Q3 2020 ChampionX Corp Earnings Call
[music].
Welcome to the champion acts that quarter 2020 earnings Conference call. My name is Adrian and I'll be your operator for today's call.
At this time all participants are in a listen only mode later, well conduct a question and answer session during.
During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note. This conference is being recorded at fair in call over to Byron Pope Vice President up yes, T. at Investor Relations.
Ryan pulp you may begin.
Good morning, everyone with me today are telling us all the founder President and CEO SAPIEN XT, and then Oh senior Vice President and CFO.
During today's call Soma will share some of our company highlights during the quarter.
He will then discuss our third quarter results.
Great synergy capture a day and our fourth quarter outlook before turning the call back to some important summary thoughts on our strategic priorities of the company.
Then open the call for your name.
During today's call, we'll be referring to the slides posted on our website.
I would like to remind our participants that some of the statements. We will be making today are forward looking matters involve risks and uncertainties that cause material difference in our results from those projected in the segment and.
Information concerning factors that could affect the company's performance and uncertainty that could cause material differences to actual results from those in the forward looking statements can be found in the company's press release.
Rather than simply Nexans annual report on form 10-K, and those set forth from time to time in SAPIEN XT filings with the SEC.
Ladies and Exchange Commission, which are currently available that SAPIEN XT dotcom, except.
Except as required by law the companies expressly disclaims any intention or obligation to revise or update any.
Forward looking statements.
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 third quarter press release and slide presentation for this call which are on our website.
I will now turn the call over to Soma to discuss you have in the third quarter achievement.
Thank you Barbara good morning, everyone I would like to welcome our shareholders, our analysts and our employees to our third quarter Twentytwenty earnings call.
You have your family, but doing well thanks for joining us today.
Let me talk about welcoming bite on to our team. We are excited to have him on board to lead over yesterday, I think investor relations effort.
Before turning to our business results. Let me first update you on our ongoing response to the COVID-19 pandemic, the health and safety of our employees remains our highest priority and we have continued to take all necessary steps to protect that in addition to all necessary the caution.
Protective equipment and physical distancing for Peter we have implemented flexible work schedules to support our employees with their personal situation ask who began to reopen this fall I'm grateful to all our employees around the world for their continued dedication through this unique.
Equally challenging period, there continues to demonstrate remarkable adaptability and flexibility during these particularly these uncertain times.
The third quarter, what momentum for our organization asset marked our first full quarter for new company.
The merger of apogee and legacy Tuck in AG have transformed our company into a global leader in production optimization solutions.
The strong financial profile of the combined company has positioned us well to navigate the challenges of the current environment as well as the long term global energy transition.
Our teams are working very well together and executing the remarkably on synergy opportunity our cost synergies are tracking well ahead of our plan and we are starting to see early indication of revenue synergies starting to materialize, but.
We continue to the team very positive feedback about the combined the company from our customers on the potential value, we may bring to them.
The strong results we achieved in the third quarter is a validation of the strength of the combined company. We are truly excited about our future.
On page five of the flight deck, you know us well enough to know that we always part with our organizational purpose of improving lights of our customers employees shareholders and communities.
Its purpose continues to be the mop stop I'm guiding context for our company. We are passionate about our purpose of improving lives and that pursuit is supported by our positive culture. We continue to nurture our positive culture by four simple operating principle.
First we will always be a relentless advocate for our customers if our customers when we've been too.
Second our employees are our biggest trend and we will always remain committed to their safety and wellbeing third we will continue to develop and deploy technology that delivered positive impact of the safety efficiency and productivity for our customers in a sustainable manner.
Fourth we are driven to improve with a culture of continuous improvement and we will always remain humble im curious.
What we do we have highly focused around providing products and technology that drive our customers' success.
To that effect.
On slide six we shared an example of our sustainability use case in which our production chemicals technologist team has helped a lot the ERP operator reduce their carbon footprint, we will be sharing more with you going forward on our Companys SD strategy, but.
For example, illustrates how our customer centric business strategy is ultimately in many ways interwoven with our stakeholders sustainability goals.
Slide seven speaks to the differentiated outcomes for champion Act that stemmed from being fierce advocates for our customers our highly motivated team of over 6500 employees around the world have focused on a collaborative approach to solving problems for our customers.
We have a deeply rooted cultural foundation and we are driven to helping our customers succeed we clearly view our culture as a competitive advantage as illustrated by the results of Kimberlites recently published Twentytwenty artificial lift a player performance report invested points out to our artificial lift business huh.
Having the highest customer loyalty in the industry.
We have received this honor now five years ago.
Dave will take you through our third quarter financial results momentarily, but let me just share a few high level thoughts our strong results demonstrates the power of our transcend the portfolio and expanded global scale as well as the cost synergy opportunities all of which we identified as key reasons.
