CA - CES Energy Solutions Corp. (CESDF) CEO Ken Zinger on Q2 2022 Results - Earnings Call Transcript
CES Energy Solutions Corp. (CESDF)
Q2 2022 Earnings Conference Call
August 12, 2022 11:00 AM ET
Company Participants
Anthony Aulicino - Chief Financial Officer
Ken Zinger - President and Chief Executive Officer
Conference Call Participants
Aaron MacNeil - TD Securities
Jonathan Goldman - Scotiabank
Tim Monachello - ATB Capital Markets
John Gibson - BMO Capital Markets
Joshua Young - Bison Interests LLC
Michael Robertson - National Bank Financial
Josef Schachter - Schachter Energy Research
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to the CES Energy Solutions Second Quarter 2022 Conference Call. As a reminder, all participants are in a listen-only mode and the conference 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 Tony Aulicino, Chief Financial Officer. Please go ahead.
Anthony 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 second quarter MD&A and press release dated August 11, 2022 and in our annual information form dated March 10, 2022. 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 second 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. On today's call, I will provide a brief summary on our record financial results released yesterday, followed by our divisional updates for Canada and the U.S., along with a brief update on our international businesses. I will then pass the call over to Tony to provide a detailed financial update. We will take questions and then we will wrap up the call.
The second quarter of 2022 was a breakout quarter for CES Energy Solutions. For the fourth consecutive quarter, we set an all-time record for quarterly revenue with $433.7 million. Q2 also set a new all-time record for quarterly EBITDAC was $61 million. This beat our former record result of $54.8 million during Q3 of 2014. I will remind everyone that this result was achieved during our historically slowest quarter due to breakup in Canada.
Another result I will highlight is the reversal of margin compression discussed extensively throughout Q1 and Q2. Our Q2 EBITDA margin of 14.1% was the highest margin level since 2017. I will note that Q2s typically have better margin percentage due to the product mix in the Canadian Drilling Fluids Group because of spring breakup. This is because most of the rigs that work through breakup are water-based rigs where we are not passing through high value, low margin base oil and invert through our books.
I would now like to, again, highlight several significant corporate milestones, which were achieved during Q2 of 2022. As mentioned, this was a fourth consecutive record setting revenue quarter in a row with $433.7 million, beating our Q1 2022 record by 8%, and our prior Q2 result by a remarkable 71%. This was our seventh quarter in the last eight quarters where we increased revenue quarter-over-quarter. EBITDA of $61 million in Q2 beat our former quarterly record result from almost eight years ago in Q3 of 2014 by 11.5%.
Quarterly EBITDA grew by 91% year-over-year from Q2 of 2021. Q2 EBITDA percentage of 14.1% was the highest quarterly result since Q1 of 2020, when we achieved 14.6%. SG&A as a percentage of revenue came in at 10.6%. This was the lowest percentage since Q1 of 2015, when it was 10.1%.
I will now move on to summarize some of the progress made in Q2. Throughout the past three quarters, there has been a focus by everyone at CES to manage the inflation and supply chain challenges affecting our business. Through respectful and cooperative communication with our customers and our vendors, we are proud to demonstrate with our Q2 results that we have made significant progress on this issue. We have managed to largely maintain our existing customer base, while at the same time, adding a few new customers in order to help grow our revenues across the board and at acceptable margins.
As a very general update on the current state of the supply side of the business, I want to note that we are not through the woods yet. Although we have worked to update our pricing, diversify our providers and identify the most reliable logistics strategies, there are still many persistent problems being encountered on a day-to-day basis. Our teams are managing these issues and finding solutions or substitutions in order to ensure timely delivery of products and service to our customers. Inflation and availability continue to be major challenges to our business.
Overall, CES experienced unprecedented revenue growth over the past four quarters. If you look at Q2 2022 revenue on an annualized basis, it leads you to an annual revenue of over $1.7 billion. I will remind everyone on the call that our previous best run rates for revenue were between $1.2 billion and $1.3 billion in 2018, 2019 and 2021. I will also remind everyone again, that Q2 is typically our slowest revenue month during the year.
