Q1 2022 ChampionX Corp Earnings Call

Speaker 2: Lights Ken will then discuss our first quarter results and the second quarter outlook before turning the call back to Soma for some summary thoughts. We will then open the call for QA. During today's call, we will be referring to the slides posted on our website.

Speaker 2: Let me remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore, I refer you to our latest 10 -k filing and our other SEC filings for a discussion of some of the factors that could cause actual results to differ materially.

Speaker 2: Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter press release, which is available on our website. I will now turn the call over to solan.

Speaker 3: Thank you, beron. Good morning everyone. I would like to welcome our shareholders, employees and analysts to our first quarter 2022 earning call. Thanks for joining us today.

Speaker 3: Before turning to our business results, let me first note that we are approaching the two -year anniversary of our transformational merger.

Speaker 3: As a reflect on all that our teams have accomplished during what has been a dynamic and unprecedented market environment for our energy industry.

Speaker 3: We have truly been better together, and I would like to exptrust my gratitues to all our employees for their ongoing focus and dedication in serving our customers and community.

Speaker 3: As a purpose to the company. We always start with our organizational guiding lives on sl number 4, which is improving the lives of our customers employees, shareholders and community.

Speaker 3: As an example of our commitment to providing our employees with a truly diverse, equitable and inclusive work environment, I was recently honoured to accept the energy workforce technology Council diversity, equity and inclusion champion award on behalf of champion Act.

Speaker 3: This award is based on a commitment and advocacy for diversity, equity and inclusion in the energy industry.

Speaker 3: At champion Act, we take a proactive approach to diversity and inclusion in company decision making, recognising differences as a both as a competitive advantage and necessary for meaningful change.

Speaker 3: one of our four operating principles is our customer focus, which we described as being the relentless advocates for our customers.

Speaker 3: As you can see here on slight number 5, we are founded that energy point research and independent customer satisfaction research firm, which surveyed more than 3700 customers of oilfield products, recently recognized champion act as being ranked first in five specific oilfield categories, including our largest product lines of production, chemicals and autctic share left, which speaks to the strong customer centric cultural alignment across our organization.

Speaker 3: This is the fifth consecutive year that champion ax have been recognized by energy point research.

Speaker 3: At chunk in Act. We continue to innovate to support our customers to bring affordable and lower carbon energy to the world. On Slide six we are pleased to spotlight our innovative feel less water co Diamond bearing that helps ocean renewable power company to reliably capture and convert hydrokinetic energy from River currents and ocean waves into renewable, emissionsfree electricity. Bring sustainable and clean energy to millions of people who live remote communities without access to traditional energy.

Speaker 3: Many of these remote communities are built near the worse and mocean environments that have a potential to provide carpentry hydrokinetic power. In the past, these harsh environments have been too challenging for conventional bearing and field technologies, making hydrokinetic power unreliable.

Speaker 3: Today our innovations made this hydrokinetic power a reality. With that, let me turn to our first quarter performance.

Speaker 3: As a physical recovery in demand for energy services and equipment has gained further momentum. Our business portfolio once again delivered industry-leading top line growth in the first quarter, both sequentially and the yearuro and year-over-year, driven by strong top line growth both in North America and international markets.

Speaker 3: In the first quarter, our revenues increased 26% year-over-year and 5% sequentially, demonstrating the strong organic growth potential and the execution capabilities of our global business.

Speaker 3: In North America. Our revenue grew 31% year-over-years and 5% sequentially.

Speaker 3: International revenue grew 19% year-over-year and 6% sequentially.

Speaker 3: All of our segments contributed to this strong top line growth. Drilling technology and production automation technologies teams executed well and delivered strong sequential revenue growth of 14% and 9% respectively.

Speaker 3: Both the segments expanded adjusted EBITDA margins in the quarter. We expect drilling technologies and production automation technologies to continue to deliver solid margin performance throughout 2020 -two.

Speaker 3: Our production terms of segment grew 4%, sequentially driven by activity increase and pricing realization.

Speaker 3: Given the strong top line start to the year, combined with the increasing pricing realisation, we expect to achieve solid full ER growth approaching mid-teens percentage in our production chemicals business in 2020 two.

