Q2 2022 ChampionX Corp Earnings Call
But advocates.
<unk> committed to our employees delivering technology that is impactful in helping solve customer problems and having a continuous improvement mindset.
Our purpose I would be remiss, if I did not recognize that June 3rd marked the two year anniversary of our transformational merger.
We are proud of how remarkably well our organization is executed on behalf of all of our stakeholders over the last two years, we are truly better together.
Consistent with our purpose of improving lives as you can see on slide number five we celebrated our two year anniversary by volunteering over 1400 hours of service and communities around the world. It is humbling to see our team's commitment to our purpose put.
Into action in such tangible ways.
Ken will take you through our second quarter financial results. Shortly so let me just share a few high level comments.
Our business portfolio once again delivered superior top line growth in the second quarter year over year, Our North America, and international revenue grew 27% and 20% respectively, illustrating the attractive organic growth opportunities within our global businesses.
As each of our businesses contributed to the strong performance.
In particular in our first quarterly earnings call. We mentioned that we expected our production chemical technologies business to experience topline growth for the full year 2022 approaching mid teens percentage <unk>.
Given the robust topline first half of 2022, we now expect our production chemical technologies business to deliver full year, 2022% revenue growth in the high teens percentage.
Revenues from digital products, which includes our emission management products increased 54% year over year and 14% sequentially in the second quarter. We continue to remain excited about the long term organic growth prospects in this business and investing appropriately to support it.
Our teams are delivering price increase realization to offset the impact of raw materials.
Labor and logistics related cost inflation that we have experienced in our portfolio of businesses.
Last quarter, we shared with you that we expected our chemical selling price to catch up to and exceed raw material inflation exiting the second quarter and our teams delivered on that objective.
Such we confidently expect to see healthy EBITDA margin improvement in the second half of this year.
We have previously shared with you our capital allocation priorities.
During the second quarter, we demonstrated our commitment to returning capital to shareholders by returning over 60% of our free cash flow generated during the period to our investors by our regular cash dividend and by repurchasing $20 million of champion X stock we remain.
I'm fully committed to creating value for our champion X shareholders and to increase capital return as our free cash flow growth in the second half of this year.
Now I would like to turn the call over to Ken to discuss our second quarter results and our third quarter outlook.
Thank you so good morning, and thanks, everyone 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 slide seven second quarter, 2022 revenue was 933 million up $67 million or 8% sequentially.
Add up 24% year over year as we posted solid revenue growth in all of our operating segments geographically North America revenue grew 6% and international revenue was up 11% sequentially.
Included in our quarterly revenues were $36 million of cross sales to equal lab 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 2023, the third anniversary of our merger closing date.
Second quarter GAAP net income for the company was $27 million or <unk> 13 per diluted share versus $37 million in the first quarter and $7 million in the second quarter of 2021.
Second quarter net income included a $23 million charge to reduce the carrying value of the chemical technologies, Russia business to its estimated fair value as this business was classified as held for sale during the quarter.
As seen on slide eight champion X consolidated adjusted EBITDA in the second quarter was $138 million up 11% versus the previous quarter and an increase of 31% versus the prior year period.
Volumes and selling prices, primarily drove this improvement in net income and adjusted EBITDA and more than offset the impact of raw material and other cost inflation.
In the second quarter, we delivered consolidated adjusted EBITDA margin of 14, 8% higher by 41 basis points sequentially and up 76 basis points over the second quarter of 2021.
Our second quarter free cash flow of 54 million reflects the effective working capital management as we supported the strong top line growth of the business during the quarter.
Cash from operating activities was $74 million in capital investment was $21 million net of proceeds from asset sales.
Turning to our business segments production chemical technologies generated second quarter revenue of $552 million up 7% from the first quarter and up 24% year over year. The sequential increase was led by solid international growth geographically North America.
Revenue increased 4%, while international revenues increased 11% sequentially.
Segment, adjusted EBITDA was $78 million up 17% sequentially and 27% higher than the second quarter of last year volume growth and selling price increases drove the sequential and year over year improvement.
Segment, adjusted EBITDA margin was 14, 2% up 118 basis points sequentially.
And 36 basis points up from the prior year's period.
We had strong revenue growth in the first half of this year and we continue to realize the benefit of our pricing actions offset by somewhat higher raw material and logistics costs in the quarter, our price realization caught up to raw material inflation during the second quarter and we still expect to delay.
Ever healthy sequential EBITDA margin rate improvement in the second half of 2022.
Given and sanctions imposed by the United States European Union and the United Kingdom, We have initiated a plan to sell our operations in Russia, which is included in our production chemical technology segment. This business was classified as held for sale at the end of the second quarter and written down to expected.
Fair value production and automation technologies second quarter segment revenue of $242 billion increased 10% sequentially, primarily due to activity increases market share capture and increased pricing year over year revenue was up 29%.
Digital revenues increased 14% sequentially in the quarter and 54% year over year. We are seeing continued customer focus on leveraging digital to reduce emissions and drive operational improvements and cost efficiencies. Our revenues are benefiting from these trends.
Pat second quarter segment, adjusted EBITDA was $49 million up 8% sequentially and 20% up year over year segment. Adjusted EBITDA margin was 20% down 40 basis points versus the fourth quarter, primarily due to materials.
And freight cost inflation in the period.
Drilling technologies segment revenue was $58 million in the second quarter up 2% sequentially and 54% year over year as we experienced continued demand growth in North America and internationally as well as increased pricing.
Drilling technologies delivered segment adjusted EBITDA of $17 million during the second quarter flat sequentially and up approximately two times on second quarter of last year.
Segment margin was 29, 5% in the quarter at 93 basis points sequential decline, but roughly 700 basis points above the year over year comparable <unk>.
Revenue chemical technologies revenue for the second quarter was 44 million, which is an increase of 11% sequentially and up 33% year over year.
The segment experienced a small adjusted EBITDA loss, driven by raw materials cost inflation.
As noted on slide nine during the quarter. After a strategic review, we decided to exit certain RCT product lines and the associated manufacturing capacity to improve the overall profit.
<unk> of this business moving forward, we incurred approximately $5 million in restructuring charges. During the second quarter related to these efforts and expect further restructuring charges in third quarter related to manufacturing capacity rationalization.
