Q3 2023 ChampionX Corp Earnings Call

Good morning, welcome to champion next Corporation third quarter, 'twenty Genesee earnings Conference call.

Your host for this morning's call is Byron Pope.

I'll now turn the call over to Mr. Tom You may begin.

Thank you good morning.

Everyone.

With me today are Tom Mccormick, President and CEO with champion X and again, Peter our executive Vice President and CFO.

During today's call snowmobile share some of our company highlights.

Ken will then discuss our third quarter results and fourth quarter outlook before turning the call back to Soma for some summary thoughts.

We will then open the call for Q&A.

During today's call, we will be referring to the slides posted on our website.

Let me remind all participants that some of the statements we'll 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 filing.

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 reconciliation to the most directly comparable GAAP financial measures can be found in our third quarter press release, which is available on our website.

I'll now turn the call over to Tom.

Thank you Byron good morning, everyone I would like to welcome our shareholders employees and analysts to our third quarter 2023 earnings call. Thank you for joining us today.

We demonstrated the benefits of public geographically diversified portfolio in the third quarter as we delivered adjusted EBITDA growth and margin expansion. Despite some near term cross currents in our Tycho U S land businesses.

We once again delivered robust free cash flow generation and return excess capital to our shareholders.

I am appreciative of all of our employees for their Pakistan, tadlock dedication to delivering value to our customers.

And they out.

On slide number four we begin our earnings call with our cockpit vision purpose and operating philosophy, because we wake up every day committed to improving the lives of our customers our employees, our shareholders and our communities.

On slide number five we paid one example of the many types of <unk> innovation with the Americas being relentless advocate for our customers and delivering technology with impact.

Kobe continuous emissions monitoring system, which was designed from the ground up to be an effective and accessible solution part of our continuous monitoring.

On site methane detecting.

And this case study illustrates how well those two pieces.

One of our customers detect and avoid a catastrophic leak at one of its production facilities in real time.

Resulting in environmental and financial payback.

Our aura optical gas imaging camera is a natural complement to our <unk> system and is designed to help our customers meet current and future emission monitoring needs by accurately detecting and documenting even small methane leak.

Now turning to third quarter performance, our third quarter revenue increased 1% sequentially at strong international growth in our production chemical technologies and production and automation technologies business.

Were largely offset by lower activity in U S land, driven by lower drilling and completion activity.

In Q3 U S rigs declined almost 10% sequentially and you have completion activity declined over 9% sequentially impacting revenues in our drilling technologies and <unk> segments.

Segment.

Our digital revenues increased 17% year over year.

We remain highly encouraged by the continued strong adoption across fit for purpose digital solutions, including of Remington management technologies that drive tangible productivity.

Inability benefit for our customers.

Our continuous emissions monitoring technology installation continue to grow along with the recurring revenues.

Today more than 50 customer used our <unk> continuous emissions monitoring technology.

We continue to deliver strong EBITDA performance during the first nine months of 2023, our adjusted EBITDA grew 28% year over year and our adjusted EBITDA margin expanded 437 basis points compared to the first nine months of 2022.

Ken will take you through the details of our third quarter financial results shortly but let me first touch on three key business highlights with our corn on slide number 10.

EBITDA margin expansion.

Expedient thing $7 million of foreign exchange losses related to Argentina currency devaluation, we delivered an adjusted EBITDA margin up 22% in the third quarter, which represents our fifth consecutive quarter of sequential adjusted EBITDA margin improvement.

Based on the midpoint of our Q4 guidance for full year 2023, we will deliver an adjusted EBITDA margin expansion of 370 basis points compared to 2022.

We remain confident in our ability to further expand our adjusted EBITDA margin.

Through 2024.

Second free cash flow, we delivered another strong free cash flow quarter, having generated free cash flow of $115 million.

Which represented 60% of adjusted EBITDA.

This further demonstrates the best in class free cash flow generating capability of our capital light portfolio of businesses and elaborate 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.

EBITDA to free cash flow through the cycle.

We expect our free cash flow to continue to grow in the coming years, driven by EBITDA growth and margin expansion.

Third returning capital to shareholders, our disciplined capital allocation framework is designed to create value for our cardholders and in the third quarter. We once again delivered on our commitment to return excess cash to our shareholders through the third quarter between our regular cash dividend of $17 million and.

$68 million up share repurchases.

We returned 74% of our free cash flow per shareholder.

Since we began our capital return program in the second quarter of 2022, we have returned $434 million of capital to shareholders through dividends and stock repurchases.

As a percent.

6% of the free cash flow generated during the same period.

We expect our capital returns to grow as we grow our free cash flow in the coming years, and we remain committed to return at least 60% of free cash flow to our shareholders.

And through the cycle.

Let me now turn the call over to Ken to discuss our third quarter results and our fourth quarter outlook.

Thank you Omar good morning, and thank you for joining us today I will be commenting on adjusted EBITDA for sequential and year over year comparison, we believe this metric best reflect the business performance of continuing operations.

Our third quarter 2023 revenue was $940 million up 1% versus our second quarter 2023 revenues, while 8% lower than third quarter of 2022.

Geographic basis sequentially, North America, and international revenues were up one and 2% respectively.

Drilling down overall U S revenues were flat quarter over quarter with PT PD up 6%.

P a deeply down 3% and 7% respectively.

Meanwhile, the rest of the world revenues were up 3% sequentially driven by solid growth in PCB and <unk>.

Year over year, North American revenues declined 2% while international revenues.

Were 17% lower.

In the third quarter, our largest business production chemical technologies generated solid sequential revenue growth of 5% with both North America and international contributing positively.

With declining U S rig count and lower new well completion activity are shorter cycle U S land businesses were impacted in the quarter with production and automation and technology revenues up slightly at 1% and drilling technologies down 4% versus the second quarter.

2023.

As previously communicated sales the eco lab under the cross sale.

Agreement ended with the passing of the third anniversary of our merger date.

As such any sales to ecolab are now reported in the production chemical technology segment and no longer reported in corporate and other.

Third quarter GAAP net income for the company was $78 million or <unk> 39 per diluted share.

$96 million in the second quarter and $23 million in the third quarter of 2022.

As seen on slide 10 champion X consolidated adjusted EBITDA in the third quarter was $190 million up 2% versus the previous quarter, and a 14% increase year over year.

Third quarter adjusted EBITDA included the impact of approximately $7 million of foreign exchange loss related to the devaluation of our peso exposure in Argentina during the period.

