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spk08: Welcome to the ChampionX first quarter 2022 earnings conference call. My name is John. I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. During a question and answer session, if you do have a question, press 0 then 1 on your touchtone phone. As a reminder, the conference is being recorded. And now I'll turn the call over to Byron Pope, Vice President, ESG and Investor Relations. Mr. Pope, you may begin.
spk10: Thank you. Good morning, everyone. With me today are Soma Somasundaram, President and CEO of ChampionX, and Ken Fisher, our Executive Vice President and CFO. During today's call, Soma will share some of the company's highlights. Ken will then discuss our first quarter results and the second quarter outlook before turning the call back to Soma for some summary thoughts. We will then open the call for Q&A. During today's call, we will be referring to the slides posted on our website. Let me remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore, I refer you to our latest 10-K filing and our other SEC filings for a discussion of some of the factors that could cause actual results to differ materially. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter press release, which is available on our website. I will now turn the call over to Soma.
spk03: Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, employees, and analysts to our first quarter 2022 earnings call. Thanks for joining us today. Before turning to our business results, let me first note that we are approaching the two-year anniversary of our transformational merger. As I reflect on all that our team has accomplished during what has been a dynamic and unprecedented market environment for our energy industry, we have truly been better together. And I would like to express my gratitude to all our employees for their ongoing focus and dedication in serving our customers and community. As a purpose-driven company, we always start with our organizational guiding light on slide number four, which is improving the lives of our customers, employees, shareholders, and community. As an example of our commitment to providing our employees with a truly diverse, equitable, and inclusive work environment, I was recently honored to accept the Energy Workforce and Technology Council Diversity, Equity, and Inclusion Champion Award on behalf of ChampionX. This award is based on a commitment and advocacy for diversity, equity, and inclusion in the energy industry. At ChampionX, we take a proactive approach to diversity and inclusion in company decision-making, recognizing, differences both as a competitive advantage and necessary for meaningful change. One of our four operating principles is our customer focus, which we describe as being relentless advocates for our customers. As you can see here on slide number five, we are proud that Energy Point Research, an independent customer satisfaction research firm, which surveyed more than 3,700 customers of oil field products, recently recognized ChampionX as being ranked first in five specific oilfield categories, including our largest product line of production chemicals and artificial lead, which speaks to the strong customer-centric cultural alignment across our organization. This is the fifth consecutive year that ChampionX has been recognized by Energy Point Research. At ChampionX, we continue to innovate to support our customers to bring affordable and lower-carbon energy to the world. On Flight 6, we are pleased to spotlight our innovative, seamless, water-cooled diamond bearings that help Ocean Renewable Power Company to reliably capture and convert hydrokinetic energy from river currents and ocean waves into renewable emission-free electricity, bringing sustainable and clean energy to millions of people who live in remote communities without access to traditional energy. Many of these remote communities are built near rivers and ocean environments that have the potential to provide carbon-free hydrokinetic power. In the past, these harsh environments have been too challenging for conventional bearing and seal technologies making hydrokinetic power unreliable. Today, our innovations make this hydrokinetic power a reality. With that, let me turn to our first quarter performance. As the cyclical recovery in demand for energy services and equipment has gained further momentum, our business portfolio once again delivered industry-leading top-line growth in the first quarter, both sequentially and year-over-year driven by strong top-line growth both in North America and international markets. In the first quarter, our revenues increased 26% year-over-year and 5% sequentially, demonstrating the strong organic growth potential and execution capabilities of our global business. In North America, our revenue grew 31% year-over-year and 5% sequentially. International revenue grew 19% year-over-year and 6% sequentially. All of our segments contributed to this strong top-line growth. Drilling technology and production automation technologies teams executed well and delivered strong sequential revenue growth of 14% and 9% respectively. Both the segments expanded, adjusted EBITDA margins in the quarter, we expect drilling technologies and production automation technologies to continue to deliver solid margin performance throughout 2022. Our production chemical segment grew 4% sequentially, driven by activity increase and pricing realization. Given the strong top-line start to the year, combined with the increasing pricing realization, we expect to achieve solid full-year growth approaching mid-teens percentage in our production chemicals business in 2022. We expect production chemical technologies segment EBITDA margin to progressively improve through the year, driven by volume and pricing improvement, reaching an exit rate of at least 18% in 2022. Our production chemical team continues to remain focused on execution and delivering a differentiated performance in the industry amidst an unprecedented inflation and supply chain disruption. Thanks to the diligent efforts of our team, ChampionX fully delivered the targeted annualized cost synergies of $125 million exiting the first quarter, sooner than our original objective of within 24 months of the merger closing. We remain encouraged by customer receptivity to our better together efforts with our combined technology products and services offering. Our teams are executing well and gaining traction on price increase realization and productivity to offset the impact of raw materials, labor and logistics related cost inflation that we have experienced in our portfolio of businesses. We are increasingly confident that we will see ChampionX margin expanding throughout the year with adjusted EBITDA margin reaching 18% as we exit 2022. Consistent with our strategic priority of evolving our portfolio, we have started a process to explore strategic options for our reservoir chemical technologies business, and we expect to execute on this in 2022. We are excited about the constructive demand tailwinds in our businesses that support a favorable multi-year outlook for our sector. The positive market fundamentals combined with our top-line momentum and traction on pricing improvement gives us increasing confidence that we will deliver positive top-line and bottom-line growth with meaningful margin expansion and solid cash generation for the full year and beyond. I would now like to turn the call over to Ken to discuss our first quarter results and our second quarter outlook.