This massive growth in our business is being managed and adapted to by all of us at CES. Our outlook remains positive for the remainder of 2022 as well as 2023. Although the industry activity growth rate appears to be leveling off to some degree, this is obviously a very comfortable and profitable level for CES and for our industry. We look forward to continuing to deliver strong results during the second half of 2022 and beyond.
Now I will summarize the Q1 performance in Canada. The Canadian Drilling Fluids division achieved our highest quarterly revenue since Q3 of 2013 and the highest second quarter revenue ever. As mentioned on our last couple of calls, we have been able to hold higher and train sufficient staff to operate efficiently. Although this is a challenge in some areas, we remain confident in our ability to find and retain people.
Today, we are providing service to 78 of the 203 jobs underway in Canada for a market share of 38.4%. This rig count is up from an average of 43 rigs during Q2. Our Q3 Canadian rig activity appears to be on track to being the highest since Q3 of 2018 and may even exceed that level. With bidding season mostly completed in Canada, recent awards from new and existing customers have us maintaining our historically strong Canadian market share for the remainder of 2022 and beyond.
PureChem, our Canadian production chemical business managed our highest quarterly revenue ever. As well this business is poised to consistently improve on this revenue level as the decline in Canadian oilfield activity due to breakup gets back to more optimal levels in Q3. We are consistently seeing growing contributions from our frac chemical and stimulation groups as this sector of the Canadian oilfield appears on track to be very active in Q3 and for the foreseeable future. The other three main Canadian business lines, including Sialco, Clear and Equal, all continue to contribute to the financial and strategic success of the two primary Canadian business lines.
Now for the United States. AES, our U.S. drilling fluids group also achieved their highest quarterly revenue ever. As I always know, we are not chasing market share on either side of the border and continue to have a focus on opportunities with sustainable margins and revenues.
As in Canada, we worked extensively with our customers in the U.S. to ensure that we manage margins as effectively as possible. Today, we are providing chemistries and service to 136 of the 764 rigs in the U.S. for a market share of 17.8%. This is up from 119 rigs and 16.9% at the time of our last call in May. This includes a basin-leading 27.5% market share in the Permian, which is up from 27% on our last call.
With an expansion aimed and increasing barite grinding capacity underway in Texas, the door is open to continue to strategically grow and expand this business in a profitable way in the United States.
Finally, I'm proud to report the Jacam Catalyst, our U.S. production chemical business also achieved their highest quarterly revenue ever. The division continues to post great results in a highly competitive environment. Our manufacturing facility in Kansas continues to be the backbone that supports the entire business. In spite of the supply chain challenges that continue to persist in our industry with WTI prices at elevated levels over the past few quarters, our customers have focused on maximizing existing production.
This has led to treatment volumes above historical levels throughout our production chemical businesses. This along with an ever increasing customer base have been the main drivers for the incredible financial results realized by Jacam Catalyst.
Now for a quick update into our recent forays into the international markets. We continue to actively pursue several opportunities in the Middle East. And I will comment further on these should any come to fruition. We remain focused on growth prospects in this region and are spending significant time and energy evaluating multiple potential opportunities.
In Nigeria, our partner company PEARL, continues to grow their business and continues to order replacement chemistries as they spend their inventory. I will point out again that both of these are early stage growth opportunities and are not yet a meaningful contributor to the overall business.
In conclusion, I want to once again 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 that we are experiencing, we have increased our total number of employees at CES from 1,814 on January 1 of this year, to the current level of 2053 today, an increase of 239 employees in just eight months or approximately 13.2% more. As always, I want to finish this portion of the call by thanking all of our customers for their trust and commitment to CES in good times and in bad.
With that, I'll turn the call over to Tony for the financial update.
Anthony Aulicino
Thanks a lot, Ken. The record financial results highlighted by Ken underpin CES’ expansion era over the past year. Unprecedented expansion has been experienced in revenue, EBITDAC and fund flows from operations amid a return to strong margins. During the quarter, CES generated $434 million and adjusted EBITDAC of $61 million, representing a 14.1% margin. This record quarterly revenue of $434 million represents a sequential increase of 8% from the previous high watermark of $401 million in Q1 and an increase of 71% from $254 million in Q2 2021.