To bring together our two organizations.
We generated 633 million of consolidated revenue and 87 million of adjusted EBITDA.
We continued our track record of delivering positive free cash flow in an emphatic fashion in the third quarter as we delivered 133 million in free cash flow before transaction expenses and 100 million in free cash flow, including the transaction expenses.
As expected many of our North American oriented product line led by our artificial lift solutions experienced the strong sequential increase in revenue during the third quarter as MP operators began to increase their production oriented opex spending.
This more than offset the impact of Gulf of Mexico Hurricanes on our production chemicals business during the quarter also as anticipated our consolidated international revenue declined during the third quarter as customers further capital spending, but we believe our international business has now stabilized.
Against a challenging market backdrop, our teams executed well on accelerating the cost synergies from the merger as well as our cost takeout efforts in both the legacy Apogee and legacy Champion Act, which helped US post such strong EBITDA and free cash flow generation in the quarter.
Given our strong synergy performance and the pipeline of opportunities ahead of US we have increased revenue, increasing our targeted cost synergies to $125 million, which we still anticipate fully capturing within 24 months of the merger closing.
This increase in synergies is evidence of both the strategic and financial benefits of the combination, but also a testimony to how well the two organizations operate together.
I would now like to turn the call over today to discuss our third quarter results and our fourth quarter outlook.
Good morning, everyone. Thank you for joining us this morning, and I hope everyone is staying safe and healthy.
For our discussion this morning I'll first this be commenting on the GAAP results and then I'll be referencing the pro forma results in order to provide for a stronger comparability.
Seen on slide nine third quarter 2020 revenue of $634 million improved sequentially by 335 million, primarily due to having a full quarter of revenues associated with the legacy champion ex businesses.
Included in our quarterly revenues were $50 million of cross supply sales to Ecolab PC sales, which will continue for approximately three years from the merger closing associated with the post merger arrangements as part of our transaction agreements and.
And we do not recognize margin on these sales from an EBITDA perspective.
Revenue associated with these sales is allocated to corporate and other within our financial statements.
We generated strong cash flow from operating activities of $111 million during the third quarter. This performance is after making significant cash disbursements for transaction and integration expenses of approximately $33 million in the quarter.
Year to date, we've generated $189 million of cash from operations, which is after settling $76 million of transaction and integration expenses.
Our free cash flow to revenue ratio was 16% in the third quarter up from 12% in the previous quarter.
Excluding the impact of transaction expenses to cash more to revenue ratio was 21% in the third quarter compared to 24% last quarter.
Performance was achieved through improved operating earnings sequentially combined with the continued strong working capital contributions as we mean maintained disciplined balance sheet management during the quarter.
In the third quarter, we invested $13 million in capital expenditures, primarily for maintenance activities and some initial capital integration related activities.
Looking at our pro forma results, which are presented in our earnings release schedules as if the merger of apogee and champion ex closed on January Onest of 2019.
Third quarter revenue of $634 million, including the $50 million or cross selling activity.
Sequentially revenue increased $19 million or 3% driven by strong a strong rebound in production and automation technologies volumes of the cyclical trough experienced last quarter combined with the increased cost cross sell volume.
These increases more than offset sequential declines in the other segments.
Geographically as anticipated third quarter revenue increased sequentially in the second quarter pro forma revenue by 12% in North America declined 6% internationally.
For profitability for the third quarter consolidated adjusted EBITDA was $87 million and represents a 38% sequential increase against the pro forma second quarter performance.
The increase was driven by higher volumes in our production and automation technologies business.
Buffett has accelerated cost synergy realization in the momentum of our proactive approach to cost management executed across our business portfolio gear.
During the quarter. We also benefited from some isolated items of approximately $6 million primarily related to gains on fixed asset sales and collections of previously reserved customer receivables.
Turning to production chemical technologies revenue in the third quarter was $410 million, a decrease of $23 million or 5% from the second quarter pro forma results to.
The sequential decrease was driven by the anticipated further decline in international spending and some expected pricing concessions for selected customers.
Production chemicals, our consumable products, which are an integral part of maintaining production levels. So as operators continue to bring production back on line over the coming quarters, we expect to see revenue growth start to return to the segment.
Geographically North America revenue was flat as increases in the US while positive were not as robust as we had anticipated coming into the quarter due to the shut ins in the Gulf of Mexico caused by multiple named storms.
As a result, the growth in the US was offset by a reduction in Canada.
International revenue declined 9% driven primarily by reduced revenues coming from customers in the Middle East Europe and Russia.
Profitability in the segment improved sequentially, even with the lower revenues second.
