Q2 2023 ChampionX Corporation Earnings Call
This represents 64% of the free cash flow generated during the same period.
Turning to second quarter performance, our second quarter revenues were unfavorably impacted by shipment delays in Latin America due to customer logistics delay Canadian wildfires and extended production platform turnarounds and Gulf of Mexico in.
In addition to the above factors sequential revenue decline was also impacted by exit of our Russia operations in Q1 now.
Now we are already seeing expect that activity pick up in the month of July as impact of these items recede.
Our digital revenues grew 4% sequentially and 21% year over year. We are seeing continued strong adoption for our fit for purpose digital solutions, including our emissions management technologies that drive tangible productivity for our customers and help them achieve their such.
Inability goals.
Ken will take you through the details of our second quarter financial results shortly but let me first touch on three key business highlights which are shown on slide number seven.
First EBITDA margin expansion.
Our laser focus on margin expansion is delivering substantive and sustainable results. Despite experiencing a slight sequential revenue decline in the second quarter. We achieved Q2, adjusted EBITDA margin of 21%, which improved by approximately 158 basis points sequentially.
And 527 basis points year over year on continued productivity improvements pricing realization and strong cost management.
This marked the fifth consecutive quarter of sequential improvements in our adjusted EBITDA margin.
We expect our adjust EBITDA margin to further improve in the second half of the year and we now expect to deliver an exit rate of 21% in the fourth quarter of this year.
Second free cash flow, we delivered another strong free cash flow quarter, having generated free cash flow of 89 million, which represents 48% of our adjusted EBITDA.
This demonstrates the best in class cash flow generating capability of our capital light portfolio of businesses and illustrates our high degree of confidence in converting at least 50% of EBITDA to free cash flow in 2023, and delivering between 50% to 60% conversion of EBITDA to free cash flow.
Through the cycle.
Third returning capital to shareholders, our disciplined capital allocation framework is designed to create value for our shareholders and in the second quarter. We once again delivered on our commitment to return excess cash to our shareholders in the second quarter between our regular cash dividends of 17 million and <unk>.
$1 million of share repurchases, we returned 76% 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 second quarter results and our third quarter outlook. Thank you Soma good morning, and thank you for joining us today I will be commenting on adjust.
<unk> EBITDA for a sequential and year over year comparisons. We believe this metric best reflects the business performance of continuing operations.
Our second quarter 2023 revenue was $927 million.
<unk> flat compared to the same period in 2022, and 2% below first quarter revenues geographically year over year, North America revenues were up 1%, while international revenues were down 3% sequentially North America and international revenue.
<unk> were down 2% respectively.
In second quarter, our largest business production chemical technologies was up 4% over second quarter, 2022, and down 3% sequentially due to a number of factors specifically during <unk>, we decided to exit our Russia business and we.
We no longer recognize any revenues associated with Russia in our financials.
Quarter PCT revenues were also negatively impacted by customer logistics delays in Latin America, and extended customer production platform turnarounds of the Gulf of Mexico.
And Canadian production shut ins is driven by the wildfires.
In July we have seen PCT revenues spring back to expected levels across key geographies and we expect to deliver solid single digit sequential growth in the third quarter.
Included in our second quarter revenues were $17 million of cross supply sales to Ecolab. These sales declined 25% sequentially and were 53% lower than the prior year period.
We do not recognize EBITDA margin on these sales and the associated revenue is allocated the corporate and other in our financial statements.
June 3rd 2023 was the third anniversary date of our transformative merger.
As previously communicated we expected cross sales to equal lab to end by this date and as such we will no longer report cross sales and corporate and other for clarity on champion X revenues on Slide 10, we have included a year over year comparison of second quarter revenues.
You can see <unk> 2022 included $15 million of Russia revenues $36 million of Ecolab Cross sales and $18 million of revenues associated with the low margin RCT product lines, we exited during the second quarter of 2022.
<unk> 2023, we had our latest eco lab cross sales moving into the third quarter. These revenues will not repeat in our financials.
Second quarter GAAP net income for the company was $96 million or <unk> 48 per diluted share versus $64 million in the first quarter and $27 million in the second quarter of 2022.
As seen on slide 11 champion X consolidated adjusted EBITDA in the second quarter was $186 million up 6% versus the previous quarter and an increase of 35% versus the prior year period in the second quarter champion X achieve.
