Q1 2022 ChampionX Corp Earnings Call
Welcome to the champion X first quarter 2022 earnings Conference call. My name is John and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If there are any question and answer session. If you do have a question press zero and one on your Touchtone phone.
As a reminder, the conference is being recorded and I will now turn the call over to Byron, Pope Vice President ESG and Investor Relations. Mr. Cope you may begin.
Thank you good morning.
Everyone with me today are Thomas M. A syndrome, president and CEO of champion X and Ken Fisher, Our executive Vice President and CFO .
During today's call Soma will share some of the company's highlights Ken will then discuss our first quarter results and second quarter outlook before turning the call back to Soma for some summary thoughts.
We'll then open the call for Q&A.
During today's call, we will be referring to the slides posted on our website let.
Let me remind all participants that some of the statements we will be making today are forward looking these matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore, I refer you to our latest 10-K filing and our other SEC filings for a discussion of some of.
Factors that could cause actual results to differ materially are.
Our comments today May also include non-GAAP financial measures additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter press release, which is available on our website.
I'll now turn the call over to Soma.
Thank you Barbara good morning, everyone I would like to welcome our shareholders employees and analysts to our first quarter earnings call. Thanks for joining us today.
Before turning towards business development, Let me first note that we are approaching the two year anniversary of our transformational merger.
As I reflect on the all of that our team has accomplished during what has been the dynamic.
It market environment, while the energy industry we.
We have truly been better together and I would like to express my gratitude to all of our employees, while they are ongoing focus and dedication in serving our customers and community.
At the focus of our company, we always talk with organizational guiding light on slide number four which is improving the lives of our customers employees shareholders and communities.
As an example of our commitment to providing our employees with a truly diverse equitable and inclusive work environment.
Recently honored to accept the NSP workforce.
All of the Council diversity equity and inclusion champion award on behalf of champion at.
This award is based on a commitment and advocacy for diversity equity and inclusion in the energy industry.
At <unk>, we take a proactive approach to diversity and inclusion in company decision, making recognizing differences as a board.
I think the advantage and necessary for meaningful change.
One of our core operating principles is our customer focus, which we describe as being relentless advocates for our customers.
As you can see here on slide number five we are proud that the energy point research, an independent customer satisfaction, but search firm surveyed more than 3700 customers of oilfield product recently recognized <unk> as being ranked first in five specific oilfield.
Categories, including our largest product line of production chemicals, and Opex, yet net which speaks to the strong customer centric cultural alignment across our organization.
Is the fifth consecutive year that <unk> has been recognized by energy point research.
Chuck in that we continue to innovate to support of our customers to bring affordable and lower carbon energy to the world on slide six we are pleased to spotlight our innovative theme that what I'll call. The diamond bearings that help ocean renewable public company.
To reliably capture and convert hydro can I take the energy from the current and also had wave into renewable emission free electricity bring gain sustainable and clean energy to millions of people who live in remote communities without access to traditional.
Energy.
Many of these remote communities are built.
And Washington environment that has the potential to provide competency hydrokinetic power in the past these harsh environment have been too challenging.
Functional bearing and field technologies, making hydrokinetics power unreliable too.
Today, our innovations make this hydrokinetic Paolo a reality.
With that let me turn to our first quarter performance.
As a cyclical recovery in demand for energy services and equipment has gained positive momentum our business portfolio. Once again delivered industry, leading top line growth in the first quarter.
<unk> actually already yielding and yet all year.
Strong top line growth, both in North America and international markets.
In the first quarter, our revenues increased 26% year over year, and 5% sequentially demonstrating the strong organic growth potential on the execution capabilities of our global business.
In North America, our revenue grew 31% year over year and 5% sequentially.
International revenue grew 19% year over year and 6% sequentially.
All of our segments contributed to this strong topline growth.
Drilling technologies and production automation technologies team executed well and delivered strong sequential revenue growth of 14% and 9% respectively.
Both the segment expanded adjusted EBITDA margins in the quarter, we expect drilling technologies and production and automation technologies to continue to deliver solid market performance.
<unk> 2022.
Our products and chemical segment grew 4% sequentially driven by activity increase and pricing relaxation.
Given the strong top line start to the year combined with the increasing pricing realization, we expect to achieve solid full year growth approaching mid teens percent page.
<unk> chemicals business in 2022.