Segment, adjusted EBITDA was $72 million, which represents a sequential increase of $13 million against the pro forma second quarter performance or 22%.
Segment, adjusted EBITDA margin was 17% in the current quarter compared to 14% in the pro forma second quarter.
The sequential improvement illustrates the strong execution in realization on synergies.
As well as the incremental benefits of the cost reduction actions.
Segment performance also includes $700000 of net benefits from gains on dispositions of fixed assets and other items.
We expect the improved margin profile achieved in the current quarter to continue as we move forward.
Looking at production automation technologies total segment revenue increased 19% and finished at $137 million in the third quarter, an increase of $22 million due to higher volumes across our artificial lift portfolio as customer spending began to recover from the compressed levels experienced in the second quarter.
In digital products production in artificial lift related revenues increased modestly on a sequential basis. The total revenue was lower by 20% as international intelligent completion related revenues declined at a greater pace.
Overtime, we expect our digital revenues to resume growth at a healthy double digit rates. We've previously experienced as customers place a greater focus on leveraging digital solutions to reduce inefficiency and adopt our modular pixel protests approach.
From a sequential geographic perspective, North American and international revenues increased 22% and 10% respectively.
Third quarter segment, adjusted EBITDA was $25 million, which represents a sequential increase of $11 million or 72%.
Our production and automation technologies teams continue to execute superbly has segment adjusted EBITDA margin was 18% in the current quarter compared to 13% in the second quarter of this year.
The sequential improvement was driven primarily by the higher volumes and the benefits of structural cost actions previously executed as well as rigorous cost management.
Were also helped by $2.8 million of isolated benefits, including gains on the disposition at facilities in collections of previously reserved receivables, making the normalized margin for the quarter, 16.2% or 360 basis points higher sequentially.
Moving to drilling technologies segment results continued to be negatively impacted during the third quarter by declining worldwide drilling activity and the related destocking of inventories by customers.
We're seeing improved order activity as we exited Q3 and early into Q4 due to the restocking by some customers and some incremental rig count additions in the us.
Based upon the recent customer order rates, we believe the effects of customer inventory destocking activities are mostly now complete.
Segment revenue was $16 million in the third quarter, representing a decrease of 25% sequentially, but still outperformed it to 35% sequential decline in the U.S. average rig count.
From a profitability perspective segment adjusted EBITDA was negative $3 million in the current quarter down from the positive $2 million in the second quarter.
While segment adjusted EBITDA margin was negative in the third quarter. The levels did reflect offsetting benefits of proactive cost actions executed within the segment, while preserving our core capabilities.
As we look ahead, we expect the business to achieve positive EBITDA in the fourth quarter.
Turning to reservoir chemical technologies revenue for the quarter was $21 million, which represents a decrease of 24% sequentially driven by international revenue decline in continued challenges in North America.
Pro forma segment adjusted EBITDA was a loss of just over $1 million in the third quarter versus the pro forma loss of nearly $10 million in the second quarter of this year.
Second quarter is the current quarter results were positively impacted sequentially by two and a half million dollars of isolated benefits during the third quarter, primarily related to the collection of previously reserved receivables.
We still have work to do to improve the profitability in the segment and our teams are acutely focused on delivering this outcome.
We believe that some of the early impacts of the actions are beginning to show up in the results, we expected as volumes stabilize and start to grow over the coming quarters, we'll continue to see the benefits of the actions contributing to margin improvement.
Before moving over to the balance sheet I'd like to update you on the progress Weve made capturing the synergies from the merger, which is summarized on slide 10 of the presentation.
Our integration is tracking ahead of schedule as you can see in the current quarter results.
Our teams hit the ground running at the merger closed and we're pleased with how the organizations have come together to execute on synergy opportunities to.
The primary drivers of the accelerated synergy savings that contributed to the current quarter earnings improvement came from execution on supply chain opportunities and a fit for purpose lower cost structure as we integrate the business as part of champion acts.
As the teams continued their work through the quarter further synergy opportunities have been identified and the teams are building plans to capture those savings.
These additional opportunities are heavily weighted towards supply chain productivity improvements, but we also see incremental GNS savings to be realized.
Given our improved line of sight towards the additional savings that will come from the cost of goods sold efficiencies in the DNA efficiencies.
When combined with the public company cost avoidance savings that are already being achieved we are now increasing our expected run rate of cost synergies to $125 million versus the previously targeted $75 million within 24 months have merger closing.
When we exit the year, we expect to be in the $70 million to $80 million run rate range.
Beyond the cost savings synergies, we continue making progress capturing the additional revenue growth opportunities made possible by the merger.
In our North American joint sell uplift, we established targeted joint sales teams, which consist of both artificial lift and chemistry sales personnel to deliver the best solutions to the customer.