Revenue generated in the U.S. was $300 million or 69% of total revenue for the company. That revenue number is up from $249 million in Q1 and $175 million a year-ago as both of our major U.S. divisions demonstrated all-time high record revenue levels during Q2. I would note that AES continues to effectively operate on the right jobs and with the right customers and is realizing operational and financial torque.
Similarly, Jacam Catalyst, our stable U.S. production chemicals business, which helped carry the company through the lows of 2020, and then power us through the growth over the past year has maintained its trajectory and has also realized increased volumes and improved pricing. Revenue generated in Canada was $134 million in a quarter, down from $152 million in Q1 as is expected on a seasonal basis with spring breakup and compared to $78 million a year-ago. Canadian revenues benefited from increased drilling and completions activity year-over-year, coupled with higher production volumes and frac-related chemical sales as Ken outlined.
Our adjusted EBITDAC of $61 million in Q2 represented a 44% increase from the $43 million generated in Q1 and is nearly double the $32 million generated in Q2 2021. Adjusted EBITDAC margin in the quarter was 14.1% compared to 10.6% in Q1 as the company delivered on margin expansion via increased pricing adoption and scale associated with higher activity levels.
At CES, our ultimate financial priority continues to be cash flow generation. I am very proud to report that during Q2, our FFO was $43 million, a $10 million increase over Q1 and nearly doubled the $23 million generated in Q2 of 2021. This figure is particularly important because as our unprecedented revenue growth rates taper and related working capital investment level subside, a higher FFO level will enable CES to deliver increasingly higher levels of surplus free cash flow.
We have maintained a prudent approach to capital spending through the quarter with a net CapEx spend of $11 million, representing just under 3% of revenue. We will continue to adjust plans as required to support existing business and growth throughout our divisions and at this time, commensurate with record revenue levels, we expect cash CapEx in 2022 to be approximately $50 million comprised of $25 million for maintenance and $25 million currently year marked to support growth.
We exited the quarter with a net draw on our senior facility of $182 million versus $149 million on March 31 and $110 million on December 31. The increase was directly correlated to the working capital investments associated with growing to these record revenue levels.
We continued to make sizable advanced inventory purchases to secure higher levels of critical products, and also realized elevated levels of accounts receivable commensurate with sharply increasing revenue quarter-over-quarter. To support the current growth phase of the company and in anticipation of potential increased activity levels, we have exercised an aggregate $80 million of available senior facility capacity year-to-date for a total facility size as of today of approximately $315 million CAD equivalent.
Since June 30, CES continued to participate in strong industry activity levels, and the current net draw on our senior facility is approximately $195 million. We ended Q1 with $521 million in total debt comprised of $288 million in senior notes, maturing October 2024 and a net draw on the senior facility of $182 million as previously mentioned. I would also note that our Q2 working capital surplus of $575 million exceeded total debt of $521 million by approximately $53 million. And that our debt-to-EBITDAC ratio actually declined from 3.0x at the end of Q1 to 2.7x at the end of Q2.
To support the growth of the business and related working capital needs, we routinely evaluate our capital structure in an effort to support our business model and strategic plan. In keeping with this philosophy, we are pleased to announce that we have entered into support agreements with noteholders representing the majority of our outstanding senior notes to amend certain aspects of the trust and denture to better align it with the increased financial scale of the company.
The existing indenture was created in 2017 when CES generated $1 billion in revenue versus the more than $1.7 billion in revenue implied by annualizing our Q2 results. These increased revenue levels necessitated an update to the indenture to support the potential future needs of our much larger company. This amendment when implemented will provide flexibility to support the current and future requirements of the company's growing business and permit CES to incur indebtedness under any of its credit facilities up to the greater of $400 million and 30% of consolidated tangible assets.
This additional potential availability also very importantly provides flexibility as we look to refinance our senior notes over the coming year or so. We are increasingly optimistic about the industry outlook and CES’ ability to continue its strong financial performance. This combination is key to informing our capital allocation decisions, which we evaluate on a quarterly basis as a team.
