Q4 2020 ChampionX Corp Earnings Call

[music].

Hello, and welcome to the champion X fourth quarter and full year 2020 earnings call. My name is scenario and I'll be the operator for today's call. At this time all participants are in a listen only mode. Please note. This conference is being recorded I will now turn the call.

All over to Mr. Byron Pope Byron you may begin.

Thank you.

Morning, everyone with me today are it's almost on a Sunday from President and CEO of champion X and Ken Fisher, Our executive Vice President and CFO.

During today's call Soma will share some of our company's highlights during the quarter. Ken will then discuss our fourth quarter results and first 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.

I would like to remind our 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 information concerning risk factors that could affect the company's performance and uncertainties that could cause material differences to actual results from those in the forward looking statements can be found in the company's press release.

As well as in <unk> annual report on form 10-K, and those set forth from time to time in champion X's filings with the Securities and Exchange Commission, which are currently available with champion X Dot com.

Except as required by law the company expressly disclaims any intention or obligation to revise or update any forward looking statements. 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 fourth quarter press release.

And slide presentation for this call, which are available on our website I will now turn the call over to Soma to discuss champion X's fourth quarter achievements.

Thank you Brian Good morning, everyone I would like to welcome our shareholders, our analysts and our employees to our fourth quarter 2020 earnings call. Thanks for joining us today.

Hope you and your families are continuing to stay safe and healthy.

I would like to start by welcoming Ken Fisher to our team as you know Kevin joined our executive team on stability first as executive Vice President and CFO and he came to this role already having a deep understanding of our businesses strategy and organization, having previously served Ottawa.

Directors over the last three years, we are excited to have Kevin as part of our team.

Now this past week, Texas and parts of the neighboring states experienced an unprecedented winter storm that left millions of people without power and favorite drinking water, our prayers and support our with our employees customers and communities as we all work to recover from the severe from in desktop.

Our teams have been working diligently to recover after the storm and minimize disruptions to our customers and that wont operations.

Before turning to our business results, let me first take a moment to express to all of our employees how proud I am of how remarkable eval our organization performed during 2020.

Which was in many ways a year. Unlike any other that cover the energy industry and of our growth thats experienced against the backdrop backdrop of the global pandemic, the health and safety of our employees has remained our most important priority and we will continue to take the necessary steps to protect our.

Employees, who have truly been essential workers as they have helped our customers.

Painfully unlocked MSG that our global economic economy needs.

And they did so while delivering what was a record year for our company in terms of safety performance in 2020.

With that let me turn to force total of fourth quarter performance.

And what was just our second full quarter since the successful transformation of motive up legacy apogee and legacy champion X, our fourth quarter results speak to how the strong business portfolio and financial profile of the combined company positions us well to outperform both I guess it's been.

Near term challenges.

The current environment and during the long term global energy transition.

We continued to execute well and realizing about targeted cost synergies and our pipeline of revenue synergy opportunities continues to expand as we leverage our global footprint and that customers recognize the value of our combined offering and delivering the full suite of production optimization technologies.

Products and services.

On page four of the slide deck as a purpose driven company, we always talked with our optimization of Mark Tarr of improving the lives of our customers employees shareholders and communities.

Now more than ever we see our four operating principles being relentless customer advocates being committed to our employees delivering impactful technology in helping solve problems.

Having an infectious culture of continuous improvement as crucial in differentiating our company and serving our internal and external stakeholders very well.

As part of our continuous improvement culture, we periodically conduct employee engagement surveys to gauge how employees feel about the company's culture and progress on key issues as well as get feedback on what we are doing well and what we need to improve.

We just concluded our recent global employee engagement survey and I am pleased to report we had about 4600 survey participants, which is a global participation rate of 71% somewhat employees.

Im also pleased to report that 89% of the participants reported that they feel very aligned to the company's purpose and 88% of the employees reported that they feel the company is committed and upholding the operating principles.

We feel our purpose and operating culture is a sustainable competitive advantage.

We continue to develop and deploy technologies that help our customers achieve their objectives and a recent example of this on page five of the slide deck, you will see the new ESP motor we introduced to the market.

This innovative design helps our customers increase production and fire under half inch route by as much as 150% improving their economics.

Equally important this technology helps our customers with their carbon reduction goals by consuming less power. This.

This technology has received great reception from our customers.

Ken will take you through our fourth quarter financial results. Shortly so I'll just share a few high level thoughts.

In each of our first two full quarters as a new company. Our strong results illustrate the promise of power of our combined portfolio and enhanced global scale.

I love the cost synergy opportunities.

We generated $706 million of consolidated revenue and $109 million of adjusted EBITDA.

Once again delivered robust profit and free cash flow in the fourth quarter at $108 million.

We are encouraged by the double digit sequential revenue growth experienced by both our North American and international operations during the fourth quarter all of those segments posted positive sequential growth led by our drilling technologies segment I would now like to turn the call over to Ken to discuss our fourth quarter.

Our results and our fourth quarter outlook.

Thank you Zelda and good morning, everyone. Thank you for joining US first let me say that I'm very excited to take the CFO rule with champion X Champion X is a unique purpose driven company with great leadership and a talented team it's great to be on that team full time.

