Q1 2023 ChampionX Corporation Earnings Call
Good morning, welcome to champion X reports first quarter results.
Your host for this morning's call is viable.
I will now turn the call over to Mr. Paul You may begin.
Thank you.
Good 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 Soma will share some of our company's highlights.
Ken will then discuss our first quarter results and second quarter outlook before turning the call back to Soma for some summary thoughts.
We 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 that 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 and 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 Soma.
Thank you Byron.
Good morning, everyone I would like to welcome all the shareholders employees and analysts to our first quarter 2023 earnings call. Thanks for joining us today.
Let me start by saying that champion X delivered strong performance in the first quarter on our key metrics, including adjusted EBITDA margin expansion free cash flow generation and capital return to our shareholders.
I'm appreciative of the remarkable dedication of our employees demonstrate daily in delivering value to our customers.
Before I touch on our first quarter performance on slide number four we always begin nobody earnings call with our corporate vision purpose and operating philosophy, because we wake up every day focused on improving the lives of our customers our employees, our shareholders and our communities.
On slide number five we shared a glimpse into just a few of the countless ways in which our teammates within our businesses and functional areas around the world take seriously our purpose of improving lives in the communities in which we live and work.
Now turning to first quarter performance, our first quarter revenue grew 10% year over year during the first quarter, we experienced normal sequential seasonal decline in international revenues.
This was partially offset by the strength of our North American revenues, which grew 4% sequentially.
All of our four segments posted sequential growth in North American revenues.
Our digital revenue grew 6% sequentially and 32% year over year.
We are seeing continued strong adoption of our fit for purpose digital solutions, including our emissions management technologies that drive tangible productivity for our customers and help them achieve their sustainability goals, we are continuing to invest in that area.
Ken will take you through the detailed tougher first quarter financial results shortly but let me first touch on three key business highlights which are shown on slide number six.
First EBITDA margin expansion.
Our continued focus on margin expansion is delivering meaningful and sustainable results.
Prior to experiencing a sequential revenue decline in the first quarter, which was primarily driven by seasonality. We typically see in international operations. Our Q1, adjusted EBITDA margin improved by approximately 40 basis points sequentially and 410 basis points year over year on continued.
Productivity improvements pricing realization and cost management.
This marked our fourth consecutive quarter of sequential improvement in our adjusted EBITDA margin.
We expect our adjusted EBITDA margin to progressively improve through the year and we now expect to deliver an exit rate of greater than 20% in the fourth quarter up this year.
Second free cash flow. We are pleased that we delivered another strong that differentiate that free cash flow quarter, especially given that the first quarter tends to be our lowest free cash flow conversion quarter after a year.
Our first quarter free cash flow of 69 million represented 39% of our adjusted EBITDA.
This once again demonstrates the best in class cash flow generating capability off little capital light portfolio of businesses.
Illustrates our high degree of confidence in converting at least 50% of EBITDA to free cash flow in 2023 and continue to deliver between 50% to 60% conversion of EBITDA to free cash flow through the cycle.
Returning capital to shareholders.
Previously shared with you and most recently in detail at our Investor Day last month, how long of a disciplined capital allocation framework.
<unk> to create value for our shareholders and in the first quarter. We once again delivered on our commitment to return excess cash to our shareholders in the first quarter between our regular cash dividend of $15 million and $40 million of share repurchases, we returned 80% of free cash flow to shareholders.
We remain committed to return at least 60% of free cash flow to our shareholders this year and through the cycle.
Let me now turn the call over to Ken to discuss our first quarter results and our second quarter outlook.
Thank you so much good morning, and thank you for joining us today I will be commenting on adjusted EBITDA for both sequential and year over year comparisons. We believe this metric best reflects the business performance of continuing operations.
Our first quarter 2023 revenue was $948 million up 10% year over year, and 4% below fourth quarter levels.
Graphically year over year, North America revenues grew 9% and international revenue was up 10% production chemical technologies was down sequentially exhibiting some expected seasonality and this was partially offset by growth in both our production automation technologies and drilling technologies business.
Yes.