In terms of capital allocation considerations, we prioritize supporting existing and new business through investments in working capital and modest CapEx projects that deliver IRRs above our internal hurdle rates. We remain very comfortable with our current dividend which represents a yield of approximately 2.3% at our current share price and is supported by a very prudent payout ratio. We will use surplus free cash flow to reduce draw levels as inflows offset working capital build outflows.
Through the year, we plan to buyback at least enough shares to offset our modest equity compensation-related dilution. As we become more comfortable with our outlook and surplus free cash flow generation, we will revisit becoming more active in our NCIB program, depending on valuation levels implied by our stock price and we will be prepared to be opportunistic.
At this time, I'd like to turn the call back to Ken for comments on our outlook.
Ken Zinger
Thank you, Tony. As you and I both noted, Q2 was a major turning point for our business with three of the four main business lines achieving their highest revenue quarters ever, and the fourth one having their highest revenue Q2 ever. In spite of this massive growth, our executive management team, including Vernon Disney, Richard Baxter, Tony and I, our divisional managers and everyone who works at CES have adapted and ensured that our service and performance for our customers has not missed a step.
The financial results for Q2 speak to the quality of the business we are running as well as the quality of people who make it all go around every day. I am honored and thrilled to be the CEO and Co-Founder of this business, which employs all these great people. These are truly exciting times here at CES. Thank you to everyone for your time. And thank you to all of our employees for contributing to these spectacular results that Tony and I have had the honor presenting here today.
I will now pass the call over to the operator for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Aaron MacNeil from TD Securities. Please go ahead.
Aaron MacNeil
Hey. Good morning, all. Thanks for taking my questions. Ken, on the production chemicals, I know treatment points aren't a perfect operational metric, but Canadian treatment points were down sequentially experienced record revenues. So maybe could you just give us a sense of – is this a function of higher volume, higher pricing, product mix, chemistry, like I don't know where to – maybe I'll just turn it over to you.
Ken Zinger
Sure. Yes. I mean, the treatment points used to be a great indicator of volume expectation and chemistry supply expectation, but with horizontal drilling and the volumes that are passing through fewer and fewer wells, it's becoming less and less of a good indicator. I mean, we continue to track it ourselves, but the Canadian – on the Canadian side, we have other lines that are index-based that flow through big volumes. And so that drags down – that increases the volume we put through to a lower number of treatment points.
And on the U.S. side, as kind of the same story, we're running more and more volume through more concentrated amount of wells, which creates the increased revenue levels on the decreased number of treatment points. Does that help?
Aaron MacNeil
Yes. I can appreciate that. I guess, maybe like, what are you seeing change sequentially quarter-to-quarter? Is it just new wells being drilled and is that the driver of the business or is it market share?
Ken Zinger
I mean, market share I think I mean, it's hard to tell on the production chem side, but we're pretty confident, we're still growing in market share and definitely from a volume perspective we're growing in market share. But I think what's driving revenue is we've got these high volume flow through stuff that it's also, I mean, it's a two-pronged approach. It's driving our revenue and it's driving our earnings because all of it has net EBITDA contribution that meets our minimum threshold. So it's all positive, but some of this high volume stuff is based on index and because it's high volume, it takes no – almost no people to manage it. We just pass it through our facilities, react it and ship it out to site. And it goes at a lower gross margin, but it comes in at the appropriate net margin.
Aaron MacNeil
Got it. Okay. Tony, I know it's small dollars, but what is the increase in growth capital relate to – relative to the prior guidance? And I know it's small dollars, but is there anything else on your sort of wishlist?
Anthony Aulicino
Yes. I would clarify that it's actually earmarked, Aaron. What we found is that although we're operating at a very comfortable capacity throughout the company, there are specific hotspots where we need to add a little bit potentially in terms of very local isolated additional capacity. So it would be things like spending a bit of money on [indiscernible] tanks and related equipment to get up to very comfortable capacity levels in those very particular areas. And that's typically in Texas in our drilling fluids business and our production chemicals business in order of priority.
Aaron MacNeil
Okay. And maybe one more question for me, any progress on the offshore business that you've recently acquired or is it still too early?