In the third quarter <unk> delivered a strong consolidated adjusted EBITDA margin of 22%.

This was up seven point sequentially and up 391 basis points over the third quarter of 2022.

Our third quarter free cash flow of $115 million reflected strong cash flow from operation and our continued focus on working capital management.

The $115 billion represented 60% conversion of free cash flow from adjusted EBITDA.

Cash from operating activities was $163 billion in capital investment with $48 million net of proceeds from asset sales.

Production chemical technologies generated third quarter revenue of $604 million up 5% from the second quarter and 6% lower year over year sales were strong in North America, and internationally, where respective revenues were up 5% and 6% sequentially.

<unk>.

Segment, adjusted EBITDA was $125 million up 7% sequentially and 22% higher than the third quarter of 2022.

The third quarter segment, adjusted EBITDA was virtually impacted by the aforementioned 7 billion, Argentina foreign exchange loss during the period.

Quickly, we saw positive impact from higher volumes and productivity projects volume growth increased selling price and productivity project drove strong year over year improvement.

Segment, adjusted EBITDA margin was 27% up 37 basis points sequentially and up 472 basis points from the prior year's period.

And again by the higher volume selling prices and the productivity initiative previously noted.

Production and automation technologies third quarter segment revenue of $256 million increased 1% sequentially year over year.

Revenue was up 3% geographically international revenue increased 9% sequentially, while North America revenue was down 1% digital revenues with can exhibit some lumpiness quarter to quarter were down 4% sequentially, while increasing 17% year over year.

We continue to see increased customer focused on implementing digital and emissions technology to reduce emissions and drive operational and cost improvements. We remain very excited about the expected future revenue growth through digital including our emission offerings.

Third quarter segment, adjusted EBITDA was $59 million.

Lower 2% sequentially, while up 14% year over year segment. Adjusted EBITDA margin was 23, 2% down 73 basis points versus the second quarter and up 213 basis points from the prior year due to higher volumes and selling prices.

Drilling technologies segment revenue was $55 million in the third quarter down, 4% sequentially and down 10% year over year with both declines driven by lower U S land rig count activity.

Drilling technologies delivered segment adjusted EBITDA.

$14 million during the third quarter flat sequentially and down $3 million compared to the third quarter of 2022.

Segment adjusted EBITDA margin was five.

Five 1% in the quarter flat sequentially.

Reservoir chemical technologies revenue for the third quarter was $25 million up 5% sequentially and a 29% decrease year over year as previously discussed the year over year revenue decline was driven by the exit of certain low margin RTD product lines last year.

<unk>.

Resulted in lower revenues, but a significant improvement in the margin profile of this business.

Segment posted adjusted EBITDA of $4 million during the third quarter flat with second quarter and up one $5 million.

Corresponding prior year period.

Segment adjusted EBITDA margin was 16, 6% in the quarter of 110 basis point sequential decline year over year. The segment margin increased 914 basis points driven by the product line exit and related director rig active.

Moving to our balance sheet as shown on slide 11, we again ended the third quarter in very strong position with liquidity of $954 million, including $285 million of cash on hand.

Our available revolver capacity.

At September 30, our net leverage rate deal with four times net debt to trailing 12 month adjusted EBITDA.

In alignment with our capital allocation framework, we remained committed to the return of surplus capital to our shareholders.

During the third quarter, we returned approximately 74% of quarterly free cash flow to shareholders, including $17 million in regular quarterly dividend.

Byron Pope: Good morning. Welcome to ChampionX Corporation's third quarter of 2023 earnings conference call. Your host for this morning's call is Byron Pope. I will now turn the call over to Mr. Pope. You may begin. Thank you. Good morning, everyone.

$68 million of share repurchases year to date, we have returned 76% of free cash flow to shareholders.

Moving forward I expect us to continue our disciplined capital allocation process and our focus on delivery of operating and free cash flow along with continued improvement in working capital management.

Byron Pope: With me today are Soma Somasundaram, President and CEO of ChampionX, and Atidrip Fisher are executive vice presidents and CFO. During today's call, Soma will share some of our company's highlights, and we'll then discuss our third quarter results and fourth 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.

We are also focused on maintaining our bus liquidity level and our strong financial position enabled to continue returning at least 60% of free cash flow to shareholders.

As we continue to drive disciplined capital allocation and continuous improvement in productivity as you can see on slide 12, we continue to improve our return on invested capital or ROIC.

Byron Pope: Let me remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause material difference in our results from those projected in the statements. Therefore, I refer you to our latest survey filing and our other SBC filings or discussion of some of the factors that could cause actual results to different serially. Our comments today may also include non-gap financial measures.

We're making good progress toward our targeted 20% plus ROIC.

Our trailing 12 month ROIC has improved to 17% up approximately 400 basis points over the 2022 full year AG will rate.

Now turning to slide 13, and our forward outlook for fourth quarter, we expect revenue in the range of $930 million to $970 million. The projected fourth quarter revenue sequential gain is primarily driven by continued positive momentum in our international businesses.

Byron Pope: Additional details on reconciliation to the most directly comparable gap financial measures can be found in our third quarter press release, which is available on our website.

Soma Somasundaram: I will now turn the call over to Soma. Thank you, Byron.

Soma Somasundaram: Good morning, everyone. I would like to welcome our shareholders, employees, and analysts to our third quarter 2023 earnings call. Thanks for joining us today. We demonstrated the benefits of our geographically diversified portfolio in the third quarter as we delivered adjusted EBITDA growth and margin expansion despite some near-term cross-currents in our short cycle U.S, land businesses. We once again delivered robust pre-cash flow generation and returned excess capital to our shareholders. I am appreciative of all our employees for their focus and wireless dedication to delivering value to our customers day in and day out.

Offset by expected seasonal slowdowns in our North American businesses as they move into the year end holidays.

We expect our drilling technology business to experience a sequential revenue decline similar to that of the fourth quarter of 2022.

Some of our customers as they manage their working capital and free cash flow into year end.

For adjusted EBITDA, We expect a range of 187 million to $197 million, which at the midpoint represents a 7% increase over the fourth quarter of 2022.

At the midpoint. This represents an approximate 200 basis points improvement year over year in the company's adjusted EBITDA margin rate. Please.