spk06: Thank you, Soma. Good morning, and thanks for joining us. Today, I will be commenting on adjusted EBITDA for sequential and year-over-year comparisons. We believe this metric best reflects the business performance of continuing operations. As seen on slides 8 and 9, first quarter 2022 revenue was $866 million, up $44 million sequentially and up 26% year-over-year as we posted solid growth in all our operating segments. Geographically, North America revenue grew 5% while international revenue was up 6%. Included in our quarterly revenues were $34 million of cross-sales to Ecolab. As previously communicated, cross-supply sales to Ecolab are associated with post-merger supply agreements. We do not recognize EBITDA margin on these sales, and the associated revenue is allocated to corporate and other in our financial statements. We expect these Ecolab sales to continue at a declining rate through mid-year 2023, the third anniversary of the merger closing date. First quarter gap net income for the company was $37 million versus $43 million in the fourth quarter, of 2021 and $6 million in the first quarter of 2021. This quarterly income represented $0.18 per diluted share. As seen on slide 9, ChampionX consolidated adjusted EBITDA in the first quarter was $125 million. While down 6% from the previous quarter, it represented a 32% increase versus the prior year period. This year's first quarter was impacted by a severe spike in raw material cost inflation, as well as continuing supply chain disruptions. To offset these factors, we continued to diligently increase our selling prices. In the quarter, we delivered consolidated adjusted EBITDA margin of 14.4%, lower by 178 basis points sequentially, and up 65 basis points over the first quarter of 2021. Our first quarter free cash flow included an increase in our inventories for growth and to support customers. Also included were certain annual compensation costs and employer contributions. Cash from operating activities was a $43 million outflow, and capital investment was $18 million net of proceeds from asset sales. Turning to our business segments, production chemical technologies generated first quarter revenue of $515 billion, up 4% from the fourth quarter, and up 25% year over year. The sequential increase was driven by solid growth in North America. Geographically, North America revenue increased 5%, while international revenue grew 3% sequentially. Segment adjusted EBITDA was $67 million, lower by 19% sequentially, and up 19% higher than the first quarter of 2021. Volume growth and selling price increases drove the year-over-year improvement. Versus fourth quarter, profitability was negatively impacted by the rapid rise in raw material costs experienced in the quarter, despite continued progress on selling price increases. Please refer to slide 10 for more details on the selling price versus raw material cost trends in our chemical businesses. Segment adjusted EBITDA margin was 13%, down 365 basis points sequentially, and 60 basis points below the prior year period. We had a strong revenue start to the year, and we continued to realize benefit from our pricing actions. However, the first quarter spike in raw material costs and ongoing material availability and logistics challenges impacted margins. We continue to drive pricing actions and expect this to contribute to healthy, sequential EBITDA margin rate improvement throughout the remainder of 2022. Production and automation technologies first quarter segment revenue was $220 million and increasing 9% sequentially, primarily due to activity increases, market share capture, and increased pricing. Year-over-year revenue was up 32%. Digital revenue was flat sequentially in the quarter and up 50% year-over-year. We expect strong revenue growth in our digital offerings. We continue to see interest in adoption of our modular, fit-for-purpose technologies as customers focus on leveraging digital to improve cost structures and drive efficiencies. PAT first quarter segment adjusted EBITDA was $45 million, up 14% sequentially, and up 27% year over year. Segment adjusted EBITDA margin was 20.4%, up 104 basis points versus the fourth quarter, primarily due to favorable product mix within the incremental revenue delivered during the period. Drilling technology segment revenue was $57 million in the fourth quarter, up 14% sequentially and 63% year-over-year, as we experienced strong demand growth in North America and internationally. Drilling technologies delivered segment-adjusted EBITDA of $17 million during the first quarter up $4 million sequentially, and more than two times the level of first quarter 2021. Segment margin was a strong 30.5% in the quarter, a roughly 400 basis point sequential improvement, and roughly 960 basis points above the prior year comparable. Reservoir Chemical Technologies revenue for the quarter was $40 million, which was essentially flat sequentially, and up 33% year-over-year. The segment experienced a small adjusted EBITDA loss driven by raw material costs. Turning to slide 11 of the presentation, I'm pleased to report that we have