Second I would like to thank Jay Nutt I worked with Jay for three years. During my Board service and appreciate his contributions to champion X and its support to meet personally for a smooth transition.

I look forward to getting to know our investors and analysts who I've not yet met over the next few days and weeks ahead.

Today, I will be commenting on the adjusted EBITDA for sequential comparisons. We believe this metric best reflects the business performance of continuous operations.

I will also refer to the pro forma results on a full year and year over year basis to provide for better comparability.

As seen on slide seven fourth quarter 2020 revenue of $706 million.

Dollars increased by $73 million or 11% sequentially with all four of our business segments contributing strong top line growth.

Geographically, we experienced sequential revenue growth in both North America up 11% and internationally up 12 income.

Included in our quarterly revenues were 46 million across supply sales to ecolab.

As mentioned on our prior earnings calls.

Those cross sales are associated with post merger agreements with Eco lab under the transaction agreement.

We do not recognize margin on these sales from an EBITDA perspective, and within our financial statements revenue associated with these sales is allocated to the corporate and other segment we.

We expect these sales will continue for approximately three years from the date of the merger closing.

For the quarter GAAP.

GAAP net income was $7 $5 million, a favorable variance sequentially to the third quarter loss of $7 $3 million, we delivered strong consolidated adjusted EBITDA in the fourth quarter of $109 million.

<unk>, 5% sequential increase.

This increase was primarily driven by higher volumes in all four of our businesses.

We also delivered strong cash flow from operating activities of $121 million during the fourth quarter and generated $108 billion of free cash flow during the period, our free cash flow to revenue ratio of a robust 15%.

Cash contributors included sequentially improved operating earnings and strong working capital performance in the fourth quarter, we invested $13 million in capital expenditures, primarily for maintenance activities at the funds from integration related requirements.

For the full year 2020, we generated free cash flow of $265 million of free cash flow to revenue ratio of 14% excluding $84 million.

Merger transaction and integration related expenses, we generated free cash flow of approximately $349 million or at 18% to revenue ratio.

Turning to the business segments production chemical technologies generated fourth quarter revenue of $447 million up 9% from the third quarter the <unk>.

Sequential increase was driven by strong Latin America orders continued recovery in the North American land business and higher seasonal international volumes geographically North America revenue increased 5% sequentially, while international revenue grew 12%.

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Profitability improved sequentially on higher sales volumes segment, adjusted EBITDA was $78 million up 9% versus the third quarter.

Adjusted EBITDA margin was 17%.

Production and automation technologies segment revenue was $159 million up 16% sequentially due to higher volumes as customer spending could use recovery from the low levels experienced in mid 2020.

Pete.

Also of note digital revenue increased 16% sequentially driven by stronger customer spending in certain U S basins as customers placed a greater focus on leveraging digital solutions to improve cost structure.

And drive efficiencies, we expect to increase adoption of our modular fit for purpose approach through time.

Fourth quarter segment, adjusted EBITDA was $49 million up 17% sequentially.

<unk> team continues their strong execution with fourth quarter segment, adjusted EBITDA margin of 18%.

As Youll recall from our third quarter results were helped by <unk>.

$2 8 million of nonrecurring items, which resulted in a normalized margin of 16% for the third quarter. The success the sequential margin improvement.

It was driven primarily by leverage from higher volumes.

Moving to drilling technologies, they experienced much improved customer demand.

The active U S rig count increased during the fourth quarter.

Segment revenue was $24 million in the fourth quarter, a 50% increase sequentially, which significantly outpaced the 22% U S industry rig count increased during the period.

We saw strong restocking of inventories.

As expected drilling technologies returned to profitability during the fourth quarter as segment adjusted EBITDA was $3 billion up 5 million sequentially from the third quarter driven by the combination of higher volumes and continued rigorous cost control.

Reservoir chemical technologies revenue for the fourth quarter was $31 billion.

45% increase sequentially driven by an increase in global well construction and completion activities.

<unk> adjusted EBITDA was $2 million or $4 million sequential improvement, which was primarily driven by the higher volumes current quarter results were also positively impacted by $1 $6 billion of nonrecurring items during the fourth quarter related to the sale.

A previously reserved inventory.

Merger synergies, we remain laser focused on maximizing merger synergies we have a program management office in place at our Cordoning coordinating activity across the company to capture all potential integration benefits as well as cost improvements and revenue synergies.

Slide eight in the presentation deck summarizes these efforts.

As mentioned in our third quarter earnings call, we expect.

We exit 2020, with a run rate of $70 million to $80 million of targeted annualized cost synergies, we exited the year at 80% at $82 billion run rate.

Further we still expect to achieve our targeted $125 billion of annualized cost synergies within 24 months of the merger closing we.

We will continue to share with you the progress on this front income.

Quarters.

Turning to slide nine and our financial position.

We had $201 million of cash on hand at the end of the year at approximately $551 million of total.

Liquidity, including available revolving credit facility capacity.

As a result of our continued strong operating cash flow, we repaid another $80 million of debt during the fourth quarter, including $23 million of our senior notes, which were retired via a tender offer.

Since the merger date, we have paid down $160 million.

