CES Energy Solutions Corp

TSX:CEU

Earnings Call Transcript 2018-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the CES Energy Solutions Corp. Third Quarter 2018 Results Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Tom Simons, President and Chief Executive Officer. Please go ahead, sir.

[Thomas J. Simons, President, CEO & Director]

Good morning, and thank you to everyone 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 third quarter MD&A and press release dated November 8, 2018, and in our Annual Information Form dated March 1, 2018. In addition, certain financial measures that we will refer to today are not recognized under current generally accepted accounting policies, and for a description and definition of these, please see our third quarter MD&A. So we'll get on to the call. On today's call, we're going to talk about our quarter. We're proud that we achieved record revenue and record EBITDA in the third quarter this year. I'll introduce Tony Aulicino, the new company CFO. I'll give a detailed and succinct operations update, and Tony and I together will give a financial update. We're going to talk about CapEx on today's call, so the buildout over the last 12 years of PP&E that is largely complete for the business now. We're going to talk about our share count. We're going to talk about having sufficient cash flow to stop comp base dilution and about our outlook on our NCIB. We'll talk about EBITDA and margins, and the different segments in the company and where they're at in terms of that. We're going to talk about our balance sheet and, specifically, our intention to use free cash flow over the next several years to pay our line down. We're going to talk about our outlook for industry and the company, and we're going to go into detail on our plan to create value for shareholders. I'll note that, historically, being better than the competitor in our businesses, so oilfield chemicals, created value for shareholders. The oil crash changed that to a degree. And we're going to talk about the discipline that it's going to take in our business as working managers to ensure that we're pursuing lines of business that justify capital and create value for shareholders. So specifically, we are targeting business lines off our platform that, over the cycle, can achieve 15% to 20% EBITDA levels. I'll now get into the operations and technical update for the company. Our Canadian drilling fluids averaged 82 jobs through Q3. July and August in Canada were above that, but September was very wet, which caused about 15 rigs to be waiting on weather through the month. Today, we've got 83 jobs running in Canada. Deep plays like the Montney and the oil sands continue to drive this business line for us. Our ability through unique chemistry, better service on location, a huge book of offsets or experience to help us give better advice and service are what's driving this business. We see that continuing through Q4 with most rigs shutting down for Christmas. Q1 looks to be very busy for us in our Canadian drilling fluid business. We see Canadian customers in general in Canada in '19 living within cash flow. Our strong and slightly increased market share sets up for a good 2019 for drilling fluids in Canada. As I said, our objective for our business lines is to generate 15% to 20% EBITDA margins over the cycle, and Canadian drilling fluids is doing that currently, with no material CapEx needs in the near or medium future for the business.At PureChem, our Canadian production chemical business, operations are going excellent. We've successfully entered treating the Montney and other deep plays that are sour or have paraffin in the condensate in the production, and we've penetrated the heavy oil market. I'll remind people that our history in PureChem is that it's an organic buildout. We built the brand starting 8 or 9 years ago by building a blend plant in Southeast Saskatchewan and targeting the conventional vertical market to establish credibility of the brand and to be able to build a team of A people. We've successfully got over the hump. We think we've got about 15% of conventional production in Western Canada today. And over the last year, we've successfully gone into treating the Montney and treating heavy oil. The importance of that is you have single wellbores in these horizontals that are producing large volumes of oil, gas and water. They require large volumes of complex chemistry, and they're a single treatment or touch point. So your cost for labor effectively is averaged down and you're mixing more high-margin product. The complex problems and solutions required are what will get PureChem into that 15% to 20% band. Today, PureChem is out of the money, which we knew it would be. And while it isn't the plan to be out of the money, that's what it took to get critical mass and scale across the basin to then get the work where you can make money. Our buildout in Grand Prairie is complete. It gives us lab, rail and blending that can benefit both the deep basin production that's growing and the oil sands.Our future cash flow capabilities are significant within PureChem. It's already positive EBITDA and we believe we can grow and improve the percentage over time, and the only CapEx that would be needed in the business in the near to medium term is rolling stock or trucks. Our blending lab and logistics in Southeast Saskatchewan launched us into the business. Today, we've got infrastructure for blending and manufacturing in storage in Nisku and Grand Prairie. Now we need to win new business in the horizontal production market off a fixed cost base that doesn't need to go up much to service the new work. Sialco and Clear continue to make positive EBITDA contributions in Canada as well. I'll now move on to the U.S. At AES, which is our U.S. drilling fluid business, it continues to make a great contribution to the company. We averaged 116 jobs through the quarter. Today, we have 117 running in the U.S. That includes 78 in the Permian, which sort of unlocked our potential there with our Kermit expansion. We've got 10 running in the Northeast U.S., so that's Marcellus and Utica deep gas. We've got a dozen rigs running in the Mid-Con and 14 running in the Gulf Coast, which includes the Eagle Ford. As I mentioned, our Kermit facility was expanded through the year. We've effectively doubled the capacity or size of that mud plant and put rail and a fuel depot in. We plan to build a second barite mill in the Northeast U.S. in 2019 to support expected drilling fluid growth that we see happening in 2020. We've secured land on the Ohio River in West Virginia. Our expectation is that we'll close on the land around Christmas and then build our second barite mill for the company in 2019. Effectively, what we're doing is preplanning growth of our drilling fluid business in Texas, which we think will need the capacity from our barite mill in Corpus Christi and that we would backfill supply chain in the