We achieved our first wins during the quarter, securing new artificial lift business through our chemical technologies resources.
On digital uplift, our digital and chemistry teams have also made progress in bringing cutting edge technologies to legacy champion ex chemical customers in building new combined offerings.
These are small early wins, but it's encouraging to see how our teams have been able to demonstrate the benefits of our combined capabilities in such a short amount of time since closing of the transaction.
On the international artificial lift expansion, we secured our first international wins and we're mobilizing our teams to execute on the contracts six.
Securing these initial artificial lift contracts are important milestones for the organization and it demonstrates the value of our better together approach.
Overall, we're making terrific progress on our cost synergies and achieving initial success on revenue opportunities and we look forward to sharing with you. The continued progress in the coming quarters.
Turning to slide 11 on the balance sheet third quarter, ending debt was $1 billion in cash at the end of the quarter was $171 million during the quarter, we repaid $82 million of debt and the year as a result of the very strong operating cash flow. We were also able to cover the final transit.
Action expenses and still closed the quarter with a healthy cash balance that grew by $30 million sequentially.
While we anticipate further integration expenses, which will be settled from available cash and cash flow from operations. Our final transaction expenses are essentially behind us.
At September Thirtyth, our net debt to the trailing 12 month pro forma adjusted EBITDA was 1.9 times comparable to our net leverage of 1.8 times at June Thirtyth.
Our available liquidity at the end of the quarter was $527 million, including our cash and approximately $355 million of undrawn capacity on our revolver.
As seen in the quarterly results, we continue to be highly focused on managing our cash flow and preserving strong liquidity.
As we move ahead, we will continue to execute on our capital allocation framework with a priority of using our free cash flow to invest in technologies to support our growth initiatives and use and available excess cash to pay down debt and reduce leverage.
Turning to slide 12.
And our near term outlook, we expect to post a modest sequential increase in revenue in the fourth quarter with revenues in the range of 635 million to $650 million we.
We expect to achieve EBITDA in the range of 80 million to $90 million.
On this slide we've also provided some other specifics pertaining to our fourth quarter outlook.
As we head toward the close of the year. We're encouraged by the structurally improved margin of the company and the cash flow profile, resulting from the solid operational performance contributions from strong synergy execution and the benefits, resulting from the cost structure reductions.
As a result, we anticipate we'll conclude the year with a pro forma adjusted EBITDA margin, excluding cross selling revenues higher than the previous trough year of 2016, and it will accomplish this on approximately $250 million lower revenue.
Based on the structural cost base improvements made in the business and in upon the product mix and associated incremental margins applied we believe that we can now achieve pro forma 2019, adjusted EBITDA margin of 18.4% on significantly lower revenue.
Finally, we're pleased with our robust cash flow performance in the improved profile of the combined company due to the synergy execution and reductions in cost structure.
The strong performance through the third quarter gives us further confidence that we will maintain free cash flow as a percentage of revenue of more than 10% for the year.
With that I'll now turn the call back over to sell more for some summary comments before we open the lines for Q in a.
Thank you Jay before we open the call to questions I would like to turn your attention to slide 14 offshore deck and shared with you the strategic priorities of new type in AG, which will drive over organization through these challenging times for our industry and differentiate us from our competitors at the energy transition.
It's in the coming years.
Tempt in excess of five clear strategic priorities as we move forward and vivo pre periodically update you our stakeholders on the progress we are making on each of these priorities.
So let me frame for you what they are and share some of the key elements of the priorities.
First realize all of that together potential.
We are even more excited now about opportunities that lie ahead for our company than VNB foot close the merger in large part the part of the clear evidence of how culturally aligned the legacy apogee and legacy champion next team saw so we will continue to build on our focus of improving lives as we lap.
Average of our collective expertise to bring differentiated production digital on Diamond Sciences solutions to our customers via.
We remain committed and laser focused on realizing our cost synergy goals and we will talk fully leverage shared service opportunities that make sense.
Second strategic priority accelerate digital and digitally enabled revenue streams via.
Realized that digital has become a buzzword in our industry our fleet for champion AG. Our strategic focuses on leveraging our proven digital capabilities to further expanding our base of new digital revenue streams, which are natural extension to our production optimization expertise such as monitoring.
Modeling failure analysis analytical services.
It also means growing our base of digitally enabled the revenue stream by using our digital capabilities as an enabler to further support sales of existing production will be into products weve.
We will actively collaborate and established partnership to fully leverage the industries digital ecosystem to achieve our objectives.
Number three leverage global footprint to expand international sales.
We have shared with you our plans to expand our artificial lift business in key international Geo market by leveraging the elderly truly global footprint tougher Pimco technologies business.