achieved our targeted $125 million of annualized cost synergies poached merger. Our strong synergy focus is enabling us to continue capturing the benefits of our merger including operational functional cost improvements, and with growing momentum, top-line revenue synergies. Moving to our balance sheet, we ended the first quarter in continued strong position, with $177 million of cash on hand and approximately $540 million of total liquidity, including available revolver capacity. During the quarter, we repaid $7 million of debt. And since the merger date, we have paid down approximately $380 million of debt, about one third of the then outstanding total. And at March 31st, our net debt to adjusted EBITDA leverage ratio was 1.1 times. We remain committed to return of capital surplus to our shareholders. In February, we initiated a regular quarterly dividend of 7.5 cents per share of common stock. This dividend will be paid on April 29. We also recently announced that our board has authorized a $250 million share repurchase program. Consistently, we remain laser focused on disciplined capital allocation, delivery of operating and free cash flow, strong working capital management, and maintaining our liquidity and financial position. Turning to slide 12 in our forward outlook, we continue to expect 2022 to be a year of solid revenue growth and sequentially improving EBITDA margin rate. We continue to target the company to exit the year in the 18% EBITDA margin range, up approximately 180 basis points, on the 2021 exit rate. Specific to the second quarter, we expect revenue including Ecolab cross sales in the range of $875 million to $905 million. As stated, with chemical selling prices catching up and exceeding raw materials inflation, coupled with our synergy initiatives and ongoing cost and productivity actions, we expect our adjusted EBITDA margin to improve healthily throughout the year. For the second quarter, we expect EBITDA in the range of $134 to $142 million. In the quarter, we expect PCT will exhibit their historic revenue and margin seasonal trend with continued improvement in selling prices. And we expect PAT will experience sequential revenue growth on strong US activity and realize pricing improvement and continued productivity actions. On this slide, we've also provided some additional specifics related to our second quarter outlook. We continue to expect capital investment to remain in the range of 3% to 3.5% of revenue. And while in periods of revenue growth we will see working capital investment, we remain confident in our to 60% free cash flow to EBITDA conversion ratio through the cycle. Given the growth trajectory of the business, we expect our free cash flow delivery to be weighted to the back half of the year. Thank you, and now back to Soma.
spk03: Thank you, Kent. Before we open the call to questions, I would like to turn your attention to slide 14 of our deck, which summarizes our ChampionX capital allocation priorities. From the time of Legacy Apergy's spin-off from Dover Corporation four years ago, through the completion of the transformational merger between Apergy and ChampionX two years ago to today, we have demonstrated to you our shareholders our consistent and disciplined approach to capital allocation. As we reached our target leverage ratio of one times net debt to EBITDA, which is a through-the-cycle target, we delivered on our commitment to begin returning capital to shareholders by initiating a regular quarterly dividend, which we expect to grow over time with free cash flow growth. In addition, during the first quarter, we initiated a $250 million share repurchase authorization as part of our comprehensive cash flow allocation framework, which further reflects our commitment to return excess cash to shareholders. As the current energy upcycle accelerates, our value creation framework will continue to guide how we allocate capital to both organic and inorganic opportunities. We prioritize high ROI internal investments in maintenance and growth capital projects and initiatives and in innovation enhancing opportunities. We are excited about the initiation of dividend in the second quarter, and we remain committed to increasing value creation for our shareholders through our disciplined capital allocation. To sum it up, we are fully committed to creating value for our ChampionX shareholders. In closing, ChampionX is a global production-oriented technology provider, and we are well positioned to be a long-term winner as our energy industry continues to evolve. Through our differentiated products and technology, attractive growth opportunities, and strong free cash flow generation, we are focused on delivering strong financial performance for our shareholders in 2022 and in the years to come. Again, I want to thank all of our 7,000 ChampionX employees around the world for your incredible dedication to our purpose of improving the lives of our customers, our employees, our shareholders, and our communities. I'm humbled and inspired to lead such an extraordinary team. With that, I would like to open the call for questions.
