This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good morning and welcome to CSI Compresco LP's third quarter 2023 earnings conference call. Speakers for today's call are John Jackson, Chief Executive Officer of CSI Compresco LP, and John Byers, Chief Financial Officer of CSI Compresco LP. Rob Price, Chief Operating Officer, also is in attendance. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I now turn the conference over to Mr. Byers for opening remarks. Please go ahead, sir.
spk02: Thank you, Keith. Good morning, and thank you for joining CSI Compressco's third quarter 2023 results conference call. I'd like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumptions and analyses made by CSI Compresco and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the partnership. Your caution that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to EBITDA gross margins, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio, leverage ratio, utilization, or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out earlier this morning as posted on our website, our Form 10-Q will be filed later today. Please note that information provided on this call speaks only to management's views as of today, November 2nd, and may no longer be accurate at the time of replay. With that, I will now turn it over to John Jackson.
spk06: Thanks, John. Good morning, and thank you for joining our call. Today, I will cover a few macro comments and discuss the third quarter results. Fourth quarter and 2024 activity outlook and how CSI can press go is positioning itself to flourish in 2024 and beyond. So last quarter I spoke about the overall compression market and how several factors have changed this market to create a more stable, durable, and less cyclical environment for the contract compression industry. These factors primarily revolve around the tight market for compression at 400 horsepower or larger, capital discipline in the space, improving pricing in terms, CPI protection, lengthening contract duration, long lead times for new build units, producer desire to outsource more horsepower than in the past, and the growing need for natural gas worldwide. Nothing has happened to change our view of the market. We have been more confident in that viewpoint from last quarter to now as we head towards year-end 2023. These factors or changes from the past continue to provide visibility into what we think is a prolonged upcycle for compression in natural gas. Overall, with this macro backdrop, we believe the future is bright for our company and the industry. Last quarter, we discussed that CSI Compresco had goals of growing EBITDA in a disciplined manner, continue to improve our operational execution to be cost and revenue efficient, while reducing our net leverage significantly. I want to walk through some of the trends towards achieving each of these goals today. As we look at the third quarter of 2023, the financial results reflect the strong macro backdrop for compressions. this quarter continues to build on the multi-quarter trend of increasing contract services revenue, EBITDA growth, and improving net leverage metrics. The transition of our fleet to market rates is still underway, but far from complete as the market continues to price units at higher rates quarter on quarter. In addition, we still have a significant portion of our contracts that do not yet include CPI protection, as those multi-year contracts have not rolled over for renewal. This will be an ongoing effort through next year to update all multi-year contracts to CPI-based contracts. Also, CSI Compressco's third quarter EBITDA, which reflects sequential quarter-over-quarter growth, does not have any EBITDA associated with Egypt as that operation was sold at the end of the second quarter of 2023. Year-to-date 2023 has had sustained growth in EBITDA over the same year-to-date period in 2022, as well as Q323 versus Q322. This EBITDA growth is net of the negative EBITDA impact of the sale of Egypt and the non-renewal of a significant contract in Latin America at the end of 2022. This EBITDA increase, net of these changes, underscores the strength of our performance. In addition, our AMS business continues to perform at a high level. The third quarter AMS gross profit was the highest AMS quarterly gross profit in the history of the company. This is not the result of a large one-off job, but the disciplined approach the team is taking to pricing, project and change order management, execution, and selectively bidding the type of work we have the skill to execute at a high level. Congrats to the AMS group this quarter for the record performance and for a job well done, not only this quarter but throughout the year. Now let's turn our attention to operational performance. The last two to three years have been very active as we've worked to put the idle portion of our fleet back to work, along with deploying new building units in our fleet. After the initial burst of activity in 21 and early 22, CSI Compressco began a more intentional effort of focusing on what we term operational rigor. These efforts were started in 2022, but have been expanded and accelerated during 2023. The operational rigor-related projects we have been working on within CSI Compressco come in many forms. This includes purchasing our fleet of units we no longer desire, increasing pricing on units to market rates if they come off terms, restaging units, improving our supply chain processes, working capital management, such as