So our strategic priority is to execute superbly to deliver on this objective we are already seeing some early Vince internationally with speak to the opportunity set before us to grow our market share in both artificial lift and production chemicals with I will see on the NRC customers.
Our fourth strategic priority, though.
Those enterprise wide continuous improvement trigger the beauty of the organizational leidy age of legacy apogee and legacy jump Cemex is that both organizations have the velcro fundamental muscle and industrial mindset to pursue continuous productivity improvement.
We will leverage this to drive automated workflow and elimination of waste to ensure that we are currently in the vanguard in terms of how we manage our cost structure.
Even if activity levels events will improve next year and beyond.
We will use digitization as an enabler to automate internal business processes to improve efficiency and reduce costs.
Lastly, you evolve our portfolio for sustained growth, we will continue to leverage our core capabilities across emerging markets and natural adjacencies to position champion eggs for sustained growth through the energy transition.
As we continue to use our through cycle free cash flow generating ability to further pay down debt toward our target level rest assured that we will continue to allocate capital in ways, which are consistent with our value creation framework, which includes a sustainable return mechanism for our shareholders.
Over time, yes.
We are actively developing our yields the framework and roadmap consistent with our corporate purpose and our business clarity.
So as you can see while our recent focus has been on taking actions to reduce cost and integrate our two businesses. We are continuing to keep our attention squarely focused on future and these growth enabling strategic priority.
Today, Chuck annexes more geographically diverse with larger scale expanded customer relationships and a broader portfolio of production optimization products, including cutting edge digital technology. We are a critical partner to our customers in production optimization the structural cost actions.
Taken combined with the synergies from the combination has positioned us plus strong margin performance and free cash flow generation.
While we cannot control the macro environment or our stock price, we can control, our strategic choices and operating execution and on both dimensions I'm incredibly pleased with that champion exists today we.
We are well positioned to be a long term when others in our industry and deliver strong financial performance for our shareholders.
Finally, I want to thank all of our employees around the world for their continued efforts on passion in improving the lives of our customers our employees, our shareholders and our community I'm proud of their dedication focus and resolve as we work to come through this unprecedented environment strong.
Other than be better before I'm proud of their accomplishments and it is a privilege for me to lead us such a great team with that I would like to open the call for questions.
Thank you well now begin the question and answer session.
Do you have a question. Please press Star then one on your Touchtone phone.
If you wish to be emotionally Q threes francyne or the hash key still believes that first question is announced.
Using a speaker phone you may need to pick up the answer that first question. The numbers and also please limit your questions to one question and one follow up question. Once again, if you have a question. Please press Star then one on your Touchtone phone and our first question comes from George O'leary from Tudor Pickering Holt.
Your line is open.
Good morning, guys.
Good morning, George.
Okay.
More of a conceptual question to start off but it's something that I think is under appreciated by investors for the production chemicals business in particular.
You guys have some really strong customer relationships there and I was just curious if you think about.
Longer dated projects on the upstream side, whether its longer dated international or offshore type projects, how early do customers, bringing you in to come help them.
As they seek to develop assets is it in the exploration phase as soon as they have hydrocarbon shows.
Trying to take away as you guys get emphasize the strength of those customer relationships and how early you guys are brought in to help solve customers.
Technical issues as they look to develop assets.
Yes, Darren Great question embedded in those Youre exactly right, the 10th and that the strong relationships our production chemicals team have with customers around the world.
Really plays well into those typically customers up they are developing their new projects. We typically get involved anywhere between two to four years ahead of the first production happens.
So that so because we worked very closely with them in in testing the chemistry, developing very specific chemistries for that particular field in solving the problems for them.
And that relationship continues all the way throughout the production cycle because as you know as the wells continue to mid two that will be different chemistries needed and different problems to fall. So two to four year ahead of the first production is when when everything starts.
Great Thats very helpful Selman.
To provide some context as thinking about going forward a little.
A little bit more of a myopic question, so I apologize, but just thinking about.
The the fourth quarter in the guidance provided there's a decent bit of moving pieces, especially given Gulf of Mexico in backs last quarter and kind of the continued hurricane season. We just saw a later rolled through in Louisiana.
You saw a nice improvement in artificial lift results quarter on quarter, how should we think about.
Yes.
To the extent you can provide more granular color on.
Topline progression by businesses, what's going to be a relative bright spot in what's going to be a little bit softer at any incremental color on the guidance for the fourth quarter would be incredibly helpful.
Yes, George So let me just walk walk you through each.
Each of the segments and so on on the production chemical technologies equity dimension in or the sequentially, we see improvements in the international.
Activity.