Included in our first quarter revenues were $23 million across supply sales to ecolab, which declined 12% sequentially from the fourth quarter and were 33% lower than the prior year period as we have previously communicated we do not recognize margin on these sales.
<unk> and the associated revenue is allocated to corporate and other in our financial statements.
First quarter GAAP net income for the company was 64 million or <unk> 31 cents per diluted share versus 68 million in the fourth quarter and 37 million in the first quarter of 2022 in the quarter, we recorded a $13 million charge for the exit of our Russia.
Business moving forward, we will not recognize revenue in Russia.
As seen on slide nine champion X consolidated adjusted EBITDA for the first quarter was $176 billion down 2% versus the previous quarter and up 41% versus the prior year period.
The first quarter champion X delivered consolidated adjusted EBITDA margin of 18, 5%. This was up 38 basis points sequentially.
410 basis points over the first quarter of 2022.
Our first quarter free cash flow of $69 million reflected strong cash flow from operations and a continued laser focus on working capital management cash from operating activities was $92 million and capital investment was 23 billion net of proceeds from asset sales.
<unk> <unk>.
Turning to our segments.
Production chemical technologies generated first quarter revenue of 592 billion down 7% from the fourth quarter and up 15% year over year segment. Adjusted EBITDA was 105 billion down 13% sequentially and 57% higher than.
The first quarter of 2022 volume growth increased selling price and productivity projects drove the year over year improvement sequentially. We saw the impact of some seasonality in volumes at a lesser mix.
Segment, adjusted EBITDA margin was 18% down 127 basis points sequentially.
And up 477 basis points from the prior year's period, driven by higher selling prices that our productivity initiatives.
Production automation technologies fourth quarter segment revenue.
250 to build yet increased 3% sequentially.
Year over year revenue was up 14% driven by both volume and higher selling prices.
Digital revenues were up 6% sequentially in the first quarter and increased 32% year over year.
We continue to see increasing customer focus on implementing digital technologies to reduce submissions and drive operational and cost improvements, we expect future revenues to continue to benefit from this industry trend.
First quarter segment, adjusted EBITDA was $60 million up 18% sequentially and 33% above the prior year period segment. Adjusted EBITDA margin was 24% up 305 basis points versus the fourth quarter and 334.
Five basis points from the prior year period, due to higher volumes and selling prices.
Drilling technologies segment revenue was $57 million in the fourth quarter up 5% sequentially and flat year over year drilling technologies delivered segment adjusted EBITDA of $13 million during the first quarter up 2 million sequentially and down 4 billion compared to the first quarter of 2012.
<unk> two.
Segment margin was 24% in the quarter of 330 basis point sequential increase driven by higher volumes and lower tooling costs or revenue chemical technology segment revenue for the first quarter was $26 million flat sequentially and a 35% decrease year over year.
As previously discussed the year over year revenue decline was driven by the exit of certain low margin RCT product lives last year. This.
This resulted in lower revenues, but a significant improvement in the margin profile of this segment.
This segment posted adjusted EBITDA of $4 million during the fourth quarter up $1 million compared to the fourth quarter and up $4 million versus the corresponding prior year period.
Segment margin was 15% in the quarter at 212 basis point sequential improvement.
And 600 basis points favorable versus the prior year period, driven by the product line exit and the resulting restructuring actions.
Moving to our balance sheet as shown on slide 10, we ended the first quarter at very strong position with record liquidity of $915 million, including available revolver capacity and cash on hand. This was an increase of $27 million versus the prior quarter. We also continued to reduce outstanding debt.
With $27 million repaid in the first quarter on March 31, our leverage ratio was point.
Net debt to adjusted EBITDA.
In alignment with our capital allocation framework, we remain committed to the return of surplus capital to our shareholders representing at least 60% of free cash flows.
During the first quarter, we returned 80% of free cash flow to shareholders, including $15 million in regular quarterly dividend at <unk> 40 billion of share repurchases. We remain laser focused on disciplined capital allocation delivery of operating and free cash flow effective working capital management.
Maintaining our strong liquidity and financial position.