Soma Somasundaram: On client number 4, we begin our earnings call with our corporate vision, purpose, and operating philosophy because we wake up every day committed to improving the lives of our customers, our employees, our shareholders, and our communities. On client number 5, we share one example of the many types of campaign act innovation with the emerge from being relentless advocates for our customers and delivering technology with impact. Over 2P continuous emission monitoring system, which was designed from the ground up to be an effective and accessible solution for our continuous monitoring of on-site methane emission detection and this case study illustrates how our 2P system helps one of our customers detect and avoid a catastrophic leak at one of its production facilities in real time, resulting in environmental and financial savings.

Please note for clarity this fourth quarter adjusted EBITDA guidance does not anticipate any further significant devaluation in the Argentine peso during the period.

Moving forward, we remain confident in our 50% to 60% free cash flow to adjusted EBITDA conversion ratio guidance through the cycle and we expect our free cash flow ratio of at least 50% for fourth quarter and the full year of 2023.

Thank you and now back to Golar.

Thank you Ken.

Before we open the call to questions, let me share a few thoughts with you.

As a leading global provider of production optimization solution for the energy industry, we are particularly well positioned to help our upstream and midstream customers maximize the value of their producing an operating asset.

Payable and cost effective ways.

The short term.

Softness we are experiencing in our talk cycle in the U S land businesses, we expect U S activity to start growing in early 2024 at customer bad debt creep that.

Soma Somasundaram: Our aura optical gas imaging or VGA camera is a natural compliment to our 2P system and is designed to help our customers meet current and future emissions monitoring needs by accurately detecting and documenting even small methane leaks. Now, turning to third quarter performance, our third quarter revenue increased one percent sequentially as strong international growth in our production, chemical technologies and production and automation technologies businesses were largely offset by lower activity in U.S, land driven by lower scrolling and completion activity.

We remain confident in the favorable demand tailwind for our business in 2024 and beyond.

Our laser focused on delivering solid bottom line growth adjusted EBITDA margin expansion and strong past generate them and we remain fully committed to creating value for our shareholders through our disciplined capital allocation framework.

Crystal clear priorities for capital deployment, which includes high return investments and returning excess cash to our shareholders.

Soma Somasundaram: In Q3, U.S, rigs declined almost 10 percent sequentially and U.S, completion activity declined over 9 percent sequentially impacting revenues in our drilling technologies and P.A.T, segments. Our digital revenues increased 17 percent year-over-year. We remain highly encouraged by the continued strong adoption of our pit co-purpose digital solutions, including our emissions management technologies that drive tangible productivity and sustainability benefits for our customers. Our continuous emissions monitoring technology installation continue to grow along with the recurring revenues.

With that.

I would like to thank all of our 7000.

300, <unk> employees around the world for their tireless and inspiring commitment to our purpose of improving the lives of our customers our employees, our shareholders and our communities I'm honored and humbled to lead that our purpose driven team.

With that I would like to open the call for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone Si.

Please turn times acknowledging your request and your questions will be called <unk>.

Soma Somasundaram: Today, more than 60 customers use our 2K continuous emissions monitoring technology. We continue to deliver strong EBITDA performance during the first 9 months of 2023. Our adjusted EBITDA grew 28 percent year-over-year and our adjusted EBITDA margin expanded 437 basis points compared to the first 9 months of 2022.

Should you wish to decline from the polling process. Please press star followed by the number.

If you are using a speaker phone please lift your handset before pressing LTE.

Your first question comes from the line at Stephens.

With Stifel. Please go ahead.

Hi, Thanks, and good morning, everybody.

Yes.

Soma Somasundaram: Ken will take you through the details of our third quarter financial results shortly, but let me first touch on 3 key business highlights, which are shown on slide number set. First EBITDA margin expansion, despite experiencing $7 million of foreign exchange losses related to Argentina currency devaluation, we delivered an adjusted EBITDA margin of 20.2 percent in the third quarter, which represents our 6 consecutive quarter of sequential adjusted EBITDA margin improvement. Based on the midpoint of our Q4 guidance for full year 2023, we will deliver an adjusted EBITDA margin expansion of 370 basis points compared to 2022. We remain confident in our ability to further expand our adjusted EBITDA margin at the step through 2024.

Can you help us maybe understand your fourth quarter expectations, a bit I'm sort of thinking about what's normally a margin improvement in production chemicals and I understand the north American softness in some of the other areas, but can you kind of help us understand a little bit maybe on a segment basis.

The margin progression you are looking at.

Yes, good morning, Steven.

<unk>.

When you look at the Q3 to Q4 margin progression.

We expect.

PCT given the resilience of PCP.

Seasonal improvement in <unk>.

In the international.

Business.

In PCT, we expect PCT margins.

Perform.

In Q4 compared to Q3, you should you should see.

Soma Somasundaram: Second, three caseloads. We delivered another strong 3 caseload quarter having generated 3 caseload of $115 million, which represented 60 percent of adjusted EBITDA. This further demonstrates the best in class 3 caseload generating capability of our capital life portfolio of businesses and illustrates our high degree of confidence in converting at least 50 percent of EBITDA to 3 caseload in 2023 and delivering between 50 percent to 60 percent conversion of EBITDA to 3 caseloads through the cycle. We expect our 3 caseload to continue to grow in the coming years driven by EBITDA growth and margin expansion.

It had a strong performance in Q3, you should see similar performance out even slightly better in Q4.

And I think Stephen this will be an important time.

And also to talk about the Argentina devaluation.

<unk> <unk> at.

As I finished my comment I'll ask.

Ken to talk about that.

Because that impacted the Q3 margin.

Right.

When they come at a time to peak at.

Drilling technologies when you look at we do expect.

Sequentially.

Our business to be softer in U S land.

Soma Somasundaram: Third, returning capital to shareholders. Our disciplined capital allocation framework is designed to create value for our shareholders and in the third quarter, we once again delivered on our commitment to return excess cash to our shareholders. In the third quarter, between our regular cash dividend of $17 million and $68 million of theory purchases, we returned 74 percent of our free caseload to shareholders. Since we began our capital return program in the second quarter of 2022, we have returned 434 million of capital to shareholders through dividend and stock repurchases.

And we saw as we exited September.

Soma Somasundaram: This represents 66% of the free cash flow generated during the same period. We expect our capital returns to grow as we grow over free cash flow in the coming years and we remain committed to return at least 60% of free cash flow to our shareholders disappear and through the cycle.

When we entered Q3.

And how we exited September we could see in September the weakness.

Getting more pronounced in the U S land activity in September and so we do expect that as we go into the queue for the normal seasonal.

Slowdown will be fully present, we saw some signs of that already starting to happen in.

In September so and and so and it is also the mix in <unk>.