Speaker 3: We expect production capital technologies segment EBITDA margin to progressively improve through the year, driven by volume and pricing improvement, reaching an exit rate of at least 18% in 2020. -two.

Speaker 3: Our production temal team continues to remain focused on execution and delivering a differentiated performance in the industry amidst an unprecedented inflation and supply chain disruptions.

Speaker 3: Thanks to the deiligent efforts of our team, champion x fully delivered the targeted annualizeded cost synergies of 125 million exiting the first quarter.

Speaker 3: Sooner than our original objective of within 24 months of the merger closing. We remain encouraged by customer subptivity to our better-together efforts with our combined technology, products and services offering.

Speaker 3: Our teams are executing well and gaining traction on price, increased realization and productivity to offset the impact of raw material, labour and logistics related cost inflation that we have experienced in our portfolio of businesses.

Speaker 3: We are increasingly confident that we will see chmenx margin expanding throughout the year, with adigjusted EBITDA margin reaching 18% as we exit 2020 -two.

Speaker 3: Consistent with our strategic priority of the evolving our portfolio. We have started a process to execute on this in 2020 -two.

Speaker 3: We are excited about the constructive demand tailwind in our businesses that support a favorable multiyear outlook for our sector.

Speaker 3: The positive market fundamentals, combined with our top line momentum and traction on pricing improvement, gives us increasing confidence that we will deliver positive top line and bottom line growth with meaningful margin expansion and solid cash generation for the full year and beyond.

Speaker 3: I would now like to turn the call over to Ken to discuss our first quarter results and our second quarter outlookck.

Speaker 4: Thank you, sova. Good morning and thanks for joining us today. I will be commenting on adjusted EBITDA for sequential and year-over-year comparisons.

Speaker 4: We believe this metric best reflects the business performance of continuing operations.

Speaker 4: As seen on Slides eight to 9, first quarter 20: 22 revenue was eight hundred and sixty-six million dollars, up 44 million sequentially and up 26% year-over-year, as we posted solid growth in all our operating segments.

Speaker 4: geographically- North america- revenue grew 5%, while international revenue was up 6%.

Speaker 4: Included in our quarterly revenues were $34 million across sales to ECO AP.

Speaker 4: As previously communicated, cross supply sales to eco-laba associated with post-merger supply agreements.

Speaker 4: We do not recognize EBITDA margin on these sales and the associated revenue is allocated to corporate and other in our financial statements.

Speaker 4: We expect these eco-apab sales to continue at a declining rate through midyear 2023. the third anniversary, the merger closing date.

Speaker 4: First quarter, GAAP net income for the company was $37 million, versus 43 million in the fourth quarter of 2021 and $6 million in the first quarter of 2021. This quarterly income represented 18 cents per diluted share.

Speaker 4: As seen on Slide 9, champion x consolidated adjusted EBITDA in the first quarter was $125 million, while down 6% from the previous quarter and represented a 32% increase versus the prior year period.

Speaker 4: 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 continue to diligently increase our selling prices.

Speaker 4: In the quarter we delivered consolidated adjusted EBITDA margin of 14%, lower by 178 basis points sequentially and up 65 basis points over the first quarter of 2021.

Speaker 4: Our first quarter free cash flow included a number increase in our inventories for growth and to support customers. Also included were certain annual compensation costs and employer contributions.

Speaker 4: Cash from operating activities was a $43 million outlooklow and capital investment was $18 million net of proceeds from asset sales.

Speaker 4: 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.

Speaker 3: Segment adjusted EBITDA was $67 million lower by 19% sequentially and up 19% higher than the first quarter of 2021. volume growth and selling price increases drove the year-over-year improvement versus fourth quarter. Profitability was negatively impacted by the rapid rise in raw material cost experienced in the quarter, despite continued progress on selling price increases.

Speaker 4: Please refer to Slide 10 for more details of the selling price versus raw material cost trends in our chemical businesses.

Speaker 4: Segment adjusted EBITDA margin was 13%, down 365 basis points sequentially and 60 basis points below the prior year period.

Speaker 4: We had a strong revenue start to the year and we continued to realize benefit from our pricing actions. However, the first quarter spike of raw material costs and ongoing material availability and logistics challenges impacted margins.

Speaker 4: We continue to drive pricing actions and expect this to contribute to healthy sequential EBITDA margin rate improvement throughout the remainder of 2022 weand.

