CES Energy Solutions Corp. (OTCPK:CESDF) Q3 2022 Earnings Conference Call November 11, 2022 10:00 AM ET
Company Participants
Anthony Aulicino – CFO
Ken Zinger – President and CEO
Conference Call Participants
Aaron MacNeil – TD Securities
Jonathan Goldman – Scotiabank
Tim Monachello – ATB Capital Markets
Keith Mackey – RBC Capital Markets
John Gibson – BMO Capital Markets
Josef Schachter – Schachter Energy Research
Michael Robertson – National Bank Financial
Richard Evans – Mara River Capital Management
Operator
Welcome to the CES Energy Solutions Third Quarter 2022 Results Conference Call and Webcast. 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 November 10, 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 third quarter MD&A.
At this time, I’d like to turn the call over to Ken Zinger, our President and CEO.
Ken Zinger
Thank you, Tony. Welcome, everyone. And thank you for joining us on this Remembrance Day holiday, as we honor those who gave their lives for our freedom.
On today’s call, I will provide a brief summary on our record financial results released yesterday, followed by our divisional updates for Canada in the US, along with a brief update on our international businesses. I will then pass the call over to Tony to provide detailed financial update. We will take questions and then we will wrap up the call.
I’m proud to report that the third quarter of 2022 was another breakout quarter for CES Energy Solutions. For the fifth consecutive quarter quarterly revenue increased. And for the fourth consecutive quarter it increased to a new record level, this time at $525 million with an associated EBITDA margin of 14%.
I would now like to highlight several significant corporate milestones which were achieved during the Q3 of 2022. Strong results have enabled CES to raise our dividend by 25% to $0.08 per share per year paid quarterly. Revenue in the third quarter reached another record setting level, beating our previous record last quarter by 21%. This was our eighth quarter in the last nine quarters, where revenue increase quarter-over-quarter. All four of the company’s major business lines contributed by posting their highest revenue levels ever. EBITDAC of $73 million in Q3 smashed our former quarterly record results from last quarter by just over 20% and by 74% year-over-year from Q3 of 2021.
SG&A and as a percentage of revenue came in as a very prudent 9.2%. This was the lowest percentage ever and beat our former low of 10.1% from Q1 of 2015 by almost 10%. We are currently providing drilling fluids, products and service to 23.2% of the land drilling rigs currently drilling in North America as we continue to be the number one drilling fluids company in the North American land market.
I will now move on to summarize some of the progress made in Q3 of 2022, as for the first time ever, we reached the milestone of being a $2 billion plus annualized revenue run rate business. These past three years have presented unprecedented challenges to our business, our industry, our employees and to the world. COVID remote working inflation, logistical challenges, product shortages and labor shortages have all made their mark on everything in our world.
In spite of these headwinds, CES Energy Solutions and our employees have steadfastly marched forward and grown the company’s revenue and EBITDAC to all-time highs. At CES, we believe a more stable market may be in front of us. We have grown the company to a much higher revenue level and are now beginning to see the free cash flow harvest that comes with the more steady market versus the incredibly rapid growth for the past couple of years.
Our working capital growth — our working capital level has increased to $666 million during the quarter to support this rapid growth. However, this was up 32% of our current annualized run rate revenue and well within our targeted historical range. Now begins the time for us to harvest the torque built into the business with our CapEx light asset light high surplus free cash flow business model. Tony will speak more to capital allocation plans during his portion of the call today.
I will note that these comments did not mean that it was easy. As always, challenges remain throughout the business. Shortages of certain chemistries, elevated shipping and logistics costs, labor shortages, FX fluctuations, and competitive pricing pressures are all present in our business lines. However, we believe we have the best team in industry to help manage our way forward in excel in any environment. We believe that the strategic utilization of the free cash flow we have started generating and will continue to generate will improve our balance sheet while enabling consistent shareholder returns.
Our outlook remains bullish for the remainder of 2022 as well as 2023. Although industry activity growth rate appears to be leveling off to a more manageable level, 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 Q4 of 2022 and throughout 2023.
I’ll now move on to summarize Q3 performance in Canada. The Canadian drilling fluids division achieved our highest quarterly revenue ever in Q3. As mentioned on our last couple of calls, we have been able to hold hire and trained 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 81 of the 211 jobs underway in Canada for a market share of 38.4%. This rig count has been steady throughout Q3 and into Q4.
Christmas in Canada historically affects the rig count by about half for the second half of December, and we would expect no differences this year. We expect the industry to increase in early Q1 back to level slightly higher than in Q1 of 2022.
