in attendance today who has not yet voted and is not signed in as a guest will have an opportunity to vote online in realtime using the Lumi platform. Rather than hold up business of the meeting for the final tabulation of votes cast of each motion, the Chairman will be providing the interim results received from the scrutineer in advance of this meeting on each of the motions presented. The Chairman has directed that the final combined results of the advanced poll and the votes entered through the virtual platform on all motions today be included with the minutes of this meeting. These results will also be available in the report on voting results posted on SEDAR following the termination of this meeting. The polls are now open. The first item of business is the presentation of financial statements of the corporation for the fiscal period ended December 31, 2020, and the report of the auditors thereon. Copies of financial statements, including the report of the auditors thereon, are available at this meeting and have been posted on the corporation's website and filed on SEDAR. As no action is required to be taken by the shareholders on the financial statements, I now declare the financial statements of the corporation for the fiscal period ended December 31, 2020, and the report of the auditors thereon have been received by the shareholders as submitted to this meeting. The next item of business is to fix the number of directors to be elected at the meeting. May I please have a motion to fix the number of directors to be elected at the meeting at 6?

I so move.

I second the motion.

Thank you. Are there any questions on this motion?

I see none, Kyle.

Seeing none, we will proceed to the scrutineer's report. According to the report, the results of the vote to fix the number of directors at 6 are as follows: 99.65% for, 0.35% against. I declare the motion carried. The next item of business is the election of directors. The corporation has nominated 6 directors for election and have not received any nominations from shareholders pursuant to the bylaws of the corporation. The 6 nominated directors as set out in the corporation's management information circular are Spencer Armour, III; Stella Cosby; John Hooks; Phil Scherman; Tom Simons; and myself, Kyle Kitagawa. May I now have a motion from the floor to elect the nominees as directors of the corporation to hold office until the next election of directors or until their successors are appointed?

I so move.

I second the motion.

Thank you. Are there any questions on this motion?

There aren't any, Kyle.

Seeing none, we will proceed to the scrutineer's report. According to the report, the voting results are as follows: myself, 99.6%, 4.4% withheld; Spencer Armour, III, 97.16% for, 2.84% withheld; Stella Cosby, 99.58% for, 0.42% withheld; John Hooks, 98.66% for, 1.34% withheld; Phil Scherman, 99.91%, 0.09% withheld; Tom Simon, 99.69% for, 0.31% withheld. I would like to remind you that CES majority voting policy requires that each director nominee receive 50% or more of the votes cast. I see that all directors have received more than 50%. Therefore, I declare that 6 nominees have been duly elected as directors of CES Energy Solutions for the upcoming year. As noted previously, the final voting results for each director will be available on SEDAR subsequent to this meeting and will be disclosed by press release. The final item of business is the appointment of auditors for the corporation. May I please have a motion that Deloitte LLP be appointed auditors of the corporation until the next Annual Meeting of Shareholders or until a successor is employed and the directors of corporation be authorized to fix their remuneration?

I so move.

I second the motion.

Thank you. Are there any questions on this motion?

There are no questions on this motion, Kyle.

Seeing none, we are -- we will proceed to the scrutineer's report. According to the report, the results of the vote to appoint Deloitte LLP as auditors of the corporation were as follows: 99.57% for, 0.43% withheld. I declare the motion carried. As there is no further scheduled business to be brought before the meeting, this will serve as a 1-minute warning prior to the polls being closed. If you are voting through the virtual platform, please ensure that your votes are recorded. [Voting]

All right. I show on my timer that we've done 1 minute. So the polls are now closed. Unless there is any other business to be brought forward, we will now proceed to conclude the formal portion of the meeting.

There are no other questions, Kyle.

Seeing none, I will now entertain a motion to end the meeting.

I move that the meeting be terminated.

I second the motion.

Thank you. Any objection?

There are none.