As you know the completion side is primarily ESP is driven more by the completion side, so tends to be a higher margin.

In the <unk> side, so that along with some slowdown in.

Ken Fisher: Let me now turn the call over to Ken to discuss our third quarter results and our fourth quarter outlook. Thank you, Soma. Good morning and thank you for joining us today. I will be commenting on adjusted even to offer sequential and year-over-year comparisons. We believe this metrics best reflects the business performance of continuing operation. Our third quarter 2023 revenue was 940 million, up 1% versus our second quarter 2023 revenues, while 8% lower than third quarter of 2022.

In the hardware digital purchases in Q4, I think so that mix impact.

Impact, so which means we will see Q3 to Q4 P Mod.

Margin to be somewhat down.

And then when you look at the DT at DTE is where we go.

Going to see bigger impact and this is going to be very similar.

But that's our conversations with customers are very similar tool.

That type of conversation that happened last year.

Ken Fisher: On a geographic basis, sequentially North America and international revenues were up 1% and 2% respectively. Drilling down overall US revenues were flat quarter-over-quarter with PCT up 6% and PAC and DT down 3% and 7% respectively. Meanwhile, the rest of the world revenues were up 3% sequentially driven by solid growth in PCT and PAC. Year-over-year North American revenues declined 2% while international revenues were 17% lower. In the third quarter, our largest business production chemical technologies generated solid sequential revenue growth of 5% with both North America and international contributing positively.

So it's very clear that at a particularly of our.

<unk> deliver to the customer of drilling technologies.

Starting to get very focused on Q4 working capital management.

We have already received calls to push out deliveries and those type of conversations already happening. So that's why we expect our drilling technologies.

Business to be impacted.

If it is similar to last year, you can imagine it could be sequentially down <unk>.

11, 12%.

So as that business decrements.

Higher so you should expect.

Drilling technologies business to be down now having said all of this are Steven I would say.

We see lot of this type of seasonal slowdown in customers managing working capital towards Q4 to be very temporary issues.

Ken Fisher: With declining US reach out and lower new well-complete in activities, our shorter cycles US land businesses were impacted in the quarter. With production and automation technology revenues up slightly at 1% and drilling technologies down 4% versus the second quarter of 2023. As previously communicated, sales to ECO lab under the cross sales agreement ended with the passing of the third anniversary of our merger date. As such, any sales to ECO lab are now reported in the production chemical technology segment and no longer reported in corporate and other.

If you look at the quality of the businesses costs still very strong and we have still deliver.

<unk> had strong exit margin improvement.

And you will still see strong cash generation, you'll still see strong capital returns. So these we see these as temporary U S land weaknesses, which we had expedient, saying, which started towards the end of the third quarter and that now we see it playing out in the fourth quarter. So we expect 2024.

As we enter into early 2024.

Ken Fisher: Third quarter gap net income for the company was 78 million dollars or 39 cents per deluded share versus 96 million in the second quarter and 23 million dollars in the third quarter of 2022. As seen on slide 10, champion X consolidated adjusted EBITDA on the third quarter was 190 million up 2% versus the previous quarter and a 14% increase year-over-year. Third quarter adjusted EBITDA included the impact of approximately 7 million dollars of foreign exchange loss related to devaluation of our peso exposure in Argentina during the period.

We expect at the <unk> and VF.

We are confident that it'll be out of that he had a positive growth in U S land as well as globally.

With that I do want to talk about the Argentina devaluation.

Because since that impact out our Q3 margin. So it can yes, hi, Steve.

PCT business.

Historically has done business in Argentina profitably, we have roughly about $100 million in annual sales there.

We had some questions around the.

<unk> impacts or wanted to be clear about that it's not really a revenue issue and that we're U S dollar functional accounting there and.

Ken Fisher: In the third quarter, ChampionX delivered a strong consolidated adjusted EBITDA margins of 20.2%. This was up seven points sequentially and up 391 basis points over the third quarter of 2022. Our third quarter free cash flow of $115 million reflected strong cash flow from operations and our continued focus on working capital management. The $115 million represented 60% conversion of free cash flow from adjusted EBITDA. As from operating activities with 163 million and capital investment with 48 million net of proceeds from asset sales.

We have many contracts are essentially indexed to the dollar so that when we invoice we invoice at the current rate then but the issue was that historically, we've been as a.

Primarily a product supplier, we have been able to repatriate monies to the U S out of Argentina regularly and.

So.

It had never been an issue before but late last year and then through this year, we've seen the government make a series of changes to both regulation and practice that's delayed reaper.

Repayments to us and delayed our ability to repatriate and so we had built up a balance with the peso exposure in the country that then right. After the election. They they change the exchange rate and we were hit with the loss that we noted so in the meantime, we've been working.

Ken Fisher: Production, chemical technologies generated third quarter revenue of $604 million, up 5% from the second quarter and 6% lower year over year. Sales were strong in North America and internationally where respective revenues were up 5% and 6% sequentially. Segment adjusted EBITDA was $125 million, up 7% sequentially and 22% higher than the third quarter of 2022. The third quarter segment adjusted EBITDA was inversely impacted by the aforementioned $7 million Argentina for an exchange loss during the period.

To mitigate that through.

Try to minimize that balance as much as possible we have <unk>.

Tailed a little business and then we're negotiating.

<unk> have some customers agreed to start to pay us outside of the country in U S dollars. So.

We will continue to work that exposure down year over the next couple of quarters as of this week, it's about a $15 million exposure. So should there be another significant devaluation.

Ken Fisher: Sequentially we saw a positive impact from higher volumes and productivity projects. Volume growth increased selling price and productivity projects drove the strong year over year improvement. Segment adjusted EBITDA margin was 20.7% up 37 basis points sequentially and up 472 basis points from the prior year's period. Driven again by the higher volume selling prices and the productivity initiative previously noted. Production and automation technology, third quarter segment revenue of $256 million increased 1% sequentially.

We would have an issue, but we're working hard to minimize it.

And I think Steven as you know.

Some of the companies have approached us to do a blue chip swap Mitchell's outfitting.

Major write downs, yes, maybe that's a good point a lot of the peers in the group are primarily providing services. So historically they were less able to repatriate and so they built EBIT bigger balances and they accessed.

Parallel market called the Blue chip swap and.

Took big losses, they excluded those losses from their EBITDA.