Moving to our financial position and balance sheet as shown on slide 10, we ended the second quarter in a strong position with $167 million of cash on hand, and approximately $740 million of total liquidity, including available revolver capacity and increase.
<unk> of $200 million versus the prior quarter.
During the quarter, we successfully refinanced our existing credit facilities with a restated senior secured credit facility and we redeemed all of our outstanding Senior notes. The restated agreement provides a $625 million term loan b and a 700.
Million dollar five year revolving credit facility.
The successful execution of the debt refinancing further simplified our balance sheet extended our nearest debt maturity to 2027 and enhanced our strong liquidity position.
At June 30, our leverage ratio was one times net debt to adjusted EBITDA.
We remain committed to the return of surplus capital to our shareholders. During the second quarter, we returned over 60% of our free cash flow to shareholders in the form of our $15 million of regular quarterly cash dividend and with $20 million of share repurchases.
We remain laser focused on disciplined capital allocation delivering.
Our operating and free cash flow targets strong working capital management, and maintaining our strong liquidity and financial position.
Turning to slide 11, 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% margin range up approximately 100 basis.
Points on the 2021 exit rate.
Specific to the third quarter, we expect revenue, including Ecolab Cross sales in the range of $925 million to $955 million.
With chemical selling price increases now exceeding raw materials inflation, coupled with our ongoing cost and productivity actions, we expect our adjusted EBITDA margin to improve healthily in the second half of the year.
For the third quarter, we expect EBITDA in the range of $148 million to $156 million.
In the quarter, we also expect sequential revenue improvement in our PCT.
In drilling technologies businesses.
We expect some revenue offset specifically the impacts of exiting certain product lines within our reservoir chemical technologies business and the expected and previously communicated reduction in cross supply sales to eco lab.
On this slide we have also provided additional specifics related to our third quarter.
We continue to expect capital investments to remain in the range of three to three 5% of revenue.
And while with periods of revenue growth, we will see working capital investment requirements, we remain confident in our 50% to 60% free cash flow to EBITDA conversion ratio target through the cycle.
And we still expect our 2022 free cash flow delivery to be weighted to the second half of the year.
Thank you and now back to silver.
Thank you Ken before we open the call to questions I would like to turn your attention to slide 13, I'll pull it back.
Summarizing our capital allocation framework.
We shared with you earlier this year.
As we mentioned last quarter now that we have reached our target leverage ratio. Our commitment was to begin to return capital to our shareholders, while continuing to invest in high return organic growth investments and small bolt on technology additions.
During the second quarter, we utilized our free cash flow to deliver on that commitment.
We expect our free cash flow profile to further improve in the second half of this year and we intend to return a substantial portion of that free cash flow to our shareholders by continuing to execute on our previously announced share repurchase program.
I remain committed to our disciplined capital allocation framework.
We are laser focused on delivering strong operational execution.
As we shared on our first quarter call, we expected Q1 to be our EBITDA margin low point of the year.
With our EBITDA margin progressively improving through the year.
In the second quarter, we saw where production chemical technologies business start to deliver margin expansion as our pricing realization popped up to the raw material inflation that we have been experiencing over the last year on behalf.
We expect our production chemical technologies.
And overall champion X EBITDA margin to accelerate in the second half of this year exiting 2022 at an EBITDA margin rate of 18%.
In addition, we have increasing confidence that champion X will achieve our intermediate term goal of an EBITDA margin of at least 20%.
Finally, we are excited about the constructive demand tailwind in our businesses our market leadership and scale in our key product lines combined with our broad exposure to global basins and customers' positions champion X, particularly valspar the favorable multi yet opened up for our sector.
As an example that has an increasing evidence that global offshore oil and gas activity levels are improving offshore.
Offshore environment, particularly in deepwater tend to be more technically challenging and chemicals and tencent and of our market leading production chemical technologies business is especially well positioned in this arena.
In closing I want to thank all of our 7000 champion X employees around the world.
They have a relentless dedication to our pulp of improving the lives of our customers our employees, our shareholders and our communities.
I draw inspiration daney from needing such a remarkable team with that I would like to open the call for questions.
Thank you we will now begin the question and answer session. If you have a question. Please press zero one on your Touchtone phone.
If you wish to be removed from the queue. Please press zero. Two if you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero one on your Touchtone phone standing by for questions.
And our first question online comes from Mr. David Anderson from Barclays. Please go ahead.
Hi, good morning, Soma Com.
So it looks like you are pretty well on track to hit your targeted production chemicals to recover margins and as you are setting your.
The pricing started to.
It has taken over the on the raw materials.
Talk about what happened to this segment after that in terms of kind of how the drivers of this business might change, particularly international activity to ramp up I guess my question.
I guess, you just said if I'm not mistaken I think you said, 11% increase in.
International.
Outpace North America pretty well so I'm just wondering if we should expect that really to continue all through next year as we see middle East volumes ramp up and you just mentioned as well really interested about the offshore coming back, which I would think a lot of it's going to be pretty short cycle. So maybe just kind of talk about how north America versus international how you see that playing out.
Further out.
Yes, David Thank you and let me first say that.
I'm fighting a little bit scratchy throat, so I apologize if my.
If my answers.
Until we get a little bit of a scratchy throat here so.
Going back to.
The question about.
Beyond 2022 I think.
You've seen I think on the teams.
Particularly in production chemicals, the teams that are executing well on the price increases. So we are.
We have seen.
As we saw in second quarter as we exit the second quarter, we could see that the price increases are offsetting the raw material inflation. So we feel good about that margin progression in the segment them overall for champion X.
As you know we have a very strong position in.
In deepwater offshore and as we have shared before they tend to be more chemical intensive technically challenging and we have a strong competitive moat around it.
That area can you give me an idea close to about 40% of our revenues in Nevada production chemical technologies comes from deepwater and offshore.
So as that.
Mark we are seeing increasing evidence that the market is.
Recovering in that area.
<unk>.
We have seen a nice growth in that in the second quarter. So we feel good about in 2023.
Our production chemical technologies should continue to benefit from.
That international as well as the deepwater and offshore growth.
Are there margin I mean, presumably the margins are much higher in deepwater as well.
That's correct Directionally as we have shared before.
Deepwater offshore margins tend to be better than.
What you typically see on a conventional.
Going back to them.
Makes sense.
On my second my follow up question I had kind of a two parter on the artificial lift side I was wondering if you could talk about in the U S onshore business kind of year to date, what <unk> seen on ESP versus the rod lift side.