<unk>, our adjusted EBITDA margin target of 20% delivering a very strong consolidated adjusted EBITDA margin of 21%. This was up 150 basis points sequentially and up 527 basis points over the second quarter of 2020.
Two.
Our second quarter free cash flow of $89 million reflected strong cash flow from operations and our continued laser focus on working capital management $89 million of <unk>.
Free cash flow represented 48% conversion to free cash flow from EBITDA.
Cash from operating activities was $116 million and capital investment was $27 million net of proceeds from asset sales.
Production chemical technologies generated second quarter revenue of 574 billion down 3% from the first quarter and up 4% year over year sales were impacted by the previously discussed items, Russia customer logistics delays in Latin America and the impact.
<unk> turnarounds with Canadian wildfires.
Segment, adjusted EBITDA was $117 million up 11% sequentially and 49% higher than the second quarter of 2022 volume growth increased selling price and productivity projects drove the year over year improvement sequentially, we saw a positive impact from raw materials and pro.
Activity projects.
Segment, adjusted EBITDA margin was 23% up 250 basis points sequentially and up 617 basis points from the prior year's period, driven by higher selling prices and productivity initiatives noted previously.
Moving to production automation technologies.
Second quarter segment revenue of 254 billion increased 1% sequentially year over year revenue was up 5% driven by volume and higher selling prices digital revenues were up 4% sequentially and increased 21% 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 our future revenues to continue to benefit from this industry trend.
Second quarter segment, adjusted EBITDA was $61 million up 1% sequentially and up 25% year over year segment. Adjusted EBITDA margin was 23, 9% up 11 basis points versus the first quarter and up 380.
Seven basis points from the prior year due to higher volumes and selling prices.
Drilling technologies segment revenue was $57 million in the second quarter flat sequentially and year over year drilling technologies delivered segment adjusted EBITDA of $14 million during the second quarter up 1 million sequentially and down $2 7 million.
When compared to the second quarter of 2022.
Segment adjusted EBITDA margin was 25, 1% in the quarter, a 134 basis points sequential increase driven by higher volumes at lower tooling costs.
Reservoir chemical technologies revenue for the second quarter was $24 million down 8% sequentially and a 46% 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 exit resulted in lower revenues by the significant improvement in the margin profile of this segment.
The segment posted adjusted EBITDA of $4 million during the second quarter flat with first quarter and up $4 million versus the corresponding prior year period segment margin was 17, 7% in the quarter at 217 basis points sequential improvement and a substantial increase.
As the prior year period, driven by the product line exit and related restructuring actions.
Moving to our balance sheet as shown on slide 12, we again ended the second quarter in very strong position with liquidity of $932 million, including available revolver capacity and cash on hand at June 30, our leverage ratio was five times net.
Net debt to adjusted EBITDA in alignment with our capital allocation framework, we remained committed to the return of surplus capital to our shareholders.
During the second quarter, we returned approximately 75% of quarterly free cash flow to shareholders, including $17 million in regular quarterly dividends at $51 million of share repurchases.
We remain focused on disciplined capital allocation delivery of operating and free cash flow effective working capital management, and maintaining our strong liquidity and financial position to support returning at least 60% of free cash flow to shareholders.
As we discussed at our March Investor Day, we continue our strong focus on but disciplined capital allocation and continuous improvement in productivity. As a result of this focus we continue to improve our return on invested capital or <unk> targeting <unk>.
8% plus ROIC for total year 2023, as you can see on page 13, we are making very good progress our trailing 12 month ROIC as of June has improved to 17% up approximately 400 basis points over the full year 2022 actual.
ROIC.
And we are on track to deliver our target.
Turning to slide 14, and our forward outlook for third quarter, we expect revenue in the range of 960 million to $990 million. Please recall 2022 third quarter revenues included $15 million of Russia revenue $6 million of RCT revenues from exited product lines.
And $34 million of Ecolab Cross sales.
The third quarter sequential change in revenue is primarily driven by a step up in chemical sales principally internationally and continued positive momentum in our north American production oriented businesses. As I noted sales are off to a solid start for the third quarter in July .
For adjusted EBITDA, we expect a range of $199 million to $207 million, which at the midpoint represents a 22% increase over third quarter 2022.
Again at the midpoint. This represents an approximately 450 basis point improvement year over year in the company's adjusted EBITDA margin rate.