reduced DSOs and reduced inventory balances, unit maintenance visibility through technology, and implementing machine learning for predictive avoidance of major failures. These are just a sampling of the internal projects we are pursuing to deliver predictable, repeatable, and improving results. The theme of rigor is embedding itself in our organization. Each group is taking on the challenge to execute more efficiently. A number of these initiatives are in the early stages, but we believe the benefits of these efforts will be reflected in 2024 and beyond via improved operational cost metrics. The last primary goal I mentioned relates to leverage. Our net leverage continues to improve as we are now under five times leverage. This has come about from growing our EBITDA, but also by reducing our net debt. We have indicated throughout the year that we plan to generate some modest amount of free cash flow to reduce debt, and we are seeing that reflected in the current results. This has been a continual focus over the last two plus years. We are pleased to see the actual results reflect the hard work that has been done to reduce our net leverage. John Byers will have more to say about this in his comments. Moving from performance to the future, we can provide some updates. As we look to the fourth quarter of 2023, we can expect the AMS business gross profit to drop back a bit due to the normal seasonality of that business as during the holidays, there's usually a slowdown in activity from our customers in the AMS segment. Offsetting the potential fourth quarter change in AMS is the deployment of some additional new build units into our contract services segment. that will be installed for our customers and on revenue during the fourth quarter. Our fleet is nearing effectively full utilization. Our fleet utilization end of the quarter at 87.6. CSI Compressco's reciprocating horsepower, representing approximately 83% of our fleet, has a utilization at the end of the third quarter of approximately 94%. And our large horsepower fleet, that being defined as all horsepower over 1,000 horsepower, is 96% utilized. Our gas, jack, and rotary fleet utilization remains in the mid-50s, as far as percent utilized, and we expect these non-reciprocating type units of our fleet to remain in that approximate utilization for the foreseeable future. As a result, there remains a very small amount of true uncontracted idle reciprocating horsepower to put back to work. We have additional horsepower contracted that is not yet deployed, because of customer timing or make ready work on the unit before being deployed. As equipment churns from one customer to another, there's a period of time that unit, while being under contract, may not be generating revenue. The unit is not generating revenue. We do not count it as utilized, so we will always have some percentage of our fleet not utilized but under contract. As we look to the remainder of 2023, we reiterate our full year guidance for EBITDA, Of $125 million to $135 million, our year-end net leverage guidance of 5.2 to 4.8. We are currently inside both of those ranges on a trading 12-month basis for EBITDA and quarter in net leverage. We expect to give guidance for 2024 on our year-end earnings call. Our current outstanding capital commitments for new build units will be completed in the units deployed and on revenue by late 2024. Every unit that we currently have on order is contracted on a multi-year term with a customer. We are currently seeing requests from multiple customers for additional equipment in 2024. To fulfill those requests, there may be a few remaining idle units that we can reconfigure that will satisfy a small portion of that demand. Anything else will require transitioning units from one customer to another, requiring a longer term and higher rate than that unit is contracted for today. In addition, we have requests for proposals for 2025 horsepower coming in from multiple customers. Many of these requests will require new build capital and the total of these requests already far exceeds our ability to fund. We are currently in the process of capital allocation for 2025 new build units. Based on current activity levels, we might well contract all our new build capital allocated for 2025 by early Q1 of 2024. Throughout this process, we will continue to focus on returns and capital discipline as we look to continue to reduce our net leverage metrics while growing EBITDA. Overall, we continue to be bullish about the macro environment, the longevity of this cycle, and how CSI can press its position to perform over the coming quarters. We continue to focus on returns and deleveraging versus absolute growth. This is evidenced by our multi-quarter improvement in leverage metrics while growing EBITDA. We believe this cycle will continue longer and stronger, and we believe in the long-term fundamentals of natural gas, and especially our ability to perform at a high level as we go forward. Finally, we will continue to look for ways to instill rigor in everything we do as we continue our pursuit of operational excellence. While we have made a lot of strides in our operational performance, we believe there's still a lot of opportunity from here. I want to thank all our employees for embracing the mantra of operational rigor and constantly looking for ways to improve what and how we do each and every job. It has been a pleasure to see the employees so engaged in these efforts. I'll now turn the call over to John Byers.