Turning to slide 11, and our forward outlook. We continue to expect 2023 to be another year of solid revenue growth and expanding adjusted EBITDA margins specific to the second quarter, we expect revenue in.
Including Ecolab cross sales in the range of $970 million to $1 billion, which at the midpoint represents 6% year over year revenue growth. Please recall 2022 second quarter revenues included Russia revenues, though.
RCT exited product lines, and a significantly higher level of Ecolab cross sales.
Second quarter sequential change in revenue is primarily driven by a seasonal step up international activity and continued positive momentum in our North American businesses.
For adjusted EBITDA, we expect a range of $182 million to $190 million, which at the midpoint represents a 35% increase over second quarter 2022.
At the midpoint. This represents a 400 basis points improvement year over year in the company's adjusted EBITDA margin rate.
We expect our adjusted EBITDA margin to improve throughout the year and we have increasing confidence that we will exit 2023 at our company adjusted EBITDA margin rate of greater than 20% in terms of capital investment. We continue to expect annual spending to remain in the range of three to three.
5% of revenues during 2023.
While at periods of revenue growth, we will see the need for some working capital investment we remain confident in our 50% to 60% free cash flow to adjusted EBITDA conversion ratio guidance through the cycle.
For this year, we continue to expect strong free cash flow with a free cash flow to adjusted EBITDA conversion ratio of at least 50% as a reminder, our free cash flow delivery is weighted towards the second half of the year.
Thank you and now back to Soma.
Thank you Ken.
Before we open the call to questions I would like to highlight a couple of important operating capabilities within champion X that helps us achieve sustainable margin expansion and delivering industry, leading free cash flow conversion.
Given all of our industrial heritage driving productivity improvements as part of our DNA.
We're constantly working on a long list of productivity projects that improve our business efficiency deliver customer value and contribute to improving our margins on the earnings.
These projects can vary from large restructuring efforts that contribute millions of dollars in productivity to daily improvements by everyone in the organization.
That add up over a period of time by eliminating waste in the system.
We enable this through our continuous improvement culture that is rooted in training all of our employees employees to be collaborative problem solvers, using lean methodologies and principles, we view our continuous improvement culture at an important competitive advantage.
Second on working capital management since our merger, we have been investing and building capabilities to enhance our working capital management at the heart of it it involves driving velocity through the system by eliminating waste and bottlenecks.
Enable this through daily metrics visibility process mapping real time data analytics, digitalization and robotic process automation.
Strong working capital management capabilities combined with our capital light business model result in champion X, having a differentiate that free cash flow profile through the industry cycles.
As the leading global provider of production optimization solutions.
The industry, we are uniquely well positioned to help operators meet that objective of maximizing the value of the a producing asset in sustainable and cost effective ways.
Market concerns about near term potential declines in North American natural gas directed activity level, Let me remind you that our champion X portfolio is highly oriented to oil and we continue to see favorable demand tailwind kind of a business.
That support a constructive multiyear outlook part of our portfolio.
Main laser focused on delivering solid bottom line growth adjusted EBITDA margin expansion and strong cash generation.
Fully committed to creating value for our shareholders through a disciplined capital allocation framework with clear priorities capital, including Hydra, Tony investment and returning cash to shareholders.
With that let me. Thank all of our 7300, a champion X employees around the world.
The tireless dedication to our purpose of improving the lives of our customers our employees our shareholders and our communities you inspire me daily with that I would like to open the call for questions.
Okay.
Okay.
Okay.
Thank you ladies and gentlemen, we will now begin the question and answer session.
You have a question please press star one.
Want to withdraw your question. Please press star two.
Questions will be both in the order received.
Are you seeing a speaker phone please lift the handset before pressing any Q.
One moment. Please for your first question.
Okay.
Okay.
Your first question comes from Steve <unk> from Stifel. Please go ahead.
Thanks, Good morning, everybody.
I guess, if you don't mind, starting with summit, when we think about the <unk>.
<unk> margin performance, which was clearly saw it in the quarter can you talk a little bit about how about pricing.
Trends, but also what youre seeing on the raw material cost side.