And then secondarily kind of similar question on the international side I know you've been trying to build out further.
On the list, but it's been a topic that's come up quite a bit.
Some of your competitors over the last week or so so.
Mike.
Expanding on both side. Thank you.
Yes, David absolutely.
As you've seen.
Artificial lift and <unk> continued to post very strong sequel.
Sequential growth you saw.
10% sequentially in Q2, and we expect to grow nicely again in Q3.
And international has been really strong growth in.
Both in Q2, and we expect another strong growth in Q3.
Going back to specifically on the ESP side.
We have seen nice growth in the <unk> continue to be there.
And I want to address the issue of what you mentioned about competitors.
Again, I want to remind that.
That internationally.
Today, we don't anticipate in the USB market.
So.
So really.
That's complete greenfield opportunity for us and.
And we are working on.
Our entry into the international ESB markets and in the coming quarters.
So again.
Today, we don't have any presence in the ESP market internationally. So.
But on the other side, although the majority of the international growth is driven by.
Our rod lift to progressive cavity pumps.
<unk> pumps, the other forms of artificial lift, which we have got a strong position and with the this is a big focus of revenue synergy opportunities.
We have been putting on.
And so we expect.
The revenue synergies to build up.
As we said last year, we got about $30 million of incremental revenue synergies what's across our portfolio. We expect that this year to be higher than that so the international ESP opportunities are all incremental to that.
In the coming quarters in the coming years.
Thank you.
Yes sure.
Thank you. Our next question online comes from Chase Mulvehill from Bank of America. Please go ahead.
Hey, good morning, everybody.
I guess, firstly on just your guidance <unk>.
You kind of gave us obviously revenue and EBITDA, but I wanted to.
In fact, the revenue a little bit.
The guidance it seems tough to kind of get to even the high end.
Of the revenue guidance.
So just.
Just.
Walk us through each of the three segments and how we're thinking of how you guys are thinking about sequential revenue growth because.
I feel like that the reservoir chemicals in the ecolab revenues, let's be falling off pretty hard.
Because I think the quarter.
Segments still should see some some really nice growth.
Yes, so I think.
You're thinking about that right in the sense that we expect up to our PCT.
In drilling technologies, all to have sequential growth in Q3.
And.
That is being offset by.
The exiting of certain product lines in our LCD business as part of our restructuring.
So.
Then the decline in the.
Cross sell it.
I love equal App, so you've seen the momentum.
Q2.
Top line growth in each of these segments.
So we feel good about the topline growth in the <unk> in drilling technologies.
So the offsetting factor here is the RCT and the decline in <unk>.
<unk> sales.
Okay.
Would you hazard, a guess, which one of those three segments whether it's.
Julian technologies with production chemicals will grow the most in <unk>.
Yes, it will.
Probably grow the most followed by Didi in BCD.
Okay Alright perfect.
I guess follow up question is just really on the capital allocation framework and I appreciate the slide in the details here.
Here.
But you've obviously hit your leverage ratio target.
You bought back a small sliver of stock in <unk>, but.
But can you talk about how youre thinking about.
Capital allocation.
<unk> as you go forward.
And especially as we think about it between share repurchases and split you mentioned special dividends I mean your stock is is exceptionally cheap so.
Just let us let us know how you're thinking about buybacks.
Given where the stock is trading.
Yes.
Let's see as said in the prepared remarks, we are committed to that capital allocation framework as you pointed out.
Having gotten to about target leverage and we continue to invest in the organic investments like we talked about and we feel good about where our portfolio is so any type of.
Investments in.
Technology additions will be small for us so which means the debt.
The substantial portion of our surplus cash.
We expect to return to our shareholders and you saw that in Q2 over 60% of it and we have we have said that we expect the cash flow profile to improve further in the second quarter second half and.
We are committed to increasing our.
Cash flow at.
Return of cash to the shareholders as that.
Cash flow profile increases so you should expect a substantial portion of our second half surplus cash to be returned to our shareholders.
And we have that $250 million of share repurchases, we do believe that.
Given better stock.
I think.
That would be out in the second half that would be our primary.
Mechanism of.
Returning.
Capital to our shareholders.
So.
Again, our commitment has not changed I think it will continue to increase.
Okay, Alright, perfect I appreciate the color I'll turn it back over.
Thank you.
Thank you.
Next question on line comes from Steven <unk> from Stifel.
Thanks, Good morning, everybody.
Yes.
Two things from me if you don't mind.
What I would start with I guess is on the production chemical side. I mean, you had a you had a step up in margin.
In the second quarter and you gave some targets for the end of this year.
When you think about the progression in terms of the overall margin target of 20% is that a is that a.
Our goal we should expect during 2023.
Yes.
Okay.
Are you talking about our intermediate target of 20% we mentioned, yes, yes, okay, yes, so we.
We are not providing.
Guidance for the 2023 right now.
What I would say is that.
Evan.
The margin progression.
We are seeing and our increasing confidence in the exit rate of 18%.
We feel that the 20% of that in the intermediate term.
Very.
Achievable number that's what I would say I'm not specifically mentioning that it is a 2023 talking about at this stage because we are not providing 2023 guidance at this point.
Okay. Thank you and then when we think about the biz.
Business and what Youre seeing.
Both in North America internationally on the revenue front, but also the margin flattish first quarter to second quarter.
I think there were some transportation costs.
Around that can you just talk about that business a little bit more on sort of how we should think about that progression of revenue and margin relative to just overall activity and some potential traction.
Do you expect to gain on the international front.
Yes, Steve.
Rightly pointed out.
Q2 was.
<unk> was somewhat flat.
Flattish and primarily driven by as you mentioned increase in logistics and freight and fuel cost.
And in the quarter, we have taken.
We have taken.
<unk> in terms of price increases and surcharges. So you should expect that as we go into Q3.
Should see sequentially that playing out.
The margin should start improving.
And Q4 as you know in typically in <unk>.
And in the North American short cycle business.
That is the.
It's seasonal.
Activity.
Slowdown that could be related to <unk>.
A number of working days holiday period, sometimes without the related things and her team. So so.
So Q4, sometimes.
In normal years Youll tend to see.
Sequential Q3 to Q4.
Slowdown in.
<unk>.
Some.
Aspects of revenues.
And by the holiday events.