spk02: Thank you, John. For the third quarter of 2023, CSI Compresca reported adjusted EBITDA 33.8 million compared to 29.8 million in the third quarter of 2022, a 14% increase. Our contract services revenue grew 6% year over year from $67.5 million in the third quarter of 2022 to $71.5 million in the third quarter of 2023. This was driven by continued improvement in utilization and pricing, particularly among our large horsepower equipment. Year over year, our utilization increased to 87.6% from 85.1% in the third quarter of 2022. Our AMS revenue grew 2% year over year and was 12% higher than the prior quarter. Moving on to profitability, our contract services gross margins were 51% up about 150 basis points for Q2. And our AMS business, as John said, continues to perform well with gross margins of just over 20. Distributable cash flow was 14 million compared to 11.1 million in the third quarter of 2022. and we'll pay our third quarter distribution of $0.01 on November 14th with a distribution coverage ratio of 9.9 times. Our capital spending guidance for 2023 has increased to $49 to $54 million. When compared to our prior guidance, the increase of approximately $6 million is offset by the redeployment of cash proceeds from the sale of our Egypt assets in the second quarter. As John mentioned, one of our primary goals is to significantly reduce leverage. As of September 30, 2023, we delivered a net leverage ratio of 4.8 times. This is down from a peak leverage of 6.8 times in Q3 of 2021 and is the lowest net leverage ratio CSI Compresco has reported since Q1 of 2016, over seven years ago. We're currently at the low end of our net leverage guidance of 4.8 to 5.2 times and anticipate exiting the year around 4.8 times. A related focus to reducing leverage is building our liquidity. Cash on hand plus undrawn ABL capacity is how we look at that. At quarter end, our total liquidity was 68.2 million. That's an increase of almost 50% from the beginning of the year. Financial perspective, as our operations and AMS teams have focused on, as John said, predictable, repeatable, and improving results, the finance team has been focused on refinancing our balance sheet. Our first lien bonds mature in April of 2025, 18 months from the end of Q3. And we have been engaged in conversations throughout the summer and fall with banks, lenders, and our rating agencies. Currently, we're optimistic about our refinancing alternatives based on these conversations. John discussed our positive outlook on the compression business. The market is short equipment and there's strong demand for existing and new build units. The industry is operating in a disciplined manner regarding pricing, new build capital, and contract duration, which is being measured in years, not months. CSI Q3 was evidence of the success of our strategy to balance growth and deleveraging. Equally as important, Q3 showed the results of our employees' multi-year effort to improve performance and grow our business. With that, We will now open the call to questions.
spk09: Thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Jeff Grant with Northland Capital Markets.
spk01: Good morning, guys. Thanks for the time. I'm curious, you mentioned some pricing upside from repricing legacy contracts to kind of today's rates. I was hoping to get a little bit more detail in terms of kind of what that delta is roughly if you look at, say, a contract you guys initiated two, three years ago versus today.