Northeast, which today is about 6,000 to 7,000 tons of barite a month with that mill in the Northeast U.S. Outside of the mill, very modest CapEx for the business line that is today in that targeted band of 15% to 20% EBITDA. So overall, AES will contribute significant free cash flow through the balance of '18 and in 2019 if today's drilling market holds up in the U.S.I'll now move on to U.S. production chemicals. Jacam Catalyst continue to expand. Treatment Points are up, number of customers is up, sales are up. We're meeting EBITDA targets in the business, again, of the 15% to 20%, and see the business only needing rolling stock or trucks, so like Canada, to grow. Our reaction capabilities in Kansas are significant, and we continue to have about half unused throughput. And our blending in Midland and in Sonora, Texas have lots of unused capacity. We did expand in the quarter our facility in Midland, but that was buying land, getting bleaching on the ground and getting it fenced to park more trucks because we're growing the business.What we need to continue to do in the business is target large-volume, complex horizontal wells for our customers because we can make a difference on problem-solving technology. The margins on the chemicals are better and the volumes are higher. During the quarter, we did see declining frac sales, but we saw growing production chemical sales. We chose through the year to deploy more capital into the U.S. production business to put treating trucks and delivery trucks on the road to take new business. For us, the math goes around on the capital if we're putting 15% to 20% to the bottom line, which we are in this business.I'd like to also update people at this point on our cationic or high-brine frac polymer. We did manage to secure a series of trials through the quarter. We pumped approximately 24,000 gallons of this novel chemistry, so we did 120 stages of fracs in the Marcellus. We were able to reduce friction in the wellbore for the operator, which allowed the pumper to turn up the pumps and place more sand. Now what we need to figure out is if we can make money in the space. Today, we're effectively working to rule in the frac market. While we have the ability to manufacture the molecules that go into slickwater fracs, so friction reducers, scale inhibitors, biocides, shale inhibitors, surfactants, the margins on the product don't justify capital, and even the contribution margin has become increasingly low. So we're sort of on the sidelines trying to find niches through technology that will allow us to sell in that market and justify people and potential capital into that space.I'll now get onto how we're going to run the business to create value. Around CapEx, PP&E has largely been built out over the last 12 years as a public business. It appears, based on what we've spent in 2018 on growth rolling stock or trucks plus maintenance, that the math to keep growing the business at the product price point that can get us to 15% to 20% bottom line EBITDA is about 20 and 20; about 20 in maintenance and about 20 of growth. Ideally, the growth number goes up because you're winning more business at the price point you want, but we're guiding people to expect that, that's around the range that we see in the business where you can win sales at a price that justifies putting new trucks on the road.Around share-based compensation, we plan to treat the equity that we grant our people like cash. And what I mean by that is we're generating enough free cash flow in the business that our intention when we issue equity-based comp is to go into the market and buy that amount of equity and cancel it. So we're not looking to dilute or needing to dilute shareholders to retain and attract talent.Additionally, our NCIB has been active through the quarter. Our view is that we don't want to look back in a year or 2 and regret not deploying the free cash flow to buy shares at these price levels. Around EBITDA and margins. I'll say again for maybe the fifth time, we need to generate 15% to 20% EBITDA margin over the longer term to justify the required CapEx to be in these business lines and to retain, train and hold the people that actually make it all go around. In both Canada and the U.S., drilling fluids is good to go. U.S. chemicals is also good to go. Canadian chemicals, we believe working our plan to grow the percentage while continuing to retain our talented people, we think that we can accomplish that range by targeting deeper horizontals and heavy oil. We do believe that it's a 1- to 2-year process to get to that range. Obviously, we're going to act on market conditions like pricing, if we can, to accelerate that timeline.How we're going to run the balance sheet of the business is to respect the fact that oil and gas is cyclical. Even though our production part of our business is much more durable when oil collapsed than the upstream piece, we want to respect that things can change quickly in the industry. So our objective is to be paying down our line over the next 2 to 3 years with the excess free cash flow we can generate in the business and ideally paying it down by a lot. Our outlook in general for the business in 2019 is that the U.S. is up slightly based on people spending cash flow and the intelligence that we've got from our customers. We think that in Canada, activity is similar to '18, maybe slightly down overall for the industry. But because of our growing market share in drilling fluids and our growth in the production business, we think that '19 in both countries is a slightly up year for the country -- or for the company. We see 2020 shaping up at $60 or better pricing for oil to be a very strong year for the business. Egress is happening in the Permian, which should help our customers realize better pricing. Longer term, we certainly need LNG in pipelines in Canada to get Canadian oil and gas back in gear.If activity levels allow us to execute our plan, we think we can create value by generating significantly more free cash flow than the business requires to sustain and grow. We're going to prudently use that cash flow to strengthen our balance sheet, so pay our line down, and run our NCIB and carefully manage dilution for equity-based comp. We're only going to allocate capital where it's justified by focusing on EBITDA margin. That's what we did before the crash. That's what we're resuming doing in the business now that the PP&E buildout is largely complete in the business. I'm now going to turn the call over to Tony. I'd like to welcome Tony to the company. For our shareholders and listeners, Tony was our banker for 6 years at Scotia. The reason that we're excited about him coming into the business is we think he makes our company better. He has an existing and very constructive working relationship with senior management and the board and our business. And we like his technical background and his financial acumen for the business.Tony, I'll turn it over to you.