spk08: Thank you, and I'll begin the question and answer session. If you do have a question, press 0 then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0 then 2. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you do have a question, press 0 then 1 on your touchtone phone. And our first question is from Steven Gingaro from Stifel.
spk01: Thanks. Good morning, gentlemen.
spk03: Good morning.
spk01: So I just would like to know if you could dig in a little further on, I think, particularly slide 10, where you talk about your production chemicals margins and sort of the interplay between inflation and price. Can you just talk about the confidence you have in the supply chain, what you're seeing there, and then maybe anything on the differences between what we'll talk about as price increases versus the surcharges that you've talked about.
spk03: Sure, Stephen. As you know, we have been dealing with inflation and supply chain disruption over the last, I would say, almost a year and a half. What we wanted to provide in this slide is a a view of how the pricing versus raw material has been evolving and a line of sight to why we believe that, you know, starting in Q2, you will see our production chemicals business starting to deliver margin expansion and then exit at a much higher rate of at least 18% as we exit 2022. So we have a very, very detailed process and daily tracking with respect to what's happening with raw materials as well as what is happening with our pricing realization. So we have a strong rigor and cadence around this. So based on everything we are seeing from the forward curves on the indices we track with respect to our raw materials, both commodity and non-commodity items. And then based on all the pricing tracking we are doing and what pricings we have finalized so far and what conversations are going on, including the surcharges we have implemented. So we have laid that out in detail by every quarter to see where we are. And that's what is giving us the confidence, you know, which we wanted to represent on this slide. In addition to that, you know, we are also making sure that our productivity initiatives are continuing to, you know, provide the necessary benefits as well, Stephen. So we feel increasingly confident. You know, I can tell you I'm more confident about this based on the rigor we have, based on the detailed traction we are seeing in the pricing realization on how well our teams are executing on this. So that's what I would say, Stephen.
spk01: Great. Thank you. And then as a follow-up, is there a difference at all in the sort of competitive landscape in that business and sort of the benefits of mix as international seems to be gaining traction? Obviously, the North American market has been strong. I know it's more heavily skewed towards international, but we're starting to get better and better data points on international growth. I'm just curious on how that impacts the business and if the competitive dynamics are any different there. Thanks.
spk03: Yeah. So we have talked about this before, Stephen, that the profitability of the different sources of revenues for PCT tends to be somewhat different based on the intensity of the chemicals being used. For example, you know, offshore tends to be deep water and offshore tends to be more technically challenging and chemical intensive. And so clearly we have a much more differentiated offering, similar in oil sands. So, you know, clearly the mix of revenues do contribute to differentiated profitability. What I'm excited about in the way our production chemicals team has been executing, and you saw that in the first quarter, delivering a strong sequential growth. And we really believe that that's a very differentiated performance in the industry. And that top line momentum which we are seeing plus the pricing realization gives us really strong confidence that we will reach at least a mid-teens type of a growth in our production chemicals business year over year. So clearly it demonstrates a differentiated growth profile. So that combined with our productivity initiative and pricing realization, I truly believe you will see the margin expansion continuing to accelerate in this business.
spk01: Great, thank you for the color.
spk08: And our next question is from Scott Uber.
spk11: Yes, good morning. Good morning, Scott. I wanted to follow on, you know, the conversations around PCT growth with the potential for continued growth in PHT and drilling. And while we expect the U.S. RIPCAM to continue to take higher here, We just assume for simplicity's sake that the U.S. rate count kind of stabilizes here around 700. How much more growth do you think you realize through year-end in PAT and drilling, you know, on rod conversions, on international growth? How much more growth do we realize in those two divisions even if U.S. drilling activity stabilizes?