That has stabilized now and how we should be thinking about that impact our margins.
Yes, good morning, Steve.
So on the PCB side the input costs.
Definitely stabilized and as we mentioned in that.
In Q4, we saw some.
Incremental favorability. So we saw that continue into Q1 so.
So going forward, we feel the input costs are going to remain stable.
The other important aspect of PCT.
Margin expansion is.
The combination of continued pricing realization and as you know we have been very active in making sure that would be what through those pricing and the <unk>.
Pricing realization as well as the significant amount of productivity improvements.
So we feel very good about the.
Continued margin expansion as we go through this year.
PCT business.
Great. Thank you.
As a unrelated follow up just on the methane monitoring side can you give us an update on where that stands and any developments and our traction on that front.
Yes, great question Steve.
If you look at it in 2022.
Grew that business, 36% and today, we have over 50 customers.
Who have adopted our technologies.
What's also really really.
Encouraging is that our cutting revenue stream, we derived from that business today is that cutting revenue stream in that business is running at that rate up about 35% of revenues.
So we are continuing to see.
Adoption and particularly in this continuous.
Monitoring business and we are expecting another yet what we have seen in the.
First quarter.
Without methane monitoring business is giving us a lot of confidence.
It's going to be another year, where we are.
At least.
It will be in the 35, 36% growth at even greater than that.
Great. Thank you.
Thank you.
Your next question comes from Scott Gruber from Citigroup. Please go ahead.
Yes, good morning.
Good morning, Scott.
Yeah.
First question here on the OPEC production cuts, we have seen in the middle East.
A bunch of questions after that announcement.
Around whether it would be any impact on chemical sales.
The region are you guys seeing any indication that chemical sales in the middle East will be impacted.
By there.
Production cut decision.
Yes, great question Scott.
We have gone back and looked at.
Over the several years.
Opex has announced production cuts.
What impact we see in our.
Revenue trends and what's interesting is.
This type of near term production cuts are competitive production cuts really don't seem to have any impact on the revenues of our production chemical technologies and to answer. Your question. Specifically, we are seeing that again now that we are not seeing any specific impact on our.
Yes.
And our path on about the PCT revenues. So the only time be saw a significant impact on the PC revenue is when that is that significant and prolonged cut.
But the production cutbacks such as during the 15 16 timeframe during the pandemic and that in the second quarter of 2020 outside of that.
<unk> production cuts.
Don't seem to have any impact on our PCT revenues and we are not seeing that now either.
Okay, that's good to hear.
And then.
A follow up on drilling technologies.
Revenue there was up.
U S rig count onshore slid a bit.
But we do have a rising.
The national rig count.
We know that you guys.
We'll sell Youre inserts.
To others, making the pitch and the bits get sold internationally.
So sometimes those sales are domestic even though the bits go abroad, but just curious how you see the rest of the year playing out.
For your your cutter business.
Kind of given some crosscurrents between weaker.
Potential U S rig count.
And rising international activity.
Yes, Scott as you rightly pointed out.
We tend to track.
The.
Global rig count.
As you saw in the first quarter.
We grew close to 6% sequentially drilling technologies business and.
While the rig count that was.
Sequentially down close to about $2 five 3% now.
<unk>.
The two things that that we feel good about going forward and it should continue to drive sequentially revenue improvement in our drilling technologies. One is the worldwide rig count even though there could be some cross currents in North America with that.
In terms of rig count being flat to down.
But the international rig count continuing to raise so we'll benefit from that and the second aspect is that technology adoption. So we introduced some really innovative technologies in Q1, and we are seeing a broad adoption within our customers.
Of those.
Technologies in fact to extend one of their customers even pointed out that some of the best technology advances. He has seen in recent years. So we really feel good that continued technology adoption.
Our cutters going forward should also drive the sequential growth in a row.
Drilling technologies business. So the combination of these two factors we feel very good about.
Our drilling technologies business should continue to improve sequentially through the year.
That's great to hear and I appreciate the color I'll turn it back.
Thanks Scott.
Thank you.
Your next question comes from Marc Bianchi from Cowen. Please go ahead.