We expect our adjusted EBITDA margin rate to continue to improve throughout the year and we have confidence that we will exit 2023 at an adjusted EBITDA margin rate of 21%.
So 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 that 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 the producing assets.
In sustainable and cost effective ways, we continue to see favorable demand tailwind in our businesses that support our constructive multiyear outlook for our portfolio. We are focused on delivering solid bottom line growth adjusted EBITDA margin expansion and strong cash generation. In addition, we are fully commit.
To creating value for our shareholders through a disciplined capital allocation framework, but clear priorities for our capital, including high return investments and returning cash to shareholders.
With that let me. Thank all of our 7300, a champion X employees around the world for their remarkable commitment to our purpose of improving the lives software our customers our employees our shareholders and our communities you inspire me every single day.
I would like to open the call for questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
I would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too Andy.
And if you are using a speaker phone please lift the handset before pressing any keys.
One moment. Please for your first question.
Your first question will come from Steven Chin Gambro at Stifel.
Please go ahead.
Thanks, and good morning, everybody.
Good morning, Steven.
So I think first on the two things from me.
I'll start with what are you seeing on the North American land side, and how is that kind of baked into your expectations for for the back half of the year.
Yes, I think being a production focus business I think we are continuing to see good activity on the production side of the businesses, Steve So we do expect.
In the second half of our production oriented businesses, particularly at the <unk> lift and production chemicals continued to show some sequential growth in particularly in North American land in Canada.
Q2, we experienced those Canadian.
Wildfires, which led to production shut ins, we are starting to see that recede.
So that should also contribute towards the second half of that growth, but being in the production oriented businesses. We continue to see that growth in U S land.
Great. Thank you and my other question is around PCT margins.
Clearly you've made.
Obviously very good progress there, but when you look at the second quarter and you called out some of the some of the revenue <unk>.
<unk> from Latin America, and the wildfires.
Was that a drag on margins I mean, obviously margins were very strong but is there any way to think about the impact that that revenue had on the margin profile in the second quarter.
Yes, I mean I think the.
If you look at the what is driving it.
Margin in PCT is.
First and foremost of.
Strong price management and followed by our continued productivity efforts.
And we saw some raw material deflation in the Q1 and and we saw a little more in Q2, and we think that that raw material deflation will remain fairly stable throughout the rest of the year and thats all built into our.
Our forecast so I would say.
Obviously, the volume impact had some incremental margin impact, but I would say that's not the biggest one the biggest.
The driver of margin for Us in Q2, plus the fact as I just described.
Okay, great. Thanks for the color.
Sure Steven.
Your next question comes from Scott Gruber of Citigroup. Please go ahead.
Yes, good morning good.
Good morning, Scott.
I wanted to stay on.
Yeah.
Drilling tech revenues.
Yes.
Yes.
The drop in the rig count.
<unk>.
What's your sense.
International growth.
Drill bits and use other technologies.
And.
How do you see that offsetting.
Any risk of inventory destocking in the U S did you see any inventory destocking in Q2 is that a risk in <unk>. How are you guys thinking about those factors and <unk> and <unk>.
Yes.
Carl.
In the in the Q1 earnings call.
We saw.
Rig count already starting to show some decline and at the time, we mentioned, we still believe that to be we'll see.
Some sequential stability or even a growth in our drilling technologies because of the new product innovations and the share gains because of that new product innovations. So I would say that was one of the big factors for us in how well that drilling technologies revenues.
<unk> has held up high stability, even during this PD it off.
Declining rig count.
The other aspect within our drilling technologies that Thats also helping if the strong growth in the bearings business. We are continuing to see strong growth in the diamond bearings business.
So putting this altogether I would say as you look into the second half, we still expect to see some modest growth in the.
Sequentially in Q3 with our.
Drilling technologies, we do expect that the drilling rig count at least the U S drilling rig count should.
Bottom out sometime in Q3.
We expect continued.
Continued sequential growth, albeit it will be modest.
In the drilling technologies in Q3.
Got it.
Appreciate the color.
Another question just on sustaining.
Sustaining.
Healthy margins in the 2024.
We get questions.
<unk>.
Yes.
Actual price reset.
Since <unk> been down this year in the <unk>.
<unk>.
Can you walk us through.
How you think about.
The tangible contractual resets lower.
Any efficiency gains.
Thank you thanks.
All set.
In terms of helping to sustain 20% plus margin.
Into next year.
Yes, great question Scott.