Ken Fisher: Year over year, PAT revenue was up 3%. The graphically international revenue increased 9% sequentially while North America revenue was down 1%. Digital revenues, which can exhibit some lumpiness quarter to quarter, were down 4% sequentially while increasing 17% year over year. We continue to see increased customer focus on implementing digital and emissions technologies to reduce emissions and drive operational and cost improvements. We remain very excited about expected future revenue growth from digital, including our emissions offering.

We treat FX today as part of normal adjusted EBITDA. So you get some small gains and losses each period, but we don't exclude it.

But.

Some of the peers took some pretty substantial write downs on the Blue chip swaps at late last year and early this year, because they build up even more significant balances. So.

Because we're a product provider.

We are able to repatriate normally the government actions recently have been adverse.

Yes.

Not very appreciated I guess I'd say so.

Ken Fisher: TAC, third quarter segment adjusted EBITDA was 59 million lower 2% sequentially while up 14% year over year. Segment adjusted EBITDA margin was 23.2% down 73 basis points versus the second quarter and up 213 basis points from the prior year due to higher volumes and selling price. Billing Technology's segment revenue was $55 million in the third quarter, down 4% sequentially, and down 10% year-over-year, with most declines driven by lower U.S, land recount activity.

Hopefully that helps give some color.

Yes.

Thank you and just one quick follow up for me and that is.

When I think about the sequential PC key margin performance in <unk> is that after after taking into account the $7 million. So I E. A cleaner number being flat.

Flat to maybe slightly up in the fourth quarter.

So I think the.

PCT margin in Q4, it does not.

Contemplate another devaluation and.

Under that scenario it should be closer to that 21%.

Got you great. Thank you for the detail.

Ken Fisher: Billing Technology's delivered segment adjusted EBITDA of $14 million during the third quarter, flat sequentially, and down 3 million compared to the third quarter of 2022. Segment adjusted EBITDA margin was 25.1% in the quarter, flat sequentially. Reservoir chemical technology's revenue for the third quarter was $25 million, up 5% sequentially, and a 29% 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.

Thanks Steven.

Your next question.

Your line of Marc Bianchi from Cowen. Please go ahead.

Hi, Thanks.

I wanted to.

I'll ask another one on the Argentina situation, because it seems like if youre going to have.

21% margins here in PCT in fourth quarter, there really isn't any operating leverage.

In the business, because you're just sort of recapturing the seven the absence of the $7 million hit in the third quarter.

Or are there some other crosscurrents that are worth pointing out.

Ken Fisher: This exit resulted in lower revenues, but a significant improvement in the margin profile of this business. The segment posted adjusted EBITDA of $4 million during the third quarter, flat was second quarter, and up 1.5 million versus the corresponding prior year period. Segment adjusted EBITDA of margin was 16.6% in the quarter, a 110 basis point sequential decline. Year-over-year, the segment margin increased 914 basis points driven by the product line exit, and related restructuring actions.

Or maybe I'm not reading that right.

No I don't I don't I.

I don't think that if anything significant I mean, there's always some mix issues that happens within the businesses.

So outside of that I would say mark.

That's nothing.

Other than that normal variations due to mix.

It's in all major.

Any other issues.

Okay.

And then suddenly you had mentioned an expectation for growth.

Entering 2024, but I know typically there is some some seasonality that occurs in the fourth in the first quarter with PCT falling off can you just sort of walk us through.

Ken Fisher: Moving to our balance sheet is going on slide 11. We again ended the third quarter in very strong position with liquidity of $954 million, including $285 million of cash on hand, and our available revolver capacity. At September 30, our net leverage ratio was 0.4 times net debt to drilling 12-month adjusted EBITDA. In alignment with our capital allocation framework, we remain committed to the return of surplus capital to our shareholders. During the third quarter, we returned approximately 74% of quarterly free cash flow to shareholders, including $17 million in regular quarterly dividend, and $68 million of share of purchases.

The typical progression and if you have any particular insight about early 2024.

Yes, Mark up.

Great observation, because we always see this Q4 to Q1 seasonality.

In the past we have provided some color around <unk>.

Historically, how that has worked in Nevada PCT business.

So on a if.

If you look at over the last seven or eight years, the PCT business and.

And on average at a mean Q4 to Q1 revenues have declined about 5%.

Ken Fisher: Year-to-date, we have returned 76% of free cash flow to shareholders. Moving forward, expect us to continue our discipline capital allocation process and our focus on delivery of operating and free cash flow, along with continued improvement in working capital management. We will also focus on maintaining our robust liquidity level and a strong financial position, enabled to continue returning at least 60% of free cash flow to shareholders. As we continue to drive discipline capital allocation and continuous improvement in productivity, as you can see on slide 12, we continue to improve our return on invested capital or ROIC. We are making good progress toward our targeted 20% plus ROIC. Our trailing 12-month ROIC has improved to 17% up approximately 400 basis points over the 2022 full-year actual rate.

Pure seasonality and some quarters, it's much worse at some quarters, it's better depending on how Q4 days.

So that will be a Q4 to Q1 decline in our PCT revenue, which is seasonally driven.

And historically like I said it could be.

5%.

And then but.

When you look at the DP drilling technologies, we do expect that.

Drilling technologies business to rebound in Q1, and again, we have shown historically when Q4s tend to be that high.

Of Q4, we are expecting Q1 will rebound.

And typically in some years, it's a sharper rebound, but we do expect.

Q1 to be at.

Good rebound in Nevada.

Drilling technologies business, we expect <unk> business Q4 to Q1 to be sequentially better swallow because.

But that's typically a reset in the early part of Q1, so normally what P&C in the P&C businesses. It will start a little slow in January but at the bi desktop getting into place in February we will exit the Q1 quarter, which are much stronger run rate than when we entered.

Ken Fisher: Now, turning to slide 13 in our forward outlook for fourth quarter, we expect revenue in the range of 930 to 970 million dollars. The projected fourth quarter revenue sequential chain is primarily driven by continued positive momentum in our international businesses offset by expected seasonal slowdowns in our North American businesses as they move into the year at holiday.

At Q1, so in summary, we expect to PCT to be seasonally down Q4 to Q1, we expect <unk> to be Q4 to Q1 up we expect.

At <unk> to be up Q4 to Q1, and then as we look in the quarter as we look to the rest of the year in 2024.

Ken Fisher: We expect our drilling technology business to experience the sequential revenue decline, similar to that of the fourth quarter of 2022 as some of our customers act to manage their working capital and free cash flow in the year end. For adjusted EBITDA, we expect a range of 187 million to 197 million, which at the midpoint represents the 7 percent increase over the fourth quarter of 2022. At the midpoint, this represents an approximate 200 basis points improvement year over year in the company's adjusted EBITDA margin rate.