Speaker 4: Production and automation technologies. First quarter segment revenue was $22 million, increasing 9% sequentially, primarily due to activity increases, market share capture at increased pricing. Year-over-year revenue was up 32 percentdigital 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 approved cost structures of drive efficiencies.

Speaker 4: Pa first quarter segment adjusted EBITDA was $45 million up 14% sequentially and up 27% year-over-year. Segment adjusted EBITDA margin was 20%, up 104 basis points versus the fourth quarter, primarily due to favorable product mix with in the incremental revenue delivered during the period.

Speaker 4: Drilling technology segment revenue was $57 billion in the fourth quarter, up 14% sequentially and 63% year-over-year, as we experienced strong demand growth in North America and internationally.

Speaker 4: Drilling technologies. Delivered segment adjusted EBITDA of 17 million during the first quarter, up $4 million sequentially and more than two x the level of first quarter. 2021 segment margin was a strong 30% of the quarter of roughly 400 basis points sequential improvement and roughly 960 basis points above the prior year comparable.

Speaker 4: Reservoir Chemical Technologies revenue for the quarter was $4 million, which was essentially flat, sequentially at up 33% year-over-year. The segment experienced a small adjusted EBITDA loss driven by raw material cost.

Stephen David Gengaro: Sort of the benefits of mix as international seems to be gaining traction and obviously, the North American market has been strong and I know it's more heavily skewed towards international, but we're starting to get better and better data points on international growth and just curious on how that impacts the business and if the competitive dynamics are any different there. Thanks.

Sivasankaran Somasundaram: So we have talked about this before Steven that the profitability of the different [inaudible] of revenues, what PCT tends to be somewhat different based on the intensity of the chemicals being used. For example, offshore tends to be deep water and offshore tends to be more technically challenging and chemical intensive. And so clearly we have a much more differentiated offering similar in oil sands. So, clearly the mix of revenues do contribute to a differentiated profitability. What I am excited about and the way our production chemicals team has been executing- and you saw that in the first quarter- delivering a strong sequential growth and we really believe that a very differentiated performance in the industry and that top line momentum which we are seeing, plus the pricing realization gives us a really strong confidence that we will reach at least a mid-teen type of growth in our production chemicals business year-over-year. So clearly it demonstrates a differentiated growth profile. So that combined with a productive initiative and pricing realization, I truly believe, you will see the margin expansion continuing to accelerate this business.

Speaker 3: and that top line momentum which we are seeing, plus the pricing realization gives us a really strong confidence that we will reach at least a mid-teen type of growth in our production chemicals business year-over-year. So clearly it demonstrates a differentiated growth profile.

Speaker 4: Gives us a releas, strong confidence that we will reach at least a midteen type of a growth in our production chemicals business year over year. So clearly it demonstrates a differentiated growth profile.

Speaker 5: So that combined with a productive initiative and pricing realization, I truly believe, you will see the margin expansion continuing to accelerate this business.

Speaker 3: That combined with a productive initiative and pricing realization, I truly believe, know you will see the margin expansion continuing to accelerate this business.

Stephen David Gengaro: Great, thank you for the color.

Operator: And our next question is from Scott Gruber.

Scott Andrew Gruber: Yes, good morning. I want to just follow on know the conversations around PCT growth with the potential for continued growth in [inaudible] in drilling and while we expect the US rig count to continue to tick higher here, just the same for simplicity say that the US rig count kind of stabilizes here around 700, how much more growth do you think you'll realize through year-end in [inaudible] in drilling on large conversions, on international growth, how much more [inaudible] we realize those two divisions, even as the US activity stabilizes?

Speaker 8: And want to follow on know the conversations around P C T growth with the potential for continued growth in P a in drilling and while we expect the? U's rig count cancontinue to takeick higher, here we just the same for simplicity say that the U's rig count kind of stabilizees here around seven under how much more growth do you think you realize through year end in P a in drilling? You know on on larged conversions on international growth, how much more th we realize those two divisions, even the U's activity stabilize.

Sivasankaran Somasundaram: Yes, Scott, I think you saw in the first quarter that our PAC business grew sequentially 9% and we are seeing good momentum in that business, continue to see momentum in that business. You may recall in 2021, our PAC business grew 23% year-over-year for the full year. So with a strong start of 9% in the sequential, we do expect our PAC business to deliver another strong year in 2022.