spk06: So it's going to vary from the size of the compressor. But a larger end where the market's really tight, let's call it the 1,000 horsepower and up, I would say in general, you're looking at a 40% to 50% increase depending on the unit. So just for example, if something was rented at $30,000 a month a year ago, it's $45,000 or $50,000 a day, something like that. Maybe a 1,300 horsepower unit rented anywhere from the end of 21, at the end of 20 going into 21, maybe it was 18 to 23, 18 to 22. If you were putting it out then, today it's it's 50% higher than that, 60% higher than that. It just depends on where it is and how tight it is. But I'd say in general, you're looking at 50% up. And it could be 15% either side of that. Now, some of our units have, we have multiple units out with the customer. We have other operational metrics we have to provide. So the rate may be higher for some of those services. It may be lower if we don't take first calls. So there's a lot of nuance around that. But in general terms, on the higher end of the fleet, you're probably 40% to 50%. On the lower end of the fleet, you're probably 10% to 15%. On the small end, you're probably 10% to 15% higher than you were two years ago. So it's a mixed bag, but that's why we kind of talk about the 400 horsepower and up segment and the below 400 horsepower segment as being what's tight and what's not. And then we think about, at least I do, maybe our sales guys don't, but I think about the 600 horsepower and segment up as those – units that we can get multi-year contracts on them. So you may have a little bit of interim pricing power on a unit that's got a one-year term on it, but it's less impactful than I'd say when you can go out and put a unit on 30% or 40% price increase and term it out for four more years. That's our five years, whatever the case may be. That's what's really impactful for us and what we've really been focusing on.
spk01: Yeah, understood. That's great. I appreciate that. And for my follow-up, I noticed that the CapEx guide for this year went up a smidge, and I know some of that's offset from the asset sale, but can you just talk on the main driver there?
spk06: Yeah, I'll let Rob Price talk about that for just a bit on what we... Our maintenance capital guidance went up slightly.
spk05: A lot of this is due to taking advantage of units that are going to be redeployed, say, and they were due for overhaul within the next three months. So we decided to do it before it got deployed so we didn't have to interrupt our service to the customers. Pulled a little bit of it ahead from maybe what would have been scheduled next year. But basically it's trying to optimize the situation that the units were in to maximize customer service.
spk06: We've been pushing a lot on, as we repriced our contracts. We've also been trying to push them around to different customers if some customers don't want to term out or don't want to go to where the market rate, what we believe the market rate is. And so we have called customer-driven churn, and then we have churn that's driven on our side. And that's unusual from price cycles. And so as a result, we've had these opportunities, as Rob mentioned, to touch the unit more. If you're going to put it out for four years and it's coming up on a cycle, something you need to do, and run it through a shop or get some maintenance updated on it before taking it out there and then having to do it in six months. We're using that opportunity to, as Rob said, accelerate that. But some of that's driven by our desire to lengthen the duration of our visibility.
spk01: Understood. So it's effectively a pull forward of maybe some 24 maintenance capex, not really any change related to inflation and cost of equipment or anything of the like on that end.
spk05: Oh, it's taking advantage of available resources, contract terms, and churn that goes on in the process.
spk01: Yeah. Okay. Great. First of the time, guys. Thank you.
spk09: Thank you. And the next question comes from Brian DeRubio with Baird.
spk10: Good morning, gentlemen. I have a couple of questions for you. John Byers, just as we think about contract operations, obviously we don't have Egypt in third quarter numbers and the large LATAM customer. What would you say is the organic growth in sales and adjusted EBITDA for the quarter?
spk11: I would say if you take, so Mexico, LATAM was not in our 2Q numbers, so it's really just Egypt.
spk02: So probably about another 900,000 of organic growth showing up quarter on quarter. So if you were If you were to look Q2, revenue is 70.5. It probably puts you around 69.5 to 71.5, so about $2 million of organic growth. Okay.
spk10: I guess versus third quarter of last year because you're missing those two both.
spk11: Yeah. So year over year, same thing on Egypt and the Latam customer would probably be about $3 million, I would say, of revenue.
spk02: Yeah. fairly significant impact.
spk10: Okay, so organically, you're probably closer to double digits or well over double digits on organic growth.
spk11: Absolutely.
spk06: That's kind of the point of that comment is we've taken a fairly significant step back because of those two contracts and yet have grown still on top of that.