We expect production chemical technologies segment, EBITDA margins to progressively improve through the year, driven by volume and pricing improvement, reaching an exit rate of at least 18% in 2022.
Our product intensive team continues to remain focused on execution and anybody can get differentiated performance in the industry amidst an unprecedented inflation and supply chain disruptions.
That's a deliberate therefore support team champion X fully delivered the targeted annualized cost synergies of $125 million exiting the first quarter.
Sooner than what would've been the objective off within 24 months of the merger closing.
We remain encouraged by customer receptivity to our better together.
With our combined technology product and services offering.
Our teams are executing well and gaining traction on price increase realization and productivity to offset the impact of raw materials labor and logistics related cost inflation that we have experienced in our portfolio of businesses we.
We are increasingly confident that we will see <unk> margin expanded throughout the year with adjusted EBITDA margin, reaching 18% as we exit 2022.
Consistent with our strategic priority of the evolving our portfolio. We have started a process to explore strategic options.
<unk> chemical technologies business, and we expect to execute on this in 2022.
We are excited about the constructive demand paid wins in our businesses that support a favorable multiyear outlook for our sector.
The positive market fundamentals combined with our top line momentum and traction on pricing improvement.
US increasing confidence that we will deliver positive topline and bottom line growth with them.
Meaningful margin expansion and solid cash generation for the full year and beyond.
I'd now like to turn the call over to Ken to discuss our first quarter results and our second quarter outlook.
Thank you Soma good morning, and thanks for joining us today I will be commenting on adjusted EBITDA for sequential and year over year comparisons. We believe this metric best reflects the business performance of continuing operations.
As seen on slides eight and nine first quarter 2022 revenue was $866 million up $44 million sequentially and up 26% year over year as we posted solid growth in all our operating segments.
Geographically North America revenue grew 5%, while international revenue was up 6%.
Included in our quarterly revenues were $34 billion of cross sales to ecolab.
As previously communicated cross supply sales to ecolab or associated with post merger supply agreements, we do not recognize EBITDA margin on these sales and the associated revenue is allocated to corporate and other in our financial statements.
We expect these ecolab sales to continue at a declining rate through mid year 2023, the third anniversary of the merger closing date first quarter GAAP net income for the company was $37 million versus 43 billion in the fourth quarter of 2021.
And $6 million in the first quarter of 2021. This quarterly income represented <unk> 18 per diluted share.
As seen on slide nine champion X consolidated adjusted EBITDA in the first quarter was $125 million, while down 6% from the previous quarter. It represented a 32% increase versus the prior year period.
This year's first quarter was impacted by a severe spike in raw material cost inflation as well as continuing supply chain disruptions to offset these factors. We continued to diligently increase our selling prices in the quarter. We delivered consolidated adjusted EBITDA margin of 14.
<unk>, 4% lower by 178 basis points sequentially.
And up 65 basis points over the first quarter of 2021.
Our first quarter free cash flow included an increase in.
Our inventories for growth and to support customers also included where certain annual compensation costs and employer contributions cash from operating activities was a $43 million outflow and capital investment was $18 million net of proceeds from asset sales.
Turning to our business segments production chemical technologies generated first quarter revenue of $515 billion up 4% from the fourth quarter and up 25% year over year. The sequential increase was driven by solid growth in North America geographically.
North America revenue increased 5%, while international revenue grew 3% sequentially.
Segment, adjusted EBITDA was $67 million lower by 19% sequentially and up 19% higher than the first quarter of 2021 volume growth and selling price increases drove the year over year improvement versus fourth quarter profitability.
<unk> was negatively impacted by the rapid rise of raw material costs experienced in the quarter. Despite continued progress on selling price increases.
Please refer to slide 10 for more details of the selling price versus raw material cost trends in our chemical businesses.
Segment, adjusted EBITDA margin was 13% down 365 basis points sequentially and 60 basis points below the prior year period.
We had a strong revenue start to the year and we continue to realize benefits from our pricing actions. However, the first quarter spike in raw material costs and ongoing material.
<unk> ability and logistics challenges impacted margins.
To drive pricing actions and expect this to contribute to healthy sequential EBITDA margin rate improvement throughout the remainder of 2022.
Production and automation technologies first quarter segment revenue was $220 million increased 9% sequentially, primarily due to activity increases market share capture and increased pricing year over year revenue was up 32% did.