spk03: Yes, Scott, I think, you know, I mean, you saw in the first quarter that our PAT business grew sequentially, you know, 9%. And we are seeing good momentum in that business, continuing to see momentum in that business. You know, you may recall, you know, in 2021, our PAT business grew 23% year over year, you know, for the full year. So with a strong start of 9%, you know, in the sequential, we do expect, you know, our PIT business to deliver another strong year in 2022. And the conversations, particularly with our customers, continue to indicate a good, strong activity, particularly in North America, as well as the international activity continues to grow here. With drilling technologies, as we have said, you know, it is a short cycle business. You know, many of our business short cycle drilling technologies is even more. And in the growth cycles, it will always outperform the rig count. And you saw that in a worldwide rig count on an average grew sequentially about 7% in Q1. And our drilling technologies business grew 14%. I know it's more North American weighted because the drilling activity has begun more in North America in the first quarter. And North American recount grew 13% in the first quarter and an average. So our drilling technologies business always will outperform the recount. So I do expect, again, in 2021, our drilling technologies business grew 48%, right? And we do expect, given the strong start in the 14% this year, you know, even if the drilling activity kind of stabilizes at this level, you can see it will still deliver a strong growth given the strong start in the first quarter. And as you know, this business has really performed well in conversions, particularly our drilling technology business. And so we should see solid margin performance as well in the business.
spk11: Got it, got it. Would you expect rod conversions to pick up pace at these higher oil prices or? those get delayed somewhat as people can't run ESPs. What would you expect to see there?
spk03: Yeah, you know, good question, Scott. You know, the rod conversions is a continuous affair, right? And, you know, with the increased focus on in the North American, you know, activity to, you know, maintain production and possibly even increase it, you know, rod lift continues to be an important aspect. So if you look at the 9% sequential growth in artificial lift, we saw solid growth both in all of our artificial lift offering, but particularly in rod lift and ESP. So our teams are executing well. So I do expect rod lift to have another strong year. Combination of both some of the rod lift conversions continue to come through, as well as the increased spending to maintain the existing production in the rod lift wells as well.
spk11: Got it. If I can just squeeze one more in. Ken, you mentioned, you know, confidence in the 50% to 60% free cash conversion rate through cycle and how, you know, this year you're going to be second half weighted with the free cash realization just given the working capital build. Do you think you'll still be able to achieve at least the lower end, you know, of the 50% to 60% in 22? Or is working capital going to be too much to bear to hit that lower end?
spk06: Yeah, we've been clear, I think, that that's a through-the-cycle target. And so in growth periods, you will see some call on working capital. We saw that in first quarter as 22s a year of strong growth. I think what you'll see as the year plays out, a much more modest call on working capital in second quarter. and we would expect to be free cash flow positive in 2Q and then still very much focused on that range with strong delivery in the back half of the year, which is quite typical of one of these years of kind of the growth trajectory in the cyclical recovery. So we remain very focused on that goal.
spk11: Got it. Appreciate it. Thank you.
spk06: Thanks, Scott.
spk08: Our next question is from Dave Anderson from Barclays.
spk05: Hey, good morning, Soma. So in your guide for the 18% year-end margins in chemicals, how are you assuming costs to go from here? Are you expecting costs? Does that assume costs moderate? Do they go down? Can you just help me understand how you're thinking about that cost progression within that 18% margin by year-end?
spk03: So Dave, as I mentioned, we have a detailed tracking mechanism for all of our commodities within our chemicals business so that we are constantly watching those forward curves. So if you look at what those are indicating right now, the cost of our raw material costs are going to remain at the levels what we are seeing today through at least Q3. And then in Q4, there is a modest decline those indices are showing today as of, you know, in particularly the non-commodity items. So it's not a very meaningful decline. So it's, you know, but there is still some decline, you know, that these raw materials are showing as we get into Q4. So it's not the raw material decline is not a big contributor to our margin expansion efforts here. Our biggest contributor to our margin expansion efforts is our pricing realization.
