ChampionX Corporation Q1 2023 Earnings Call
Drilling technologies businesses.
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 the sale.
<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 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.
<unk> 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 million down 2% versus the previous quarter and up 41% versus the prior year period.
In the first quarter champion X delivered consolidated adjusted EBITDA margin of 18, 5%. This was up 38 basis points sequentially and up 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 million net of proceeds from asset sales.
Turning to our segments.
Production chemical technologies generated first quarter revenue of $592 million 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.
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 and 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 in our productivity initiatives.
Production automation technologies fourth quarter segment revenue.
252 billion 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 330.
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 million compared to the first quarter of 2012.
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 lines last year. 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 points 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 in 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 <unk> five.
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 dividends and $40 million of share repurchases. We remain laser focused on disciplined capital allocation delivery of operating and free cash flow effective working capital management.
And 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 <unk>.
Alluding 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, the 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 in 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 delivered industry, leading free cash flow conversion.
First I would like to touch on driving productivity improvement.
Given all of our industrial heritage driving productivity improvements as part of our DNA.
We are constantly working on a long list of productivity projects that improve our business efficiency deliver customer value and contribute to improving our margins and earnings.
These projects can vary from large restructuring efforts that contribute millions of dollars in productivity to daily improvement by everyone in the organization.
Add up over a period of time by eliminating waste in the system via.
We enable this through our continuous improvement culture that is rooted in training all of our employees employees to be collaborating problem solved was using lean methodologies and principles.
View, our continuous improvement culture is 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 via.
Enabled this through daily metrics visibility process mapping real time data analytics, digitalization and robotic process automation.
The 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 for the energy industry, we are uniquely well positioned to help operators meet that objective of maximizing the value of their producing asset in sustainable and cost effective ways.
Despite market concerns about near term potential declines in North American natural gas activity levels. Let me remind you that our champion X portfolio is highly oriented to oil and we continue to see favorable demand tailwind kind of our businesses that support our constructive multiyear.
While our portfolio, we remain laser focused on delivering solid bottom line growth adjusted EBITDA margin expansion and strong cash generation.
We are fully committed to creating value for our shareholders through a disciplined capital allocation framework with clear priorities for our capital, including Hyatt atone investment and returning cash to shareholders.
With that let me. Thank all of our 7300 attempt connects employees around the world part of 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 should you have a question. Please press star one to.
I want to refer your question. Please press star two.
No questions will be both in the order received.
Are you seeing a speaker phone please.
Before Bruce again in Q.
One moment. Please for your first question.
Okay.
Okay.
Your first question from Stephen <unk> from Stifel. Please go ahead.
Thanks, Good morning, everybody.
I guess, if you don't mind, starting with when we think about the <unk>.
PCT margin performance, which was clearly solid in the quarter can you talk a little bit about.
Pricing.
Trends, but also what youre seeing on the raw material cost side.
As that has stabilized now and how we should be thinking about that impact on margins.
Yes, good morning, Steve.
So on the PCB side.
Costs have definitely stabilized and as we mentioned in that in.
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 we work through those pricing and the 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.
And 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 in 2022, we grew that business, 36% and today, we have over 50 customers.
Who have adopted our technologies.
And what's also really really.
Encouraging is that our cutting revenue stream, we derived from that business today without cutting revenue stream and the business is running about eight up about 35% of revenues.
So we are continuing to see adoption and particularly in this continuous.
Monitoring business and we are expecting another year of 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.
At least.
It will be in the 35, 36% growth that 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.
Assuming the middle East, we've got a bunch of questions after that announcement.
Round, whether it would be any impact on chemical sales.
In the region are you guys seeing any indication that chemical sales in the middle East will be impacted.
Hi, there.
Production cut decision.
Yes, great question Scott.
We have gone back and looked at.
Over the several years.
Yes.
OPEC has announced production cuts.
What impact we see in our.
Revenue trends and what's interesting is you know.
This type of near term production cuts are temporary production cuts really don't seem to have any impact on their revenues of our production chemical technologies and to answer. Your question. Specifically, we are seeing that again now that we're not seeing any specific impact on our.
<unk>.
On our path of our PCT revenues. So the only time, we saw a significant impact on the PC revenue is when that is that significant and prolonged the cut.
With the production cutbacks that task during the 15 16 timeframe all during the pandemic came there 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.
We do have a rising international 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 kind of business.
Just kind of given some crosscurrents between weaker potential.
Potential U S rig count.
Rising international activity.
Yes, Scott as you rightly pointed out.
We tend to track.
The.
Global rig count so as you saw in the first quarter.
We grew close to 6% sequentially in our drilling technologies business and.
While the rig count 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 the.
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 of it.