Hi, Thank you.
I wanted to first ask about.
Growth rates, so for the second quarter here it looks like maybe 4% growth rate is implied.
By the by the revenue guidance I am curious, how you see that progressing beyond second quarter and I know you probably don't want to get into specific figures, but just sort of do you expect that acceleration at some point later in the year or is it stay consistent at this level, maybe you could provide some more color around how that shapes up.
Yes sure Mark.
I think at the midpoint I think.
Sequentially our growth rate.
The 4%.
But.
Like Kevin mentioned in his prepared remarks.
You feel it.
At the end of the first quarter, we exited Russia, so that is.
Some of that I shouldn't revenues will not repeat for us going forward and then the continued.
RCT product line.
It will step down and then also the lower profit that equal up all that play into that equation, but the thing that is really important here is what.
What we are what we are exiting and these revenues on lower margin to breakeven market type product lines. So why is that.
The 4% that is revenue growth sequential revenue growth.
Including all of those elements.
Now going forward, we are very confident about that high single digit organic growth, which we laid out during the investor day. So we do expect our 70 COVID-19.
<unk>.
High single digit this year as well.
But even more confident we are on our solid EBITDA growth.
And the marketing continued stepping up and expansion of our margin and cash generation because of all the restructuring work, we have done and we have exited some of the lower margin product lines.
So.
We expect EBITDA growth to be even stronger as we work through that.
Through the quarters here, that's what gives us significant confidence in achieving our exit rate.
Greater than 20% this time, but you should expect us to sequentially the growth rates to improve and we still will achieve.
The high single digit growth rate for the year.
Okay.
That was a great response, and mostly answered my second question, which related to.
Sort of the margin leverage it would appear that you need to have a bit higher.
Metal margins in the back half to get to that above 20% and I'm, assuming that above 20% is that 21% youre going to be to play a bit more than that but it would seem that the margin leverage needs to pick up and what I'm hearing is it sounds like it's sort of more.
Restructuring than any kind of price cost.
<unk> that you would expect to develop.
Yes, Mark I would say that it's a combination of two.
Two things one let's say, we do expect our.
Volume to continue to step up right because as you know sequentially the volume.
<unk> steps up through that through the year and then the second thing is.
The all the productivity work, we have done well continue to.
Contribute as well so so definitely it's a volume as well as all of the restructuring and the productivity what we have done.
Wonderful. Thank you so much somewhat.
Thanks Mark.
Thank you.
Your next question concerns.
Okay from Bank of America. Please go ahead.
Hi, Good morning, Hi, Sumit Hi, Ken.
Good morning, Sarah.
I still I think just a quick follow up on marks question.
From a topline perspective, so just to clarify I think you said in 2023, you should be getting.
High single digit percentage top line.
Number I just wanted to confirm that and then.
Assuming thats correct, how should we think about the different businesses.
And last in drilling technology, which one do you think that's better than that number of enrichment is worse than that number.
Yes.
First and foremost I would say.
Filled up that all of our <unk>.
Business be expect.
Expect to grow except year over year flight in 2023, except that <unk> adds because RCT.
Because of all the.
The restructuring we have done and the Opex.
By by the time, we get to.
The middle of this year by end of June .
Cross sales to ecolab.
But it will stop.
Our reporting in the corporate line and additional sales from data onto you collapse would be.
Would be reported.
Of our segments.
So that's the framework so given that framework we expect.
Our <unk> business to kind of lead the growth followed by our PCB. So you should expect.
Both of those businesses.
Performing at a high single digit type level and with a little more than that and then followed by our drilling technologies.
Our business. So that's how I would think about et cetera.
Okay. Okay. Okay, perfect and then just a quick follow up Soma I know last quarter, we were talking about what PCB revenues can do in 2023, there is a lot of pricing and costs flow through dynamic because we had not just volume and I realize that but I think you were talking about that business, probably growing double digit rate I know it was not guidance it was.
Just a possibility right I'm just trying to think what needs to happen for you to be hitting double digit kind of revenue growth in PCB versus versus high single digit kind dependent.
Just so that I understand.