spk05: Right. That makes sense. And then if I compare kind of how the margins were back in 19, where we have kind of similar revenue levels, you're doing kind of, we don't have a huge amount of data, but kind of 18, 19% margins during that timeframe. How has the mix changed between now and then? I think one of the efforts you've talked about in past quarters was, I guess, sort of high grading some of that revenue and sort of coming from a margin potential. Can you just help us understand that revenue mix a little bit better in chemicals today versus where it was, say, three years ago?
spk03: Yeah, you know, so I think, you know, our revenue mix has probably moved more positive towards, you know, what I would call it our higher margin areas and particularly around deep water, oil sands, which, you know, so over a period of the last two, three years, our teams have really done a great job executing on share gains, in those areas. So that's why we feel increasingly confident about the 20% EBITDA margin on this business, because if you look at the progression of margin, we are confident we'll exit at least 18% in the PCT business this year. With further price contribution as well as some more volume growth next year, you could see how the line of sight of getting to 20% is a reality in this business. So the mix of business, I would say today versus before, is more exposed to the higher margin activities.
spk05: All right. If you don't mind, I'm going to squeeze one more in here. Scott did it, so I guess I get to do it too. I'm just curious on the pricing side on the Lyft side of the business. We're seeing signs of pricing all throughout kind of the services side. There's not a ton of equipment out there. Is it different? How is Lyft looking today in terms of, I guess, the ability to get equipment? Are things tight in that market? Are you confident you can start pushing price, or is this going to take a little bit longer compared to other kind of service product lines we're seeing today?
spk03: Yeah, I think, you know, it varies by a little bit by the particular type of lift, as you would imagine, because, you know, there are certain types of lifts which are, you know, have still more capacity in the market. But for the type of lifts we are on, like ESPs and the differentiated performance we have in broad lift, I would say that, you know, today we are able to continue to you know, cover the inflation. You know, this business is already in the track of margin expansion. So I would expect this business to continue to, you know, perform solidly on the margin side, you know, above the 20% mark. And, you know, we have said before this business can perform somewhere between 20% to 22% margin. And with volume growth, I think you should see this business continue to deliver solid performance in that range. Thank you. Thanks, Dave.
spk08: And our next question is from Ian McPherson from Piper Sandler.
spk04: Thanks. Good morning, Soma, Ken. Good morning, Ian. You highlighted the diamond-bearing applications in hydrokinetics and also mentioned the strategic review for the reservoir chemicals just thinking I just wanted to hear how you were thinking with regard to You know the portfolio of the enterprise and whether you want to or you're contemplating using the balance sheet to advance champion X's progress into you know new new energy verticals renewable or otherwise and you know how that pipeline of opportunities has evolved just given the volatility of the market and, you know, a lot of business valuations moving around recently.
spk03: Yeah, no, thanks, Ian. So first on the diamond bearings, our efforts on this is very much, you know, as we have said before, organically focused efforts, you know, because we strongly believe we have this diamond sciences capability which we wanted to expand into other verticals. I want to be clear that this is very much an organically focused effort, and our teams have been, as we have talked before, our teams have been focused on few of these type of applications. We have talked about cutting tools. We are continuing to stay focused on it. We are focused on diamond bearings for industrial applications, which we consider this to be one of those in the industrial applications. So it's very much an organically focused effort. With respect to any type of investments in energy transition type things, for us, it's very much focused on organic efforts. And then any type of investment in our energy transfers, similar to our emissions portfolio, is going to be small and tuck-in. You know, we are not contemplating any, you know, our focus is on continuing to sustain growth more organically as well as to continue to be focused on return for our shareholders at the same time. So we are not planning on any, you know, as we have laid out in our capital allocation framework, any inorganic opportunities will be a small tuck-in technology-oriented that enhances our existing capabilities. So that's what I would say.
spk04: That's great. Thanks, Soma. That's good for me. I think the margin guidance is clear now and constructive, so I appreciate the details there, and I'll turn it over. Thanks. Thanks, Ian.
spk08: Our next question is from Taylor Zucher from Tudor Pickering and Holt.
spk07: Hey, Soma and team. Thanks for taking my questions. We've covered margins in really all the segments, but just a lingering question on drilling technologies. It feels like, well, strong top-line momentum through Q1 feels like 2022 could look pretty similar to either 2018 or 2019 from a top-line perspective. Margins in the low 30s versus, you know, sort of high 30s EBITDA margins back then. So I'm just curious, don't want to pin you down on timing, but curious, you know, if there's any dynamics at play this cycle that would prevent you from getting back to those sort of mid to high 30% type EBITDA margins moving forward. Thanks.