Digital revenue was flat sequentially in the quarter and up 50% year over year, we expect strong revenue growth in our digital offerings. We continued to see interest in adoption of our modular fit for purpose technologies as customers focus on leveraging digital to improve cost structures a draw.
Five efficiencies.
First quarter segment, adjusted EBITDA was $45 million up 14% sequentially and up 27% year over year segment. Adjusted EBITDA margin was 24% up 104 basis points versus the fourth quarter.
Due to favorable product mix with is that.
Incremental revenue delivered during the period.
Drilling technologies segment revenue was $57 million in the fourth quarter up 14% sequentially and 63% year over year.
As we experienced strong demand growth in North America and internationally.
Drilling technologies delivered segment adjusted EBITDA of 17 million during the first quarter up $4 million sequentially and more than two times. The level of first quarter of 2021 segment margin was a strong 35% in the quarter roughly.
400 basis points sequential improvement and roughly 960 basis points above the prior year comparable.
Reservoir chemical technologies revenue for the quarter was $40 million, which was essentially flat sequentially and up 33% year over year. The segment experienced a small adjusted EBITDA loss driven by raw material cost.
Turning to slide 11 of the presentation I am pleased to report that we have achieved our targeted $125 million of annualized cost synergies post merger. Our strong synergy focus is enabling us to continue capturing the benefits of our merger, including operational functional cost improvements.
And with growing momentum top line revenue synergies.
Moving to our balance sheet, we ended the first quarter and continued strong position.
With $177 million of cash on hand, and approximately $540 million of total liquidity, including available revolver capacity.
During the quarter, we repaid $7 million of debt and since the merger date, we have paid down approximately $380 million of debt about one third of the then outstanding total and at March 31, our net debt to adjusted EBITDA leverage ratio was one one times.
We remain committed to return of capital surplus to our shareholders in February we initiated a regular quarterly dividend of seven and a half cents per share.
Common stock.
Evident will be paid on April 29.
We also recently announced that our board has authorized a $250 million share repurchase program.
Consistently we remain laser focused on disciplined capital allocation delivery of operating and free cash flow.
Strong working capital management, and maintaining our liquidity and financial position.
Turning to slide 12, and our forward outlook. We continue to expect 2020 to be a year of solid revenue growth and sequentially improving EBITDA margin rate, we continue to target the company to exit the year in the 18% EBITDA margin range up.
<unk> 180 basis points on the 2021 exit rates.
Specific to the second quarter, we expect revenue excluding ecolab cross sales in the range of 875 million to 900.
And $5 million as stated with chemical selling prices catching up and exceeding raw materials inflation, coupled with our synergy initiatives and ongoing cost and productivity actions, we expect our adjusted EBITDA margin to improve healthily throughout the year for the second quarter, we expect EBITDA in the range of.
$134 million to $142 million in.
In the quarter, we expect PCT will exhibit their historic revenue and margin seasonal trends with continued improvement in selling prices that we expect will experience.
Sequential revenue growth on strong U S activity and realized pricing improvement and continued productivity actions.
On this slide is also providing some additional specifics related to our second quarter outlook.
We continue to expect capital investment to rates remained in the range of three to three 5% of revenue.
And while in periods of revenue growth, we will see working capital investment we remain confident in our 50% to 60% free cash flow to EBITDA conversion ratio through the cycle.
Given the growth trajectory of the business, we expect our free cash flow delivery to be weighted to the back half of the year.
Thank you and now back to Soma.
Thank you Pat before we opened a positive question I would like to turn your attention to slide 14 of our deck, which summarizes our <unk> capital allocation priority.
From the time of legacy apathy spinoff from Dover Corporation point years ago.
Through the completion of the transformation of a merger between apathy and champion X two years ago.
We have demonstrated to you our shareholders.
System and disciplined approach to capital allocation.
As we have each fell a target leverage ratio of one times net debt to EBITDA with a through the cycle target. We've delivered on our commitment to begin returning capital to shareholders by initiating a regular quarterly dividend, which we expect to grow over time with free cash flow growth.
In addition, during the first quarter, we initiated a $250 million share repurchase authorization as part of a comprehensive capital allocation framework.
Further reflects our commitment to the ton excess cash to shareholders.
As the currency and as the up cycle accelerating our value creation framework will continue to guide, how we allocate capital to both organic and inorganic opportunities we find.