[Anthony Michael Aulicino, Chief Financial Officer]

Thanks, Tom. And thank you, everyone, for joining the call, my first call, so I really appreciate the opportunity to continue on the positive trajectory that my partners have built here at CES. So in summary, from a financial perspective, Q3 demonstrated continuation of strong financial results with revenue of $338.5 million and adjusted EBITDAC of $45.6 million, both representing record quarterly results for the company. From a geographic perspective, as Tom mentioned, we're very fortunate to have built out a significant presence in the U.S. through investments in key people and investments in infrastructure that are now largely behind us. So when we look at geographic composition of that revenue, we did again achieve record U.S. revenue of $227.1 million, which represented 67% of total revenue and an increase of $58.2 million or 34% compared to the $169 million of revenue in Q3 2017. Also very important to note is that, that quarterly figure represented a $25.6 million increase or 13% versus our previous record, which was literally last quarter, at $201.5 million, that record set in Q2 2018.All of this growth was underpinned by increased activity and completed investments in U.S. infrastructure and operations, primarily in the Permian, but also very good results in Eagle Ford, Bakken and Marcellus, where we have strong positioning. Canadian revenue of $111.4 million represented an increase of $19.4 million or 17% over the $92 million of revenue in Q3 2017. Both Canadian drilling fluids and PureChem production chemicals made significant contributions, and I echo a lot of what Tom said by noticing that PureChem is definitely continuing to grow into its infrastructure and operational structure. EBITDAC for the quarter was technically $43.1 million, practically $45.6 million, representing a 13.5% margin when we add back a onetime $2.5 million charge related to CFO-related management transmission costs -- management transition costs. We continue to focus on improving margins through optimizing cost structures and product mixes throughout the operations, as Tom has mentioned.Now on to CapEx. CapEx for the quarter was $25.4 million, including expansion CapEx to debottleneck our very active Permian operations. We expect remaining CapEx in 2018 to include key strategic investments of USD 2 million in a Permian-based mud plant to provide expansion in rail capacity; USD 5.3 million for a land purchase related to our Northeast U.S. barite grinding facility; and CAD 4.1 million related to the completion of PureChem's Grand Prairie facility, which is specifically designed to effectively serve the Montney, Duvernay and oil sands. Absent completion of the barite grinding facility, we do not anticipate other significant expansion CapEx in 2019, and we expect CapEx levels to return to below 2017 levels.Also of note, as at September 30, we had a net draw of $149.4 million on our senior facility, representing an increase of $56.4 million from June 30, 2018. The increase was driven primarily by typical seasonal working capital needs, opportunistic inventory purchases and share repurchases. On November 8, we also exercised $55 million of the available accordion capacity to increase availability on our Canadian facility, bringing it up to CAD 180 million, in addition to the USD 40 million on our U.S. facility. Recall that we, like others in the space, voluntarily reduced the size of our credit facility during the downturn, and this change -- this increase brings us back to our facility size pre-2015 when we were also at the approximate $1 billion revenue range. This rightsizing provides ample liquidity to meet our anticipated needs.As Tom mentioned, in Q3, we also repurchased 2.7 million common shares at an average price of $4.57 per share for a total of $12.4 million. And subsequent to September 30, we repurchased 1.3 million additional shares at an average price of $3.60 per share for a total of $4.7 million.As we complete our significant CapEx programs in 2018, harvest working capital and generate free cash flow going forward, we will continue to specifically focus on prudent allocation of capital, including share repurchases, debt reduction, dividend payments and investments in operations.