Sivasankaran Somasundaram: And the conversations particularly with our customers continue to indicate a good strong activity particularly in North America as well as the international activity continues to grow here. With drilling technologies, as we have said, it is a short cycle business. Many of our business short cycle drilling technologies is even more and in the growth cycle it will always outperform the recount and you saw that in a worldwide recount and an average growth sequentially of about 7% in Q1 and our drilling technologies business grew 14%. I know it's more North American weighted because the drilling activity has began more in North America in the first quarter and North American recount grew 13% in the first quarter and an average. So our drilling technologies business always will outperform the rig count, so I do expect again in 2021, our drilling technologies business grew 48%, right? And we do expect, given the strong start in the 14% this year, even if the drilling activity kind of stabilizes at this level, you can see it will still deliver a strong growth given the strong start in the first quarter and, as you know this business really performed well in conversions, particularly our drilling technology business, and so we should see solid margin performance as well in the business.

Speaker 9: 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, 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 the strong start in the first quarter and, as you know this business really performed well in conversions, particularly our drilling technology business, and so we should see solid margin performance as well in the business.

Scott Andrew Gruber: Got it. Would you expect rod conversions to pick up pace with these higher oil prices or do those get delayed somewhat as [inaudible] ESPs? What would you expect to see there?

Sivasankaran Somasundaram: Yeah, good question, Scott. There are conversions that are a continuous affair, right? And with the increased focus in the North American activity to maintain production and possibly even increase it, rod lift continues to be an important aspect. So if you look at the 9% sequential growth in artificial lift, we saw solid growth both in all of our artificial offering but particularly in rod lift and EP. So our teams are executing well, so I do expect rod lift to have another strong year. A combination of both some of the rod lift conversion continues to come through, as well as the increased spending to maintain the existing production in the rod lift wells as well.

Speaker 10: So our teams are executing well, So I do expect RO lift. We will have another strong year combination of both. Some of the rod lift conversion continue to come through, as well as the increased spending to maintain the existing production in the rod lift wells as well.

Scott Andrew Gruber: Got it. I'll just squeeze one more in. Ken, you mentioned confidence in the 50 to 60% free cash conversion rate through cycle and how this year you're going to be second half weighted with the free cash realization just given the working capital bill. Do you think you'll still be able to achieve at least the lower end, the 50 to to 60% in 2022 or working capital pretty much [inaudible] that lower end?

Kenneth M. Fisher: Yes, 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 the first quarter as 2022 is a year of strong growth. I think what you see as the year plays out, a much more modest call on working capital in the second quarter and we would expect to be free cash flow positive in 2Q and then still very much focused on that range with strong delivery in the back half of the year, which is quite typical of one of these years of the kind of the growth trajectory in the cyclical recovery. So we remain very focused on that goal.

Scott Andrew Gruber: Got it. I appreciate it. Thank you.

Kenneth M. Fisher: Thanks, Scott.

Operator: Our next question is from Dave Anderson from Barclay's.

J. David Anderson: Hey, good morning, Soma. So in your guide for the 18% year-end margins in chemicals, how are you assuming costs to go from here? Does that assume cost moderate? Do they go down? Can you just help me understand how you're thinking about that cost progression within that 18% margin by year-end?

Speaker 15: Go from here? Are you expecting cost? Does that assume cost moderate? Do they go down? Can can help me understand how you're thinking about that cost progression within that 18% margin? But you're end.

Sivasankaran Somasundaram: So Dave, as I mentioned that we have a detailed tracking mechanism for all of our commodities within our chemicals business so that we are constantly watching those forward curves. So if you look at what those are indicating right now, our raw material costs are going to remain at the levels what we are seeing today through at least Q3, and then in Q4 there is a modest decline those indices are showing today as of in particularly the non-commodity items. So it's not a very meaningful decline but there is still some decline that these raw materials are showing as we get into Q4. So the raw material decline is not a big contributor to our margin expansion efforts here. Our biggest contributor to our margin expansion efforts is our pricing realization.

Speaker 16: So it's not a very meaningful decline but there is still some decline that these raw materials are showing as we get into Q4. So the raw material decline is not a big contributor to our margin expansion efforts here. Our biggest contributor to our margin expansion efforts is our pricing realization.