PureChem, our Canadian production chemical business also achieved its highest quarterly revenue ever. We continue to see growing contributions from our FRAC chemical and simulation groups as this sector of the Canadian oil field remains very active now and for the foreseeable future.
Now for the United States, AES our U.S. drilling fluids group also achieved their highest quarterly revenue ever, as they always know, we’re not chasing market share on either side of the border and continue to focus on opportunities with sustainable margins and revenues. Today we are providing chemistry and service to 147 of the 770 rigs in the United States for a 19.1% market share. This total is up from 136 rigs and 17.8% market share at the time of our last call in August. This includes a basin leading 29.8% market share in the Permian, which is up from 27.5% on our last call.
Our second barrel grinding facility which we are constructing in the Permian Basin continues to be on schedule and on budget. We also began shipping invert from a second Permian facility in Midland during the quarter. This was achieved with minimal CapEx, and offers a logistical benefit to our customers on the east side of the Permian Basin.
Finally, I am proud to report the Jacam Catalyst, our U.S. production chemical business also achieved their highest quarterly revenue ever. Our manufacturing facility in Kansas continues to be the backbone that supports the entire business, while operating at a very comfortable output level of about 60% of what we believe to be the maximum capacity. This number varies based on the ratios of the different chemistries being manufactured, with some being quicker and easier than others, but safe to say we see no capacity issues in the foreseeable future.
Now for a quick update on our recent four forays into 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 conclusion, I would once again like to highlight that all four of our major divisions achieve record revenues during the third quarter of 2022. This is truly an historic accomplishment that we are extremely proud of. The busy market is obviously one of the drivers of this success. But this also showcases the great teams we have everywhere in the organization. The results in Q3 were not due to one division or area excelling. This was a balanced effort across the company in which every business group contributed. It speaks once again to the quality of the people employed everywhere and every division here at CES Energy Solutions.
I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success of CES. It is rewarding to note that, due to the growth we are experiencing, we have increased our total number of employees at CES from 1,814 at the beginning of this year, to the current level of 2105 to-date. This is an increase of 291 employees in less than a year or approximately 16%. 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
Thank you, Ken. As highlighted by Ken, in his part of the call, CES financial results for the quarter represent all time high record levels of revenue, adjusted EBITDAC and funds flow.
These impressive results were realized amid continued quarterly growth and industry activity. Targeted pricing increases and discipline spending. During the quarter CES generated revenue of $525 million and adjusted EBITDAC of $73 million, representing a 14% margin.
This record quarterly revenue of $525 million represents a sequential increase of 21% from the previous high watermark of $434 million in Q2, and an increase of 67% from $314 million in Q3 2021.
Revenue generated in the U.S. was $350 million, or 67% of total revenue for the company. That revenue number is up from $300 million in Q2 and $197 million a year ago, as both of our major U.S. divisions demonstrated record revenue levels during Q3.
Revenue generated in Canada was $175 million in the quarter, up strongly from $134 million in Q2, as expected seasonally with spring break up and compared $170 million a year ago. Canadian revenues benefited from increased drilling and completions, activity year-over-year growth and higher production volumes in general.
Our adjusted EBITDAC of $73 million in Q3 represented a 20% increase from the $61 million generated in Q2 and a 74% increase from the $42 million generated in Q3 2021. Adjusted EBITDAC margin in the quarter was 14% and in line with a 14.1% margin in Q2, as the company continued to realize increased pricing and scale associated with higher activity levels.
Gross margins were slightly compressed by a combination of a temporary spike in the U.S. dollar toward the latter half of the quarter in particular, and also some product mix dynamics. We call that our Canadian operations price in Canadian dollars, but most of their product related costs are in U.S. dollars, thereby resulting in margin compression until pricing is adjusted or the FX rate settles back down, as it has already. We also had some high revenue product with associated lower gross margins, but minimal SG&A burden.
On a consolidated basis, or low SG&A burden that Ken describe was able to offset the gross margin compression to deliver EBITDAC margins in the 14% range.
At CES, our main financial priority continues to be cash flow generation. I am proud to report that during Q3, our FFO was $49 million a $6 million increase over Q2 and a 40% increase over the $35 million generated in Q3 2021.
We have maintained a prudent approach to capital spending through the quarter with a net CapEx spend of $15 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, we expect cash CapEx in 2022 to be approximately $50 million comprised of $25 million for maintenance, and $25 million for growth initiatives.
We exited the quarter with a net draw on our senior facility of $221 million versus $182 million on June 30. The increase was directly correlated to the working capital investments associated with the increased financial scale of the company and related revenue growth. Working capital surplus was also impacted by the significant depreciation of the U.S. dollar quarter-over-quarter, which contributed $28 million to the increase in working capital balances on revaluation those balances held in the U.S.