This is an important one for us so we actively track.
Our chemicals business, we actively track all of our contracts and we know exactly which contracts have what type of a pricing mechanism built into it and we have talked about this before the next mechanism, but those cost plus on what percentage of our contacts has what so we have a very granular view.
And a detailed view contract by contract.
How this plays out and we update that would be.
Every month to make sure that we understand what will be there.
Index, driven not a cost plus driven up pricing changes that is forthcoming in our contracts. So all of that element.
Are all built into our forecast and guidance.
And then offset.
We are continuing to work on our productivity, our continuous improvement projects and the great thing about continuous improvement mindset in that journey. We add on is the more we do the more we find opportunities right. So the continuous improvement opportunities continue to show up for that.
But the pricing element, we actively track those and any forthcoming price changes in Q3 Q4 is already built into the guidance we are providing.
So based on the <unk>.
Trend and the pricing for raws will most of them already hit before the end of the year.
Yes, most of them will be already hit before the end of the year because the most of the pricing.
Index price contracts tends to be and on average I would say probably five six months.
The cost plus contracts tends to be monthly.
But the index contracts tend to be anywhere between three to six months, but I would say on average I would say in the past six months so based on our forecasted.
Commodity.
As I just mentioned, we see stability in the commodity price as we saw in Q2 into the second half. So based on that most of that type of a pricing changes should happen before the end of the year.
Okay. That's great color. Thank you very much.
Scott.
Your next question comes from Marc Bianchi at TD Cowen. Please go ahead.
Thank you.
Maybe sticking with some of the pricing stuff.
Wanted to get a better understanding of the surcharges that you have in place or that might be going away.
And how we should think about the interplay with revenue growth and margin.
On those I would think that if you have a surcharge with minimal margin and that goes away that hurts revenue, but it helps percentage margin.
Yes.
The surcharges have not a very big part of our.
Pricing mechanism as yes, you may recall mark that.
We did have to do some.
Surcharges in Q2 up last year was when we first did our.
Quick surcharges and lot of that was in the other segment.
So a lot of those elements.
Already.
Gone away.
Lot of them have got to do with Fright, If may if you recall.
So so I think surcharges is no longer a major issue for us.
Okay, great that makes things a lot simpler.
Then in terms of the revenue progression I am curious if you could remind us about the seasonality.
Over the end of the year and into the beginning of next year.
And I'm wondering if the seasonality benefit would maybe get you to a mid single digit type growth rate in the fourth quarter and how youre thinking about the.
24 broadly I go back to the analyst day, and I think you were talking about kind of a high single digit growth rate over the next several years is that a is that a good placeholder for 'twenty four.
Yes, Mark.
No.
If you looked at.
We have been on a good growth trajectory. Obviously in Q2, we had some one time events and that kind of.
It had some unfavorable impact on the Q2 growth, but we are already seeing the growth trajectory has resumed in as we get into the as we had in the month of July that growth.
Through as expected.
And if you look at the end of Q3.
Sequentially.
Around the 5% little over 5% sequential growth at the midpoint of our guidance and we expect to all of our segments to grow.
<unk>.
The growth charge will be from a geographical perspective.
It will be led by international but we also expect North America to grow.
And within International we expect Latin America to lead the charge given our delayed shipments followed by middle East. So we will see good growth in the international side, we will see growth in North America now from a segment perspective, we expect strong growth about that charge will be led by <unk>.
Followed by <unk>.
And again, both segments will have strong international growth, followed by North America and growth as well so the growth trajectory across segments.
Continue to see in Q3 and beyond now as we walk into Q4 typically the seasonality for us in Q4 international tends to be stronger in Q4, so which will lead PCT.
International business to be strong and then domestically.
In the U S. Obviously, the holiday impact and we typically tend to see that a little bit in <unk> and I think mark we have talked before.
There are periods of time, we see that impact that a period.
Periods of time, we grow through it so specifically for this year I think we think we would continue to see similar growth like we saw in Q3 sequential growth in Q3, I think we will see similar growth in Q4, mostly led by that international So we feel that Q3 to Q4 should be.
The strong sequential growth for this year.
And that all sets up well for us as we walked into 2024.
Because the fundamentals business fundamentals of the business still remains very strong we continue to see energy demand, increasing we continue to see capital spend growing we continue to see.
Their production complexity.
Increasing so all that factors.
Wow quite a while.