J. David Anderson: Right, that makes sense. And then if I compare kind of how the margins were back in 2019 where we have kind of similar revenue levels, we don't have a huge amount of data but 18, 19% margins during that time frame. How has the mix changed between now and then? I think one of the efforts you 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 makes a little bit better in chemicals today versus where it was say, three years ago?

Sivasankaran Somasundaram: So I think our revenue mix has probably moved more positive towards what I would call our higher margin areas, and particularly around deep water oil sands, which over a period of the last two to three years, our teams have really done a great job executing on share gains in those areas. So that is why we feel increasingly confident about the 20% EBITDA margin on this business because if you look at the progression of margin, we are confident we'll [inaudible] at least 18% in the PCB business this year. So with further price contribution as well as some more volume growth next year, you could see how the line of sight of getting to 20% is a reality in this business. So the mix of business- I would say today versus before- is more exposed to the higher margin activities.

Speaker 3: On this business because if you look at the progression of margin, as we we are confident we'll Lakes at least 18% in the PC business this year.

Speaker 3: So with further price contribution as well as some more volume growth next year, you could see how the line of sight of getting to 20% is a reality in this business. So the mix.

Speaker 3: Of business- I would say today versus before- is more exposed to the higher margin, higher margin activities.

J. David Anderson: Alright, if you don't mind I'll squeeze one more in here. Scott did it so I guess I get to do it too. Just curious on the pricing side, on the lift side of the business, we're seeing signs of pricing all throughout kind of the services side. There's not a ton of equipment out there. How is lift looking today in terms of, I guess, the ability to get equipment? Are things tight in that market? Are you confident you can start pushing price or is it just going to take a little bit longer compared to other kind of service product lines we're seeing today?

Sivasankaran Somasundaram: Yeah, I think it varies a little bit by the particular type of lift, as you would imagine because there are certain types of lifts which have still more capacity in the market. But for the type of lifts we are on like ESPs and the differentiated performance we have in broad lift, I would say that today we are able to continue to cover the inflation we have. This business is already in the track of margin expansion, so I would expect this business to continue to perform solidly on the margin side about the 20% mark and we have said before, this business can perform between 20 to 22% margin and with volume growth, I think you should see this business continue to deliver solid performance in that range.

Speaker 3: Have still more capacity in the market. But for what what? For the type of lips we are on by E, P and and the differentiated performance we have in broad left, I would say that you know today we are able to continue to know cover the inflation we have. You know this business has already in in the track of margin expansion. So I would expect this business to continue to know perform solidly on the margin side. You about the 20% Mark and you know we have said before this business can perform a may between 20 to 20 two percent margin and with volume growth I think you should see this business continue to deliver solid performance in that range.

J. David Anderson: Thank you.

Sivasankaran Somasundaram: Thanks Dave.

Operator: And our next question is from Ian McPherson from Piper Sandler.

Ian Mcpherson: Thanks, good morning, Soma and Ken.

Multiple speakers: [Kenneth Fisher] Good morning, Ian. [Sivasankaran Somasundaram] Good morning.

Ian Mcpherson: You highlighted the Diamond bearing applications and hydrokinetics and also mentioned the strategic review for the reservoir chemicals. Just wanted to hear how you were thinking with regard to the portfolio of the enterprise and whether you want to or you're comtemplating using the balance sheet to advance Champion X's progress into new energy verticals, renewable or otherwise, and how that pipeline of opportunities has evolved, just given the volatility of the market and a lot of business valuations moving around recently?

Speaker 20: The portfolio of the enterprise and, whether you want to, are you're comtemplating?

Speaker 20: Using the balance sheet to advance champion ex's progress into new new energy verticals, renewable or otherwise, and how that pipeline of opportunities has evolved, just given the volatility of the market and a lot of business valuations moving around recently.

Sivasankaran Somasundaram: Thanks, Ian. So first on the Diamond bearings, our efforts on this are very much, as we 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. So I want to be clear that this is very much an organically focused effort and the teams have been, as we have talked before, our teams have been focused on few of these type of applications. We have talked about cutting tools, we are continuing to stay focused on it. We are focused on Diamond bearings for industrial applications, which we consider this to be one of those in the industrial applications. So it's very much an organically focused the effort.