We ended Q3 with 566 million in total debt, comprised primarily of 208 million senior notes, maturing in October 2024. And a net draw on the senior facility of $221 million, as previously mentioned.
Our total debt to adjusted EBITDAC declined to 2.5 times at the end of Q3 from 2.7 times at Q2 and 3.0 times at Q1 demonstrating our continued deleveraging trend.
I would also note that our Q3 working capital surplus of $666 million, exceeded total debt of $566 million by $100 million and represented 32% of our annualized quarterly revenue, well within our targeted range of 30% to 35%.
At this time, I believe it is very important to highlight the relative financial positioning of the company. CES’s annualized Q3 revenue grew to $2.1 billion from $1.0 billion, just five quarters ago, commensurate with a near doubling of industry activity, improved pricing, and maintenance of strong market share, we were able to strategically use our balance sheet to support this growth by increasing our credit facility size to approximately $425 million from $350 million in order to provide ample liquidity to support current revenue levels and beyond.
As these strong industry levels have begun to stabilize at more muted growth rates, we believe that CES’s incremental working capital requirements should decline materially and usher in an era of strong surplus free cash flow generation, fueled by these record setting revenue and EBITDAC levels.
For immediate context, the current net draw on our senior facility is approximately $218 million versus $221 million on September 30. However, it should be noted that since September 30, CES made its semi-annual high yield coupon payment of $9.2 million, quarterly dividend payments of $4.1 million and spend $2.1 million on share repurchases. Absent these scheduled cash outflows, CES has begun to realize the surplus free cash flow generation that Ken described. This surplus free cash flow generation has been realized thrilled most of our divisions and is also being enhanced by measurable working capital optimization.
We believe that CES will generate material surplus free cash flow amid a constructive industry outlook. And in support of that view, I am pleased to announce that on November 10th, Company’s Board of Directors approved the 25% increase to the quarterly dividend from $1.06 per share to $0.02 per share. Accordingly, CEX will pay a cash dividend of $0.02 per share on January 13, to shareholders of record at the close of business on December 30, representing a dividend yield of 2.5% on an annualized basis, at yesterday’s closing price, and a modest implied payout ratio of 13% of LTM distributable earnings.
During the quarter CES repurchase 550,000 common shares for $1.2 million or $2.20 per share under our NCIB program, subsequent to September 30, CES repurchased 844,500 additional shares at an average price of $2.45 per share, for a total of $2.1 million, bringing the total year-to-date amount of repurchase common shares to 1.8 million, at an average price of $2.32 per share for a total of $3.6 million.
We continue to be optimistic about the industry outlook and CES’s ability to continue its strong financial performance. This combination is key to in forming our capital allocation decisions, which we evaluate on a quarterly basis. And in terms of capital allocation considerations, we prioritize capital allocation towards supporting existing and new business through investments and working capital and modest CapEx projects that deliver IRR above our internal hurdle rates.
We remain very comfortable with the conservative increase of our dividend and will continue to revisit our policy on a quarterly basis. We will use surplus free cash flow to reduce fraud levels, as inflows begin to materially offset outflows. And we plan to buyback at least enough shares to offset our modest equity compensation related dilution. And we will consider opportunistic purchases in the context of surplus free cash flow generation, leverage and implied valuation levels.
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, the Q3 results represented significant record results for revenue and EBITDAC. We were also able to maintain a strong margin of 14% while simultaneously expanding our market share throughout the North American land market. Thank you to all of our employees for contributing to these spectacular results that Tony and I have had the privilege of presenting here today.
I will now pass the call over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Aaron MacNeil with TD Securities. Please go ahead.
Aaron MacNeil
Good morning, all thanks for taking my questions. I know in the past, you’ve said you’ve got a lot of capacity, you don’t really need to spend to take on higher volumes of work. Obviously, we’re sort of there now. You’re building a secondary grinding facility. I’m sure you’re doing other smaller things around the edges. But I think generally speaking, does that still hold? Are you below your theoretical capacity? Or do you think we’ll need to see an uptick in growth spending to accommodate further growth from this point?
Ken Zinger
Good morning, Aaron. Thanks for the question. Yes, we think we’re in good shape. We’ve been we’ve been adding to facilities a little bit here and there, as it makes sense. But these CapEx expenditures are minimal. And unless we got really busy and a play that we’re not focused on right now, or in a place we’re not focused on right now, there’s no need for big CapEx spends, I noted the facility in Sterling, as somewhere between 55% and 60% of capacity as we estimate it. But that’s a variable number, depending on which chemistries we’re making at the time.