spk10: Got it. That's really encouraging. You know, just with the The equipment, the small horsepower equipment, the gas jacks that you talk about that really don't have a home, what is sort of the plan with those? Are you just going to let them sit around and hopefully someone picks off to buy, or is there any thoughts about maybe trying to get rid of them in another way where it can just add to liquidity?
spk06: I think at this point, what we're doing is we are selling some gas jacks that are idle or stranded in an area where we don't necessarily have anything else. So if you were to look back two and a half years ago today, we have just over... We have around 2,500 gas jacks in our fleet today, but we had almost 3,000 two and a half years ago. We sold 450 gas jacks or disposed of them. So as we have opportunities to sell our idle fleet and sell them to customers or other people who want to use them, we're doing that. In the meantime, we still have over 1,000 gas jacks out running, primarily in the mid-continent. There are in other areas. So at this point, we'll continue to run and operate those. Obviously, everything that we own and operate is subject to the valuation that someone puts on it. And if someone wants to put a value on it that they value it more than we do, then we would certainly entertain that. But that doesn't just apply to the gas jacks. That would apply to our rotary fleet. Anything we own and operate, it's a value equation. So I think right now in the smaller horsepower, there's a lot of competition there. And so to get a value for any of that equipment on a scale that we have, 2,500 units, is going to be hard to find someone that has the financial wherewithal and desire to spend that money on this at that scale. I think we can move a couple hundred a year out to other people as we revamp them and put them to work and sell them to people, and we've been fairly successful at that. So right now our strategy is to take a more measured approach, but we would obviously – look at anything that came along, but I don't expect that to happen.
spk10: Two quick ones, and they'll be for me. What percentage of your business today do you think has CPI inflators in place?
spk06: I look at it in a couple of different ways. To answer your question in a little more nuanced way, I'd say of our total revenue, total U.S. revenue, Because the international is kind of contracted. It's a different world. But in the U.S. revenue, I would say we're approaching 30% of our total revenue. But you have to think about this, that the CPI inflator only is applied to a multi-year contract. So we also segment and look at what of our multi-year contracts that are outstanding today have CPI on it, and that's in the mid-50s. So let's call it 50, 55%, give or take a couple percent of changes every day, right? So somewhere in the mid-50s. And I think if you were to go back to this time a year ago, it would be 5%. So, you know, we just started being able to put these in in the third quarter of last year. So we've moved from a very small percentage to a very large percentage of those contracts that a CPI would be applicable to. Does that make sense, what I said? No, that was as clear as could be. That's extremely helpful.
spk10: Okay. And then just last question, time for the backlog with getting new compressors, has that worsened or gotten any better? And where can you maybe help us pin down where the logjam is? Is it solely at Caterpillar, or is it also at Ariel or some of the other providers, just trying to get a sense of where the logjam is in the supply chain?
spk05: This is Rob. I think the lead time on a new compressor package has stayed at least a year out, depending on what size you're looking. Obviously, in the range that we're building, we're only deploying capital in the large horsepower category. So we're still a year plus out in that segment. And the lead time or the critical path item is the engine, the driver, that limits your ability to get packages quicker. Unless you can find an engine that somebody else has canceled or something like that, you're still 55 plus weeks out.
spk06: And I think that the issue with Caterpillar is that they don't just build engines for the natural gas segment. These same engines get applied to diesel and other marine. So they're busy in other segments and so they're not allocating more engines to this segment because they're busy across the spectrum. So I expect this to remain tight
spk05: At least for a year.
spk06: At least for a year. And I would say so far this year on our engine deliveries, they've actually been behind the expected delivery when we initially contracted them. I think the next few engines are going to be on time, but that's been the theme over the last six to nine months is they've been four to eight weeks behind their delivery they quoted when we placed the order. So take that with what you will. a year out, give or take a couple of months.