Hi, Ottawa internal investments in maintenance and growth capital projects and initiatives and innovation enhancing opportunities.
We are excited about the initiation of dividend in the second quarter, and we remain committed to increasing value creation for our shareholders through our disciplined capital allocation.
To sum it up we are fully committed to creating value for all of <unk> shareholders.
In closing tuck in excess of global production would against that technology provider and we are well positioned to be a long term winner at top of the energy industry continues to evolve.
Through our differentiated products and technology attractive growth opportunities and strong free cash flow generation.
Focused on delivering strong financial performance for our shareholders in 2022, and then they get the comp.
Again, I want to thank all of our 7000 champion of can probably he's out in the world plug you are incredible dedication to our purpose of improving the lives of our customers thought that I'd, probably eats our shareholders and our community.
Humbled and inspired to lead such an extraordinary team.
With that I would like to open the call for questions.
Thank you well now begin the question and answer session. If you do have a question Chris Euro one on your Touchtone phone.
If you wish to be removed from the queue. Please press.
Zero into if.
Using a speaker phone mainly pickup the handset first before question the numbers.
Once again, if you do have a question for zero then one on your Touchtone phone.
And our first question is from Stephen <unk> from Stifel.
Hi, Thanks, good morning, gentlemen.
Good morning.
So I just would like to know if you could dig in a little further I think particularly slide 10, when you talk about your production chemicals margins in terms of the interplay between.
Inflation and price can you just talk about the confidence you have in the supply chain, what youre seeing there and then maybe anything on kind of on the differences between what we'll talk about sort of price increases versus the surcharges that you've that you've talked about.
Sure Steven.
As you know.
We have been dealing with.
Inflation and supply chain disruption.
Over the last I would say almost day yet on behalf.
And what would be what we wanted to provide in the slide.
View.
How.
The pricing versus raw material has been evolving and.
Line of sight to why we believe.
That.
Starting in Q2, you will see our production chemicals business starting to deliver margin expansion and then the exit at a much higher rate up at least 18%.
2022.
So we have a very very detailed.
Process and the daily.
King.
Back to what's happening with raw materials as well as what is happening with our pricing realization.
So we have a strong rigor on cadence around that so based on everything.
We are seeing from the fraud what curve.
First we track the prospective about raw materials, both commodity and non commodity items and then based on all the pricing.
Tracking we are doing and what pricing we have finalized so far and what conversations are going on including the surcharges. We have implemented so we have laid that out in detail.
Quarter to see maybe at and that's what is giving us the confidence.
We wanted to represent.
On the fly.
In addition to that.
Also making sure that our productivity initiatives continue to.
Provided that necessity benefits as well Stephen so we feel increasingly confident I.
I can tell you I'm more confident about that based on the rigs that we have based on the detailed traction we are seeing in the pricing realization.
How well our teams are executing on this.
So that's what I would say Stephen.
Great. Thank you and then as a follow up is there a difference at all.
The sort of competitive landscape in that business and sort of the benefits of mix as international.
Seems to be gaining traction.
Obviously, the North American market has been strong I know, it's more heavily skewed towards international, but we're starting to get better and better data points in international growth I'm, just curious on how that impacts the business and if the competitive dynamics are any different there. Thanks.
Yeah. So.
<unk> talked about this before.
Stephen that the profitability of the different.
Cost of revenues, what PCT tends to be somewhat different based on the high intensity.
Chemicals.
Being used.
Example.
Offshore tends to be deepwater and offshore tends to be more technically challenging and chemical intensive and so clearly we have a much more differentiated offering similar in oil pan so so.
Clearly the mix of revenues do contribute to differentiate that profitability what I'm excited about.
Our production chemicals.
And our team has been executing and you saw that in the first quarter.
Delivering a strong sequential growth and we strongly have read.
We really believe that that's a very differentiated performance in the industry.
And that top line momentum, which we are seeing plus the pricing relaxation.
Gives us.
A really strong confidence that we will reach at least a mid teens type of a growth in that.
In our production chemicals business year over year, so so clearly demonstrate a differentiated growth profile.
No.
That combined with productivity.
Productivity initiatives and pricing relocation I truly believe you will see the margin expansion continuing to accelerate in this business.
Great. Thank you for the color.
Yes.
And our next question is from Scott Gruber.
Yes, good morning.
Good morning, Scott.
I wanted to follow on the conversations around PCT growth with it.