Our debt obligations or 15% of the total outstanding as of the merger date.

At December 31, our net debt to trailing <unk>.

12 month pro forma adjusted EBITDA was one eight times compared to our net leverage of one nine times at September 30.

One additional point on our leverage as we've communicated the merger was a deleveraging transaction.

The combined enterprise is far stronger on leverage metrics than legacy average would have been particularly considering the pandemic induced industry downturn.

Moving forward, we remain highly focused on operating and free cash flow delivery.

Working capital management, and maintaining our strong liquidity, 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 high margin growth initiatives.

And using available excess cash in the near term debt pay down debt to reduce leverage to our long term target of approximately one times debt to EBITDA.

Moving to our outlook for first quarter.

Turn to slide 10.

We expect a sequential decline in revenue in the first quarter with revenues, including Ecolab Cross sales in the range of $650 million to $700 million.

This range does not include the potential impacts of last week's extreme weather in Texas and Oklahoma.

We are working to fully.

Quantify the impacts of that those events the revenue and costs.

The sequential revenue change is primarily driven by typical seasonal trends in our international operations, partly offset by anticipated continued positive momentum in the shorter cycle North American land oriented businesses.

We also anticipate some near term cost pressure as energy and commodity prices have strengthened and oilfield activity levels of increases versus the pandemic driven lows experienced in mid 2020.

The chemical segments are seeing some related raw material commodity inflation. They are in the process of adjusting selling prices, but we expect some margin impact in the first half of the year until your selling prices catch up with the raw material inflation.

Additionally, as we have previously shared we are reinstating certain employee salary and benefits reversing the temporary cost actions taken to address the 2000 to 2020 pandemic related downturn.

We appreciate the sacrifices our employees made to address the health of our business during a very challenging 2020.

Meanwhile, with our synergy initiatives and ongoing cost and productivity actions, we expect year over year margin rate improvement as we exit the year.

For the first quarter, we expect EBITDA in the range of $90 million to $100 million.

Again, excluding any extreme weather impacts.

On this slide we also provide some additional specifics related to our first quarter outlook, we expect capex to be in the range of two 5% of revenue for the year can be slightly front end loaded to the first half of the year due to infrastructure needs to support transit.

Services exits from Ecolab.

Our ESP leased asset pool.

We remain pleased with our robust cash flow performance and we are confident that we will maintain free cash flow.

EBITDA conversion ratio is up 50% to 60% range for 2021.

Before turning the call back to Soma I would also like to mention that the company is on track to clear all six material weaknesses in our financial processes identified in 2019 in the coming 2020 form 10-K filing. This is a result of the significant effort and process.

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Now back to Soma.

Thank you Ken.

Before we open the call to questions I would like to turn your attention to slide 12, I'll pull it back which highlights the five strategic priorities of Tech index on our first quarterly earnings call I mentioned that we will periodically update you our stakeholders on the progress we are making on each of these priorities.

And so we are taking this opportunity today to do just that.

Starting with the realizing our better together potential as Kevin shared with you. We exited 2020, having realized $82 million of our top $125 million of annualized cost synergies.

Remain laser focused on achieving our cost synergy goals and continued to make good progress on this front.

Our pipeline of opportunities and revenue synergies continued to build.

In addition, our recent employee engagement survey indicated that our global employees are overwhelmingly positive about the merger and the combined company.

Strategic product to accelerating digital and digitally enabled revenue streams we.

We are making good progress on development and deployment of our fit for purpose modern let digital solution.

We are continuing to see customer interest in digital solutions that deliver tangible value.

While our overall digital revenue, which includes hardware and software declined in 2020 due to the pandemic related downturn. It is important to note our software revenue grew 8% in 2020.

This indicates the increased adoption of our monitoring predictive analytics failure analysis and optimization software products by our customers.

Turning to leveraging global footprint to growth non U S revenues.

In the fourth quarter non U S revenue accounted for 54% of revenues.

Our pipeline of revenue synergy prospects continues to expand as somewhat artificial lift and chemical team leveraging our combined offering and relationships.

In addition, we are continuing to build occupancy and the capabilities and the prioritized country.

An example of this initiative is evidenced by our first shipment of <unk> from all of our JV plant in Argentina.

We continue to remain very excited about the international growth opportunities.

Strategic product and number four is building our enterprise wide continuous improvement vigor.

Part of our continuous improvement journey, we have established a focus to operational excellence team consisting of expert practitioners of lean principles.

We will deploy these experts to high impact opportunities to help us build out that Ci culture within the organization. Our efforts continue to help us drive productivity across the enterprise that eventually helps us to expand margin and increase cash flow.

The last strategic priority evolving our portfolio obtained the growth.

As evidenced by our third quarter and fourth quarter actions, we continue to use our free cash flow to further pay down debt towards our target level.

That said, we will continue to concurrently evaluate the opportunities to leverage our core capabilities across the energy markets and natural adjacencies to enhance champion excess position for sustained growth through the energy transition.

In addition, we have made further progress towards developing our ESG framework, our ESG priority assessment work is well underway and we look forward to communicating the results with you soon.