Q1 tends to be.

The lower quarter, and Q2 Q3 continued to sequentially improve from there and Q4 as you know.

Mark that like we are seeing this year, sometimes we run into these type of issues, but that's too.

Too early to predict what Q4 of 2024 may look like but we are confident in Q4 to Q1 that will be growth and VLT growth Q1 to Q2 and Q2 to Q3.

Great. That's very helpful summary, thank you.

Ken Fisher: Please note for clarity, this fourth quarter adjusted EBITDA guidance does not anticipate any further significant evaluation in the Argentine peso during the period. Moving forward, we remain confident in our 50 to 60 percent free cash flow to adjusted EBITDA conversion ratio guidance through the cycle and we expect a free cash flow ratio of at least 50 percent for fourth quarter and the full year of 2023.

Thanks Mark.

Your next question comes from the line of David Anderson from Barclays. Please go ahead.

Hey, good morning, Soma I have a few questions on the North America side of PCT.

So the U S rig count contracted to 20% this year, but if I look on the EIA numbers onshore production appears would actually increase at least through July.

Now you said lower PCT revenue was through the rig count falling, but I thought there was a little bit of a longer term longer cycle relationship there.

Soma Somasundaram: Thank you and now back to Zola. Thank you, Ken.

Soma Somasundaram: Before we open the call to questions, let me share a few thoughts with you. As a leading global provider of production optimization solutions for the energy industry, we are particularly well-positioned to help our upstream and downstream customers maximize the value of their producing and operating assets in a sustainable and cost effective ways. Despite the short-term softness we are experiencing in our short-cycle U.S, land businesses, we expect U.S, activity to start growing in early 2024 as customer budget reached that we remain confident in the favorable demand tailwind for our businesses in 2024 and beyond.

Is in production related to driver here am I missing something in terms of that.

Apprised of it was that much of a relationship.

Yes, Dave I think I think let me make sure that we <unk>.

I think in the in the in the slide deck.

We had a slide which showed the sequential.

By segment.

The us versus non U S. So if you look at that the PCT business actually grow grew sequentially, 6%, where we had the real issues we had in <unk>.

And BT in the U S land. So this goes to show that long term relationship and the resilience of our PCT business. So PCT U S business grew 6% Q2 to Q3.

Soma Somasundaram: We are laser focus on delivering solid bottom line growth adjusted EBITDA margin expansion and strong cash generation and we remain fully committed to creating value for our shareholders through our disciplined capital allocation framework with crystal clear priorities for capital deployment which includes high return investment and returning excess cash to our shareholders.

Okay.

That held up there.

So it's a Phd side and the relationship there is the completions with the ESP.

Okay that makes sense. So if we think about kind of longer term drivers in Nam for PCT.

U S onshore is sort of in manufacturing mode, we're not going to see a whole lot of production growth for the next several years. So how should we think about the drivers. It's damn for PCT from here is there an underlying kind of increasing chemicals intensity story here, how should we think about kind of growth in this business relative to production over time.

Soma Somasundaram: With that, I would like to thank all of our 7,300 champion ex-employees around the world for their tireless and inspiring commitment to our purpose of improving the life of our customers or employees, our shareholders and our communities. I'm honored and humbled to lead such a purpose-driven team.

Yes, David I think Thats exactly right and even if you looked at our continued growth in the U S business in in PCT.

It's a combination of two things one is definitely the growth in the intensity and then the second aspect is.

Soma Somasundaram: With that, I would like to open the call for questions. Thank you.

Gulf of Mexico.

Operator: Ladies and gentlemen, we will now begin the question and answer.

Can use to grow as well if you look at our offshore growth Q2 to Q3, we grew 13 at 12%.

Sequentially in the offshore markets globally, and Gulf of Mexico, what that important part of that as well. So as we go into 2024, we continue to expect.

It's a density improvements as well as the off the Gulf of Mexico growth as well.

So even in a flat level, let's just say hypothetically U S. Onshore production is flat should PCT still continue to grow with higher with higher basically chemicals to production over time is that a trend you are expecting to see okay alright.

Saurabh Pant: Saurabh Pant, Saurabh Pant, Saurabh Pant, Saurabh Pant, Saurabh Pant, Saurabh Pant, Saurabh Pant,[inaudible] Saurabh Pant, Saurabh Pant, Saurabh Pant, Saurabh Pant[inaudible] The Hardware Digital Purchases in Q4, I think, you know, so that makes the impact PAT. So which means we will see Q3 to Q4, a PAT margin to be somewhat down. And then when you look at the DT, a DT is where we are going to see bigger impact and this is going to be very similar to because the conversations with customers are very similar to the type of conversation that happened last year.

And then secondly, and then sticking on U S. Onshore E&P consolidation is obviously, a big theme with Exxon and Chevron can you talk about what that means to your business and I guess I'm curious just how how fragment we know the offshore business is sort of very motif.

Around that but how about U S. Onshore is that more fragmented and does this potentially create more market share opportunity for you onshore.

Yes.

I think when you look at this consolidation so the positive aspect for us.

We have stronger relationships as you know.

With the I will see you.

You saw with Exxon.

One of the supplier of the year award so as the consolidation thats driven by the <unk>.

Our <unk>.

Presence.

And have a long term relationship with them, but I will seize should help us continue tube.

Maintain and gain positions in the.

In this consolidation now.

The thing we have to really be.

Watching for is to make sure obviously as they consolidate.

The E&ps will also look for.

<unk> alright.

Savings along the way.

But we do feel good.

Given our long term relationship and given the.

Global.

Maybe support our customers in this areas I think we will see it will be a net positive for us.

Okay.

Aside from any U S onshore production growth. The two main drivers of Nam here are going to be increasing revenue sorry, increasing chemical intensity in market share on top of kind of any other inherent growth. So okay that makes a lot of sense to alright. Thank you very much.

Thanks, Dave.

Okay.

Your next question comes from the line of Scott <unk> from Citigroup. Please go ahead.

Yes, good morning.

Morning, Scott.

It does look like your EBITDA margin is going to stagnate here in <unk>, given this north American weakness.

But if I heard you correctly I think you mentioned margin expansion in.

In 2004.

Can you walk through some of the major drivers.

For continued margin expansion in <unk>.

Do you think.

Getting back to that 21% level later next year is a realistic or do you think you can do better.

Yes, Scott.

If you look at.

For the last two three years, we have consistently expanded margins every year.