The potential for continued growth in Ta.
In drilling.
And while we expect the U S rig counts continue to tick higher here can you just assume for simplicity sake that the U S rig count kind of stabilizes here around 700, how much more growth do you think you'd realized through year end in P&C and drilling.
Rod conversions on international growth.
More.
We realized most of the divisions, even U S drilling activity stabilizes.
Yes, Scott I think.
I mean, you saw in the in the first quarter.
Out of the business.
Business grew sequentially.
9%.
And we are seeing good momentum in that business continued to see momentum in that business I know you made a call.
In 2021, our <unk> business grew 23% year over year.
For the full year, so with a strong start up 9% in the.
Sequential we do expect our business to deliver another strong year in 2022.
And the conversations, particularly with our customers continue to indicate.
Have a good strong activity, particularly in North America as well as international activity continues to grow here.
But drilling technologies as we have said it is a short cycle business.
Many of our business upcycle drilling technology gives us even more and in the growth cycle.
Always outperformed the rig count and you saw that in a worldwide rig count on average grew sequentially about 7% in Q1, and our our drilling technologies business grew 14%.
It's more north American weighted because the drilling activity began more.
In North America in the quarter and North American become grew 13% in the first quarter.
On average so.
Our drilling technologies business always will outperform the rig count so I do expect again in 2021, our drilling technologies business grew 48% right and we do expect to given the strong start in the 14% this year.
Even if the drilling activity kind of stabilizes at this level you can see it will still deliver a strong growth given their strong start in the first quarter.
And.
As you know this business have really performed well in conversions, particularly of a drilling technology business and so we should see solid margin performance Thats one of the business.
Got it got it would you expect rod conversions to pick up pace.
Higher oil prices or do those get delayed somewhat as people run ESP as well would you expect to see there.
Yes.
Good question Scott.
Conversions.
It's a continuous affair outright and.
The increased focus on in.
In the North American.
Activity.
Maintain production and possibly even increase it.
Rod lift continues to.
An important aspect. So if you look at the 9% sequential growth.
In the artificial lift we saw solid growth both in all of Florida.
Artificial lift offering but.
Particularly in broad lift on ESP.
Our teams are executing well so I do expect rod lift have.
Another strong year combination of both some of the Rod conversions continued to come through as well as the increased spending to maintain the existing production in the rod lift about that as well.
Got it and if I could just.
Squeeze one more in can you mentioned.
It's in the 50% to 60% free cash conversion rate through cycle and how this year youre going to be second half weighted with the free cash utilization just given the working capital build I think you'll still be able to achieve at least the lower end.
<unk>, 50% to 60% in 'twenty to working capital.
Too much.
Too much to bear to hit that lower end.
We've been clear I think.
That's a through the cycle target and so in growth periods, you will see some call on working capital we saw that in first quarter.
'twenty two is a year of strong growth.
I think what youll see for the.
As the year plays out.
More modest call on working capital in second quarter and.
We would expect to be free cash flow positive in <unk>, and then still very much focused on that range with with strong delivery in the back half of the year, which is quite typical of one of these years.
The growth trajectory.
The cyclical recovery. So we remain very focused on that goal.
Got it appreciate it thank you.
Thanks Scott.
Our next question is from Dave Anderson from Barclays.
Hey, good morning, good morning, Soma, So one of the guide for the 18% year end margins in chemicals, how are you assuming cost too.
Go from here are you expecting.
Does that assume costs moderate do they go down can you just help me understand how are you thinking about the cost progression within that 18% margin by year end.
So.
David had mentioned.
We have a detailed tracking mechanisms for all of our commodities within our chemicals business. So that we are constantly watching those.
But cogs so if you look at.
What those are indicating right now that it.
The cost.
Raw material costs are going to remain at the level. What we are seeing today through at least Q3.
And then in Q4 that is that modest decline, but those individuals are showing today as of.
And particularly the non commodity items.
So it's not a very meaningful decline.
So it's.
So that is still some decline.
If raw materials are showing as we get into Q4.
So it's not the raw material decline is not a big contributor to our margin expansion efforts here, our biggest contributor to our margin expansion efforts with our pricing realization.
Right.
That makes sense and then if I compare with kind of how the margins were back in 19, where we have kind of similar revenue levels you do.
We don't have a huge amount of data that about 18, 19% margins during that timeframe.