Ken Zinger
It's still early. It’s been – I would say, it's been static to what we had acquired at that. So it's accretive and it's been a positive story. We've worked through a lot of hiccups on getting to the point where we could produce the volumes that they required instead of having to buy them from a third-party. So from the way we look at it internally, it's been very positive, it's been a learning experience and it's gone really well and we're set up – we're on a big RFP right now that if we were to win, it would be a nice piece of business for us.
Aaron MacNeil
Okay, perfect. That's all for me. I'll turn it over. Thanks.
Operator
The next question is from Jonathan Goldman from Scotiabank. Please go ahead.
Jonathan Goldman
Hey. Good morning, guys.
Ken Zinger
Good morning.
Jonathan Goldman
In terms of the price pass-throughs achieved to date, are there any differences in the progress between the U.S. and Canada or between drilling fluids and chemicals?
Ken Zinger
I'm sorry, that was – I didn't catch that, Jonathan.
Anthony Aulicino
Can you repeat that Jonathan? You are breaking up a little bit.
Jonathan Goldman
Yes. No problem. So in terms of the price pass-throughs that you've achieved to date, has there been any differences in the progress between the U.S. and Canada on those price pass-throughs or between drilling fluids and chemicals?
Ken Zinger
I think high level. It's been pretty equal on both sides of the business and both sides of the border. We've been pretty organized and how we've gone about that and then set thresholds for each group and each group has kind of met those levels. But it's been a little bit – I don't know, it's hard to say. It's been about the same both sides of the border and across both business lines as the way I would describe it. There is some slight differences, but they're not enough to mention. I mean, overall it's pretty much the same.
Jonathan Goldman
Okay. That makes sense. And then just moving on to the gross margin improvement, I wanted to get a sense of how much was driven by pricing gains and receding cost inflation versus operating leverage, any color around that would be helpful?
Ken Zinger
Sure. Yes. I mean, our cost can continue to move up and continues to move up, so pricing gain has been all of it. However, when you're looking at it, I know gross margin is a number we keep talking about. And I think it's important to understand that the business has these high volume pass-through components on the production chem sides and maybe even a little bit on the frac side where we have minimum net thresholds we meet.
But they come without much work from us, we're more supplying and doing a little bit of blending and then occasionally a little bit of reacting, but there's very little service component to it. So we're able to pass those out at much lower gross margins than historically. And that part of the business is becoming much bigger than it's been in the past. So it makes the gross margin last like, if you look at 17% to 19%, we were kind of in that 25%, 26% gross margin range, but we're not going to – I don't know that we will see that again. And I don't know that we need to see it. Well, I know we don't need to see it again. We're focused on net margin and we can accommodate that with the lower gross margin than historically was possible.
Jonathan Goldman
No. That makes sense. The total picture accounts. That's it for me. Thanks guys. I am going to turn it over.
Ken Zinger
Thanks, Jonathan.
Operator
The next question is from Tim Monachello from ATB Capital Markets. Please go ahead.
Tim Monachello
Hey. Good morning, everyone. To follow-up on Jon's question on pricing. It strikes me that there's a pricing dynamics in the consumable space are very different than some of the other equipment-based sectors. You don't have scarcity of supply like you do there. But you are seeing sort of a concerted effort within your concentrated competitors to raise pricing. That said, the backdrop for E&P is lower commodity pricing, what we saw in Q2. So how has that impacted your ability to move pricing? And I guess what's your outlook for pricing as we go through the remainder of the year?
Ken Zinger
I think we're still confident. We've had a lot of success. I mean, I know the numbers show a move in EBITDA margin from 10.5 to 14.1, but the increases we've given to our customers are significant. And they've been accepted by the customers because they're necessary. I mean, we can show them the cost of goods on things and how it's been affected.
And then there's a little bit of concern on the customers side as there should be on security of supply because as much as – things are a little bit better now. There is still key components of almost every chemistry we use that are really hard to get. There's three or four major chemistries, well three for sure and a fourth one, that's kind of borderline, we're running on fumes on them and we're able to keep up and we've been able to promise it. But some of our competitors had trouble keeping up to it. It's resulted in a couple of wins for us.