And the Gulf of Mexico, adjusted dimension that it's about a 3 million dollar.
Hit in Q3 for US. So we expect you know as of Q4 growth along we expect sequential improvement.
In our us business as well and as you know the the production chemicals technologies products and chemicals don't kick a don't experience the same level of holiday.
Impacts our seasonal holiday impact like you may see an Arctic ship because it is very is the consumable for that production walking them. So in PCT VC boom and in international and VC possible improvement outflow in the U.S.
Then when you go into.
Artificial lift in artificial lift we expect a sequential decline is primarily a seasonal VC that every year now if there is a need for customers.
Improved their operating spending as we go towards the end of the year, we may see an improvement but right now.
Our view is that sequentially artificial lift we'll.
The decline in Q4, which is consistent with.
Prior years.
As you move into drilling technologies.
We expect drilling technologies to be positively.
Up from Q3 to Q4 in the past we as you know we have updated you on the progress of the Destocking, we think that.
It's largely complete.
And we also see.
Incremental improvement than the us rig count, it's also going to help us with the automated.
We have seen now charge.
Three months off improving order rate in drilling technologies. So when you go into August September now into October we are seeing three month of improving order rate I noticed from low levels right to give you an idea August to October our order rates are up about over 30% right. So you can.
See that improvement in order rates happening.
So we think that sequentially drilling technologies will be.
Will be up.
And then when you go into the White critical technologies as you know that our teams are very focused on prudent operational performance and we do think that in Q4, we will see the benefit of that.
Going through so we expect a possible improvement in the in the in the topline, albeit it will be modest, but we do expect that.
By an improvement in our city.
And our next question comes from David Anderson from Barclays. Your line is open.
Great. Thanks, Good morning Sola.
Hey, good morning, Dave.
I just wanted to see if we could dig in a little bit more on the international side of the production chemicals. So let me talk about the mix a little bit I mean, you had guided softer softer in third quarter. So it wasn't a surprise, but just.
Just curious where that decline was more pronounced our sumit offshore power is probably pretty stable, but it was a middle east related I was just wondering you said you expected to go to increase in the fourth quarter. I was just wondering maybe you can talk about more specifically, which regions are bottoming out and starting to increase as we think about going into any year end just speaking about the international side.
Petrochemicals.
Yeah, Dave I think you know from Q2 to Q3, we saw that international declines, particularly in middle East and we saw that but also in Russia Caspian.
Areas. So those are the primary.
Declining areas and as we move into Q4, we see those areas starting to emerge.
Improved up to.
So we are expecting a sequential improvement.
In in in both of those areas.
We are as we are expecting a modest improvement in the Latin America as well and then the.
Talk to you about the U.S.. So it's primarily middle East, Russia is where we saw the sequential decline.
Russia, Caspian and that's where we also see expect to see some improvement in Q4, okay.
Okay. Thank you again.
International expansion of Lifters, there's been a big goal of yours.
I know, we've talked about international cross the cross selling of lifts to chemical it was great to see you announced an award at this quarter just a few questions about how this award came up and how you supply. So was this a prior champion next customer that you are now pulling in low or is that a new customer that part of the package and also I'm just kind of curious on how it worked on that.
Customer side, we've often talked about chemicals procured in one division lifted another is that how it works can you maybe just give us a little bit more color in terms of how this came about and then how we're thinking going forward of accelerating dis revenue synergy opportunity internationally.
Yes.
As we have said before you know the leveraging the international footprint.
We feel that the yearly the initial stages opportunities. We will win is because of the leveraging the existing footprint ox champion acts in those countries, where there is good artificial lift market, it's not necessarily that we are bundling option.
Less than.
Chemicals.
I think that opportunity will come eventually, but we don't.
That is not we are seeing as the first set of opportunities for this particular case, what you mentioned is in a country where champion excess good established operations.
And they have good relationships with the customers.
They have local legal entities they have local operations. So this is this is really again.
It as an option it would artificial lift market, where we don't have a big meaning legacy apogee did not have the.
Peasants. So now we were able to quickly qualify for the bed and participate because we have the local infrastructure, we have the local ability to support it and our teams worked together really well and when I say our teams I'm not just talking about our.
Sales commercial teams, but our supply chain team our legal teams because we know this involve.
How are the customers are going to place. The order we are willing to recognize revenue. So that lot of three as you can imagine detailed work that needs to be done behind it. Our teams worked superbly together to show that we can get this done and this is I think this is a good example of how opportunities.
Double up in those artificial lift market.
They're eight internationally where pemex.
Chemical technologies business already have solid footprint.
And your next question comes from Scott Gruber from Citigroup. Your line is open.
Yes, good morning.
Good morning America.