spk03: Yeah, and I think, Taylor, for us, it is a question of continued volume growth, right? You know, the mix of revenues, as you know, we also, our drilling technologies now includes the bearings, the diamond bearing side. While the diamond bearings business, you know, margins are, you know, accretive to Champion X margins, but compared to our diamond cutters insert margin, it's still slightly lower than that. So I would say the thing that is what you're seeing there is diamond bearings as a little bit of a mix in the business now than compared to 2018 levels. But as you move into, as the volume continues to grow, we are confident this business continues to increment at the low 40s. As the volume continues to grow, this business will continue to expand margins appropriately from the current level of 30%. So that's what I would say.
spk07: Yeah, got it. Makes sense. Thanks for that. And just a quick follow-up on capital allocation. So you've given us a pretty detailed rubric on how you're thinking about all things capital allocation. You've been very clear you're going to return surplus cash to shareholders above and beyond likely the existing dividend moving forward at some point. And I'm just hoping you could give us a bit more color on how we should be thinking about what surplus free cash flow actually means. Obviously, in Q1, the working capital dynamics took free cash flow negative. But as you pointed out, through the cycle, that should reverse course and get back to the typical really healthy free cash flow conversion type ratio for Champion X moving forward. So You add on top of that asset sales, sounds like you might get hopefully a little bit of cash for RCT, strategic process. So just putting all the puzzle pieces together, I'm just curious if you could help us think about what surplus free cash flow or surplus cash actually means for ChampionX moving forward.
spk03: Yeah, sure. You know, I mean, as you saw in the slide 14, we laid out that framework. So clearly, for us, this business is capable of generating that 50% to 60% free cash flow to EBITDA conversion through the cycle. And periods of times of growth, like what we are seeing, there will be a quarter-to-quarter call on working capital, which is what we see. As Ken mentioned, we expect to generate positive free cash flow in Q2, and then a strong, you know, free cash flow delivery in the second half. So our view on the surplus cash is obviously, you know, our priority is to, you know, make sure that we support the organic growth and then, you know, make sure that we continue to programmatically improve our dividends, right? As free cash flow grows, we feel confident that we can continue to improve, increase the increase our dividends with the growth of our free cash flow over a period of time. And then, for us, the surplus cash flow will be anything beyond that, we will consider opportunistically the best way to return to shareholders, whether we have a $250 million stock repurchase program, that gives us that flexibility to return cash, clearly. So any surplus cash beyond that for us, we will see the right mechanism to return through the stock repurchase, which we already have. We said that we'll also consider a special dividend. So I feel that as we work through 2022 and get beyond, you'll see our return to our shareholders starting to pick up pace.
spk07: Understood. Thanks for the answer, Soma. Sure.
spk08: And our next question is from Neil Mehta from Goldman Sachs.
spk09: Thank you for all the color here today, Soma and team. I just wanted to build on that slide 14. If I think about your comments last quarter, you indicated that if you look at the energy sector over a long period of time, it hasn't necessarily create a ton of value through share repurchases. This cycle, maybe it's a little bit different. It seems to be working better. Now, as you think about deploying that $250 million buyback, do you think of it more opportunistically when the stock is trading very dislocated versus its intrinsic value? Or do you think of it more like some of the customers of yours are doing right now, which is more ratable and doing it on an ongoing basis? Do you have a It's a high-level question, but curious on your philosophy around share repurchase.
spk03: Yeah, you know, as Neil, you correctly pointed out, you know, for us, you know, the programmatic way of returning capital for us will be the dividends. So as we look at the stock repurchase authorization, you know, for us, you know, we have an internal, we have established an internal process, you know, to look at how we evaluate the repurchase. So for us, when we have a surplus cash, which we will have from time to time given the free cash flow generation potential of this portfolio, clearly for us this $250 million authorization will be an opportunistic way to return that surplus cash. And I do believe that the the continued capital discipline in the industry is an important data point for us to look at the stock repurchase as an important way to return capital. So it will be opportunistic. And then we have a process internally to do that. And I think that's how we use that. So it will be, if there's a dislocation of the stock price, you know, that's clearly an opportunity. But even otherwise, you know, given the capital discipline in the industry, you know, there will be reasons to consider, for us to consider, you know, continue to use that stock repurchase.