But as we walk into 2023 and Thats. We continue to grow you should you should expect to see borrowing those see subtle.
Slowdowns.
You should see continued revenue and margin progression.
Business.
Great.
Helpful color. Thank you.
Sure Steve.
Thank you. Our next question online comes from Mr. Marc Bianchi from Cowen.
Thank you.
The revenue growth for PCT for this year upgraded to high teens for mid teens.
It seems to imply very minimal sequential growth for the remainder of the year.
Can you talk to the dynamic there I think previously you had expected price increases too.
Maybe result in some market share loss and it seems like that hasnt occurred.
So maybe just.
Put a little more color around the expectation for the back half if you could.
Yes, Mark.
<unk>.
You rightly pointed out that our teams have done a really nice job.
<unk> on this and I can tell you based on the tracking we do.
I would say that.
In every geographic market we participate.
Actually gain net market share in.
In our PCB business.
So.
I feel good about how all of them.
Teams of <unk>.
<unk> focused on executing on it.
In the second half, we do expect sequential growth in that.
Q3.
We expect a sequential growth in Q4 tends to be.
Stronger for our PCT because of international.
International volume tends to be stronger in Q4.
So it's possible.
Topline expectation on PCT.
May prove.
A little bit conservative in the second half.
But.
But we feel confident about the high teens.
But the activity is good our teams are executing well.
Okay Super and then.
On the margin the.
20%.
Versus exiting at 18% is the difference there just catching up on.
The raw material inflation it sounds like now Youre ahead of the curve on that but is it just more of that or.
Is there mix or some other reason that that's driving the delta from 18% to 20% whenever you end up getting there.
Yes, no I think.
It will be a combination of.
No.
I think the incremental.
Volume.
In 2023 as well as the flu.
Okay.
We do we do expect the.
<unk>.
If you walk into 2023 some moderation.
It should happen in some of the raw material.
Prices as well.
But but it's more from 18% to 20.
It will be more incremental volume and continued productivity.
Great. Thank you so much I'll turn it back.
Thank you.
Our next question online comes from Etsy monarch.
Goldman Sachs. Please go ahead.
In terms of the capital return strategy do you think that 60% of free cash flow over the longer term is a good way to think about it.
What are the radio moves would you consider as you think about the right level of return overall return yield on equity between dividends and buybacks.
Yes.
<unk>.
Again as soon as I mentioned before.
Again, I go back to capital allocation framework, and we stay committed to that so in the second half.
You should.
We mentioned.
You did.
Over 60% return of free cash flow in Q2, we expect the second half to be higher.
Because of our increased cash flow profile.
And substantial.
Sure.
We expect the share repurchase to be that Maine.
The main mechanism part of that.
Now.
As we have said before we are.
We are very focused on.
<unk>.
Sustainably growing our dividend.
As our free cash flow goals.
With respect to.
Long term.
View off.
What is the right.
The way to think about the capital return percentage of free cash flow we.
We are currently reviewing that and.
So we will be in a position how we.
We are doing that in the amendment made sure of that.
Do we think about that through the cycle and.
So we have Eddie will be in a position to communicate that.
But I do want to make sure of that.
Turning capital to shareholders is that very integral part of our capital allocation strategy as we have said before we feel good about where we are with our portfolio.
We have continued to invest in organic growth opportunities so any type of Ah.
A technology additions.
M&A activity will be it will be small for us.
So which means.
The substantial portion of our.
Surplus free cash flow.
We will be returning dollars to shareholders.
Great and then as you think about the international Recon inflection in the second half of the yard.
Do you think you could see another round of stocking related strength in orders and revenue for the drilling technologies segment. How do you. How do you think about the cadence there for the rest of the year in early 'twenty three if you can.
Yes, so I mean, the the lease.
Destocking additional stocking.
Orders in our drilling technologies.
Tend to be more of that.
Step function, which means.
If that is.
The step function change in.
If rig count additions.
Then customers tend to.
AD.
Stop more.
In our current.
Forecast for the second half what it means for <unk>.
Building technologies, we are not anticipating any additional restocking.
What is built into our forecast is that regular cadence of orders, which is in line with.
Headcount additions.
Thank you I'll turn it over.
Okay. Thanks, Eddie.
Thank you.
Our next question online comes from Mr. Shawn Mitchell from Daniel Energy Partners.
Good morning, guys. Thanks for squeezing me in.
One thing you guys have historically talked about is a pretty rigorous process on tracking.
Cost of raw materials, and this may be kind of.
Something Mark was trying to get at the earlier, but are you guys seeing any signs of cost going lower with raw materials or is there anything you can share with us on the cost side or relief within the supply chain in general.
Yes.
No.
But tourists.
Clearly it has been pronounced thing in our production chemicals side auto chemical technologies business.
No.
Our view right now what we have built into our second half.
Our forecast is in Q3, we expect.
Okay.
Another small increase in our raw material inflation, which is mostly just below what from.
Some of the increases we saw in Q2.
And we expect a small increase going into Q3.
And then as we go into Q4, we have a small moderation in our raw material prices in certain categories.
So to answer your question, we do expect in Q4, a small moderation in other.
Commodity prices, but Q3, we still.
However.
Increase built into our forecast.
Okay. Thanks.
And the <unk> side.
We do expect.
Some level of moderation in the fourth quarter, particularly in the steel side still and the special bar quality side.
Got it thank you.
Sure.
We have no further questions at this time.
Well I want to thank everyone for your continued.
Trust in <unk>.
<unk>.
And we look forward to talking to you again in our next quarterly earnings call. Thank you.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Please standby for your debrief.
Okay.
[music].
[music].
Welcome to the champion X second quarter 2022 earnings Conference call My.
My name is Richard 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 during.
During the question and answer session. If you have a question. Please press zero one on your Touchtone phone.
As a reminder, the conference is being recorded.
I will now turn the call over to Byron Pope Sir you may begin.
Thank you.
Morning, everyone with me today are Soma Soma syndrome, President and CEO of champion X and Ken Fisher, Our executive Vice President and CFO .
During today's call, we will share some of the Companys highlights.
Ken will then discuss our second quarter results and third quarter outlook before turning the call back to Soma for some summary thoughts we will then open the call for Q&A.
During today's call, we will be referring to the slides posted on our website.
Let me remind all participants that some of the statements we will be making today are forward looking.
These matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore, I refer you to our latest 10-K filing and our other SEC filings for a discussion of some of the factors that could cause actual results to differ materially.
Our comments today May also include non-GAAP financial measures.
Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our second quarter press release, which is available on our website I will now turn the call over to Soma.
Thank you Byron.
Morning, everyone I would like to welcome our shareholders employees and analysts to our second quarter 2022 earnings call. Thanks for joining us today.
I am pleased with <unk> second quarter results.
Our teams executed well.
Our performance was driven by a robust top line growth across our business portfolio in both our international and North American markets.
Increasing price realization and we are well positioned to deliver strong adjusted EBITDA and.
Adjusted EBITDA margin growth in the back half of the year.
As we have said before we see our culture as a source of sustainable competitive advantage.
Which is why we always talk with our organizational purpose.
As shown on slide number four.
We hold ourselves accountable for being tired less customer advocates.
<unk> committed to our employees delivering technology that is impactful in helping solve customer problems and having a continuous improvement mindset.
Speaking of our purpose I would be remiss, if I did not recognize that June 3rd Mark the two year anniversary of our transformational merger.
We are proud of how remarkably Val our organization has executed on behalf of all of our stakeholders over the last two years, we are truly better together.
Consistent with our purpose of improving lives as you can see on slide number five we celebrated our two year anniversary by volunteering over 1400 hours of service and communities around the world. It is humbling to see our team's commitment to our purpose put it.
To action in such tangible ways.
Ken will take you through our second quarter financial results. Shortly so let me just share a few high level comments.
Our business portfolio once again delivered superior top line growth in the second quarter year over year, Our North America, and international revenue grew 27% and 20% respectively, illustrating the attractive organic growth opportunities within our global business.
As each of our businesses contributed to this strong performance in.
In particular in our first quarterly earnings call. We mentioned that we expected our production chemical technologies business to experience top line growth for the full year 2022 approaching mid teens percentage.
Given the robust topline first half of 2022, we now expect our production chemical technologies business to deliver our full year 2022 revenue growth in the high teens percentage.
Revenues from digital products, which includes our emission management products increased 54% year over year and 14% sequentially in the second quarter. We continue to remain excited about the long term organic growth prospects in this business and investing appropriately to support it.
Our teams are delivering price increase realization to offset the impact of raw materials.
But on logistics related cost inflation that we have experienced in our portfolio of businesses.
Last quarter, we shared with you that we expected our chemical selling price to catch up to and exceed raw material inflation exiting the second quarter and our teams delivered on that objective.
We confidently expect to see healthy EBITDA margin improvement in the second half of this year.
We have previously shared with you our capital allocation priorities during the second quarter, we demonstrated our commitment to returning capital to shareholders by returning over 60% of our free cash flow generated during the period covered investors buy our regular cash dividend and by <unk>.
Purchasing $20 million of champion X stock.
We remain fully committed to creating value for our champion X shareholders and be increased capital return as our free cash flow growth in the second half of this year.
Now I would like to turn the call over to Ken to discuss our second quarter results and our third quarter outlook.
Thank you so much good morning, and thanks, everyone 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 slide seven second quarter, 2022 revenue was $933 million up $67 million or 8% sequentially and up 24% year over year as we posted solid revenue growth in all of our operating segments.
Geographically North America revenue grew 6% and international revenue was up 11% sequentially.
Included in our quarterly revenues were $36 million of cross sales to eco lab 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.
<unk> statements. We expect these ecolab sales to continue at a declining rate through mid 2023, the third anniversary of our merger closing date.
Second quarter GAAP net income for the company was $27 million or <unk> 13 per diluted share versus $37 million in the first quarter and $7 million in the second quarter of 2021 second quarter net income included a $23 million.
Charge to reduce the carrying value of the chemical technologies, Russia business to its estimated fair value as this business was classified as held for sale during the quarter.
As seen on slide eight champion X consolidated adjusted EBITDA in the second quarter was 138 million.
11% versus the previous quarter, and an increase of 31% versus the prior year period.
Higher volumes and selling prices, primarily drove this improvement in net income and adjusted EBITDA and more than offset the impact of raw material and other cost inflation.
In the second quarter, we delivered consolidated adjusted EBITDA margin of 14, 8% higher by 41 basis points sequentially.
76 basis points over the second quarter of 2021.
Our second quarter free cash flow of $54 million reflects effective working capital management as we supported the strong top line growth of the business during the quarter.
Cash from operating activities was $74 million in capital investment was $21 million net of proceeds from asset sales.
Turning to our business segments production chemical technologies generated second quarter revenue of $552 million up 7% from the first quarter and up 24% year over year. The sequential increase was led by solid international growth geographically North America.
Revenue increased 4%, while international revenues increased 11% sequentially.
Segment, adjusted EBITDA was $78 million up 17% sequentially and 27% higher than the second quarter of last year volume growth and selling price increases drove the sequential and year over year improvement.
Segment, adjusted EBITDA margin was 14, 2% up 118 basis points sequentially.
36 basis points up from the prior year's period.
We had strong revenue growth in the first half of this year and we continued to realize the benefit of our pricing actions offset by somewhat higher raw material and logistics costs in the quarter, our price realization caught up to raw material inflation during the second quarter and we still expect to deliver.
Our healthy sequential EBITDA margin rate improvement in the second half of 2022.
Given and sanctions imposed by the United States European Union and the United Kingdom, We have initiated a plan to sell our operations in Russia, which is included in our production chemical technology segment. This business was classified as held for sale at the end of the second quarter and written down to expected.
Fair value production and automation technologies second quarter segment revenue of 242 billion increased 10% sequentially, primarily due to activity increases market share capture and increased pricing year over year revenue was up 29%.
Digital revenues increased 14% sequentially in the quarter and 54% year over year.
We're seeing continued customer focus on leveraging digital to reduce emissions and drive operational improvements and cost efficiencies. Our revenues are benefiting from these trends.
Pat second quarter segment, adjusted EBITDA was $49 million up 8% sequentially and 20% up year over year segment. Adjusted EBITDA margin was 20% down 40 basis points versus the fourth quarter, primarily due to materials and freight.
Cost inflation in the period.
Drilling technologies segment revenue was $58 million in the second quarter were up 2% sequentially and 54% year over year as we experienced continued demand growth in North America and internationally as well as increased pricing.