Check index is a global production of audience pet technology provider and we are well positioned to be a long term win I don't know about industry and continued to deliver strong financial performance for our shareholders.

We're excited about the opportunity set ahead for our company.

We expect 2021 to be I'm, not going to get a solid performance driven by improvement in North American activity and the strength in the second half of 2021 at the international activity gains momentum.

Finally, I want to take a moment to acknowledge today not who is here with us today at.

As previously announced day will be retiring from champion, but he has graciously agreed to remainder of that through the second quarter of this year to ensure a smooth transition.

I want to personally thank Jay for his leadership and important contributions to our organization over the last several years as we became a standalone publicly traded company and later completed our successful transformational merger with champion X during a challenging period fly with energy industry.

<unk> has been a trusted business partners and all of US here at champion X vision, the very best in his next chapter of life. Thank you Jay.

Again, I want to thank all of our champion ex employees that all over the world for your continued efforts of passion and improving the lifestyle for our customers our employees, our shareholders and our communities I'm proud of the dedication focus and resolve during these unprecedented and challenging environment. It is a privilege for me.

To lead such a great team that that I would like to open the call for questions.

And if anyone has any questions. Please press star then one on your Touchtone phone issue extremely thin the queue. Please press that from kind of a husky. Once again if anyone has a question that is one.

Your first question comes from David Anderson with Barclays. Your line is open.

Hey, good morning, Soma how are you.

Good David.

So I just wanted to start with the production chemicals business could you talk a bit about the international performance this quarter.

You had highlighted Latin America did any other region really stand out to you and.

And I guess kind of more importantly.

Which regions are you expecting to improve the most over the next 12 months internationally as global oil recovers.

Yes, David.

So thank you.

I would say that Covid production chemical technologies pretty.

Pretty much across the board.

All of the international regions improved sequentially and this is the seasonal strength, we see in Q4.

I wouldn't call. This headset at the international recovery I would call. It the seasonal expense so across the board sequentially from Q3 to Q4, we saw strength in all of the International region led by Latin America.

<unk>.

<unk>.

The other regions that you saw.

Strong performance.

Europe.

In fluids Caspian business.

So Russia and then we also saw in the Middle East.

Strong performance high single digit growth in middle East sequentially. So.

We saw across all regions with respect to your question of where do we see as we walked into 2021.

As the international recovery starts hitting in <unk>. The biggest growth I think the areas, we will see will be in middle East West Africa.

And followed by Latin America.

And then staying with our production chemicals side and just looking at your margin profile. We don't have a ton of information going historically, but just kind of looking a little bit further out and.

If we assume that kind of going into next year that a lot of the synergies are going to be in this side of the business. I was wondering if you can just comment on kind of where you're seeing kind of margins can kind of normalize here. If we look at kind of the prior peak, which we don't have a ton of information on it looks like margins will be structurally higher going forward production chemicals.

If that is true.

What is the reasons behind that.

Maybe it's not true, but that's what it looks like anyways.

Yeah. So.

Tenants also here, so I'll ask him to make some comments, but let me give you some cost of thoughts around <unk>.

See the production chemicals margin.

So clearly a fee as we've talked about in the <unk>.

Talent by patient off the margin would be that we would have some margin pressure in the beginning of the year.

Half of the year due to raw material cost inflation, and some cost reset, but the synergies that we talked about a good portion of the synergies comes into.

Production chemicals.

And typically.

The combination of the price improvements the synergies the volume improvements also helped in plant absorption.

We truly believe this business over a longer period of time kind of get to that 20% EBITDA margin. So this year, we would expect to be able to exit the second half of this year.

Better margin than maybe exits into Q4, so that so ken any flow.

Hi.

I think thats it.

Good day.

Lions share of the synergies.

<unk>.

Yes.

They get their prices up.

In response to the industry raw material inflation.

And more volume on the seasonal basis, you should see their margin improved through the second half of the year.

Exit rate versus year end 2020.

But if I could just one little follow up there you just talked about 20% kind of thinking a little bit further out that is structurally higher than it was before isn't it.

That's correct.

Yeah.

You have come up volume equivalent volume perspective, yes. It is and that has got lot to do that the the productivity improvements and definitive benefit okay. That's contributing to that so I think we feel 20.

20% EBITDA margin, it's a very realistic target for us.

In the coming years.

Great. Thank you.

And our next question in queue comes from Chase Mulvehill with Bank of America.

Hey, good morning, everyone, It's Mike, Mike Sabella opportunity to get the extra step away for a SEC.

I was wondering if maybe you could just talk about the ones you guide.

It looks like relatively heavy decrementals in <unk>, you kind of touched on.

The moving pieces there are some costs coming back.

And then there are some synergies there and are you able to just kind of help us quantify.

Some of the moving pieces and then.

If you could just talk about <unk>, if there was anything one offs.

That helps <unk>.

Yes, Mike so with respect to <unk>.

Clearly you know the seasonal strength, we saw in the international.

<unk> was.

Very helpful.

Other than <unk> expected.

And also I would want to remind that in <unk>.

You made a call.

We had a Q3 call we had kind of said that you expect by year end.

Seasonal.

Loss share non holiday weakness, but the north American activity improvement and I won't share gains.