Sivasankaran Somasundaram: With respect to any type of investments in energy transition type things, for us, it's very much focused on organic efforts and then any type of investment in our energy transfer, similar to like our emissions portfolio, is going to be small and tucked in. We are not contemplating any--our focus is on continuing to sustain growth more organically as well as to continue to be focused on return for our shareholders at the same time. So we are not planning on any, as we have played 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.

Ian Mcpherson: That's great. Thanks, Soma. That's good for me. I think the margin guidance is clear now and constructive, so I appreciate the details there and I'll turn it over. Thanks.

Sivasankaran Somasundaram: Thanks, Ian.

Operator: Our next question is from Taylor Zucher from Tuter, Pickering, and Holt.

Taylor Zurcher: Hey, Soma and Ken, thanks for taking my questions. We've covered margins in really all the segments but just a lingering question on drilling technology. So it feels like, well strong top-line momentum in Q1 feels like 2022 look pretty similar to either 2018 or 2019 from a top-line perspective, margins in the low thirty's versus sort of high thirty's EBITDA margins back then. So I'm just curious, don't want to pin you down on timing, but curious if there are any dynamics that play this cycle that would prevent you from getting back to those sort of mid to high 30 EBITDA margins?

Speaker 23: I just just a a lingering question on drilling technology So.

Speaker 24: It it feels like.

Speaker 23: Well strong strong, top line momentum are: Q1 feels like 2020 two.

Speaker 23: To look pretty similar to.

Speaker 23: Either 2018 or or 2019 from a.

Speaker 23: Top line perspective margins in the low thirty's versus.

Speaker 23: Sort of high thirty's EBITDA margins back then. So I'm just curious. Don't want to pendn down on timing, but curious.

Speaker 23: You know, if this's, if there's any dynamics that play this cycle now that would prevent you from from getting back to those sort of bid to high.

Sivasankaran Somasundaram: Yeah, and I think for us it is a question of continued volume growth, right? The mix of revenues, our drilling technologies now include the bearings, the Diamond bearings side, while the Diamond bearings business margins are accretive to Champion X margins but compared to our Diamond cutters, insert margin is still slightly lower than that. So I would say the thing that is what you are seeing there is the Diamond bearings as a little bit of a mix in that business now than compared to 2018 levels. But as the volume continues to grow, we are confident this business continues to increment at low forty's. So as the volume continues to grow, this business will continue to expand margins appropriately from the current level of 30%, so that's what I would say.

Speaker 16: So as the volume continues to grow, this business will continue to expand margins appropriately from the current level of 30%. So that's what I would say.

Taylor Zurcher: Yeah got it. Makes sense. Thanks for that. And just a quick follow-up on capital allocations, you've given us a pretty detailed rubric on how you're thinking about all things capital allocation. You've been very clear you're going to have returned surplus cash to shareholders above and beyond, the existing dividend moving forward at some point. And now I was 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, on the working capital dynamics free cash flow negative but as you pointed out, through the cycle, that's your reverse course- and get back to the typical, really healthy, free cash flow conversion type ratio for Champion X moving forward. So if you add on top of that asset sale, sounds like you might get hopefully, a little bit of cash for RCT strategic process, so just put all the public pieces together, I'm just curious if you can help think about what surplus free cash flow or surplus cash actually means for Champion X moving forward.

Speaker 23: You've given us a pretty detailed rerubric on.

Speaker 23: How you're thinking about all things: capital allocation. You've been very clear: you're going to.

Speaker 23: I've returned surplus cash to shareholders above and beyond.

Speaker 23: That the existing dividend moving forward at some point. And now I was just hoping you could give us a bit more color on how we should be thinking about. You know what surplus free cash flow actually means, obviously in Q1, on the working capital dynamics.

Speaker 23: Free cash flow negative but.

Speaker 23: As you pointed out, through the cycle. That's your reverse course- and get back.

Speaker 23: toyou know the typical, really healthy, free cash flow conversion type, type of.

Speaker 23: ratiofor champion x moving forward So.

Speaker 23: You add on top of that asset sale, sounds like you might get hopefully, a little bit of cash for our.

Speaker 23: T strategic process. So you just put all the public pieces together. I'm just curious if you help.