And even if we got to a number that caused us to want to spend some money in in Sterling, it’s not building new buildings and putting in new infrastructure, it’s adding some kettles adding some blending facilities, adding some reactors. So the spends are quick and not significant.
And then along with that, the one place, actually there’s two places where we are starting to get stressed, the [indiscernible] facility in Texas was getting pretty close to where we were going to have to start spending some money on it. So we strategically decided to just shift some of the production away from that facility and move it over to the east side of the Permian Basin, in Midland, because we had a facility there that we were able to get going on pretty short notice and a very low cost, it was something that was sitting there and ready to go that we were using for backup.
And we’ve shifted, you know about right now, I think we’re about 10% of what we have going in the Permian, we’ve shifted over there, but we can move that to more like 20% or 30%, as we see fit, or as we get more exposure to that side of the basin, we’re hopeful also that it’ll generate some growth in our market share there as well, because it’s now we’re going to be logistically advantageous on that part of the play as well.
And then the other one is, of course, is the is the very grinding facility, we’re pretty much we built our facility to provide about half of its production when it was fully optimized to us and half we were going to wholesale in order to keep it going and keep our costs down. This is the corpus facility.
That one was, is we are now using 100% of our capacity on that one. And that’s the reason that we started building the new facility in the Midland, or in the Midland area in the Permian Basin a few months ago. It’s approaching completion, we hope to have it done sometime in Q2. And at that point, that’s probably the last piece of big infrastructure we need for the foreseeable future, especially considering the outlook on rig counts for 2023 Unless something drastically changed in oil went way up.
Aaron MacNeil
I guess maybe as a follow up, you mentioned the Middle East expansion. Is there a potential to put capital to work there or engage in M&A to sort of take that business to the next level? And I guess, point to Jacam and Catalysts in the past that completely changed the makeup of the business like, I guess, do you think something like that is in the cards and what sort of traction would you have to see in order to kind of pursue a larger or lumpier capital outlay and in markets outside of North America?
Ken Zinger
Yes, we’ve been we’ve had a lot — we’ve been spending time on this and we’ve got some opportunities that are moving at what seems like a snail’s pace but are getting closer to fruition. We’re getting some verbal awards and we’re just trying to latch on to a piece of business that’s significant in order to move forward. At that point, I think, we would look at, at an M&A piece to buy a piece of business if we felt it got us some people on the ground and some infrastructure on the ground, but it definitely would not be a swing for the fences kind of an acquisition, we’d want to get into the market, get settled, understand the market better. And then at some point down the road, if something came available, we might look at it.
But, the capital expenditure to actually get in there and get putting up some real revenue and EBITDA won’t be significant, or at least that’s our plan right now.
Aaron MacNeil
Understood. Thanks, Ken. I’ll turn it over.
Operator
The next question comes from Jonathan Goldman with Scotiabank. Please go ahead.
Jonathan Goldman
Hi, good morning, guys. Thanks for taking my question. Just a question on current supply demand and demand dynamics in the industry, could you maybe talk about what you’re seeing in terms of supply and drilling button chemicals, whether that’s supportive right now? Or it’s too much to less kind of any color around? That would be great.
Ken Zinger
Sure, good morning, Jonathan. I think, much like it has been for the last couple of years, there is stress on some of the supply chain. It’s not on every product anymore. I mean, there was a period in Q1, where everything was in short supply, and everybody was scrambling, and everything was going up in price because of that short supply. But the markets adapted. I think, right now, there’s four major product lines that we’re struggling with. And we may, some of them, we may be able to offset through some agreements, some of them, we may have to create alternative chemistries or alternative treatments for them.
But I don’t think that stuff ever goes away, there’s always one or two things that are in trouble around the world. So, as far as it being positive or negative for our business, I mean, we’re one of the higher volume providers out there. So obviously, we have to be more ahead of this and buy more inventory.
So if there’s nothing going on, that gives us pause, that we’re not going to be able to find a solution or get the chemistry. But there is potentially some strategic purchasing that needs to happen. So maybe some increase in inventory on some things if we get an opportunity to buy them. But I’ll say that at this point, with none of those things has happened. It’s just the usual struggle that’s going on right now. That’s been going on for as long as I’ve been in the business.
Jonathan Goldman
That makes sense. And I guess I don’t know the answer to this. But that’s kind of a condition industry wide, everyone’s kind of dealing with the same supply dynamics getting the same sort of inputs, or unique by each provider.
Ken Zinger
No, I think it’s the prior, that’s the one good thing about it, not good. But when there’s a shortage out there, if we can’t get it, then no one’s getting it. And, you know, if we need it, then our competitors need it. So it’s just a matter of who gets more first and what price you pay for it really.