How is the mix change between now and then I think one of the efforts you've talked about in past quarters was I guess sort of high grading some of that revenue and sort of coming from a margin potential can you just help us understand that revenue mix a little bit better in chemicals are today versus where it was say three years ago.
Yes.
I think we have.
Our revenue mix.
<unk> moved more positive towards.
What I would call it our higher margin areas.
And particularly around deepwater oil sands.
So over a period of the last two or three years, our teams have really done a great job executing on share gains.
In those areas. So that's why we feel increasingly confident about that 20% EBITDA margin.
On this business because if you look at.
The progression of margin.
We are confident will exit at least 18% in the PCB business this year.
So with that.
The price contribution as well as some more volume growth in the next year you could see how the lineup site of getting to 20% is a reality in the business. So the mix.
<unk> business I would say today versus before.
More.
Exposed to.
The higher margin higher margin activities.
Alright, if you don't mind me squeeze one more in here Scott Dennis I guess I get to do it too.
Just curious on the pricing side on the left side of the business, we're seeing pricing signs of pricing all throughout kind of the services side.
It does not all kind of equipment out there is it different how is lift looking today in terms of I guess the ability to get equipment are things tighten that market.
Are you able to are you confident you can start pushing price I was just going to take a little bit longer compared to other kind of service product lines, we're seeing today.
Yeah, I think it varies by little bit by the particular type uplift that you would imagine because there are certain types of lift COVID-19 job.
No.
Okay.
Still more capacity in the market, but.
For what for the type of lift that we are on ESP and and the differentiated performance, we havent rod lift I would say that today, we are able to continue to.
However, the inflation.
This business is already.
In the in the track up margin expansion. So I would expect this business to continue to.
Perform.
Solidly on the margins by about 20% Mark and.
We have said before this business can perform somewhere between 20% to 22% margin and with the volume growth I think you should see this business continue to deliver.
Solid performance in that range.
Okay. Thank you.
Thanks, Dave.
And our next question is from Ian Macpherson from Piper Sandler.
Thanks, Good morning, Soma and Ken.
Good morning, Ian.
You highlighted.
The diamond bearing applications and Hydrokinetics.
So.
Mentioned, the strategic review for.
The reservoir chemicals, just thinking just wanted to hear how you were thinking with regard to.
The portfolio of the enterprise and whether you want to.
Are you contemplating.
Using the balance sheet to advance.
Champion X's.
Progress into.
New new energy verticals renewable or otherwise and how.
How does that pipeline of opportunities has evolved just given the volatility of the market.
A lot of business valuations moving around recently.
Yes, no. Thanks Ian.
So first on the on the Diamond bearings I wanted your thoughts on this is the very much.
We have said before organically focused efforts because we strongly believe we have this diamond sciences capability, which we wanted to expand into other verticals.
It is.
I wanted to be clear that this is that very much organically focused effort and our teams have been as we have talked before our teams have been focused on few of these types of applications. We have talked about cutting tools. We are continuing to stay focused on it we are focused on.
Diamond bearings for industrial applications.
We consider this to be one of those and the industrial applications. So so it's very much organically focused effort.
With respect to the any type of.
Investments in.
Energy transition type things for us it's very much is focused on organic effort and then any type of.
Investment in our energy density.
Our emissions portfolio, it's going to be small and tuck in.
We are not contemplating any our focus is on continuing to sustain growth more Atlantic Lee as well as to continue to be focused on the return but.
But our shareholders at the same time. So we are not planning on any as we have laid out in our capital allocation framework any inorganic opportunities will be a small tuck in technology oriented that enhances our existing capabilities. So that's what I would say.
That's great. Thanks, so much.
Thats good for me I think the margin guidance is clearer now and constructed so I appreciate the details there and I'll turn it over thanks.
Thanks Ian.
Our next question is from Taylor Zurcher future from Tudor Pickering Holt.
Thanks, so much and thanks for taking my questions.
We've covered margins and really all the segments, but.
A lingering question on drilling technologies.
It feels like a strong strong topline momentum through Q1 feels like 2022 could look pretty similar to.
Either 2018, or 2019 from a topline perspective margins in the low thirty's versus sort of high <unk> EBITDA margins back then so I'm just curious I don't want to pin you down on timing, but curious.
If there's any dynamics that play in this cycle and that would prevent you from getting back to those sort of a mid to high.