Speaker 23: Think about what surplus free cash flow or surplus cash actually means.

Sivasankaran Somasundaram: Sure. I mean, as you saw in slide 14, we laid out that framework, so clearly, for us this business is capable of generating that 50 to 60% free cash flow to EBITDA conversions through the cycle and periods of times of growth like what we are seeing there will be a quarter-to-quarter call on working capital, which is what we see. As Ken mentioned, we expect to generate positive free cash flow in Q2 and then a strong free cash flow delivery in the second half. So our view on the support 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 dividends, right? As free cash flow grows, we feel confident that we can continue to increase our dividends with a growth of our free cash flow over a period of time.

Speaker 9: So our view on the supportly 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 dividends right as free cash flow growth. We feel confident that we can continue to im ve increase the increase our dividends with a growth up ourfree cash flow over a period of time.

Sivasankaran Somasundaram: And then for us, the surplus cash flow anything beyond that we will consider opportunistically the best way to return to shareholders, whether we have a $250 million stock repurchase program that gives us that flexibility to return cash, clearly. So any surplus cash beyond that for us we will see the right mechanism to return through the stock repurchase which we already have or we said that we will also consider a special dividend. So I feel that as we work through 2022 and beyond, you will see our return to our shareholders starting to pick up pace.

Speaker 3: We will see the right mechanism to return through the star repurchase which we already have. Or you know we said that will also consider a special dividend. So I feel that know, as we work through 2032 and get you and beyond, you will see our return to our shareholders starting to pick up pace.

Taylor Zurcher: Understood. Thanks for the answer, Soma.

Sivasankaran Somasundaram: Sure.

Operator: And our next question is from Neil Mehta from Goldman Sachs.

Neil Singhvi Mehta: Yeah, thank you for all the color here today Soma and team. I just want to build on that slide 14, if I think about your comments last quarter, you indicated that if you look at the energy sector over a long period of time, it hasn't necessarily created a ton of value through share repurchases this cycle, maybe it's a little bit different, it seems to be working better. Now as you think about deploying that $250 million buyback, do you think of it more opportunistically when the stock is trading very dislocated versus it's intrinsic value, or or do you think of it more like some of the customers of yours are doing right now, which is more ratable and doing it on an ongoing basis? It's a high level question, but curious on your philosophy around share repurchases.

Sivasankaran Somasundaram: Yes, so Neil you correctly point out for us the programmatic way of returning capital for us will be the dividend. So as we look at the stock repurchase authorization, for us, we have established an internal process to look at how we evaluate the repurchase. So for us, when we have a surplus cash, which we will have time to time given the free cash flow generation potential of this portfolio. Clearly, for us this 250 million authorization will be an opportunistic way to return that surplus cash and I do believe that the continued capital discipline in the industry is an important data point for us to look at the stock repurchase as an important way to return capital. So it will be opportunistic, and then we have a process internally to do that, and I think that is how we use that. So if there is a dislocation of the stock price, that's clearly an opportunity, but even otherwise, given the capital discipline in the industry, there will be reasons for us to consider to continue to use that stock repurchase.

Speaker 2: For us. We have an intern. We have established an internal process to look at how we evaluate the repurchase.

Speaker 9: So for us, when we have a surplus cash, which we will have know, time to time, given the free cash flow generation potential of this portfolio, clearly for us- you know there's 2- a $5 million authorization will be an opportunistic way to return that surplus cash and I do believe that you know the.

Speaker 3: The continued capital discipline in the industry is an important data point for us to look at the stock repurchase as an important way to return reittturn capital. So it will be opportunistic, and then we have a process internally to do that and and I think you know that is how we use that. So So it will be.

Speaker 3: If there is a dislocation of the stock price, that is clearly an opportunity. But even otherwise, given the capital discipline in the industry, there will be reasons to consider for us to consider continue to use that stock repurchase.

Neil Singhvi Mehta: Thanks, Soma. The follow-up is on your international portfolio. Just would love your perspective of what you're seeing in different regions of the world in terms of the pickup in activity, and are there any pockets you're more or less bullish on from a revenue growth perspective?