So there is that ability to show customers the shortages in the market and use that to get the price increases. And like I say, we've gotten as much as this doesn't look like much, we've gotten significant price increases. Like, I don't want to put a number on it, but significant price increases and we feel like through the rest of the year activity will allow us to continue to do that.
I'll say on the supply and logistics side, the biggest change that's happened hasn't really – I mean, we've been able to get space on ships now, container space coming from overseas where three, four months ago it was a 50, 60-day wait now we're being awarded the containers right away. The only problem is the ports are still completely congested. So even though we can get the container onto the ship easier now, we still can't get it onto the ground in Canada and the U.S. any quicker or – it sits in port 30, 40 days before it gets offloaded. So that challenge remains. So we're still having to carry a little more inventory than probably would be optimal, but we're, it's an ongoing struggle.
And during the board call yesterday, we’re in Disney kind of hammered on this over and over again. I mean every single day I used the term whackamole too many times during the Q1 call and got made fun of for it. But that's what it's like. I mean, it's still one thing after another happening and we're still, we've got a great team there. Everyone's keeping up with it and we will continue to. But all that leads to, I think, pricing power because we're going to have to recover that stuff.
Tim Monachello
Okay. Yes. That's really helpful. The rest of my questions have been answered. Nice quarter guys.
Anthony Aulicino
Thanks, Tim.
Operator
The next question is from John Gibson from BMO Capital Markets. Please go ahead.
John Gibson
Good morning, all. Congrats on the great quarter here. Just a few in your Canadian business. The revenue number in Q2 is one of the highest in history despite spring breakup and rig counts remaining below sort of pre-COVID levels. What's driving this exactly? Is it bigger jobs and higher pricing or is the business getting better in general?
Ken Zinger
Yes. A little bit of it's the higher pricing and quite a bit of it was the product or the well mix. No, I wouldn't say we had any problems during Q2 that led to the high revenues, but we definitely were on better quality work. I mean, we're pretty dominant in Canada on the heavy oil side of the business and those jobs generate a lot of cash flow. They drill quickly and they mix a lot of chemical for anti-accretion and for whole cleaning because they drill them so fast nowadays, so all that just leads to better revenue.
John Gibson
Great. And then last one, just more broadly, how have market dynamics shifted in the drilling fluids market in Canada over the past few months?
Ken Zinger
Yes. As far as – like I don't think that there's been a huge shift. I actually think – we gained a little bit of ground, but I think the top three are still the top three. There's a couple of smaller private companies that are out there getting a little bit of work now, but our market shares as strong as it normally is. I think our top two competitors are probably as strong as they've normally been. And the biggest dynamic that's happening is a couple of these little companies are causing us problems by trying to steal our people. So we've been fighting that over and over again. So far we lose a person here and there, but for the most part we've retained everybody.
And then the other sort of dynamic that's at play in Canada and in the Permian is just finding people to work at the plants and truck drivers and trucks that are available. I mean, all that stuff continues to be a challenge, but all things that we're working through.
John Gibson
Great. Appreciate the color. I will turn it back.
Operator
The next question is from Josh Young from Bison. Please go ahead.
Joshua Young
Hey guys.
Ken Zinger
Hey, Josh.
Joshua Young
Hey. Ken, first of all, congratulations on – you guys have great results and it's impressive that you stepped in and it seems like things are going pretty smooth. I was going to ask about the offshore. It sounds like you answered that high level. I guess, what's this look like for you guys in terms of potential opportunity going forward? How big of opportunity is it and then how much might you have to invest in order to address that opportunity?
Ken Zinger
Sure. Yes. I mean, we're looking at – we're trying to find a safe way to enter the market beyond what we've already done. I mean, we have the one partner that we were working with over there that we're continuing to do a little bit of work with. And then we've got a second opportunity. We had two other opportunities, one, I think that's kind of fading away. And then a second one that's – we're right in the middle of talking to them about. So if that one works out, it could be, I would call it, meaningful. It's not going to – it's not a home run, but it would get us on the ground and it would get us on the ground with the people and infrastructure we need. It's probably going to cost us a little bit of money. It's not going to be a big amount of money either, but, there's definitely opportunity there. We're definitely spending some time on it and it's a little frustrating, things move very, very slowly, but hopefully, we'll have something to talk about at some point in the future. Just can't promise anything because this could still go to zero.