Really outperformed any quantitative weaknesses, we saw you saw the sequential growth.

With almost 16%.

So I think that while Liam.

Average really really helped us as well.

Or with anybody on a boat.

I know with EBITDA.

So as we walk into Q1, the two factors I would say three factors I would say that contributes to this.

The sequential decline one is the international volume decline.

Particularly in PCP.

And we also see not money back in the latter.

Artificial lift segment that's model.

The second aspect is that raw material cost inflation, which we just talked about and that's a function of this.

This is particularly in the PPD, that's a function of commodity prices inflation and.

As Ken pointed out.

It's normal for us too.

Start working on our price improvements and that many of our complex off commodity.

This index, so it's a matter of working those and getting those price improvements in place.

And then the put and that is always a time lag between.

Cost inflation, and then when we get to a lot of price improvement.

And then the third element, which we talked about was b debt.

Cost of reinstatement and benefit reinstatement and.

As Ken pointed out.

So proud of our teams all day employees around the world, who rallied and show that.

We are executing well and they also made some sacrifices and I think with our.

The ton of a strong performances I think it's the right thing for us to make sure that we reinstate some of the benefits in their salaries.

Some of the temporary reductions we had.

But we are very confident.

The productivity the <unk> the price improvement, which we are looking forward to.

Net debt.

Our first half margin impact will be.

Offset.

In the second half you should see that margin progressively improve and we've an exit and a better margin and as we exit the 2021 than even 2020.

Understood. Thanks, and then just a quick follow up so.

You all still are clearly targeting debt reduction will use free cash flow to pay down debt.

It looks to us at least like maybe get two or below that one times target in the back half of this year.

Can you just talk about next steps there that.

You can just talk us through whether you would consider dividends or buybacks and how youre thinking about.

Those two options in returning cash to shareholders.

Yes, Mike.

We have always said debt.

Once we get to what we consider as that.

They have eaten up those target funnel will elaborate dividends was six one times.

We will adopt a balanced capital allocation.

Fluids and attempt to the shareholders and we are very committed to that.

And.

Along with that we had.

Also looking at as part of the energy transition and we are also looking at.

For the pathways for growth and our teams we have a project going on.

We have engaged outside resources to chalk out those pathways for growth in the world of energy transition and you'll hit above this more as we complete those projects.

No.

Get through all that.

Target leverage which is that one times, we kind of set ourselves.

<unk>.

Implement a balanced capital allocation, which includes sort of tend to the shareholders and then along with that.

Make sure that we are.

Investing in pathways to growth.

And based on some of the things we are seeing in the pathways to growth we feel good about.

For our portfolio.

<unk> pathways to growth in the energy transition.

So Kevin anything with that.

Well I think the question was when you think we'd get to the target leverage and I think thats more likely sometime in 'twenty two.

Sure.

Youll recall that we have the first quarter strong.

Comparison versus last year, and so it will drop that compares that first quarter 2020, EBITDA and the leverage calculation. So that will put a little pressure on near term leverage, but the glide path to your point.

It gets us to the one probably sometime in 2022.

Understood. Thanks, everyone.

Thanks, Mike.

Okay.

And your next question in queue comes from George O'leary with peak rate and Colin Your line is open.

Good morning, guys.

Good morning.

D.

Production revenue growth was really strong in the fourth quarter and people have asked about this.

A few different times, so I'll leave net there, but just thinking about the international headwinds that you mentioned in the first quarter.

2021 is that the business that we should expect to see the most revenue most top line pressure in the first quarter and is there any help you could provide an.

Quantifying that for us.

Yeah. So Doug this is.

This is <unk>.

Is this a seasonal.

Issue and.

We have went back and looked at.

But our production chemical technologies.

Business, which is the most international business.

Our portfolio and.

Every day every year Youll see this phenomena Q4 to Q1 debt.

Is that seasonal.

Decline.

It varies from year to year.

How much it is right depending on how strong the Q4 was right. So you'd have varied anywhere from 3% to 5% in the past from the analysis. We have we have seen alright, but again it again depends on how strong that.

So this year it could be a little bit more because of the strong Q4 performance. We had site, but it is a seasonal issue and we see that every.

Every year and.

So so so.

That's what I can say.

No that's very helpful and then just.

Part of what's interesting is the question more born out of curiosity and trying to drill into the numbers on anything but that.

Commentary on a five and a half inch casing and firm power of its system.

I'm curious if you could frame, how often youre seeing those opportunities arise or what the market opportunity might be and then any color on I realize some of that you probably don't want to share, but any broad brush strokes.

With respect to how you get that.

The increase.

Fees on lower alpine and strong resiliency of the system.

Curious that struck me as an intriguing portion of the presentation.

Yes, no. We have we are very excited about this new product with <unk>.

It's really a great innovative design plan that happens well really all flow and important for our customers because it produces.

Drilling and completion costs, so what what.

Alright.

We mentioned that index.

Slide.

In the first year of introduction, we have already have more than 107 valve in operation.

<unk>.

And we think that at the <unk>.

All of our customers are continuing to start looking at carbon reduction goals.

This type of technology is going to get the increasingly popular it's not get some proved developed <unk>, but it's also helping our customers reduce their own.