spk10: Got it. No, it makes sense why I've been calling it the golden age of compression, as you guys know. Appreciate all the time. You bet. Thanks, Frank. Thanks, guys.
spk09: Thank you. And the next question comes from Selman Aguilar with Stifel.
spk04: Thank you. Good morning. So let me just ask, you talked about your units already being sold out for 24. And, um, Are all of those in excess of 1,000 horsepower? Should we think of it as all being that large and then probably going out for five years?
spk06: Yes. Yes, they're all 1,875 or 2,500 horsepower units. That's what we're building in 24. And they're all four-, five-year type contracts.
spk04: Got it.
spk02: Everything we've built since 2021 has been a 3606 or larger contract.
spk04: Understood. And then you also talked about sort of 25 and looking to be sold out pretty early on that as well. And I'm just kind of wondering, can you talk about sort of the price increases you're seeing between stuff that you're looking to deploy in 24 plus 25? Are you still getting additional prices as you're engaged in those conversations? Or is there any flattening to it? Yeah.
spk06: I would say what you're seeing go out at this quarter and in the first quarter of next year was contracted well over a year ago. And what we're talking about now, a year later, is contracting 2025. The prices have moved a lot since then on aerial, on cat, on the tightness in the market, on the capital that people have across the compression industry to deploy. I think everybody... is being capital disciplined. I said that in my opening comments, and that remains the case. So for anyone to deploy capital today, I can't speak for the other companies, but based on what I'm seeing and hearing from our customers, from anyone to deploy their capital today, you want full cash on cash payback in the cycle of the contract that you're signing to put this to work. So that's requiring price increases dynamically. So as you think about this, so we signed a contract, let's just say we signed a contract at the end of this year to deploy in the May of 2025, and you put a CPI price protection on that, it doesn't kick in. The first CPI inflator doesn't hit until May of 2026. So it's two years away before you're almost getting your first price increase, and you don't know what inflation is going to do during that window. So even though you have CPI protection, you're still exposed in this initial almost 18-month window. So you combine that with the price increases that are going on in the new build, delivery, The limited capital you have, prices are absolutely up a significant amount from last year to this year on quoting new build capital. So I said that we could be sold out by the end of Q1 or by early Q1. It's going to depend on what people decide to do because we're pricing this as a valuable commodity to us. So we want solid returns that show up really well. Whether customers make all those decisions and consume all our capital in that window depends. remains to be seen. But we have a lot of inquiries, and we're really trying to cherry pick and battle order what we want to quote first and second and third, because once it's gone, it's gone. We're done.
spk04: Got it. From those comments, I presume your customer list is dwindling, but you're growing within each one of those customers. Is that a fair assessment as well?
spk06: That's a fair assessment to some degree, but it's also an assessment that we Debate internally. We have, for example, I was talking to our head of sales this week. We have a new customer that's come in and asked for some additional, some equipment that do you have some available or could you build some for us? And so this is the part of the decision making you have to work your way through. Do we want to continue to feed our existing customers and take care of them or do we want to add a new customer? Given our limited supply of capital and the fact we're basically sold out of our existing recent fleet, these are the balances we have to have to go through where we want to allocate our capital. So we would like to add new customers, but at the same time, new customer may want 10-3608, so it's the 2,500 horsepower unit, and those are $3.2, $3.3 million each. That's $30, $35 million of capital. For us, when you're looking at $50 million to $60 million of discretionary cash flow, that's a big chunk of your discretionary capital you're going to spend in the coming years. So these are the things that you kind of have to debate. and decide where you're going to allocate your capital, existing customers, new customers, and what people want. The thing is, a lot of people are going through their budget process right now, and not all our customers are even ready to commit for 2025 capital. But we expect by the time we get on our year-end earnings call, we will have had a lot of these customers have their budget for 2024. Therefore, they need to plan for 2025 as they drill in 2024, and they're going to start wanting to commit capital because of the lead times and all these other issues we've talked about as far as being able to get a unit on site People know they need to commit 12, 15, 18 months in advance. So I think as we get through this budget cycle, we're going to have a lot more demands than we're even seeing today. And that's why we're trying to talk to our customers, be very proactive, get in front of them and say, look, we need to know sooner rather than later because we may not be able to do much for you other than find units as they come off term and move them to you. So it's a lot of commentary there, but it's quite the delicate balancing act. So it's We could grow a new customer base. We could grow our existing customer base, but trying to find that balance is tricky.