Selling technologies delivered segment adjusted EBITDA of $17 million during the second quarter flat sequentially and up approximately two times on second quarter of last year.
Segment margin was 29, 5% in the quarter at 93 basis points sequential decline, but roughly 700 basis points above the year over year comparable revenue.
Revenue chemical technologies revenue for the second quarter was $44 million, which is an increase of 11% sequentially and up 33% year over year. This segment experienced a small adjusted EBITDA loss driven by raw materials cost inflation.
As noted on slide nine during the quarter. After a strategic review, we decided to exit certain RCT product lines and the associated manufacturing capacity to improve the overall profitability of this business moving forward, we incurred approximately $5 million in restructuring charges dori.
The second quarter related to these efforts and expect further restructuring charges in third quarter related to manufacturing capacity rationalization.
Moving to our financial position and balance sheet as shown on slide 10, we ended the second quarter in a strong position with $167 million of cash on hand at approximately $740 million of total liquidity, including available revolver capacity and increase.
<unk> of $200 million versus the prior quarter.
During the quarter, we successfully refinanced our existing credit facilities with a restated senior secured credit facility and we redeemed all of our outstanding Senior notes. The restated agreement provides us $625 million term loan B and a 700.
Million dollar five year revolving credit facility the.
The successful execution of the debt refinancing further simplified our balance sheet.
<unk>, our nearest debt maturity to 2027 and enhanced our strong liquidity position.
At June 30, our leverage ratio was one times net debt to adjusted EBITDA.
We remain committed to the return of surplus capital to our shareholders. During the second quarter, we returned over 60% of our free cash flow to shareholders in the form of our $15 million of regular quarterly cash dividend and with $20 million of share repurchases.
We remain laser focused on disciplined capital allocation delivering.
Our operating and free cash flow targets strong working capital management, and maintaining our strong liquidity and financial position.
Turning to slide 11, 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% margin range up approximately 100 basis.
Points on the 2021 exit rate.
Specific to the third quarter, we expect revenue, including Ecolab Cross sales in the range of $925 million to $955 million with.
With chemical selling price increases now exceeding raw materials inflation, coupled with our ongoing cost and productivity actions, we expect our adjusted EBITDA margin to improve healthily in the second half of the year.
For the third quarter, we expect EBITDA in the range of $148 million to $156 million.
In the quarter, we also expect sequential revenue improvement in our PCT.
In drilling technologies businesses.
We expect some revenue offset specifically the impact of exiting certain product lines within our reservoir chemical technologies business and the expected and previously communicated reduction in cross supply sales to eco lab.
On this slide we have also provided additional specifics related to our third quarter.
We continue to expect capital investments to remain in the range of three to three 5% of revenue.
And while with periods of revenue growth, we will see working capital investment requirements, we remain confident in our 50% to 60% free cash flow to EBITDA conversion ratio target through the cycle.
And we still expect our 2022 free cash flow delivery to be weighted to the second half of the year.
Thank you and now back to silver.
Thank you Ken before we open the call to questions I would like to turn your attention to slide 13 of our deck.
Summarizing our capital allocation framework, which we shared with you earlier this year.
As we mentioned last quarter now that we have reached our target leverage ratio. Our commitment was to begin to return capital to our shareholders, while continuing to invest in high return organic growth investments and small bolt on technology additions.
During the second quarter, we utilized our free cash flow to deliver on that commitment.
We expect our free cash flow profile to further improve in the second half of this year and we intend to return a substantial portion of that free cash flow to our shareholders by continuing to execute on our previously announced share repurchase program.
Remain committed to our disciplined capital allocation framework.
We are laser focused on delivering strong operational execution.
As we shared on our first quarter call, we expected Q1 to be our EBITDA margin low point of the year.
With our EBITDA margin progressively improving through the year.
In the second quarter, we saw where production chemical technologies business start to deliver margin expansion as our pricing realization caught up to the raw material inflation that we have been experiencing over the last year on behalf.
We expect our production chemical technologies, and overall champion X EBITDA margin to accelerate in the second half of this year exiting 2022 at an EBITDA margin rate of 18% in.
In addition, we have increasing confidence that champion X will achieve our intermediate term goal of an EBITDA margin of at least 20%.
Finally, we are excited about the constructive demand tailwind in our businesses.
Our market leadership and scale in our key product lines combined with our broad exposure to global basins and customers' positions champion X.
Globally worldwide, the favorable multiyear outlook for effective.
As an example that has an increasing evidence that global offshore oil and gas activity levels are improving.
Offshore environment, particularly in deepwater tend to be more technically challenging and chemicals intensive and above market, leading production chemical technologies business is especially well positioned in this arena.
In closing I want to thank all of our 7000 campaign ex employees around the world. They have a relentless dedication to our purpose of improving the lives of our customers our employees, our shareholders and our communities.
Draw inspiration Daney, some leading such a remarkable team with that I would like to open the call for questions.
Thank you we will now begin the question and answer session.
Have a question. Please press zero one on your Touchtone phone.
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Standing by for questions.
And our first question online comes from Mr. David Anderson from Barclays. Please go ahead.
Hi, good morning, Soma Com.
So it looks like you are pretty well on track to hit your targeted production chemicals to recover margins and as you say the pricing started to.
It has taken over the on the raw materials I would like to talk about what happened to this segment after that in terms of kind of how the drivers of this business might change, particularly international activity to ramp up I guess my question is.
Yes, you just said if I'm not mistaken I think you said, 11% increase in international.
Outpace North America pretty well, but I'm just wondering if we should expect that really to continue all through next year as we see middle East volumes ramp up and you just mentioned as well really interested about the offshore coming back, which I think a lot of it's going to be pretty short cycle. So maybe just talk about how north America versus international how you see that playing out.
But further out.
Yes, Dave. Thank you, let me first say that.
I'm fighting a little bit of a scratchy throat, so I apologize if my.
If my answers.
<unk>.
<unk> got a little bit of scratchy throat here so.
Going back to <unk>.
The question about <unk>.
Beyond 2022 I think.
As you have seen I think on the teams.
Lean production chemicals, the teams that are executing well on the price increases. So we are we.
We have seen.
As we saw in the second quarter as we exit the second quarter, we could see that the price increases are offsetting the raw material inflation. So we feel good about that margin progression in the segment them overall for champion X.
As you know we have a very strong position in.