Carbon footprint.

So I think we are seeing some really great adoption.

With our customers and I think we are very pleased with.

The pace at which.

This technology has been adopted.

Thanks, so much.

Okay.

Thank you.

Okay.

And our next question in queue comes from James West with Evercore ISI. Your line is open.

Yeah.

Thanks, Good morning, guys.

James.

So some of them. It seems like you had some good success in Latin America with cross selling.

Products now with two months under the belt or two quarter. She has been with the bill with the combined company I'm curious.

What regions should we look for that success to occur in kind of mixed and maybe if you have some color on.

How easy or not easy debt was it seems to me that it was the it looks like the synergies are so clear representative so clear.

Probably an easy sale, but I'd love to hear any context, you can provide.

Yes.

I think the.

The opportunity when we look at the pipeline of opportunities we have a very really owe team. The work streams have a really good process by Covid staff unbilled opportunities quantify them. So we have a really good stage gate process that would be no.

What is the total set of opportunities in the pipeline right now, which ones are hot prospect and going after them right. So they're continuing to assemble and then exceed that pipeline deal.

<unk>, it's really a great day.

Kind of prospects that have.

Alright.

So what we have.

I feel that as the pandemic related.

The situations of the seats.

I think we will see more of these opportunities materialize.

We are seeing several of them come through but they are smaller one they.

They come through quickly, particularly in Permian, particularly in.

And we have shared with you a couple of big wins, we have had internationally.

It's a matter of.

The pandemic.

Pandemic related uncertainty repeating.

I think most of these opportunities will come through now the ones, where we are doing.

What we call it the digital.

An archive share left and.

Chemical too to help customers optimize their production we have currently about three.

Solid trials going on and decided that the large customers and there'll be able also pleased about their interest in bringing these to be together.

Help customers.

Optimize stay out of it.

Okay.

Fifth production as well.

I think these are always hard to predict how quickly it will come but let me put it. This way we are encouraged by the pipeline.

Okay, Okay fair enough and then maybe just.

Unrelated question, but with the situation in Texas. So we have seen over the last week or so could you run any color or context on how the restart process given that you have a lot of your equipment and your technology is gonna be used here now the restarting process.

And then we'll be should expect.

Yes, again, we have.

<unk> got about three days into the debt the week.

Week after that storm, so what again, what we are seeing on a preliminary basis here.

I think.

The customers restocked, the wells and we mentioned this in the slide deck.

When you think on the production automation side, particularly octave share left I think debt with a potential that we will be able to recover the volume and we are watching the workover rig activity increases I think than we expect.

Quote activity will increase as customers are starting to bring back the wells and we think that could be some incremental.

Opportunity in March flow of occupancy of net and particularly at Rod lift.

Type of opportunities where customers that are a little place maybe some parts of the pump, but our strength.

The well back on line so we feel.

<unk>.

March that could be yes.

Some uptick in that in that activity.

That's why and production automation, we feel we may be able to cover some up.

That was in Q1.

The effect of production chemicals, IPO games that because it's tied to lost production.

<unk>, it's probably unlikely we will be able to recover.

That lost volume.

Sure and their drilling and completion.

Like in our drilling technologies.

There'll be some impact but.

We still expect our drilling technologies to have a sequential growth from Q4 to Q1.

Okay.

Great. Thanks, so much.

And the next question in queue comes from Marc Bianchi with Cowen Your line is open.

Thank you.

First following up to the line of questioning around kind of the pace of revenue here.

Maybe if we if we take the effect of the storms out out of the equation and just starting to think about where you were in fourth quarter.

It'll be in first quarter, and then where you go from there.

Is there any aspect of the business, obviously, we have it in drilling where theres a catch up of a restocking that if I look at the production automation business had a nice recovery from the lows of 2020 was there a catch up in installation of some list lift equipment and as we get beyond first and second quarter there could be.

A normalization or rig.

Rig count and completion activity, just sort of stays flat from where we get to in the first half you would think that your production automation business sort of does the same thing.

Yes, so mark.

If you recall going back to the third and fourth quarter of last years.

As the production shut down.

<unk> coming back online, we saw that nice recovery and we saw all through the six months we saw.

Sequencing improvement month over month.

And that capped with a 16% Q4 sequential growth so we feel that the.

But bringing back to the Alcon line that type of activity improvement is.

It's behind us so from here on I think it's more of the completions.

Improvement in incremental maintenance spending.

That can happen.

So the North American.

Set aside the winter storm impact.

No.

We haven't quantified it yet but.

If you set aside of them into some impact if you look at January.

We could see that activity level.

Particularly in North America in our production automation technologies continuing.

As we saw in January so again via kit that winter storm and stability, but I do think that debt the strength of the commodity prices I think as customers regroup.

Bringing wells back online and I think the completions activity.

Continuing we will see.

That sequential improvement in occupancy.

<unk> automation technologies.

That even from a market perspective, now aiding that a little bit more would be.

Our share gain.

Opportunities, particularly with our new products and also the digital we do think that the digital will stop but.

Continuing dose taken share growth.

So I feel like.

Our production automation technologies that 2021 is set up well.