[Thomas J. Simons, President, CEO & Director]

Thanks, Tony. At this point, we'll turn it over to listeners for questions.

[Operator]

[Operator Instructions] Our first question is from Aaron MacNeil of TD Securities.

[Aaron MacNeil, Analyst]

On a sequential basis, I guess, the U.S. revenues are up about 13%. But drilling fluids operating days are basically flat and so are Treatment Points. So maybe could you comment on what's driving the top line revenue growth? I know you'd mentioned a couple of things on AES, but figured I'd ask for more detail.

[Thomas J. Simons, President, CEO & Director]

No, it's a great question, Aaron. So 2 things, what's driving drilling fluids revenue growth with flat operating days is that you're drilling faster, and drilling fluids revenue is basically correlated to how much rock you drill. And so as customers are improving efficiencies, which we want to take part of the credit for, but as you can drill the well in less days, it just compresses that revenue. So your daily revenue's going up as long as there's continued efficiency gains at the rig, if that makes sense.

[Aaron MacNeil, Analyst]

Okay, got it. And so is it fair to say that you saw a sequential improvement quarter-over-quarter in drilling efficiency?

[Thomas J. Simons, President, CEO & Director]

Yes. Specifically -- and we introduced some new mud technology in New Mexico that helped operators get cement returns to surface on intermediate casing. We were able to roll that out and quite a bit of work that took days off jobs, which, for us, it takes the same amount of product to build that volume of fluid to clean the hole, stop it from sloughing or falling in. And as these horizontal legs get longer, way more lubricants, both chemical and mechanical, to get liners in the lateral section. So dynamics like that have led to getting more holes drilled with the same number of rigs, but the mud revenue is sort of the same as if it was a higher rig count. On the production piece, Aaron, what's happening is that new production that we're winning is different than 10-year-old production because it's all big, multistage fracked horizontal wellbores. So you could have one treatment point that consumes 10 or 100x the volume that an old vertical well does. So we're considering whether we track and release vertical to horizontal production sort of ratios like we used to do when drilling before everything became horizontal, but it's the same dynamic. Those big horizontal wells to treat for production take much more product than an old vertical well, obviously.

[Aaron MacNeil, Analyst]

Okay. And then just one follow-up question. So obviously, variable cost inflation has been a key theme this year. One of your competitors announced an 8% to 15% pricing increase on Friday of last week. And so how do you think that dynamic will shape your outlook, either from a pricing or a market share perspective?