Jonathan Goldman
That makes sense. There’s been second one, I guess…
Ken Zinger
Sorry, Jonathan. There’s been some opportunities that we’ve taken advantage of where, where you just couldn’t get a chemistry. And so you had to pivot. And we’ve done some pivots. And that’s the other thing that we can bring to our customers. And I think it speaks to the market share, that we’re putting up. I know, I talked about not talking about market share all the time. But the market share that we’re currently participating in is very impressive. And I think part of it is due to our adaptability.
When these problems come up that people struggle with solving where they can’t get supply, or they can’t get a chemistry and literally cannot get a chemistry. We’re very quick to pivot and find a solution that will work at some other price and some other methods. And I think some other companies struggle with that. And that’s part of the reason we’re having such success in the market.
Jonathan Goldman
No, definitely. I mean, that shows through the numbers to holding on to those significant share gains in 2020. The second one for me on the working cap. DSOs seemed to be high just relative to 2018 to 2020 levels. I mean, obviously, there’s some supply dynamics in there and inflation as well. But I just want to know if there’s any specific dynamics behind the higher DSO levels, and maybe what the trajectory would look like going forward?
Anthony Aulicino
Yes, I think, I can answer that. And that’s twofold. And one of them is really good problem and the other one is one that’s starting to dissipate. The first dynamic is that revenue has been growing on a monthly basis and a quarterly basis at a torque rate. So when you do the math for your DSO calculation you’re using AR as part of your denominator and revenue as your target NAV. AR is part of your numerator and AR and revenue is part of your denominator. So when you’re when you’re making the calculations, you’re actually collecting an amount of money today. That is reflective of revenues that were at lower levels a couple of quarters ago or a couple of months ago, even.
So, you’re artificially inflating the DSO calculation. And the other big part is, is that AR that that we’re using for calculation is, a lot of it is in the U.S. And because the effects rates in the U.S. and the spike of the U.S. dollar, especially towards the end of Q3, the value of that AR, in Canadian dollars spiked up as well, again, making that AR look higher than otherwise would have.
So we expect there’s some things that we’re doing on working capital upfront to systematically reduce that DSO number. The other thing you’re going to see is as the revenue plateaus and started to, you’ll see that number improving, and also as FX flattens, and it’s actually changed in the other way, it will improve on the DSO number as well.
Jonathan Goldman
No, that makes sense. Thanks, guys. I’ll turn it over.
Operator
The next question comes from Tim Monachello with ATB Capital Markets. Please go ahead.
Tim Monachello
Good morning, everyone. The first question just on margins, revenue is very strong. You pointed this out, I guess, lower margin volume work that came through in the quarter. But at the same time, I think you would agree that you’re probably seeing an easing in inflationary pressures. And maybe that’s not true. But if it isn’t, please let me know. So I’m just curious on like a same product basis, what you’re seeing for margins, and how we should be thinking about margins going forward?
Anthony Aulicino
Well, I’ll jump at that one first. I think it depends. If you’re talking about gross margin or EBITDA margin, net margin, we’re very focused on net margin, we’re less focused on gross margin. We’ve got some business lines that historically have been a little bit smaller. So one or two of them are new pieces of business that we picked up.
And one or two of them are new business lines, that we’ve sort of fixed our old business lines that we’ve started making a bigger dent in. And these business lines have fewer touch points for on our side, it’s more big volume, kind of pass through less service oriented business.
And so, all we care about on that business is net margin, EBITDA margin. So we know how to get to that, and unfortunately, that dilutes gross margin a little bit. But, that’s not something we’re concerned about. We’re trying to get free cash flow, and we’re trying to generate earnings for our shareholders. So the gross margin number has is going to move where it moves, as we continue to focus on net margin.
And then as far as inflation goes, yes, like we’re it depends on the product and the day, and obviously, FX moves a lot during the quarter. And that, that helps us on our overall numbers, but it does hurt us in Canada, where our cost of goods goes up. And that affects the margin that gets put out. And it’s hard to adjust to when something like that smoothing 5% up and back down again, in a quarter kind of thing. So, we’re watching it all the time. And we are comfortable with the net margin and the EBITDA margin that we’re creating. And that’s what we’re focused on is free cash flow to shareholders.
Tim Monachello
Does the expansion service lines that you’re talking about carry the same type of working capital intensity is the higher margins going to difference you?
Ken Zinger
The different business lines, so one, without identifying what they are. A couple of them do and a couple of them don’t. And it’s the one of them is very high volume. And so, we make sure that we work into our cost of goods, the cost of carrying the inventory. But all these business lines that are more passed through revenue are pretty quick pay kind of scenarios where we have deals on these business line that are commensurate with the risk we’re taking on the inventory.