2020 for growth.
Super that's a great summary, thank you so much.
Absolutely Mark.
Your next question comes from David Anderson at Barclays. Please go ahead.
Great. Thank you and good morning, Soma how are you.
Good David how are you.
Unwell.
Just sticking with the middle East a little bit I'm, just sort of thinking back on your PCC business, and obviously production related so kind of where we thinking about.
Volumes growing over the next 234 years.
Thinking about middle East Middle East capacity expansion is coming.
Coming on.
Wanted to ask you a little bit more how you see that playing out in the chemical side.
They are coming on in 'twenty, six do you need to build out capacity and some of that I mean do you have to start thinking of a supply chain. How do you sort of think about growth is coming like that than I am.
Assuming those contracts haven't yet been tendered I haven't.
I don't recall seeing anything on that if you could maybe just kind of give me your.
On how this market plays out over the next few years.
Yes.
Definitely what were the <unk>.
The next coming years, we see continued growth in Middle East Latin America.
As all of this capital investments continue to drive significant.
Production growth as well as the complexity growth, which is what we are seeing especially in places like Latin America, even in middle East as you think about feels like defer out which have very very high level of production complexity. So we see that continuing to grow and same in offshore think about all the <unk>.
Sure the investments that are going on and as you know we generate a big part of our revenues at this offshore platforms on the paybacks come online to produce what we are seeing now the big expense in offshore, particularly in the drilling and well construction site that all going to translate eventually for iOS.
Strong growth in offshore and as we have shown before in the Investor day. The offshore growth is at long structural growth for us even when.
As the fluids continued to grow its along structural growth. So we are excited about the long term growth trajectory, particularly part of our continued production chemicals and artificial lift businesses.
Now in terms of capacity.
We have been very very our teams have done a great job in looking at how do we continue to.
Look at capacity utilization Debottlenecking, and what we need to make inside what we need to buy so based on all the projections, we have and the capacities. We already have we don't see a need for us to build any more capacity I think we have plenty of plans in place to continue to meet the demand.
Without having to.
Build any more capacity and Thats, what gives us confidence Dave in continued capital return to our shareholders. So we feel really good about where we are.
Really interesting thanks.
Maybe if I can shift over to <unk> and also talk about the international side of that business.
I can't recall.
I talked in my notes what percentage as international by notes considerably smaller.
Wondering if you could talk to the opportunity we see to grow on the lift side listen we're in the middle East and brought up several times. This quarter is this an area you need to get dig in.
And we were talking about revenue synergies with champion X and sort of the footprint and utilizing that when you talk about how that's gone and maybe what are some of the other ways youre thinking about growing the international side of PHA.
Yes.
If you think about desktop reset.
International is roughly about today, it's running about between 20% to 22% that's outside of North America. So that's the <unk> and as we have discussed that's where our biggest opportunities come for PDP.
In terms of that international growth and if you look at the second quarter. It grew very nicely internationally and then we expect another strong growth again in Q3 for <unk> internationally.
And the biggest areas of growth for us.
Internationally is in Middle East and Latin America and UBS.
<unk> talked before about our ESP product line, David today, our ESP product line have zero revenues internationally and we have been working on plans plans to expand that internationally. So you. So you should see in the coming years that business contributing as we expand.
Our ESP business internationally.
Going back to the revenue synergies this is <unk> bin.
<unk> focused on this and we have been kind of.
Disclosing our incremental revenue synergy awards as part of our first quarter calls what we achieved every year.
And I think if you recall last year, we achieved $45 million.
The incremental revenue synergies and this year, we are targeting in the Investor day, we talked about we are targeting about $60 million of it and.
And a good portion of that is related to the <unk>.
<unk> international growth leveraging our chemical footprint.
Alright, Thank you very much.
Sure Dave Thank you.
Your next question comes from Doug Becker at capital One. Please go ahead.
Thank you.
So wanted to get your thoughts on how do you see the revenue being recovered from these transitory issues.
In the second quarter and really thinking about next year, assuming your commentary suggested maybe we're at the higher end of high single digit growth. So maybe eight 9% revenue growth as opposed to 37.
So Doug on the on the on the revenue recovery going back Q2, I think if you look at or above the three elements, particularly the delayed shipments obviously be able to recover so that's about that $13 million.
The delayed shipments that we will recover but with respect to the Canadian wildfire and the extended turnaround times in Gulf of Mexico. Those are production shut ins.