[Thomas J. Simons, President, CEO & Director]

I think they're experiencing what we're experiencing, Aaron. We've had some input cost increases, largely driven by the price of crude going up. And you've got some natural gas derivatives we use as well that prices, fortunately, strengthened a little as well. To get top people to do this work in the field, and that's really what creates the sale and the efficiency for the customer, you have to pay people properly. And so I think our outlook matches theirs. We need to get into this 15% to 20% band in the production business in Canada. We're hopeful that they push that increase through. I don't know if it needs to be that much. Maybe that's a way to negotiate sort of with yourself afterwards by going in at the lower number. But we can see a reason for them needing that. We don't need it today in the U.S., but we would take any increase we could get, obviously. Our outlook has been, Aaron, all along, and we've said this going back to the beginning of the recovery, is we're not big enough in the production market, even though we're #3 on land in North America behind Nalco and Baker. We're not big enough to set the market price. They are. So if Baker goes after Nalco, probably sets up for good things for us. Either you hold the line in the States and win much more work or you go for some in-between increase and hope you take advantage of their bigger increase. And in Canada, I think it's going to be tight because the differentials are so big. The customer's probably going to push back. But they need it, and I'm going to guess, the other big competitor in Canada probably needs it, too.

[Operator]

Our next question comes from Greg Colman of National Bank Financial.

[Greg R. Colman]

Just a couple of real quick ones here. Thinking about CapEx, I appreciate the commentary about a lot of your larger infrastructure buildouts completing in 2018. Just trying to quantify a little bit here. We saw the CapEx in '18 and in '17 and what that was looking like. As it resets to a lower level, should we be thinking about that $35 million to $45 million level that we saw in sort of '15 and '16? Or is that too much of a compression?

[Anthony Michael Aulicino, Chief Financial Officer]

I think that would be a little bit light if you go back to what we've been talking about and some of the numbers that Tom has talked about. We typically do have $20 million to $22 million of maintenance CapEx. We have that Northeast barite grinding facility scheduled to come online over the next year or so, 1.5 years. And that second project, which is our only significant expansion project on the books right now, is expected to cost USD 15 million. And as we continue to win production business in the U.S. based on what we believe is going to continue to happen, we will require that rolling stock, light-duty vehicles and, more importantly, treater trucks to win that new business, hopefully higher-margin business. So I think you're a little bit light. I would look more closely at the 2017 numbers that, I believe, was in that $60 million or $65 million CapEx level total, and we would love to be below that.

[Greg R. Colman]

Great color, Tony. Keeping on that sort of grinding towards free cash flow here. If we see the 2019 shake out how you see it, with Canada being flat, U.S. being up modestly and you guys taking a little bit more market share, how do you see your working capital requirements shaking out in 2019? Should it be largely a flat year for working capital? Or do you anticipate your business mix driving either a release or is it going to be a working capital draw?

[Anthony Michael Aulicino, Chief Financial Officer]

We anticipate it to be significantly lower than what we've seen over the last year.

[Greg R. Colman]

So a release of capital from working capital?

[Anthony Michael Aulicino, Chief Financial Officer]

I think we'll see that, as we typically do from Q1 to Q2. Depending on how we track on certain elements of that working capital, I'd say flat to slightly up on a year-over-year -- from a working capital basis. So a slight increase in working capital year-over-year, but nothing like we saw this year.

[Greg R. Colman]

Got it. Okay. And then just lastly, that's sort of on the uses of capital and the source of capital. I really appreciate the color, Tom, that you provided on sort of a segment-by-segment basis as to who's contributing and who's not. If we put everything in a mix together and think about where margins have trended to now, sitting in sort of the high 12s, are you continuing -- as we go into Q4 and then into Q1, are you continuing to see margin pressures? Or are you kind of at a little bit of a steady state here where with the competitors putting out a little bit of a price increase, cost inflation maybe not being too much of a hit, got a little bit of work to do on the fracking side, are we seeing sort of more stability on the margin side?

[Thomas J. Simons, President, CEO & Director]

Yes. By our math, Greg, we were more mid-13s for bottom line. We got to be careful not to price our self off the work, but we can't subsidize the operation either. Sort of by country and segment, a little more breathing room in U.S. drilling fluids. Our very big competitors are looking to come off bottom on the pricing they locked in at in the crash to get the work. And we're rolling out new technology all the time to get the work, not just on the basis of price. So I think we can hold the line in the U.S. And if drilling efficiencies continue to develop, we may even do better just based on that volume or revenue in a shorter amount of time. U.S. production treating, we have to be disciplined and understand what it's going to cost in terms of manpower and rolling stock to service new business and then price the products and how we're going to deploy the chemistry properly. We think '18 will be indicative. We've been able to grow the business and hold the line on bottom line contribution without pricing. The customer's viewpoint on these big horizontals is you're treating 10x the volume. Don't ask us for more on a unit basis, and you need to live within that condition. If the big competitors can get these big increases, it probably gives us a little room to move on stuff. We're evaluating that in real time, Greg. In Canada, it's tight. We continue to see competitor behavior in drilling that isn't sustainable over the long term. We are doing everything humanly possible to justify pricing that can get us to that 15-plus percent based on technology. We've had a couple of wins on significant RFPs in the Montney in the last 6 months. So I think our value proposition is holding up really good on drilling in Canada. And on production, we know what needs to be done. It's more the big horizontals. It's heavy oil. And it's probably fine tuning our cost structure a snick. But getting pricing in Canada, when the lead story in the Calgary Herald is 30%, they can see downtown and $50 dips. It's tough.