30% type EBITDA margins moving forward.
Yes, and I think for US it is our quest.
Question of continued volume growth right.
The mix of revenues.
Also our drilling technologies now includes.
The bearings diamond bearing side, while the diamond bearings business.
Margin thoughts.
Accretive to champion X margins, but compared to our diamond cutters insert Martin it's still slightly lower than that so so so I would say the thing that is what you are seeing there is the.
Is it the diamond bearings is a little bit up.
Our mix in that business now than compared to.
22018 levels.
But as you move into <unk>.
As the volume continues to grow.
We are confident this business continues to increment at the low forties.
So as the volume continues to grow the business will continue to expand margins.
Appropriately.
From the current level of 30%. So that's that's what I can say.
Got it makes sense, thanks for that and just a quick follow up on capital allocation. So you've given us a pretty detailed rubric on how youre thinking about all things capital allocation, you've been very clear youre going to return surplus cash to shareholders above and beyond unlikely that the existing dividend moving forward and at some point in time.
Just hoping you could give us a bit more color on how we should be thinking about what surplus free cash flow actually means obviously in Q1, the working capital dynamics to free cash flow negative but.
And as you pointed out through the cycle that should reverse course and get back to the <unk>.
Typically it's really healthy free cash flow conversion type type ratio for champion X moving forward. So.
You add on top of that asset sales. It sounds like you might get hopefully a little bit of cash for RCT strategic process.
So just putting all the puzzle pieces together I'm just curious if you could help us think about what surplus free cash flow or surplus cash actually means for champion X moving forward.
Yes sure.
As you saw in the slide 14, we laid out that.
Framework so.
Clearly.
It will for us.
This business is capable of creating generating that 50% to 60%.
Free cash flow to EBITDA conversion through the cycle and periods of times of growth like what we are seeing that will be it for a quarter to quarter call on working capital, which is what we see as Ken mentioned, we expect to generate positive free cash flow in Q2 and then.
Free cash flow delivery in the second half.
So I would view on the surplus cash is obviously.
Our priority is to.
Make sure that we support the organic growth and then make sure that we continue to.
Programmatically improve our dividend as free cash flow growth, we feel confident that we can continue to improve increase.
<unk>.
The increase that our dividends fit.
Brought our free cash flow or a period of time.
And then.
But I'll tell you though.
The surplus cash flow will be editing beyond that BMO consider opportunistically.
The best way to return.
So the two shareholders, whether we have that $250 million stock repurchase program that gives us that flexibility to return cash clearly so so any surplus cash beyond that for us.
BMO.
You'll see the right mechanism to return through stock repurchases, which we already have.
We said that can be also considered a special dividend so I feel that.
We worked through 2022 and get.
You'll see our return to our shareholders.
Starting to pick up pace.
Understood. Thanks for the answers cinema.
Sure.
And our next question is from Neil Mehta from Goldman Sachs.
Yes. Thank you for all the color here today. So my team I just wanted to build on that slide 14, if I think about you.
Your comments last quarter.
You indicated that if you look at the energy sector over a long period of time, it hasnt necessarily create a ton of value through share repurchases.
This cycle, maybe it's a little bit different it seems to be working better now as you think about deploying that $250 million buyback.
You would think of it more opportunistically when the stock is trading very dislocated versus intrinsic value or do you think of it more like the customers of yours are doing right now which is more ratable.
Sure.
And do any ongoing basis do you have a.
High level question, but curious on your philosophy around share repurchase.
Yes.
You've got a good pointed out for us.
The.
Programmatic way of returning capital for us will be the dividends. So as we look at the stock repurchase authorization.
For us we have and in turn we have established an internal process.
To to look at.
How we evaluate the repurchase so for us when we have surplus cash, which we will have.
Time to time, given that free cash flow generation potential of this portfolio.
Clearly put us at $250 million authorization will be in an opportunistic way to return surplus cash and I do believe that.
The.
The continued capital discipline in the industry.
Is that important.
A data point for us to look at the stock repurchase.
That's an important way to return.
None.
Got it on capital.
So it will be opportunistic.
And then we have a process internally to do that.
And I think that's how we use that.
So it so it will be.
If that is the dislocation of the stock price.
That's clearly an opportunity.
But even otherwise.
Given the capital discipline in the industry.
There'll be reasons to consider for us to consider.
<unk> two.