In deepwater offshore and as we have shared before they tend to be more chemically intensive technically challenging and we have a strong competitive moat around it.
That area can you give me an idea close to about 40% of our revenues in Nevada production chemical technologies comes from deepwater and offshore.
So as that.
Mark we are seeing increasing evidence that the market is.
Recovering in that area.
And.
We have seen a nice growth in that in the second quarter. So we feel good about in 2023.
Our production chemical technology should continue to benefit from.
That international as well as the deepwater and offshore growth.
Are there margin.
The margins are much higher in deepwater as well.
That's correct Directionally as we have shared before.
But a deepwater offshore margins tend to be better than.
What you would typically see on a conventional.
Going back to the.
Makes sense.
On my second my follow up question I had kind of a two parter on the artificial lift side I was wondering if you could talk about in the U S onshore business kind of year to date, what <unk> seen on ESP versus the rod lift side.
And then secondarily kind of similar question on the international side I know you've been trying to build out further.
On the list, but it's been a topic that's come up quite a bit.
Some of your competitors over the last week or so so if you wouldn't mind.
Expanding on both sides. Please thank you.
Yes, David absolutely.
As you've seen.
Artificial lift them.
<unk> continued to post very strong sequel.
Sequential growth you saw.
10% sequentially in Q2, and we expect to grow nicely again in Q3.
And international has been really strong growth in.
Both in Q2, and we expect another strong growth in Q3 <unk>.
Going back to specifically on the ESP side again, we have seen nice growth in the <unk> continue to be there and I want to address the issue of what you mentioned about.
Again, I want to remind that.
That internationally.
Dave we don't participate in the USB market.
So.
So really.
That's that's complete greenfield opportunity for us and.
And we are working on.
Our entry into the international markets and.
In the coming quarters.
So again.
Today, we don't have any presence in the ESP market internationally. So.
But on the other side.
Majority of our international growth is driven by.
Rod lift progressive cavity pumps.
Jet pumps.
Other forms of artificial lift, which we have got a strong position.
And with the this is a big focus of revenue synergy opportunities.
We have been reporting on and so we expect that.
The revenue synergies to build up.
We said last year, we got about $30 million of incremental revenues an idea what's across our portfolio. We expect that this year to be higher than that.
The international ESP opportunities are all incremental to that in the coming quarters in the coming years.
Thank you.
Yes sure.
Thank you. Our next question online comes from Chase Mulvehill from Bank of America. Please go ahead.
Hey, good morning, everybody. So I guess, firstly on just your guidance <unk>.
You kind of gave us obviously revenue and EBITDA, but I wanted to unpack.
In fact, the revenue a little bit.
The guidance it seems tough to kind of get to even the high end.
Of the revenue guidance.
So just.
I mean, you walk us through each of the three segments and how we're thinking of how you guys are thinking about sequential revenue growth because.
Yes.
Feel like that the reservoir chemicals in the ecolab revenues, let's be falling off pretty hard.
Because I think the quarter.
Segment still should see some some really nice growth.
Yes, so I think.
Youre thinking about that right in the sense that we expect up to our PCT.
In drilling technologies, all to have sequential growth in Q3.
And.
That is being offset by.
The exiting of certain product lines in our LCD business as part of our restructuring.
So.
The decline in the.
Cross sell it.
<unk> equal App. So you have seen the momentum.
Q2.
Top line growth in each of these segments.
So we feel good about the topline growth in the PCT PID in drilling technologies.
So the offsetting factor here is the RCT and the decline in <unk>.
<unk> sales.
Okay.
Would you hazard, a guess, which one of those three segments, whether it's pad drilling.
Julian technologies with production chemicals will grow the most in <unk>.
Yes, it will.
Probably grow the most followed by Didi in BCD.
Okay Alright perfect.
I guess follow up question is just really on the capital allocation framework and I appreciate the slide in the details here.
Here.
But you've obviously hit your leverage ratio target.
You bought back a small sliver of stock in <unk>, but.
But can you talk about how youre thinking about.
Capital allocation as you go forward.
Especially as we think about it between share repurchases and split you mentioned special dividends I mean your stock is is exceptionally cheap so.
Just let us let us know how you're thinking about buybacks.
Where the stock is trading.
Yes.
As said in the prepared remarks, we are committed to that capital allocation framework as you pointed out.
Having gotten to about target leverage and we continue to invest in the organic investments like we talked about and we feel good about where our portfolio is so.
So any type of.
Investments in <unk>.
And all of the additions will be small for us so which means that.
The substantial portion of our surplus cash.
We expect to return to our shareholders and you saw that in Q2 over 60% of it and we have we have said that it would be.
We expect the cash flow profile to improve further in the second quarter second half and.
We will be committed to increasing our.
Cash flow and.
Return of cash to the shareholders as that cash flow profile increases. So you should expect a substantial portion of our second half surplus cash to be returned to our shareholders.
And we have that $250 million of share repurchase we do believe that.
Given where our stock is.
I think.
That would be out in the second half that would be our primary.
Mechanism of returning cash.
Capital to our shareholders.
Again, our commitment has not changed I think it will continue to increase.
Okay, Alright, perfect I appreciate the color I'll turn it back over.
Thank you.
Thank you our next.
Question on line comes from Stephen <unk> from Stifel.
Thanks, Good morning, everybody.
Two things from me.
Don't mind.
What I would start with I guess is on the production chemical side. I mean, you had a you had a step up in margin.
In the second quarter and you gave some targets for FERC for the end of this year.
Do you think about the progression in terms of the overall margin target of 20% is that a is that a.
Our goal we should expect during 2023.
Our CFO .
Are you talking about our intermediate target up to 20% we mentioned, yes, yes, okay, yes. So.
Not providing.
Guidance for the 2023 right now.
What I would say is that.
Given.
The margin progression.
We are seeing and our increasing confidence in the exit rate of 18%.
We feel that the 20% of that in the intermediate.
Term.
Achievable number that's what I would say I'm not specifically mentioning that it is a 2023 talked about at this stage because we are not providing a 2020 guidance at this point.
Okay. Thank you and then when we think about the <unk>.
Business and what Youre seeing.
Both in North America internationally on the revenue front, but also the.
The margin flattish first quarter to second quarter.
I think there were some transportation costs around that could you just talk about that business a little bit more on sort of how we should think about that progression of revenue and margin relative to just overall activity and some potential traction.