So those normally you don't recover in subsequent quarters, and obviously, what a period of time you will not cover those productions being produced so I would say that.
Late in the recovery side.
Built into our Q3 sequential growth is one leader.
<unk> side only the delayed shipments that's the only thing which is built into our Q3.
Now going into 2024.
Today, providing guidance for that but.
But we do think that the Q3 Q4, I think we'll continue to see good sequential growth and that should set us up well for 2024, and we'll wait and see how markets are wall by that time, but I think the fundamentals remain strong our teams are executing well so I think.
I am confident 2024 will be another good growth year for us.
Makes sense and then maybe one housekeeping nature.
It looks like the working capital management was very strong in the quarter are there any particular drivers to call out, particularly I am thinking about cash taxes, which my understanding is tend to typically hits in the first half of the year.
But still very good working capital management cash flow generation, just anything to call out in the second quarter cash flow.
So thank you Doug I appreciate the comment that our teams are really executing well on that let me turn it over to Kevin and maybe you can talk a little bit about that.
Specifics out on the working capital sure Doug Yeah.
Quarter typically.
But a little lighter on cash flow, primarily driven by tax payments.
We did.
The typical second quarter tax payments, including some international.
Payments.
Terms of working capital we remained very focused on all elements of working capital.
We've continued to work on the supplier terms side as the company has become.
Its better known.
Coming out of the merger people weren't sure exactly what champion X was now they know what what we are.
Our credit.
Position is very strong so suppliers are willing to.
<unk> terms to which has been very helpful and then.
We're very focused on daily collections.
In terms of what's our entitlement to go in.
Collect cash.
Customers and so we've improved the linearity of our collections.
<unk>.
<unk> reduced the amount of past dues so.
The amount of past dues beyond a certain date have come down pretty dramatically. So those two things have been.
In a sense structural improvements to our working capital position and then we continue to work hard on inventories at strengthening the whole.
Disciplined as our sales and operational planning processes. So.
In all elements of working capital, it's paid off and I think it will continue to pay off as we move forward.
That sounds encouraging thank you.
Thanks, Doug.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one now.
Your next question will come from Pete <unk> at Goldman Sachs. Please go ahead.
Hi, good morning.
So any color you can provide on the variance between street expectations and guidance for Q1 revenue. What do you think that the street is maybe Miss calibrating Joanna needs to calibrate better.
Got it.
Good morning.
Look I can specifically talk about what's built into the Street's model, but my my estimate would be that I think obviously, we had some unfavorable impact in Q2 right.
So that.
That base a little bit logo.
But I also think that some of the restructuring efforts and how they are.
<unk> zipped off some of the RCP type product lines.
That actually.
The impact of that I say exit.
And.
But I think I think those may or may not have been.
Fully understood.
So I think that's one of the reasons.
We put that slide in there in the slide deck.
We will provide.
Full visibility.
The three elements that are shy exit the cross sales as well as the existing this low margin product lines. So I think.
Partly I feel that that could have been one of the issues that that that may be contributing to the AE.
The difference in there.
In the guidance as well so I would say those are the combination of lower base in Q2, and then these revenues.
The exit of these businesses.
Okay.
That's helpful.
Then you mentioned some pricing momentum in the second half of the year for BCD.
Investor Day expectations, I guess was Florida, 30% incremental margins, which would've implied that 21% doesn't really happen in 'twenty, three but not updated guidance is for 21%. So.
What I'm thinking is investor questions tend to be how much more upside that is so how should we think about that incremental margin expectation going forward on a normalized basis should be clearly higher than 30% now.
I would say.
As I mentioned I mean, thanks to the team's execution.
We are executing well on productivity efforts.
Good disciplined price management, and so on and so forth.
But I would say going forward on a normalized basis I think that 30% is a good <unk>.
Incremental margin numbers for their totality of champion acts as we have talked before that the incremental margins vary by segment with that drilling technologies being a higher incremental margin segment, but in totality by champion.
I think at 30% incremental margin is a good way to think about it.
Okay. Thank you I'll turn it over.
Thank you.
We have no further questions from the phone lines. So at this time I will turn the conference back to Soma for any closing remarks.
Well. Thank you thanks for joining our call today and your continued interest in champion X. We look forward to talking to you again in our next quarter call. So thank you and have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everyone for participating and ask you to please disconnect your lines.