Use that stock repurchase.
Thanks. So my follow up is your international portfolio, just would love your perspective of what you're seeing in different regions of the world in terms of the pick up in activity and are there any pockets, you're more or less bullish on from a revenue perspective.
Sure.
I think we are we are.
I would say that if you look at across the sector.
We are more bullish on the international side clearly in the Middle East.
And we have got more bullish on that we are also seeing good.
Activity in the in Latin America. So so that's another area of growth.
So we expect to all of the areas to grow but it's just a degree of which one more than the others. So clearly middle East and Latin America.
Seeing good good growth momentum I think.
Specific to <unk>.
Asia Pacific properties, we had I would say that.
In the lower.
Lower amount of growth and partly because of.
No.
Our warden.
Exposure there as well is that about the market activity data as well is probably I would say it's the lowest.
In Asia Pacific.
We expect good growth in Caspian.
This year as well.
So and then Gulf of Mexico.
We are bullish on as well.
Okay. That's great. Thank you so much.
Sure Neal.
Our next question is from Chase Mulvehill.
Okay.
Hey, good morning, Soma, Thanks for squeezing me in here.
I guess.
First question is really on PCT.
Obviously, you took up your outlook for 2022 revenue ethical last quarters Conference call you talked about high single digits and now you're talking about mid teens.
And so I guess first question is the better top line outlook, how much of that is.
Better pricing versus kind of better volume.
And then the.
The second kind of question related to pricing is really around surcharges and price increases.
Just how sticky you think these will be if you start seeing some raw material cost deflation and less supply chain friction later this year and into 2023.
Yes so.
On your first question of how much of the revenue.
Our revenue increases.
Volume and price.
Well, we probably are not going to provide very specific split up that but I would say it changed that.
Both are contributing.
Clearly both are contributing and I can tell you in the first quarter.
Revenue growth of sequential growth of 4%, we had both volume growth as well as pricing growth and.
As the pricing.
Elevation gains traction for us through the year I would say that the pricing realization will contribute more to the growth than the volume.
At quarter score one.
But we still expect.
Volume volume growth in the business.
Okay.
The follow up to of.
How sticky at this pricing and.
If raw materials prices start coming down just like we've talked about we have different types of contracts with our customers.
And I would say just like what you saw that.
In the in the in the upcycle up pricing.
There was a delay for us to get pricing.
Okay.
We will also hold onto the pricing longer number one.
Number two I would also say that.
We would be able to typically given our contract.
Sure.
Businesses that are contracted with us not contracted I would say, we should be able to hang on.
<unk> to 60% of these pricing.
As time goes on.
Okay perfect.
The unrelated follow up here could you update us on the.
International list strategy, I mean, obviously the Po.
The merger you would really wanted to get some better penetration.
Shall lift side, so what kind of success that you had recently and I don't know if <unk> got any data points that you'd be willing to share about your recent growth for the international lift just so we can kind of benchmark it against what we're seeing out there.
Overall market lift and international.
Yes so.
You may recall the.
Last year, we kind of communicated.
So with respect to the thinner decides itself right.
Plan is to.
Date on a on a yearly basis, how we are doing on.
On the revenue synergy FX right. So so last year, you made a call it'll be delivered $30 million of revenue synergies.
New wins due to synergies on out of $6 million was international and we expect that to really accelerate this year and we are seeing good signs of that now.
Now with respect to our growth.
Internationally I would say, let me say in production automation technologies International business outside of North America in the first quarter for us sequentially grew about 13%.
So it's a.
I mean again.
No.
Is that the split is.
80% of our business in a little over 80% of the businesses is that North America and the remaining is international so in the first quarter International grew faster.
Yep, Okay, where.
I didn't makes sense I'll turn it back over thanks.
Yes. Thank you.
We have no further questions at this time.
So.
Well, thank you everyone for joining the call today.
We are excited about.
Where we are at champion X and.
The.
Accelerating topline momentum our pricing realization delivering margin expansion and we are very focused on.
Shareholder return based on the programmatic dividend, we announced as well as as we continue to execute on our free cash flow with surplus cash to be able to be in a position to return that as well as the eight that through stock repurchase.
Conservation of special dividends as well so we're excited about the future of Sam Kinect and thank you for joining and thank you and we look forward to talking to you again in the next quarter.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect speakers standby for your deeper.
Okay.
Okay.
Okay.
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