You expect a gain on the international front.
Yes, Steve.
As you rightly pointed out.
Q2 was.
Margin in <unk> was somewhat flat fairly flattish and primarily driven by as you mentioned increase in logistics and freight and fuel cost.
And in the quarter, we have taken.
We have taken.
Compromise shows in terms of price increases and surcharges. So you should expect that as we go into Q3.
You should see sequentially that playing out in the margin should start improving.
And Q4 as you know in typically in <unk>.
And in the North American short cycle business.
That is the.
It's seasonal.
Activity.
Slowdown that could be related to.
Number of working days holiday period, sometimes weather related things can achieve so so Q4, sometimes.
In normal years, you tend to see.
Sequential Q3 to Q4.
Slowdown in.
In some.
Some aspects of revenues driven by the holiday events.
But as we walk into 2023 and Thats. We continue to grow you should you should expect to see borrowing the C suite level.
Slowdowns.
You should see continued revenue and margin progression.
Business.
Great.
Helpful color. Thank you.
Sure Steve.
Thank you. Our next question online comes from Mr. Marc Bianchi from Cowen.
Thank you.
The revenue growth for PCT for this year upgraded to high teens for mid teens.
It seems to imply very minimal sequential growth for the remainder of the year.
Can you talk to the dynamic there I think previously you had expected price increases too.
Maybe result in some market share loss and it seems like that hasnt occurred.
So maybe just.
Put a little more color around the expectation for the back half if you could.
Yes, Mark I think.
You rightly pointed out that our teams have done a really nice job.
<unk> on this and I can tell you based on the tracking we do.
I would say that.
In.
Every geographic market, we participate we have actually gained net market share in.
In our PCB business.
So.
I feel good about how all of them.
Teams have stayed focused on executing on it.
In the second half, we do expect sequential growth in Q3.
We expect a sequential growth in Q4 tends to be.
Stronger for our PCT because of international.
International volume tends to be stronger.
In Q4.
It's possible.
<unk>.
Topline expectation on PCT.
May prove.
A little bit conservative in the second half.
But.
But we feel confident about the high teens.
But the activity is good our teams are executing well.
Okay Super and then.
On the margin.
20%.
Versus exiting at 18% is the difference there just catching up on.
The raw material inflation it sounds like now you're ahead of the curve on that but is it just more of that or.
Is there a mix or some other reason that that's driving the delta from 18% to 20% whenever you end up getting there.
Yes, no I think.
It will be a combination of.
No.
I think the incremental.
Volume.
In 2023 as well as the flu.
Okay.
We do we do expect.
<unk>.
If you walk into 2023 some moderation.
<unk>.
You should have happened in some of the raw material.
Prices as well.
But but it's more from 18% to 20.
It will be more incremental volume and continued productivity.
Great. Thank you so much I'll turn it back.
Thank you.
Our next question on line comes from Etsy monarch.
Goldman Sachs. Please go ahead.
You guys in terms of the capital return strategy do you think that 60% of free cash flow over the longer term is a good way to think about it.
What are the radio moves would you consider as you think about the right level of return overall return yield on equity between dividends and buybacks.
Yes.
<unk>.
So as I mentioned before.
Again, I go back to our capital allocation framework and we stay committed to that so in the second half.
You should assume.
As we mentioned.
You did.
Over 60% of free cash flow in Q2.
We expect the second half to be higher.
Because of our increased cash flow profile and substantial.
We expect the share repurchase to be that Maine.
The main mechanism part of that.
Now.
As we have said before we are.
We are very focused on.
Sustainably growing our dividend.
As our free cash flow goals.
So with respect to.
Long term.
View off.
What is that right.
The way to think about the capital return percentage of free cash flow. We are currently reviewing that and.
So we will be in a position how we.
We are doing that in the amendment.
To make sure that how do we think about that through the cycle.
And.
So we have Eddie will be in a position to communicate that and but I do want to make sure of that.
Turning to <unk>.
Capital to shareholders is that very integral part of our capital allocation strategy as we have said before we feel good about where we are with our portfolio.
We have continued to invest in organic growth opportunities so any type of fire.
A technology additions.
M&A activity would be it will be small for us so which means.
The substantial portion of our.
Surplus free cash flow.
We will be returning dollars to shareholders.
Great and then as you think about the international Recon inflection in the second half of the yard.
Do you think you could see another round of stocking related strength in orders and revenue for the drilling technologies segment.
Think about the cadence there for the rest of the year in early 'twenty three if you can.
Yes, so I mean the.
The restocking of additional stocking.
Orders in our drilling technologies.
Tend to be more of that.
Function, which means.
If that is the.
The step function change in.
If rig count additions.
Then customers tend to.
AD.
We stopped more.
In our current.
Forecast for the second half what it means for <unk>.
Building technologies, we are not anticipating any additional restocking.
What is built into our forecast at the regular cadence of orders, which is in line with.
The account additions.
Thank you I'll turn it over.
Okay. Thanks, Eddie.
Thank you.
Our next question online comes from Mr. Shawn Mitchell from Daniel Energy Partners.
Good morning, guys. Thanks for squeezing me in.
One thing you guys have historically talked about is a pretty rigorous process on tracking.
Cost of raw materials, and this may be kind of.
Something Mark was trying to get at the earlier are you guys seeing any signs of cost going lower with raw materials or is there anything you can share with us on the cost side or relief within the supply chain in general.
Yes.
No.
But to us.
Clearly it has been pronounced thing in our production chemicals side auto chemical technologies business.
<unk>.
Our view right now what we have built into our second half.
Our forecast is in Q3, we expect.
Another small increase in our raw material inflation, which is mostly yes below what from.
Some of the increases we saw in Q2.
And we expect a small increase going into Q3.
And then as we go into Q4, we have a small moderation in our raw material prices in certain categories.
So to answer your question, we do expect in Q4, a small moderation in.
Commodity prices, but Q3, we still.
However.
Increase built into our forecast.
Okay. Thanks.
Book.
And the <unk> side.
We do expect.
Some level of moderation in the fourth quarter, particularly in the steel side still and the special bar quality side.
Got it thank you.
Chip.
We have no further questions at this time.
Well I want to thank everyone for your continued.
Trust in <unk>, and we look forward to talking to you again in our next quarterly earnings call. Thank you.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect speakers. Please standby for your brief.