Tim Monachello
Okay, and are you seeing any pricing like net pricing traction with customers, or is that sort of plateau or have plateau?
Ken Zinger
I think we’ve had, like we’ve had tremendous pricing success with customers like the last week. I mean, there’s customers we’ve gone to five times in the last year with significant increases. There’s some that have been two or three. It was a fight in Q1, when our margins weren’t good. And it’s a fight today, when our margins are better, but not as good as everybody would probably like to see. It’s a competitive space.
I would say the operators, the oil companies are in a different situation with equipment where there’s a finite supply. And so they kind of take it on the chin and have to accept what they have to accept to get what they need. With us, they choose to spend their time fighting with us. So we — it’s an ongoing battle. And I don’t know when it’s going to end, hopefully things just stabilize, so we don’t have to keep doing it.
Tim Monachello
Okay, that’s really helpful. The next line question I have is just around capital allocation. Good to hear that the harvest mode is underway. The dividend increase seems almost little bit symbolic, in respect, just given the size of the free cash flow that you’re probably going to see next year. So I’m just curious what the playbook is with the other message to shareholders and what they should expect next year, in terms of growth in returns to shareholders, and deleveraging. Are there goalposts that you’re looking for, and KPIs where you can begin to move more aggressively towards distributions to shareholders?
Ken Zinger
I can, start on that one. So we’ve been pretty consistent in terms of the buckets of the capital allocation, point taken that that increase in the dividend, although conservative, probably less than we could have done is very symbolic. We wanted to wait until we saw that free cash surplus free cash flow waterfall starting to happen.
What I will say is that you will see some natural deleveraging, as in the background, we will continue to buy some shares, we will continue to look at our dividend in terms of at what point do we have very serious discussions about really amplifying some of those other return mechanisms, it’ll probably be when we view towards that two times on that EBITDA level. And if we’re in that 1.5 to 2 times, we’re going to take a serious look at significantly using some of those other levers.
So then we were starting to see the free cash flow as a bunch of you on the call predicted. And I think what we need is another good quarter of understanding it understanding the trajectory, before we can be more definitive on allocation.
Tim Monachello
Okay, that’s really helpful. And then just the last one for me, I’m just curious around, conditioning that new beret facilities that can unleash as another or more job capacity and some market share in the Permian, or is that, just basically building capacity for future growth, and allowing for third party sales?
Ken Zinger
That wouldn’t — we didn’t build it because we see a whole pile of business suddenly coming our way that we’re going to have to support. We built it to support the business we have. But yes, it’s just it’s a big strategic advantage. One of the main ferrite grinders in the United States just sold their ferrite facilities grinding facilities to another major ferrite supplier in the United States. So the access to a ferrite is dropping down to a very few number of people who can actually grind them supply. And that is something we’re basic in. So that’s something that we’re going to participate in. And I think there’ll be tailwinds from that for sure. That’s why we’re doing it.
Tim Monachello
Got it. Thanks a lot.
Operator
The next question comes from Keith Mackey with RBC Capital Markets. Please go ahead.
Keith Mackey
Hi, good morning. Maybe Tony, if we could just start out on working capital again. You mentioned that you’re undergoing some working capital optimization initiatives can maybe just give us a little bit more context on what those might be. And if they will have an impact potentially on that 30% to 35% of revenue raised that you’ve historically been in?
Anthony Aulicino
Yes, so those are, it’s just a focus from the top on working capital. As we talked about in the last few quarters. We were unable to focus as much as we wanted on working capital optimization just because we’re growing as much as we get growing annualized revenue from a $1 billion to $2 billion and just over four quarters. So the relative to start, there’s some blocking and tackling, triaging of larger accounts focusing on AR, and streamlining the billing and collection methodology.
There’s some technology that we’ve employed there to marry our earpiece, for example to the customer’s payables portals. That’s from the technical perspective, there’s also been some very focused hiring of capabilities to accelerate that on the so that’s on the AR and DSO side. And on the, on the DSI side, we’re looking at inventory levels. And we did have to buy more than we needed and carry higher inventories than we have historically, to give us a buffer during the really challenging supply chain period that we’ve gone through over the last couple of years. We’re not out of the woods yet. But we are getting a little bit more efficient in those carrying levels in terms of volumes.
So, is that going to give us a breakout of that 30% to 35%? I really don’t know yet, but you got to appreciate that when you’re doing $2 billion of revenue and 2.1 on an annualized basis. Any basis points improving in that 30% to 35% metric is going to be dividends. And I think you’re going to see, a solid numbers they are going forward. And hopefully in permits.