[noise], so the great cloud hanging over the oil services industry here is concerned the world demand recovers from the pandemic, but theres just so much OPEC spare capacity out there that there's just not much of a need for Capex list to start non OPEC supply growth for some time you guys obviously have some.
Exposure to increase in production, how does OPEC year more chemical sales.
So I was wonder if you could just put some color on that I mean, if we say that OPEC is able to bring back some 5 million barrels a day ignore timing.
What is the impact on production chemicals from that.
Total production growth from the OPUC close group.
Yes, I think of what.
But what we have said before the production chemicals.
Business.
By the way it to.
To think about it is production volume growth right plus.
Plus or minus by things like minus share. So you would expect if the war back.
Production growth increases by 5%.
You should expect us to trend closer to back with our with our production chemicals, because we have good exposure to.
OPEC producers.
So you should expect as the production chemicals side.
Got you yes.
Very differentiated exposure versus low so others and then turning to the us thinking about.
Recovery in interest on your drilling segment.
Obviously, the Destocking restocking cycle has made the drilling business, even more cyclical than the US retail you guys. If advisors, we get data in your presentations over the last couple of quarters I was just eyeballing, the 16 17 year recovery.
Where you use you saw drilling revenues outpaced.
On the U.S. rig count during the first few quarters of recovery.
Yeah, maybe the twist. This time is just how deep the Dow.
The downturn as it has been in years. So the destocking is largely done but.
Yes, given the pullback in crude prices here for just grinding higher on rig count over.
Over the next 12 months, how do you think the.
The the the case of drilling revenues lose relative to rig count that is still our former is is it more in line with the first three quarters of its grind.
Well I definitely think cockpit will outperform in a given the extent of de stocking that have happened that our customers.
So I definitely think it'll outperform which is very consistent with what we've seen in the evthree.
The Destocking restocking cycle before so I definitely think it'll outperform.
[noise] enter next question comes from Chris Sighinolfi from Wells Fargo. Your line is open.
Thanks, Good morning.
Tony.
So margins for drilling and resort chemicals or the laggards here you expect positive EBITDA in the fourth quarter for drilling, but it sounds like reservoir chemicals might still be negative obviously higher revenues are critical lever here, but I wonder if you can help us understand what's left to do on the cost side in these businesses so in that perspective.
Can you give a sense maybe of what Mike.
By 2021 expiry margins could be for those segments if activity remained at current levels.
Good reservoir chemicals gets positive in that scenario and could be drilling get to mid or high single digits. Just curious if you can give a little bit of color there.
Yes, Chris so.
As we shared in the Q3 call our CAD their second quarter call specifically, let me talk about the way of chemical technologies.
No sorry.
Our teams are very focused on executing on what we can control. So the malls around the cost actions, which they are executing on and we've shared with you that dino that near term without meaningful volume improvement.
It it would be difficult for us to get us to a breakeven in the near term, meaning Q3, Q Q3 Q4, but.
But our teams are also working on making this business.
In a more variable cost based.
So which means over and thats going to take a little bit of time that when a deliberate uptime nine to 12 month type of time period to execute on reducing the fixed cost structure. So if the volume doesn't improve I would expect in the nine to 12 month period, when we execute on.
Reducing our fixed cost structure and making it more variable we would get to a breakeven in those type of scenario, but we may get to a breakeven ahead of that because as I mentioned, we are starting to see some volume improvement and we mentioned that Q3 to Q4, we do expect a wireless improvement you know.
The volume comes through we May get there even ahead of that.
So hope that gives you some color.
And then that's how I see it.
Yeah, I think it was a great technology.
It's it's a it's perhaps I mean that as you know very well that business has really.
It does well, let the volume starts returning the Incrementals are will be really high.
And so we do think that you know.
Abbvie in Q4, we will get positive and that math.
While in sequence will improve from there you should see the margin expansion.
Coming through.
Okay. Thanks, that's helpful. And then if we switch to margins for production chemicals. So I think you typically expect about a 4% to 6% pricing headwind. Just curious if you think that is fully already in place the.
The full pricing impacted already in place for production chemicals, and if so is there material upside to that 17% margin. This quarter as you go through 2021.
Yeah, So I would say here.
If you remember in the last call we mentioned that we.
We do expect an incremental approach sometimes so in in Q3.
Sequentially pricing impact them back.
And we did experience as expected so I would say our Q3 performance.
Indicates the pricing.
The full pricing impact in our production chemicals business.
Now with respect to margin improvement in the production chemicals business, yes, as volume starts improving you should.
The incremental margin improvement as we go forward.
And your next question comes from the Nx fearsome sort of Simmons energy. Your line is open.
Thanks, Good morning team congrats on the good results.
Yes.