And then as far as PEARL goes in Africa, I mean they're a great partner. They're doing great work there for the customers they have, but they're a startup, so they've got to grow that business and as they grow, we'll grow with them.
Joshua Young
Got it. Okay. That's really helpful. And then just on margins, I think I saw that you guys historic maximum margin. So obviously you guys had a record quarter on overall numbers, but I think your margins were a little higher in the last cycle. Is there a line of sight to be able to get up to that sort of, I think I remember seeing close to 20% margin. Is that achievable or was that a situation that's unlikely to be repeated?
Ken Zinger
I think that's unlikely to be repeated unless something really changed. I mean anything's possible in an elevated WTI environment, especially where the supply chains getting squeezed if people can't get stuff, but I mean, you got to have the right market for that. And I would also say that at the time we did that, we didn't have a ton of frac and stimulation and some of the production chem work for the high volumes and the index pricing dragging down overall margins. But if any of those things got in short supply, I mean we could go higher. I know in 2017, we kind of did high-14s all the way through it. And we think that at some point that's probably achievable, but it's more about getting the right number of people and continuing to increase the revenue through the company and find all the efficiency in that because that's where we can really make gain.
Joshua Young
Great. Thank you.
Operator
The next question is from Michael Robertson from National Bank Financial. Please go ahead.
Michael Robertson
Hey. Congrats on a record quarter there, gens, and thanks taking my questions. Just had a couple of follow-ups to some comments you made earlier. Can you spoke to the, I think 13% increase in the headcount since the start of the year. Based on where you guys see activity levels trending, I guess for in the back half of 2022 here, how do you feel about your current headcount levels and do you see that trending materially higher as the year goes?
Ken Zinger
I think if you look at the U.S. rig count, I mean it grew by 50. I think this year that required a lot of people. The production chem revenues obviously went way up, that required some people. If you look at the forecast, I mean the forecast we're looking at that come from all the analysts, show that softening to the second half of the year. So it'll probably move at the same pace as that. I would say it'd be much slower. We don't like as of today we're staffed to the level we're operating at and we're comfortable with it. We might have to add a few more people to get to the higher levels, but it definitely won't be in that same realm. It won't be 230 people.
Michael Robertson
Got it. Thanks. That's helpful color. The other thing I wanted to touch on and this, I appreciate might be a very difficult thing to answer given the moving parts. But if you look at your current levels of inventory, obviously there's a component there that's higher volumes due to higher activity levels. Also there's a component that's strictly price related, was just sort of trying to get a high level appreciation of how you sort of see that caring amount trending, I guess, in the back half of the year, whether you feel like you're nearing a peak or if there's more to do there.
Ken Zinger
Well, I'll take a cut stab at it first and then let Tony have a stab. But for me, I mean, we're seeing a leveling here. We've been going through some extreme growth for the last two quarters, call it, maybe even three, but these last two have been heavy. And then on top of that, we were just in Q2, in Canada. So in Q3 and Canada, we always are building inventories ahead into Q4 and Q1. So we've got the added pressure of that. However, we've got a softening demand side. We think we're going to have growth through Q3 and Q4, but definitely not going to be the same level as Q1 and Q2 or Q1 to Q2 and Q2 to Q3. So I think that that's going to back off a bit, but Tony's got some metrics he can probably share with you.
Anthony Aulicino
Yes. And you've – actually all the analysts have done a good job of spending time to understand working capital investment. Inventory is a massive part of that. When you look at our company, typically if you go back historically, we have to invest in the business as revenue grows. And if you go back historically that investment typically represents 30% to 35% of annualized revenue. So multiply annualize that any given revenue by quarterly revenue by four, you get your annualized revenue. And you multiply that by 30% to 35% and that gives you ballpark, what the working capital amount should be on our balance sheet at the end of that period.