And clearly that is a bit of a calendar ization in how order margin performance quarter to quarter given <unk>.

Q1 tends to be a softer quarter.

Q4 to Q1, typically we'll see data from margin drop and then we'll pick up our expansion efforts from Baird.

So when we look at 2023.

Saurabh Pant: So it's very clear that particularly for the customers of drilling technologies are starting to get very focused on Q4 working capital management. And we have received calls to push out deliveries and those type of conversations are already happening. So that's why we expect our drilling technologies business to be impacted, you know, if it is similar to last year, you can imagine it could be sequentially down as much as 11 to 12 percent.

When you look at 2022.

At 2023 at the midpoint of our guidance, we will expand margins.

At.

Close to three three.

<unk>.

Basis points right.

So you will see us.

As we go into 2023 continued expansion of that and that will be driven by a couple of things number one.

Saurabh Pant: So as, you know, that business decrements higher. So you should expect the drilling technologies business to be down. Now, having said all this, Steven, I would say, you know, we see a lot of this type of seasonal slowdown and customers managing working capital towards Q4 to be very temporary issues. You know, if you look at the quality of the businesses are still very strong. We will still deliver, you know, year over, you are strong exit margin improvement.

We do expect a positive growth portfolio in 2024, so so that so that incremental a little how the second is our continued productivity efforts and continued growth in higher margin businesses I E. Our digital business and our emissions business. So we do think that.

Saurabh Pant: And you will still see strong cash generation, you'll still see strong capital returns. So these, we see these as temporary U.S, land weaknesses, which we are experiencing, which started towards the end of the third quarter. And then now we see it playing out in the fourth quarter. So we expect 2024, you know, as we enter into early 2024, we expect the budget story said. And we are, you know, we are confident it will be another year of positive growth in U.S, land as well as globally.

The mix of our businesses.

And the growth will also help.

So to answer your question, we do expect continued margin expansion in 2024.

Got it.

And looking specifically at drilling.

That business used to post margins closer to 30%.

Closer to 25% and I realize it's going to take a hit here in <unk>, but just thinking about the medium term.

Is 25% the new normal or should we be expecting something better than that.

30%, where can that business get back to you.

Yes, Scott Great question, I think that as a structural element around.

The continued drilling.

Efficiencies that are driving.

The volume growth challenges.

Hey.

And that business is over a period of time.

Soma Somasundaram: So with that, I do want to tend to talk about the Argentina devaluation just because since the impact of our Q3 margin, so can... Yeah, hi, Steven. The PCT business historically has done business in Argentina profitably. We have roughly about 100 million of annual sales there. That we had some questions around the devaluation impacts of wanting to be clear about that. It's not really a revenue issue in that we're U.S, dollar functional accounting there.

So.

The business is definitely at 25% of business.

There is no question in our mind.

Can it get to a closer to 30% margin business.

Is going to very much depend on volume, but what I would say is it's definitely at 25% margin business at the state.

Got you I appreciate that it will take it will take a hit in Q4 as I mentioned right.

Got it thank you so much.

Thanks Scott.

Your next question comes from the line of Sarah <unk> from Bank of America. Please go ahead.

Soma Somasundaram: And we have many contracts are essentially indexed to the dollar so that when we invoice, we invoice that the current rate then. But the issue was that historically, we've been as a primarily a product supplier, we've been able to repatriate monies to the U.S, out of Argentina regularly. And so it had never been an issue before, but late last year and then through this year, we've seen the government make a series of changes to both regulation and practice that's delayed repayments to us and delayed our ability to repatriate.

And his line of Jessica disconnected moving over to the next question from Al <unk> from Goldman Sachs. Please go ahead.

Hi, good morning team.

Can you mentioned that the Argentina revenue exposure it doesn't really exist, it's more on the margins and it sounds like though our activity expectations that drove the delta versus expectations for our <unk> TQ around guidance, especially some but I'm wondering if that or any other things maybe destocking in drilling technology of any other factor.

Soma Somasundaram: And so we had built up a balance with a peso exposure in the country that then right after the election, they changed the exchange rate, and we were hit with the loss that we noted. So in the meantime, we've been working to mitigate that through, you know, trying to minimize that balance as much as possible. We have to care, tell the little business, and then we're negotiating. And in fact, have some customers agreed to start to pay us outside of the country?

As you can provide any color on how do you see those going forward.

Yes, if you look at our.

Shortfall too.

First of all we are disappointed with that right.

Shortfall to our Walden.

Midpoint guidance is about $35 million in top line right.

And I would say.

A half of that is related to the U S land and particularly in <unk>.

Soma Somasundaram: Secretary in U.S, dollars. So, we'll continue to work that exposure down here over the next couple of quarters. As of this week, it's about a $15 million exposure. So, should there be another significant evaluation? You know, we would have an issue, but we're working hard to minimize it. And I think, Stephen, as you know, some of the companies have approached us to do a blue chip swap, which results in a major write-down.

Again, this is with respect to our expectation.

And drilling technologies, so roughly $16 million to $17 million of that 35 million.

Is shortfall is in U S land in <unk> as well as in drilling technologies the.

The remaining $617 million is a combination of two things one is.

Shortfall in Argentina.

And that is primarily driven by a delay in import certifications and that.

Soma Somasundaram: Yeah, maybe that's a good point. A lot of the peers in the group are primarily providing services. So, historically they were less able to repatriate and so they built even bigger balances. And they accessed a parallel market called the blue chip swap and took big losses. They excluded those losses from their EBITDA. We treat FX today as part of normal adjusted EBITDA. So, you get some small gains in losses each period.

And I'll ask Ken to comment on that again. This is all related to this devaluation issue.

And then the remaining.

Another country, which we had we had we had a shortfall.

The expectation is in Mexico, So, Argentina, and Mexico together.

<unk> contributed another about $15 million to $16 million for the shortfall. So there are three primary areas, where we had shortfall to our expectation that U S land, Argentina, and Mexico, and Argentina was about $5 million of that revenue.

Soma Somasundaram: But we don't exclude it. But, you know, some of the peers took some pretty substantial write-downs on the blue chip swaps at late last year and early this year because they built up even more significant balances. Because we're a product provider, we are able to repatriate normally government actions recently have been, you know, adverse and not very appreciated, I guess I'd say. Hopefully that helps give some color. Yeah, that does. Thank you.

What drove that was we.

So the government.

Slow down or stop giving import certificates during the course of the quarter.