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 the customers even pointed out to 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 a 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 <unk>.
Sequentially, our growth rate, it's about 4%.
But.
Like Kevin mentioned in his prepared remarks.
If you.
In the.
The end of the first quarter, we exited Russia, so that is.
Some of the Russian revenues will not repeat for us going forward and then the continued.
Our <unk> product line.
The step down and then also the lower cross EMC Ecolab, all that play into that equation, but the thing that is really important here is what.
What we are what we had exiting in these revenues on lower margin to breakeven margin type product lines, so while that the 4% debt.
Revenue growth sequential revenue growth.
Including all of those elements.
Now going forward, we are very confident about the high single digit organic growth, which we laid out during the Investor day. So we do expect our 70 could be.
High single digit this year as well.
And.
But even more confident we are on our solid EBITDA growth.
And the margin 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 and Sylvia.
Our EBITDA growth to be even stronger as we work through that walk through the quarters here, that's what gives us mark a significant confidence in achieving our exit rate.
Hi.
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 <unk>.
The margin leverage it would appear that you need to have a bit higher incremental margins in the back half to get to that above 20% and I'm, assuming that above 20% is not 21% youre going to beat it by 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.
Sure.
Restructuring than any kind of price cost.
Improvement that you would expect to develop.
Yes, Mark I would say that it's a combination of.
Two things one is to say no we do expect our.
Volume to continue to step up.
Sequentially the market.
Volume steps up through that through the year and then the second thing is.
The all the productivity work that 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.
From Bank of America. Please go ahead.
Hi, Good morning, Hi, <unk> Hi, Ken.
Good morning, Robert.
So 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.
That high single digit percentage top line.
The number I just want to confirm that and then.
Assuming thats correct, how should we think about the different business areas.
Chemicals and left in drilling technology, which one do you think that's better than that number of enrichment.
Worse than that number.
Yes.
First and foremost I would say.
Third of all of our.
Business be expect.
Expect to grow except year over year in 2023, except two areas, which is RPT because of all the.
Restructuring, we have done and the Opex as you know.
By the time, we get to.
The middle of this year by end of June as you know Theyre cross sales to ecolab.
We'll stop.
As reported in the corporate line and but it would be additional sales from there onto you collapse would be.
Would be.
Under our segments. So so that's the framework so given that framework we expect.
Our <unk> business to kind of lead.
The growth followed by our PCT. So you should expect.
Yeah.
Both of those businesses.
Performing at a high single digit type level and with 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.
PCB revenues can do in 2023, there's a lot of <unk>.
Pricing and costs flow through dynamic because we had not just volume and I realized that but I think you were talking about that business, probably growing double digit rate I know it was not in 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 and PCB versus what it is high single digit kind of a number.
Just so that they understand.
Yes, I mean, I think I think if you if you look at.
What happened last year, but 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 a fee for it the high single digit growth is a lot driven by volume improvement as well as the caddy in pricing.
With regard through now what can even further.
Prove that for US you know obviously as you know we are always working on.
Market share gain opportunities 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 you know obviously.
As we have shared with you before where the source of production comes from.
It 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 dry as we have mentioned during the environment of high oil price.
Customers tend to increase even more of their production spending so, but we feel very confident about that high single digit growth but.
It would be better it's all going to depend on some of these factors.
Got it okay. Okay, 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 more from Goldman Sachs. Please go ahead.
Hi, good morning.
So 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 year 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.
Our operating culture, which is rooted on the continuous improvement and for us what we do and because generally with our continuous improvement culture. The stops with the basic training are for people to understand how to see based on how to eliminate waste and we.
Really training people to see waste in the system.
If there 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.
Got it.
One is to one because we want everybody who find the problem audit also enable to solve problems right. So we were really really focused on enabling that operating culture and.
And then on top of that is all of our investments around things like automation technology Digitization 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.
Our view is.
Every one of our employees needs to know, but we are winning or losing because imagine if everybody knows winning or losing.
Frequently it's easier to make corrective actions.
This is a system capability, which we continuously invest in dry and that is 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 consistent CFO .
Our cash generation, it still will be somewhat back half weighted but compared to previous years.
We have improved their 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 and 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.
The exposure we have.
Is that related to some of that gas drilling rig count right, because our drilling technologies business tend to.
Rig count driven but.
I mentioned before with the.
The international rig count growing and our technology and new products adoption continuing to.
Become strong I think we feel you know.
We should be able to offset that impact and growth through the year.
The area, where we have.
<unk> gas exposure is.
In the.
Artificial lift.
You will see.
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 a.
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 gas.
Gas.
Production, not drilling and completion type activities.
Got it appreciate it I'll turn it over.
Thanks Eddie.
Thank you.
There are no further questions at this time 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.
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