Okay. I then declare the meeting to be terminated. Before I turn over the floor is Tom Simons, President and CEO of CES, I would just like to thank management and staff. It's been a wonderful 15 years. I am stepping down as Chairman. And it has been a pleasure and honor to serve you. I know that I treasure the time I've spent as Chairman and the wonderful people I've met, from the staff to the Board, to the management team. And I'd just like to say to Tom, thank you very much for being a CEO. I valued your leadership and your friendship over the last 15 years. And I'd also like to recognize Ken Zinger, who is one of the original founders of the company, who's -- I valued his friendship and his wise counsel over the years. And I just want to say that this is a wonderful management team, Tony Aulicino, Vern Disney, Richard Baxter, Ken Zinger and Tom Simons, and it's been really wonderful to work with you over the last 15 years. I'd also like to thank the Board, both current Board: Stella, John, Spencer and Phil. It's been a real pleasure to work with you all. And I'd also like to recognize the past directors that I've had the opportunity to work with: Colin Boyer, Michael Stewart, Rod Carpenter, and of course, recently passed, Burt Ahrens. It's been wonderful. And I'd just like to say one other thing. The staff of CES have been absolutely wonderful to work with. They're hard working, they're dedicated. They care very much about the company, and they provided wonderful support to management and to the Board. And so I'd just like to thank them for all their efforts over the last 15 years. And I would also like to welcome Phil Scherman as the new Chairman. And I know Phil will do a wonderful job. And I have utmost confidence that he will lead this Board and this company well. And with that, sorry, I took so long. I'd like to turn it over to Tom and he will do a presentation and update you on where we are at CES. Thank you very much.