Yes, I mean, I think I think if you if you look at.
What.
Last year, the big one of the Big contributors is the continued pricing and inflation.
And I think this year I think.
We don't expect.
The inflation.
We are not expecting any stepping up inflation.
So it's.
The high single digit growth is a lot driven by volume improvement as well as the Caribbean pricing.
Basically got through now what can that even further improve that for US obviously as you know we are always working on.
Market share gain opex.
So if.
If you have more successful in that I think.
That can be even better.
And.
And the other aspect of that can happen is obviously.
As we have shared with you before where the source of production comes from.
Can also move the needle more so if that is more growth from.
And our offshore than expected then that can that can drive that.
And then higher oil prices can also drive as we have mentioned during the environment of high oil price.
Customers tend to increase even more of their production spending so we feel very confident about that high single digit growth but.
And it would be better it's all going to depend on some of these factors.
Got it okay. Okay. So that's perfect I've done it back thank you.
Thank you Sarah.
Thank you.
As a reminder show you have a question please press star one.
Your next question comes from adding water from Goldman Sachs. Please go ahead.
Hi, good morning.
Maybe can you talk about the operating discipline and working capital comment for <unk> that drove better free cash flow and how should we think about that going forward maybe for the full yard and subsequent <unk> is this a new normal.
Does that it sounds like the 50% conversion for this year should be easily achievable given <unk> was strong.
Yes.
Look we are we are.
We are very focused on our operating rigor and how we drive the business.
And as I mentioned, the fundamental core to that is our operating culture, which is rooted on the continuous improvement and for us what we do and because generally with our continuous improvement culture starts with the basic training for people to understand how to see based on how to eliminate ways.
<unk>.
And we.
Really training people to see waste in the system.
Is that is a significant way to identify productivity element and then helping them.
To solve the problems so within the company, we talk about making sure that we always have problem finders to problem solve this ratio to be at least.
Okay.
One is to one because we want everybody who finds the problem audit also enable to solve problems right. So we were really really focus on enabling that operating culture and.
And then on top of that is all of our investments around things like automation technology.
And then the other aspect of it is really really important in our system and our operating cadence is we constantly strive for daily visibility of metrics because our view is.
Everybody went upload employees needs to know that we are winning or losing.
Imagine if everybody knows winning or losing free.
Frequently it's easier to make corrective actions.
This is ed system capability, which we continuously invest in dry and Thats, a sustainable competitive advantage and that's why to your point about why this is important for us because this is what provides that sustainability and continuous.
Improvement in our.
Operating margin as well as cash generation.
Now you'll notice in the first quarter, our working capital management capability improvements.
Really showing up so that improves the consistency of our.
Our cash generation, it still will be somewhat back half weighted but compared to previous years.
We have improved that consistency of cash flow generation in the business. So I think you should expect that from us going forward.
And at this and we will continue to advance this capability.
Great. Thank you and then you mentioned leverage to oil prices more so than gas prices, but maybe touch on what kind of exposure do you have to softening gas prices in the U S and maybe any impact from the activity slowdown if you do see that in the second half of the yard across your segments.
Yes so.
The exposure we have.
Is that related to some of the gas drilling rig count right, because our drilling technologies business tend to.
Rig count driven but.
As I mentioned before with the.
The international rig count growing and our technology.
New products adoption continuing to.
Become strong I think we feel.
We should be able to offset that impact and growth through the year.
The other area, where we have.
Gas exposure is.
<unk>.
Our artificial lift.
You will see.
About less than about 10% of our revenues comes from gas related activity. This will be like dewatering up gas wells.
And those type of operations. So you will see it.
Some of that so that's the extent of it we have some midstream exposure gaslog, but thats driven more by gas production and transmission that just any type of fat gas.
Production, not drilling and completion type activities.
Got it I appreciate it I'll turn it over.
Thanks Eddie.
Thank you.
There are no further questions that you may proceed.
Well, thank you everyone for joining.
Joining our earnings call today. We appreciate your continued interest in champion X and we look forward to talking to you in our next quarter call. Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.
Please disconnect your lines.