Ken Zinger
I think, if I add to that maybe just that 30% to 35% number that we throw out is a range that we’ve been in always other than significant downturns. So it’s, as long as things keep stable, the improvements will probably stay within that ratio or that that percentage, but maybe we get to the lower side of it.
Keith Mackey
Got it. Thanks for Thanks for the color. Now Ken, one of your bigger customers is talking about doing more exploration in the Utica Shale, they’re starting with initial program about 2020 wells, which might be a rig. Can you just talk a little bit more about what you’re seeing in that area? Maybe in the context of your current US job mix? And what you think your capacity could be if we start to see a lot more activity in that area?
Ken Zinger
Sure. I mean, the customer you speak of, we’ve been in contact with as well, obviously, it’s early days, nothing has been awarded. But historically, we do a high percentage of their business. And so I’d be surprised if we don’t participate in some way in that. As far as infrastructure and people in the area, it’s been a depressed market, due to a lot of reasons gas prices and takeaway issues, primarily, but it may be that sees an uptick. We haven’t noticed it yet. Our activity has been pretty constant up there.
But as far as capacity goes, I mean, we have a high level of capacity in the area. We have two facilities in the area that we have historically service the Marcellus and Utica with when we bought FMI back in 2010 2009. That was their busy area. That was the reason that we bought them it wasn’t the Permian. The Permian is something we did after the fact as we saw attention shifting there. They were dominant in that market. So should that market get more active again, we will definitely be and we already have infrastructure and people to manage it.
Keith Mackey
Okay, thanks. That’s it for me. I’ll turn it back.
Operator
The next question comes from John Gibson with BMO Capital Markets. Please go ahead.
John Gibson
Good morning. I’ll just add one on market share. I know it jumps around quarter to quarter but the job count figures you touched on in Q4 apply jump next quarter and it’s obviously up in Q3. Wondering if there’s anything that’s changed with you or your competitors that could allow for sustained higher market share across either Canada or the U.S. in 2023?
Ken Zinger
Yes, I mean, I think it’s probably a lot of it has to do with customer mix. The customers we have getting busier. But it’s also a little bit to do with all the supply stuff and the people shortages that are going on. I mean, I don’t like to brag too much about our people but we really I can’t think of an example where we’ve let people down not I’m going probably get a whole bunch of calls from customers now telling me things.
But, as far as I know, we haven’t let anyone down. We haven’t missed any balls and we’ve provided good service and our customers that we’re working for are getting busier and getting the rigs and so yes, like when the first quarter that I reported was in March this year for Q4. And I think we were kind of 21% of the U.S. market and today we’re over 23, the North American market, and today we’re over 23.
It’s been a steady grind up. We’re always working. But I will say that, you’re talking about margin or the others. I’ve had some questions today about margin. Lately, we’ve had to knowingly submit bids for some work for customers we were working with, that didn’t meet the criteria that they wanted for low pricing. And, we’ve lost a couple of pieces of business, because we’re just not willing to take what they’re getting.
So anybody who thinks that we were leaving money on the table, or we should be getting a lot more, I mean, these are the kinds of examples that we’re dealing with daily, where, you know, customers are telling us what they’re willing to pay. And if we’re willing to work for it, we will but there’s there is a line where we can’t get proper returns, we will walk away.
John Gibson
Great, appreciate the color and congrats on the quarter.
Operator
The next question comes from Joseph Schachter with Schecter Energy Research. Please go ahead.
Josef Schachter
Good morning, Ken and Tony. Congratulations on the great quarter and dividend increase, a lot of the questions have been answered. The one left I had was the international offshore business. You almost talked about it every quarter of the impact from onshore offshore. Have you seen any more improvement than that to in the most recent quarter and in terms of businesses that you’re looking for Q4 and going forward?
Ken Zinger
I think we I mean, we’re focused on the Proflow acquisition we did back earlier this year. And one of the reasons for that is that offshore market is different than the land market in North America, there’s only a couple of providers out there both on drilling rigs and on production, camp. And I think that those companies print better overall numbers or margins and reflect better overall margins and numbers largely because of that space, where they don’t really have much competition. So the two of them are able to get a much better return.
And so that’s why we want to enter the market. But having said that, it’s a tough road to get there, we continue to have slow solid growth with the company that we acquired. And together, we’ve just submitted another big bid. So hopefully, we can pick something up. But that that kind of business is hard to break into. And it’s just it’s a long road to get there on the drilling fluid side. We’ve done some jackups over the years, but we don’t do any of that floater business. So that’s just like international business, I think there’s strong margins, because there’s fewer competitors. And we’d like to get into it.