Sivasankaran Somasundaram: Sure. I would say that if you look across the sector, we are more bullish on the international side, clearly, in the Middle East and we are bullish on that. We are also seeing good activity in Latin America, so that's another area of growth. So we expect all of the areas to grow, but it's just a degree of which ones are more than the other. So clearly, Middle East and Latin America, we are seeing good growth momentum. I think for us, specific to Asia, specific probably, is where I would say that in the lower amount of growth and partly because of our own exposure there as well as the market activity there as well, is probably, I would say, is the lowest, is in Asia Pacific. We expect good growth in Caspian this year as well, and then Gulf of Mexico, we are bullish on as well.

Neil Singhvi Mehta: Okay, that's great. Thank you so much.

Sivasankaran Somasundaram: Sure.

Operator: Our next question is from Chase Mulvehill.

Chase Mulvehill: Hey, good morning, Some. Thanks for squeezing me in here. I guess the first question is really on PCT, obviously you took up your outlook for 2022 revenue- I think last quarter's conference call and you talked about high single digits and now you talked about mid.-teens. And so I guess the first question is with the better top-line outlook, how much of that is better pricing versus kind of better volume? And then the second kind of question related to pricing is really around surcharges and price increases and 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 into 2023?

Sivasankaran Somasundaram: So your first question of how much of the revenue increase of the volume and price-probably you are not going to provide a very specific split of that, but I would say Chase, 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 realization gains traction for us through the year, I would say that the pricing realization will contribute more to the growth than the volume as the quarters go on, but we still expect volume growth in the business.

Sivasankaran Somasundaram: The follow-up of whether how sticky or this pricing and as the raw material prices start coming down, just like we talked about, we have different types of contracts with our customers and I would say just like what you saw in the upcycle of pricing where there was a delay for us to get pricing, we will also hold on to the pricing longer, number one, and number two, I would also say that we would be able to typically given our contract versus businesses that are contracted versus us not contracted, I would say we should be able to hang on 50% to 60% of this pricing as time goes on.

Speaker 28: Businesses that are contracted versus us not contracted. I would say we should be able to hang on 50% to 60% of this pricing as as time goes on.

Chase Mulvehill: Okay, perfect. An unrelated follow-up here, could you update us on the international lift strategy? I mean obviously post a merger you'd really wanted to get some better penetration on the international lift side. So what kind of success have you had recently and I don't know if you've got any data points that you'd be willing to share about recent growth for the international lift just so we can kind of benchmark it against what we're seeing out there on the overall market for lift in international.

Sivasankaran Somasundaram: So you may recall that last year we kind of communicated--so with respect to the synergy side itself right, our plan is to update on a yearly basis how we are doing on the revenue synergy aspects, right? So last year, you may recall, we delivered 30 million of revenue synergies, our new wins due to synergies, and out of which six million was international, and we expect that to really accelerate this year and we are seeing good signs of that. Now, with respect to our growth internationally, let me say, production automation technologies, international business outside of North America in the first quarter for us sequentially grew about 13%. So I mean again, the split is 80% of our business in PA, a little over 80% of the business is North America and the remaining is international, so in the first quarter international grew faster.

Speaker 16: So it is a you know. I mean again it is a to mine. You know that the split is 80% of our business in PA, little over 80% of the business is North America and the remaining is international. So in the first quarter international grew faster.

Multiple speakers: [Chase Mulvehill] Yeah, okay. Makes sense. I'll turn it back over to thanks, Soma. [Sivasankaran Somasundaram] Yes, thank you.

Operator: Sir, we have no further questions at this time.

Sivasankaran Somasundaram: Well, thank you everyone for joining the call today. We are excited about where we are at Champion X and the accelerating top-line momentum, our pricing realization delivering margin expansion, and we are very focused on shareholder return based on the programmatic dividend we announced, as well as 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 either through stock repurchase or consideration of special dividends as well. So are excited about the future of Champion X and thank you for joining and we look forward to talking to you again in the next quarter.

Speaker 9: Well Thank you everyone for joining the call today. You know we are excited about where we are: champion x and the accelerating top line momentum, our pricing realization delivering margin expansion. And we are very focused on shareholder return based on the programmatic dividend we announced, as well as 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 either throw stock repurchase or consideration of special dividends as well. So are excited about the future assumption x and thank you for joining and thank you for and we look forward to talking to you again in the next quarter.

Operator: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Speakers standby for your debrief.