So I wanted to maybe generally pushed back a little bit to me guiding.
You, obviously, you know and I know, but.
Outlook for you.
You asked last down in the fourth quarter.
Strikes me as a little bit this quarter from at least what I would expect that hearing others that see yes, theres always seasonality, but you know last year for example, completions and well count, we're clearly trending down third quarter and fourth quarter.
And that doesn't seem to be the case from from other sources that I've heard. This this quarter. This year notwithstanding the seasonal impacts do you think that theres any pockets.
Optionality for your U.S. slipped business relative to how you've guided it or am I just.
A stray on this on this thank you.
Yeah, Here's how I say and that is in our diet is not based on what I would say anything be no specifically.
It is the more.
In from the buy typically what we see in the previous years, because that is the seasonal holiday impact.
Now.
As you know we are also in artificial lift a short cycle business. So if the customer activity continues to keep up.
You will see us.
Outperforming.
For example in our October yes.
Continuing to stay strong in activity.
Right. So we are starting at over really well.
In artificial lift.
Now we have also seen in the past that as as we get into past Thanksgiving sometimes.
Sometimes those activities slows down because customers decide to.
That reduce activity during the holiday period. So again it is more based on the our short cycle business and more based on that.
Historically, we always see Q3 Q3 to Q4.
Sequentially lower because of the holiday, but I would say that I'm very encouraged by our October activity. So can be outperform profitable if that keeps up right. So.
But we just wanted to be prudent.
Okay I got it thanks, Jay can I ask you to refresh us on a go forward free cash flow aspirations. If you want to if you want to peg it against EBITDA conversion or revenue conversion. It strikes me that your upsized cost synergy targets should accrete.
Mostly to the bottom line on free cash flow conversion. So could you update us on how to think about that for 2021 for example.
Sure Ian.
So for us for the near term you're right based upon the structural cost changes in the business of synergy realization that we are having we believe that free cash flow conversion from EBITDA or from revenue should be permanently stepped up from where we were in the previous cycles. You may recall that we previously talked about.
2016 to 2019 period of 45% to 46% EBITDA conversion and we believe that we are now comfortably above 50% and probably approaching 60, 60% on a run rate basis in this near term.
Just be here just given the change in the cost structure and the higher earnings that we expect to have going forward. So.
The working capital has been a significant contributor to us in 2020 based upon receivable release and better management of inventory and we believe that we can maintain day.
Today's in the cash cycle and increase the velocity of the working capital turnover. So we would say that we're going to be higher than where we were in the 2016 to 2019 period probably.
In the upper end of 50% to 60% range and even higher as we close above 60% business closed this year.
And our next question comes from Tammy Motion Stephens incorporated your line is open.
Good morning, and thanks for taking my questions.
Good morning, Tommy.
So my wanted to double back to production chemical Technologies' margins.
And again using the impressive.
Level, you put up in the third quarter is kind of a new baseline.
As you look ahead is there a way you could frame what.
A reasonable assumption would be for incremental EBITDA margins there.
And just as a sub bullet.
On your synergies that have yet to be realized.
How much of that is within the PC segment.
Yeah. So.
B, we've talked before.
And a good incremental to think about on our production chemical technologies on a normal basis would be in their high twentys.
Type up an incremental.
Now.
The we do expect our production chemical technologies business.
To be there to be a beneficiary.
A lot of the synergy effort because that is the largest part of our business.
And so so that should continue to contribute to the margin expansion as well. So let me frame. It this way if that you've given.
EBITDA thing to be the same.
There is no revenue improvement, but assume then build the margin on our production Finfet technologies in 2021, SPX that should that should improve as we exit 2021 because of the incremental synergy delivery in that in that segment. So.
Yes, we expect more.
More margin upside to the to the to the production chemical technologies segment because of the energy deliveries.
Very helpful. Thank you and.
A follow up I wanted to ask about Capex for next year I understand it's early the numbers are probably shifting around as you budget, but is there any way you could frame what a reasonable range would be in dollar terms or if not then.
Maybe just refresh us on a percent of revenue basis, what we should think about.
Sure. Tom This is Jay I would say as we were still working through our plans for 2021 as you can imagine but today, we're very focused just on maintenance capital and integration related capital, we're running closer to 2.5% of revenue.
So as we look forward into 2021, if there is not a significant increase in growth in the business. We would not have growth capital and you should be thinking about a similar number in terms of two and a half a percent of revenue for 2021 in this early stage development.
And this concludes our question answer session I will turn the call back over to summer for final remarks.
Okay. Thanks again, everyone for your continued interest in champion X. I'm, joining the call. We look forward to talking to you in our Q4 earnings call. Meanwhile.
Please stay safe and healthy thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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