From from from from that perspective, now second half I think the commodity price continues to stay.

Yeah.

Robust.

I think we'll continue to see the completions.

Completions activity.

Incrementally improve.

Right.

Thanks, a lot of sense some effects.

I want to go to go to the energy transition discussion now.

Where are you you talked about these pathways that you are exploring and I know, it's still very early days it seems but.

Could you provide any any direction as to where you might be looking and perhaps.

What it is that champion X has within the portfolio debt might have some.

Some application just to maybe give us something to think about.

Yeah, no absolutely I think.

There are three different type of pathways, we are exploring right. So the first one is.

What are the opportunities within our existing markets.

And I'd get transitioned so here a lot of this mark to walk around.

The idea of decarbonization.

Our customers continued to commit.

Carbon production targets on carbon reduction goals and you saw some of the E&ps are already announcing how much money. They will probably start spending on those I think we have a real opportunity there given our technology portfolio.

<unk> net production chemistry technologies, where we have shared before how these chemistries.

Customers reduce their carbon footprint and we are very active debt.

Particularly the large integrated oil companies.

In this process.

And then that combined with our digital if you look at that.

One of the digital technologies and product we have a debt.

It extends the life of the equipment emission control emission management as well as production optimization. So we feel that it's a deep carbonization opportunity within the existing on our technologies already play right.

Very vital into that market just like we've talked about the <unk> pathway and we are setting up for that the second pathway IP as the existing technologies we have.

That can be applied to adjacent markets and be able to share with you before our Diamond Sciences. I think we will continue to share more about that and as and we may deploy more capital into it and that's what I mentioned, when I say <unk> pathways and we are doing some work to see how we can.

What how does that pathway to accelerate that the Diamond Sciences movement and the third element is our digital portfolio. So if you look at our digital technologies, we have and some of the proprietary hardware we have on the platform from the analytics, we have that can be used in other verticals.

And so we are looking at those pathways and how we will unlock the value in that portfolio.

Outside of the oil and gas. So we had we have looking into those cap rates as well. So these are the type of pathway. We're looking at for a major transition.

That's great. Thank you.

Thanks for the answer Jay.

Really appreciate the time and good luck going forward.

Thank you Mark.

And your next question in queue comes from Chris <unk> with Wells Fargo. Your line is open.

Thanks. Good morning, just curious if you can help set some early boundaries for the impact of weather this quarter compared to the 90 to 100 million guidance.

Yes, I mean like I said.

So too early to do that that's why we gave you some qualitative commentary.

So.

Here's how I would think about it right.

Production automation technologies that its a chance that we will be able to recover right volume given.

If the customer increase day of March.

With COVID-19 activities, and so on and so forth.

Production chemical technologies, the way I would think about it as it is tied to the production volume right.

And you can see.

<unk> of our revenues.

We get from the U S market right and you can kind of get a fee influx into the consumable.

The daily use of things so to the extent the production volume has been curtailed.

Kind of think about.

Along those lines you have the golf.

Production was shut down and in parts of the U S.

Right so.

Way to think about it with respect to drilling technologies.

If debt.

One week lots of activity I don't think that will recover but as I mentioned, we have good momentum in that business. So we still expect to deliver.

So I don't see that at the.

Major impactful out.

<unk> 90 to 100 million drilling technology.

The impact of the $90 million to $100 million.

Sure.

Docket I think the primary thing would be I don't know if production chemical technologies.

The last one I.

I don't think.

Customers will make it out yet.

Okay. Thank you and then maybe thinking a little bit longer term here, but it is.

Production chemical technologies the margin in the U S are they dilutive or accretive compared to international just thinking if you get <unk>.

Production growth in 2022 would that be dilutive to margin goals.

If the U S outperforms.

I think would be a surprise compared to my forecast, but could potentially happen with oil prices where they are.

Yes, no I mean, we don't as you know.

We don't give margin details by bi specific.

<unk>.

Region specific.

Basins.

But here's what I would tell you.

Put us when you think of U S and North America that are things, which are built around debt offshore deepwater as Gabe mentioned deal buildup typically higher margin because of the nature of the applications.

<unk> tends to be higher margin because of the gains I need setup. The applications. So that all puts and takes so I wouldn't say that the U S growth will be necessarily dilutive to the margin.

But.

And also we have some really strong synergies and productivity opportunities going on in the U S. So that also will add to it so I wouldn't say that U S growth of net de Luca.

Okay, Thanks, and if I could just squeeze one last one in the year at $82 million on the run rate for the synergies.

Is the remainder mostly going to come in 'twenty, one or is there a big chunk less that's going to hit in 2022.

Most of it will come as we exit 2021.

Again, it's in the second half.

And the reason for that day.

Okay.

It has come from the areas of supply chain from <unk>.

G&A opportunities. So those are already in progress. So most of it will come in the second half so I think it would be.

We will get.

Most of it as we exit 2021, there'll still be some to go as part of the ecolab separation into 2022, but most of it should come through in 2021.

Okay. Thanks for taking my questions.

Thanks, Chris.

And our next question in queue comes from Ian Macpherson with Simmons Your line is open.