spk09: Thanks, Soma. The follow-up is your international portfolio statement. just would love your perspective of what you're seeing in different regions of the world in terms of the pickup and activity. And are there any pockets you're more or less bullish on from a revenue growth perspective?
spk03: Sure. No, I think, you know, we are, we are, you know, I would say that if you look at across the sector, I know we have, we are more bullish on the international side, clearly, you know, in the Middle East, And we are bullish on that. We are also seeing good activity in Latin America. So that's another area of growth. So we expect all of the areas to grow, but it's just a degree of which ones are more than the others. So clearly, Middle East and Latin America, we are seeing good growth momentum. I think, you know, for us specific to Asia Pacific probably is where I would say the, you know, in the lower amount of growth and partly because of, you know, our own, you know, exposure there as well as the market activity there as well is probably I would say is the lowest is in Asia Pacific. We expect good growth in Caspian.
spk02: uh this year as well so so and then gulf of mexico uh we have bullish on as well okay that's great thank you so much sure yeah our next question is from case mulvihill hey good morning so much thanks for uh squeezing me in here um i guess the first question is is really you know on pct You know, obviously you took up your outlook for 2022 revenue. I think the last quarter's conference call, you talked about high single digits and now you're talking about mid-teens. And, you know, so I guess, you know, first question is, you know, the better top line outlook, you know, how much of that is, you know, better pricing versus kind of, you know, better volume. And then, you know, the second kind of question related to pricing is really around, you know, surcharges and price increases and, You know, just how sticky you think these will be if you start seeing some raw material cost deflation and less supply chain friction, you know, later this year and into 2023.
spk03: Yeah. So, you know, on your first question of how much of the revenue increases volume and price, you know, well, we probably are not going to provide a very specific split of that. But I would say, Chase, that, you know, both are contributing. You know, clearly both are contributing. And I can tell you in the first quarter revenue growth of sequential growth of 4%, we had both volume growth as well as pricing growth. And as the pricing realization gains traction for us through the year, I would say that the pricing realization will contribute more to the growth than the volume as the quarters go on, but we still expect volume growth in the business. The follow-up to how sticky are these pricing and if raw materials prices start coming down. Just like we talked about, we have different types of contracts with our customers and I would say Just like what you saw in the up cycle of pricing where there was a delay for us to get pricing, we'll also hold on to the pricing longer, number one. And number two, I would also say that we would be able to typically, given our contract versus businesses that are contracted versus not contracted, I would say we should be able to hang on 50% to 60% of this pricing as time goes on.
spk02: Okay, perfect. The unrelated follow-up here, could you update us on the international lift strategy? I mean, obviously, post-emerger, you really wanted to get some better penetration on the international lift side. So what kind of success have you had recently? And I don't know if you've got any data points that you'd be willing to share about recent growth for the international lift just so we can kind of benchmark it against what we're seeing out there on the overall market for lift and international.
spk03: Yeah. So, you know, you may recall, you know, the last year we kind of communicated. So with respect to the synergy side itself, right, you know, our plan is to update on a yearly basis how we are doing on the revenue synergy aspects. So last year, you may recall, we delivered 30 million of revenue synergies of new wins due to synergies, and out of which 6 million was international. And we expect that to really accelerate this year, and we are seeing good signs of that. Now, with respect to our growth internationally, I would say, you know, let me say, in production automation technologies, you know, international business outside of North America in the first quarter for us sequentially grew about 13%. So it's a, you know, I mean, again, it's a, to remind, you know, the split is, you know, 80% of our business in PAT, a little over 80% of the business is is North America, and the remaining is international. So in the first quarter, international grew faster.
spk02: Yep, okay, that makes sense. I'll turn it back over. Thanks, Oma.
spk03: Thank you.
spk08: We have no further questions at this time.
spk03: Thank you, everyone, for joining the call today. We are excited about where we are at ChampionX and the accelerating top-line momentum, our pricing realization, delivering margin expansion, and we are very focused on shareholder return based on the programmatic dividend we announced, as well as we continue to execute on our free cash flow with surplus cash to be able to be in a position to return that as well as either through stock repurchase or consideration of special dividends as well. So we are excited about the future of StampionX, and thank you for joining, and we look forward to talking to you again in the next quarter.
spk08: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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