As it pertains to specific metrics that we always try to improve, I think Ken outlined it very well. We're buying more stuff now than we would otherwise to get ready for a busier season in Q3, Q4, Q1 and you're seeing that and it's more expensive. So when you look at our metrics like DSI, for example, we're buying more expensive stuff. And you're comparing that when you're doing your DSI calculations to a COGS that's based on inventory, that's a bit lower priced.
And that's why you've seen DSIs blow out a bit. And similarly with AR, we're doing great in terms of growing that revenue month-to-month, quarter-to-quarter. But the corollary with that is we're collecting the revenues that we generated a month or two months ago versus the revenues that we're generating today. So when you're doing those DSO calculations, you are being affected by that trend and your DSOs will be a bit higher. That will normalize as this torrent growth rate level starts to stabilize, but we're going to continue to see that in the near future, and then you'll see that stabilization and that massive surplus free cash flow.
Michael Robertson
Got it. That's really helpful detail. I appreciate the color there and congrats again on a record quarter.
Ken Zinger
Thanks very much.
Operator
[Operator Instructions] The next question is from Josef Schachter from Schachter Energy Research. Please go ahead.
Josef Schachter
Good morning, guys and thanks for taking my questions. You've answered them pretty thoroughly in your commentary already. More of a high level going into the end of the decade, in Canada, we have all these LNG opportunities, LNG Canada, maybe Phase II, and then train two and then you've got the Enbridge project, and then we got SEDAR. Do you need to expand your business in Northeast BC so that you'll be able to handle that potential significant growth as those projects start moving forward?
Ken Zinger
A few years ago, we built a big facility in Grande Prairie and it supports our production chem business, and it supports our drilling fluids business and our frac business up there, and our stimulation business up there. And then we have room to grow more within that facility. I think if some of these things that look like they're going to finish actually get to the finish line, perhaps we would do more on the infrastructure front directly in Northeast BC, however, to get from here to some sort of moderate activity on all that stuff. We're more than capable with the existing infrastructure we have.
Josef Schachter
Okay. And in the states with LNG projects being announced left and right. Do you need to do anything to get into the bigger presence in some of those basins? You've got great presence, of course, in the Permian and the oil side. Do you need to do anything to really lift your scale for the natural gas growth potential between now and the end of a decade there?
Ken Zinger
I'd answer it the same way. I mean, we've got historic warehouses and infrastructure all over the U.S. So we're in all the major plays, we're close to the Haynesville, which I think would be the biggest one to be affected by that. And it would take – we have enough infrastructure to support the same sort of level of moderate activity. So if the margins got better in those basins, and we decided to make a full push to get into them, we would have the infrastructure required to do that. And then once we got in there, it would be like the Permian, we'd continue to build out infrastructure as required, but we could definitely get to a moderate level with what we have.
Josef Schachter
Okay. And lastly for me, in terms of your science side, are there any new things that you're coming up with on the product side that could be meaningful with even higher margins than you – within the product lines you have now?
Ken Zinger
Well, we're always trying Josef. That's for sure. And yes, we've got a whole bunch of initiatives in play for different plays, different products, different problems, but nothing we want to tell our competitors about today.
Anthony Aulicino
And the other aspect of that Josef that we've spoken to before is that technical and scientific expertise allows us to do something else that's very valuable, which is switching. So if we have situations where there's a product that's very, very expensive or very difficult to get, we have the brain power and the technology to be able to do swapping, to get a more reliable supply or even a more economical solution to our customers that helps them and helps us deliver both from a supply chain perspective, as well as a profit perspective.
Josef Schachter
Super. Thanks so much, Ken and Tony. And again, congratulations on a great quarter and looks like a fabulous year.
Ken Zinger
Thank you.
Operator
This concludes today's question-and-answer session. I would like to turn the conference back over to Ken Zinger for any closing remarks.
Ken Zinger
Thank you. Well with that, I'm going to wrap up this call by saying thank you to all of our customers and our employees for helping us produce another record quarter. We are not only pleased with our current position in the market, but also very optimistic about our future. We look forward to speaking with you all again, and during our Q3 update in November. Thanks to all for your time today.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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CES Energy Solutions Corp. (CESDF) CEO Ken Zinger on Q2 2022 Results - Earnings Call Transcript