Thanks, Good morning, everyone. I'd also like to start with a thank you to Jay and Hello to Ken.

But I wanted to ask a follow up on the question on.

Some on your energy transition pillars, the first one regarding leveraging your existing.

Market opportunities I would imagine that there are probably some R&D.

Activity is unfolding currently with regard to.

Screening your supply chain.

Raw materials and feedstocks for the chemicals business.

Not that that would've been an ESG conquer coming out of ecolab.

I imagine that that would be an area with significant runway for improvement is that an area that is commanding more R&D at this point as well.

Yes.

We have stepped up.

The benefits hyped up right.

He stepped up.

The efforts as well as our resources now are more out of technology resources R&D. As you know we have a big R&D technology growth within those kinds of technologies debt.

We are very focused on.

The.

Engineering and chemistry.

Including.

No.

Things like Green Chemistries and those type of opportunities, yes, absolutely.

Do you have a persuasive.

Pathway towards margin uplift over the course of this year, but you also cited at the beginning some squeeze near term in Q1 with <unk>.

Chemicals.

Raw materials as well as normalizing some of your your payroll.

What is the historical experience with that business in terms of passing through your raw material costs and the chemical side.

Okay.

Hi.

Does that require.

No.

Our chemical technologist team has really done a good job up there.

They are very experienced in doing this because they have been doing it over and over and.

These type of.

Inflationary cost pass throughs. So it typically is.

It's between three to four months, you will see a lag.

And that depends on that type of contract.

What does the customer contact cloud force and so on and so forth. So typically about a three to four month lag.

Okay. That's helpful. Thanks, and then last one from me I know it's late.

Q4 was a big free cash flow result, just wanted to get a refresh if theres any change in your thinking your guidance around <unk>.

Free cash flow conversion out of EBITDA for the full year this year.

Yes, so I'll ask.

I can comment on it.

So yes.

As you know last.

Last year, we increased actually we used to say $40 million to $50 million and we've increased debt last year to $50 to 60, and our teams continued to execute well on those.

And so I think.

But now I feel 50% to 60 it ranges.

The appropriate one as we walk into 2021.

As Ken too.

Maybe give a little bit more color on it.

Yes, I think.

The guidance for the year is that 50 to 60 I think in the first quarter you may see a little pressure on that because some working capital impacts and then.

The capex may be a little bit higher than the debt <unk>.

<unk> level and <unk> some things too.

It helps the ecolab transition.

But overall I think that guidance is very appropriate.

It's baked into our thinking in terms of leverage as well as <unk>.

Shareholder return and high growth investment.

In terms of capital allocation.

Super Thank you Beth.

Okay.

Thank you Ian.

And your next question in queue comes from Blake Gendron with Wolfe Research. Your line is open.

Hey, Thanks for squeezing me on here My first is on artificial lift and specifically ESP is just wondering if you could level set for us the lease versus sale mix.

Some of the Neurotechnology as sales versus lease.

So to the degree that ESP is get damaged as a result of what's happening in Texas are you exposed to any of the replacement costs as it pertains to your lease fleet.

Blake good question so.

Since the days on the call I'll ask Jay to comment on it.

Yeah, Blake so as we've shared before we still have a pretty high proportion of the.

Revenue based on ESP directed at lease while we've been trying to pull that down to more sales. We're still at about a 70 525 mix in terms of lease versus sale and then as you know those lease assets our champion X asset. So we would be responsible for making sure that we provide the replacement part.

Or repairs is necessary to get those customers back into operation.

That's helpful and thanks, Jay and happy retirement. My second question is on the commerciality in the better together cross sell opportunity. It sounds like you've had some real success with some of the smaller customers, which.

Given the operational volatility in some of the logistical constraints that that makes sense you have some trials with some of the larger customers when.

When I think about <unk> and large ISC as I think of having an individual for every type of thing in procurement. So I'm wondering number one are you able to cross train the sales force to sell both of the same time, especially for the large customers.

And how do you think your large customers potentially could change the way that they source.

Production optimization technology moving forward as a result of what Youre doing with the bundling.

Yeah, Blake so I think.

The way we go about this as we have them.

Do you know.

Very strong.

What we call the key account management team.

Chemical technologies business.

So what we do has to be for each of the accounts larger accounts, particularly the integrated oil companies.

We have at.

A focused key account manager and possibly a management team. What we are doing is we are adding to the team and artificial lift expert to the team because.

It does.

Given the technical aspects the depth is important as you have conversations with customers. So we add an option that expect to that team and so now that key account management team is fully capable of.

Selling of a whole portfolio of talking about a whole portfolio to the customers. So that's step number one step number two is the real opportunity with door opening opportunity for US is this combination of ringing.

I mentioned, the digital optics share left and chemical technologies together I think that's that's the day.

A real door opener because.

Customers really see the value in that and so that the trial site startup I talked about in the early part of the Q&A was.

It was all opening doors for us so that's how.

We demonstrate value to the customers and that starts the process.

Understood. Thanks, so much for the time.

Thanks, Nick.

And we have no further questions at this time.

Thank you.

Again, everyone for your continued interest from champion X and we look forward to talking to you on the on our first quarterly earnings call. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Okay.

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And from there.

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