spk04: Got it. And then just the last one for me. You mentioned you're already beginning to talk with lenders and look at some of the refinancing. I guess can you just talk about any generalities that you're seeing in terms of pricing, anything that we should be thinking about? I presume you'll address those notes next year.
spk02: Yeah, that's the plan to address them next year. In terms of pricing, you know, we've seen a pretty wide range, and with our first lien being at 7.5%, pricing on that is pretty good. So our expectation is, you know, overall our interest, our kind of debt could go up, you know, one to two percent.
spk03: Got it. Okay, thank you.
spk09: Thank you. And the next question comes from Greg Brody with Bank of America.
spk08: Hey, guys, just to follow up on financing, clearly funding with your cash flow would make sense for funding some of this growth. Are there other avenues that you're contemplating? Is there any financing out there that's starting to look attractive to maybe fund some of these new bills that have contracts on them?
spk02: Yeah, we have some contracts. Different alternatives for financing. One that's been interesting, particularly given the term of the contracts, the new contracts that we're signing, is capital leases. We've done a few of those over the last two years, and they've worked out pretty well at attractive rates. As far as capital to grow the business, I think there's a lot available. Really, the question and the balance is, given the rates on some of it, how much of that do we want to spend versus focusing on deleveraging the business and driving free cash flow?
spk06: I think part of that's going to come down to when we get refinanced and know what our true go-forward interest cost is, then we'll be able to figure out what the arbitrage is on that versus capital lease, just using our whatever we might have, an ABL or liquidity-free cash flow, or just using some kind of capital lease structure because, as John mentioned, those could be attractive. But you're comparing a known versus an unknown, but we are – John's done a great job, I think, of chasing down all the alternatives that we could potentially accelerate some growth capital if we found the right source of financing.
spk08: What is today's market? What is the cost of capital for some of these capital leases?
spk03: It's at or below ABL debt.
spk08: Gotcha. And then just last one here. Is the limitation on growth more component availability at this point more so than capital availability?
spk06: No, it's more capital availability than component. I mean, there's There's component issues, but I think if we went to CAT and said we want $30 or $40, if we want to spend $100 million of capital, I think Caterpillar could deliver that for us in 2025. It's definitely self-constrained. Our primary motivation has been to get this leveraged down to a sustainable environment. So we've been using pretty much our free cash flow to grow but sustaining our debt levels. and growing into our debt, so to speak. Now as we refinance and know what that's going to look like going over the next five years, seven years, whatever that may be, then we'll be able to make more decisions on do we grow a little bit beyond our cash flow. We're not really there at that point. I think we want to get down closer to four times before we start looking at a cycle of what we want to do. We really want to stay within that cash flow.
spk07: And can you just remind us when you plan on providing 24 guidance?
spk06: Year-end earnings call, which will probably be late February, early March.
spk07: All right. Thanks for your time, guys.
spk06: Yep. Thanks, Jerry.
spk07: Thank you.
spk09: And this concludes the question and answer session. I would like to return the floor to John Jackson for any closing comments.
spk06: We appreciate everyone checking in with us today. And for those listening live and for those who will listen to it on recording, we look forward to talking to you at year-end and – continue to improve and grow this company. Appreciate the time today. Thanks.
spk09: Thank you. The conference is now concluded. Thank you for attending today's presentation.
Disclaimer