[Greg R. Colman]

Agreed. And I don't think we'd be looking for that increase there. We're trying to figure out where we can put a bottom in on margin progression. It sounds to me as though...

[Thomas J. Simons, President, CEO & Director]

If we can add a point a year in bottom line over the next few years, our best guess is that does not disrupt what we already have. It doesn't disrupt our ability to pick new work up. Short of the competition doing bold things like with Nalco's press release, I think that's probably as good as you can get unless commodity prices go way up.

[Operator]

Our next question comes from Tim Monachello of AltaCorp Capital.

[Tim Monachello, Analyst of Institutional Equity Research]

The new barite facility, just trying to square up how you think that's going to impact your cost structure and sort of returns on that capital in 2020.

[Anthony Michael Aulicino, Chief Financial Officer]

Sure. When we did the analysis -- when the team did the analysis in the summer of this year to get the board to review and ultimately approve the project, the metrics were actually predicating on a WTI environment very similar to where we're at, i.e. that $60 range. And at that time, Tim, I'd have to go back to the specific return numbers. But from a return perspective, we were looking at a 2- to 2.5-year payback on that.

[Tim Monachello, Analyst of Institutional Equity Research]

Okay, that's helpful. And then around the commentary relating to margins on your different segments geographically. Did that suggest -- or the fact that you have margins in both Canada and U.S. drilling fluids and U.S. specialty chemicals within the 15% to 20% EBITDA range, that would suggest to me that your Canadian specialty chemicals business is probably pretty close to the 0% EBITDA range, 0 to 5%. Does that square up with how you're seeing things?

[Thomas J. Simons, President, CEO & Director]

It's not that grim, but it's tight. We want to emphasize that it isn't for lack of a good plan. It's what it took to get into the Montney, into the Duvernay, into the oil sands was the 6 or 8 years of organic buildout in these conventional wells. That's why there's only 2 big players in the business in our view, Tim. There's not many people who have the balance sheet or kind of strength to ride that out to get into the business. So today, we're acting on the PureChem cost structure, and we're targeting these big horizontals and heavy oil, and we think that's what pulls it up. And we know what the results will be because we're doing the same thing in the U.S. today. Not to make light of it too much, but we know what it takes to get there because we have a business doing that today. If you'll allow me, Tim, I'll go into why it's so good in the Montney, why LNG had guys doing high fives in the hallways here. This production is slightly sour and there's paraffin in the condensate. The acid gas, so CO2 and H2S, is highly corrosive. You prevent that corrosion to your multimillion-dollar asset with chemistry. And then the paraffin, as the condensate comes out of the hole and cools, if that paraffin in that condensate breaks out or comes out a solution, it affects productivity of the well by basically plugging the well. But you also get shrinkage in your volume of condensate you sell. So it's a double whammy to the operator. So there's a massive value proposition to stop paraffin from coming out of solution and stop corrosion to these expensive assets. That's why we built Grand Prairie. We can work both the oil sands and these deep plays out of that asset. And it's a beautiful business to be in for treating because it's complex and the volumes are high. And there's basically 2 companies that own the market.

[Tim Monachello, Analyst of Institutional Equity Research]

Got it. Are you still seeing raw input cost inflation? And if you are, what would the outlook for that look like? And can you quantify what you're seeing year-to-date?

[Thomas J. Simons, President, CEO & Director]

Oil-based derivatives are flat or even a little down. And labor costs and logistics costs in different markets are up. There's 2% unemployment in the Permian. My firm view is that the bottleneck there is people. It's not differentials. So we're seeing increases in labor and trucking in the states. Input costs for oil-based mud or all of our production chemicals that have solvents in them, they're pretty flat. And in Canada, base oil costs are kind of market driven more than commodity driven, so they're pretty flat.