But there’s also big costs on the drilling fluids side anyway, to getting into that space on the production cam side it’s lower class more supply agreements, once you figure out the problems and then some intermittent servicing when there is an issue. So we feel like it’s — if we’re going to get into one side or the other, the production cam is going to be the one we’re going to have a better time with.
Josef Schachter
Now, in terms of the area that is working is mostly Gulf of Mexico, or is that also looking at the North Sea or offshore Brazil, how big of a place or format that they have right now in terms of market access?
Ken Zinger
That’s just the Gulf of Mexico. International businesses is a different animal. And that’s, we’re taking steps there in the Middle East to try and gain some land business there first, but I would suggest that unless it was a very good customer who had a very high level of confidence in us, it would be really tough to get anything offshore. That would be like a third step after we got offshoring in the Gulf.
Josef Schachter
Okay, Kim, Tony, thanks so much. And congratulations again.
Operator
The next question comes from Michael Robertson with National Bank Financial. Please go ahead.
Michael Robertson
Good morning, gents. Congrats on the solid quarter. And thanks for taking my question. Just one for me at this point. Obviously, you guys have been focused on your sort of core markets, given the supportive nature of that backdrop, but was wondering if there’s any updates or if you’re making any inroads in sort of non-traditional spaces the like cosmetics or what have you?
Ken Zinger
Yes, we have been looking at those opportunities and so we’ve probably spent the last year doing deep dives in specific end markets that have included these bios in fact ends personal care. We’ve taken a look at some of the chemistry behind carbon capture as well. What I’d say Michael is we are in information gathering mode, and that’s starting to shift to a better appreciation of our divisional groups and our technology focus on what we can actually do.
So I think it’s been a real eye opener to find examples where we can use our chemistry. But we haven’t seen any significant progress in terms of revenue generating abilities, yet, there are a couple that we’re going to go down the path of. And this is like a multiyear journey, where we’ll start off organically and maybe in a few years. If we like one of those markets, you’ll see something bigger.
Michael Robertson
Interesting color commentary, we’ll keep an eye out for updates on that down the road. Again, appreciate you taking my question. I’ll turn it back.
Operator
[Operator Instructions] The next question comes from Richard Evans with Mara River Capital Management. Please go ahead.
Richard Evans
I just wanted to follow up a little bit on the working capital side, you seem to be targeting 30% to 35% of working capital to sales. But if we look at your biggest U.S. direct payer, they managed to run their business closer to sort of 20% of sales, which is quite a lot of cash. I just wondering why you feel you need to be sort of 10 points structurally higher on working capital to sales?
Ken Zinger
Richard, I’d have to look at their specific numbers, what we’re talking about, has been our historical level. We have some great peers out there. And if you don’t mind, I assume you’re talking about it’s really champion X, is that right?
Richard Evans
Yes.
Ken Zinger
Yes. And they’re a great company. However, one of the things that’s a little bit different about our two businesses, is the end markets that we serve, almost all of their chemistry gets sold into the production chemical end market. And ours we’ve been on record in the past of saying is approximately 50% drilling fluids and 50% production chemicals.
As many of the analysts on this call know, the working capital requirements, and the cash conversion cycle associated with the drilling fluids industry is much higher, and much longer than the production chemical cash conversion cycle. That’s the main reason, Richard.
Anthony Aulicino
On the flip side, because it’s very important, because what we’re talking about, it’s important, it’s cash. On the flip side, the cash investment requirements, CapEx requirements are much lower for the drilling fluids business than the production chemicals business. And as Ken said earlier, that’s what we’re squarely focused on.
Richard Evans
Okay, but why is somebody less familiar with the industry. Why is the working capital higher for drilling versus production?
Anthony Aulicino
Yes, so really simply, and again, that’s the first question from every analyst, when they start covering us. There’s different reasons, but the main one is the following. We have a wellsite, or a production chemical and we’ll either jack or we’ll drop off a tote with a bunch of chemistry. And we drop that off, and we build the clients immediately. And then we wait to collect in drilling fluids, we continue to bring product to the wellsite as they’re drilling the wells and completing the wealth, but that process can take a few weeks. And it’s only at the end of those few weeks, that we sit down with the customer to reconcile exactly what was used. And at that point, we’re able to build them. That’s the main difference.
Richard Evans
Okay, great. Thanks for clearing that up.
Operator
As there are no further questions in the queue, this concludes the question and answer session. I would like to turn the conference back over to Ken Zinger for any closing remarks.
Ken Zinger
Thank you. With that, I’ll wrap up this call by saying thank you to all of our customers and to our employees for helping us produce another record quarter. We’re 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 during our Q4 2022 update in March of next year. 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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