Thank you, Kyle. Before I make the corporate presentation, Kyle, on behalf of all the employees, thank you for your service to the company as Chairman, and for all the people that have benefited from this company being public and for the people that have sold, and I think this is an important point that I want to make. For those of us that had private businesses, without Kyle's assistance, Ken and I couldn't have taken our private business public. And I think that distinction needs to be made. The last 5 or 6 years have been tough to have an energy business that's public, that's based in Canada. And a lot of the shareholders on this call, unfortunately, have experienced that. But for everyone that has benefited from being part of CES being public, that wouldn't have been possible without Kyle Kitagawa. So Kyle, we all owe you a debt of gratitude. Each and every person who owned the private business, worked at those private businesses. And I want to publicly thank you and thank you on behalf of all of those people. And as Alberta is able to relax COVID rules, we're going to be able to do something together to celebrate that. And we're grateful that you're going to serve as Audit Chair going forward. And I want to thank you for helping us get our private business public and then learn how to run a public business. So thank you, Kyle, so much. And you helped me go from a young guy with a private business who felt pretty nervous being in the public markets and kind of not blow up like a lot of service companies did, and we turned this into what's a really good business. So thank you, Kyle. With that, I'm going to get into the presentation for everyone. For people that can look to the slide deck, the presentation is going to contain forward-looking information. I'll get on to Page 3 now. CES is a provider of chemistry and minerals to the oil and gas market, and a little bit to industrial and cosmetics. We're the #1 drilling fluid provider on land in North America, the #3 provider of production chemicals on land in North America. We provide to the frac market, the stimulation market. We treat pipelines and tanks. And we do that all across North America off of a vertically integrated model. We have local leadership that does that. That's one of our unique attributes as a business. And we've been successful uniquely as an independent doing that. On to Page 4. How did we get through this unique COVID? We kept our people safe. We had to reduce our costs. I want to note that it was very hard on our employees because we had to reduce headcount. We had to pay people less. I'm pleased to note that we made people hold at this point. We've been able to bring quite a few back. Through it, we kept our core people so that we could service our customers. And as commodity prices have recovered, we've been able to go back to supporting our customers as they've got busy. We maintained liquidity as a business and we, of course, properly allocated capital through the crash. So we suspended our dividend. We recovered receivables and shrunk inventory and let the cash on the balance sheet. We exited the year with cash. We suspended or stopped buying shares last summer not knowing where oil inventory or storage would go and how collections would go. And then we resumed buying shares again in the fall. I'll go on to Page 5 in the slide deck. So that shows where our infrastructure is as oil and natural gas prices have become strong coming out of COVID as North Americans have resumed driving. And in the U.S., in record levels have resumed flying. Commodity prices have become strong as oil companies on both sides of the border have started spending 60%, no more than 70% are public companies, no more than 70% of free cash flow. Oil, $70. Natural gas is $3. Oil and gas companies are active at levels that are less than pre-COVID, but they're making a lot of money and they're making it where our infrastructure is. So we've got good operating leverage, and our business is good today. On to Page 6 on our slide deck. We're busy with big companies. We're busy with big public companies. A lot of the rig market or drilling activity market and production chemical market in the U.S. is being driven by privates. That's a good share of our drilling fluid and production chemical market in the U.S. It's important to note that for people. What we're trying to demonstrate to people here is that the people that are spending money, we're on location for them, and our shareholders are benefiting from that. On to Page 7, some financial highlights for people. In 2020, which was a tough year for suppliers to oil and gas companies, we were able to generate $888 million of revenue and a little over $102 million of EBITDA. On a trailing basis, so Q1 included, because Q1 of 2020 was pre-COVID, we had a stronger quarter in 2020 than in 2021, primarily because U.S. operators haven't shifted yet to spending much less of cash flow than they are now. We were able to generate more money in Q1 2020 than 2021. On a trailing basis, we've generated $799 million of revenue and positive $86 million of EBITDAC. We're proud of that number. It converted a lot of that into free cash flow, and we continue to have a nice Q2 running today. On to Page 8 on the slide deck, and this is a really important attribute about the business. So oil and gas services, it's cyclical. As commodity prices go up and down, the upstream or drilling a completion market for oilfield services can be very busy or very slow. In 2009, 2015 and 2020, activity for oilfield service companies got very quiet. Our business in each one of those occasions collected receivables, shrunk inventory, and actually went to cash on the balance sheet. So we didn't owe the bank any money. We've been able to do that by staying disciplined and only having equipment that delivers chemicals to the locations of our customers. We don't have equipment that centrifuges out or stores the products like tank farms and stuff on location for our customers like a lot of competitors. We've been very disciplined as a business that our equipment is to manufacture chemistry and then deliver chemistry to our customers, warehouses for chemistry, warehouses for minerals, crushing minerals. That served our business very well over the last 20 years. That's why we were able to survive COVID as a business when it gets quiet. Our production chemical business carries on because the wells continue to produce, and then we're able to sustain the upstream business. And then when it's busy, it's the beta or torque in the business later. And that's what that page is able to demonstrate. On Page 9, this shows the strong free cash flow generation of the business. And if you go back in history, this business that Ken and I started and Kyle helped take public in 2006, we started this business September 5 of '01. We did $4 million of sales that year. We got the business public in '06. It did $60 million of sales or revenue and made $10 million of EBITDA. Since then, we've slightly over tripled the share count and put a bond on the company. In our really strong years, we've 17x EBITDA. In 2020, it's 10x EBITDA. We've, since public, paid out $340 million of dividends to shareholders. We took the business public with 1 warehouse. Today, we have $304 million of property, plant and equipment, including 2 reaction chemistry plants; a 30-acre facility in Midland that blends and stages chemistry; a blend plant in Carlyle, Saskatchewan; a staging and blending facility in Grande Prairie and H2S; manufacturing facility in Edmonton; and other facilities like our barite grinding facility in Corpus. We've got 8 labs across North America that are populated by about 70 scientists. We've got a head office full of professionals that help manage the back end of the business and keep us tax efficient. We've got a high-end business here that is able to generate serious cash for our shareholders. On Page 10, information of our capital structure and liquidity profile. What I'd like to share with listeners is what our intentions are about capital allocation. Our intention is, as we refinance the bond in the next few years, we intend to reduce the size of it. We intend also to continue to whittle away at the share count, and we'll do both of those with cash flow that the business is able to generate over the next couple of years. We're confident that the business will be able to do that based on operations. We are doing that to the bond in light of the fact that our customers who have historically spent 120% to 130% of cash flow for the last 20 years on upstream activity, are today spending 60% to 70% of cash flow. They're paying dividends and they're buying back their shares. So we need to adjust our capital structure accordingly as well, so that's what we're doing with our business. On to Page 11 on our slide deck to wrap it up. These are operational trends that are favorable for our business. Our customers are drilling deeper vertically and further horizontally. Why that's important for people to know and understand is that, that drives up higher volumes and complexity of chemistry, polymers and minerals every day for drilling fluid jobs, which is why we reported Q1 market share in the U.S. of 22%. It's why we have had 30% to 40% in Canada of the drilling fluid market for a decade. We lower the number of days that our customers spend on location to drill a well, which saves money for them, not through unit price, but through performance. Our production treating business, our job is to lower lifting costs through reduced failures, through improved productivity on the well. The bit of frac business we do, same thing: improve productivity of the frac, win the business. Our stimulation business, same concept: study offsetting wells and then do specialized asset treatments to win the business. The length of a horizontal well, that well doesn't look like a straight shot. It looks like a corkscrew. So the last mile, the amount of product that you put in the well is much greater than the first well. So these things are all beneficial to our business and competitors of ours in the space. So those are positive trends for our business over the longer term. With that, I'm going to wrap up the presentation and open up the floor to any questions that people want to ask.

Thanks, Tom. I'll just remind everybody that guests are now able to ask questions using the Lumi platform. [Operator Instructions] So we'll leave the line open for a moment here in case anybody wants to ask any questions. It does not look like we have any questions. So at this point, I think we're ready to wrap up the presentation and the meeting. Thank you very much, Tom. And I'll turn it back over to the operator.

This concludes the meeting. You may now disconnect. Everyone, have a great day