[Operator]

[Operator Instructions] Our next question comes from Ian Gillies of GMP.

[Ian Brooks Gillies]

I just wanted to make sure I was understanding some of the margin commentary correctly. Tom, it sounds like based on what you're seeing today, you're hopeful for, call it, a move of 100 basis points higher next year for EBITDA margins and then another 100 basis points the year after, just given some of the headwinds and so forth within all the businesses from a cost perspective.

[Thomas J. Simons, President, CEO & Director]

Yes, I think that's the expectation we're prepared to set, Ian, and think we can meet. We think more than that requires pretty good pricing increases. And today, we don't have customers asking us to do that. So we think that's the best way we can guide people.

[Ian Brooks Gillies]

Okay, that's helpful. And with respect, I guess, specifically to the Permian, I mean, we've seen a bit of consolidation there for some of the smaller production chemicals players. We've seen a release out of Nalco. But I mean, how would you characterize the competitive environment for production chemicals in that specific basin right now?

[Thomas J. Simons, President, CEO & Director]

We've got all the big industrials that came into the space focused on that market. As you mentioned, there are some private equity roll-ups that are out there. Hopefully, they're going to start wanting to make money rather than just have a book of business that someone might buy from them. It's a competitive market, Ian. But you get into the Wolfcamp wells there, there's a lot of issues to solve through treating. So you can make a market for yourself at a price that you can live with if you can get the job done down there. And we have U.S. production chemical leadership for our business residing in Midland. So that's why that business is growing. It's the people that are trusted by the local customers. And then I'd say the thing that we share in common with Nalco and Baker that these PE guys or the mom and pops in that market don't have, is that we're basic in making the intermediates for the products. So we're creating innovation that way. We're creating margin. And I think, maybe most importantly, supply chain of the oil company does not want to buy white-labeled, resold chemicals or sand or anything else. So we can extinguish the need for supply chain to find the manufacturer of the stuff because that's us. And that's what our book is. Our playbook is, use the manufacturing for margin and innovation but also to drive sales by showing the customer that it's not resold product, which implies that they're paying too much.

[Ian Brooks Gillies]

Okay, that's helpful. And I mean, you've mentioned consistently on the last number of calls how being basic is important. Would you be willing to share what the margin degradation would have looked like or maybe some thoughts around what the business would look like had you not structured it that way? Because I do think that's important for the concept of how you've put the business together.

[Thomas J. Simons, President, CEO & Director]

Yes, sure. I -- my psychiatrist would probably say I've got fear of failure, Ian. In '08, '09, we changed out our internal procurement people, recognizing that reselling wholesaler stuff wasn't going to go around when the industry crashed. We were afraid of losing what we had built at that point. So we started buying product ourselves directly from Asia, from manufacturers and actually carrying inventory. In the oil crash -- before the crash, we did about CAD 1 billion and made $177 million of EBITDA. We had to effectively discount everything from 10% to 20% to just stay on the work. All of the ops people, whether it was drilling frac, production or pipelines, they had to be able to take back to management at the E&P that their service providers have given a concession. It didn't matter what you did, you had to discount it or you were fired. So how I would characterize it is, we gave back to the customer most of that EBITDA margin and have now reinvented ourselves by cutting out the middleman by direct supplying or self supplying all these intermediates that go into these finished products. And we're not back to 17% or 18% EBITDA, but we are at 13% and we haven't been able to hardly touch pricing. So if we didn't have reaction capabilities, I don't know, we might make $80 million instead of $180 million.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Simons for any closing remarks.

[Thomas J. Simons, President, CEO & Director]

In summary, I'd like to thank you for your time today. I'd like to commit on behalf of management and the board the discipline that this business is going to take to make shareholders money. So we're going to pursue and take work that can meet the financial targets that we have. We're going to spend money on CapEx that either allows that or sets it up. For example, in PureChem, we're going to use manufacturing to create innovation to win work based on results and science, not just on price. It'll also help us create margin. And we're committed to using the free cash flow the business will create above what it requires to sustain and grow the business to improve our balance sheet and either stop dilution or reduce the share count. And with that, I'll thank you for your time.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.