We werent the only ones that experience that we actually engaged with the U S Commerce Department.

Heard that a lot of imports, we're being similarly treated across a lot of sectors and the.

The Comverse guys have actually been helpful and try to get us those certificates and they've started to flow a little bit better recently.

Soma Somasundaram: Just one quick follow-up for me. And that is the, when I think about the sequential PC key margin performance in 4Q, is that after, after taking into account the 7 million, so IE a cleaner number being flat to maybe slightly up in the fourth quarter? Yeah, so I think, you know, the PCT margin in Q4 does not, you know, contemplate another devaluation and under that scenario, it should be closer to the 21%. Gotcha. Great. Thank you for the details. Thanks, Steven.

Got it. Thank you just wanted to follow up is there a way for us to gauge what the segment exposure is in Argentina is it evenly spread out or is that a higher and it's essentially it's all it's all PCT largely PC Tam.

Theres not a lot of.

<unk> exposure there.

Got it.

The other question I had is you mentioned free cash flow growth over time.

A lot of that from EBITDA growth and some margin expansion I'm. Just wondering if there is any kind of color you can provide or you have a bunch of productivity projects ongoing is that the main driver of it are there other operating leverage drivers here.

As you think about hitting that 21% target and beyond.

Yes, I think the 21% target for US is as I mentioned is a combination of productivity and.

Mark Bianchi: Your next question from the line of Mark Bianchi from PD Cowan, please go ahead. Hi, thanks. I wanted to ask another one on this Argentina situation because it seems like if you're going to have 21% margins here in PCT and fourth quarter, there really isn't any operating leverage in the business because you're just sort of recapturing. The 7 million, the absence of the 7 million dollar hit in the third quarter. Are there some other cross currents that are worth pointing out?

And incremental revenue growth, that's what I would say and I think the free cash flow conversion of that 50% to 60% for us is very much intact and I think you will see our business continues to.

B capital light business and.

We will continue.

Right that 50% to 60% free cash flow conversion.

Great. Thank you Eduardo.

Thanks Avi.

Mark Bianchi: Or maybe I'm not reading that right? No, I don't, I don't, I don't think there's anything significant. I mean, there's always some mixed issues that happens within the businesses. So outside of that, I would say Mark, there's nothing other than the normal variations due to mix. There's no major in any other issues. Shoes. Okay, and then some of you had mentioned an expectation for growth in entering 2024, but I know typically there's some seasonality that occurs in the first quarter with PCT falling off.

Your next question comes from the line of Sarah <unk> from Bank of America. Please go ahead.

Hi, Good morning, Soma, Ken I'm, sorry, the line got disconnected for some reason right when you call my name.

Sorry about that but.

Thanks for getting me back on.

Yeah.

Good morning, Sorry go ahead.

Yes, so Matt I think.

Basically I'm thinking of how should we think about the level setting expectations for revenue growth from our 2020 full perspective, because North America has like you said has some crosscurrents activity would be improving on a leading edge basis.

But on a full year basis, maybe you can expand on that how do you see North America behaving in 2024, and then international and offshore should be doing well right. So how should we think about top line as a whole.

Mark Bianchi: Can you sort of walk us through the typical progression and if you have any particular insight about early 2024? Yeah, Marc, you know, great observation because we always see this Q4 to Q1 seasonality and in the past we have provided some color around, you know, historically how that has worked in our PCT business. So if you look at over the last seven or eight years, you know, the PCT business, you know, and an average or a mean, Q4 to Q1 revenues have declined about 5%, you know, that is a pure seasonality.

2020 forward versus 2023.

Mark Bianchi: And some quarters it's much worse, some quarters it's better depending on how Q4 is. So there will be a Q4 to Q1 decline in our PCT revenue, which is seasonally driven. And historically like I said, it could be, you know, 5%. And then, but when you look at the DT drilling technologies, we do expect the drilling technologies business to rebound in Q1. And again, we have shown historically when Q4s tend to be the type of Q4 we are expecting, Q1 will rebound.

Yes, sorry about.

Let me start by saying, we do we expect a positive growth both in North America as well as internationally in 2024.

Now given.

What we have seen in terms of the.

The Q3 slowdown in Q.

Q4 slowdown.

The seasonal slowdown.

<unk>.

The base in Q3, particularly for the U S land is kind of.

And our lowered a bit.

From what we had yield so.

As we go into Q4 like I said I think we will see in <unk>.

Going into next year, you will see in in North America. The Q1 revenue to be sequentially better Q4 to Q1, and then it will progressively get better into Q2 and Q3 so from.

For me it's.

Again Q4 of next data is too early to predict right now but that.

But I do expect a positive growth.

In North America so.

What we are seeing.

Mark Bianchi: You know, typically in some years, it's a sharper rebound, but we do expect, you know, Q1 to be a good rebound in our drilling technologies business. We expect PAT business Q4 to Q1 to be sequentially better as well, because you know, the budgets typically reset in the early part of Q1. So normally, what we'll see in the PAT businesses, it will start a little slow in January, but as the budget starts getting into plays in February, we will exit the Q1 quarter, which are much stronger run rate than when we entered Q1.

Right now it is.

It's a temporary situation and that in there.

With respect nothing in our customer conversations is telling us.

That 'twenty 'twenty four is that it's going to be at.

It's not going to be a growth year in North America.

Okay perfect. That's helpful. And then just one quick follow up on the <unk> side of things because there's obviously a seasonal element yearend slowdown budget issues all of that stuff, but I'm. Just thinking is there also an element and how important is it.

Thinking about the lag effect of.

Lower D&C activity rate lower completion activity on production there is obviously a little bit of a lag.

Marc Bianchi: So in summary, we will expect PCT to be seasonally down Q4 to Q1. We expect PAT to be Q4 to Q1 up. We expect a DT to be up Q4 to Q1. And then as we look in the quarter, as we look in the rest of the year in 2024, Q1 tends to be the lower quarter and Q2, Q3 tends to sequentially improve from there. And Q4, as you know, mark that, you know, like we are seeing this year, sometimes we run into these type of issues, but that's too early to predict what Q4 of 2024 may look like. But we are confident Q4 to Q1, there will be growth, and we'll see growth Q1 to Q2 and Q2 to Q3. Great. That's very helpful summary. Thank you. Thanks Mark.

Especially on the ESP side of things how should we think about just that lag effect versus seasonality because that would tell us how quickly things.

<unk>, that's the reason I'm asking.

Yes Sara.

Think.

Intellectually and logically.

Definitely.

We see that should be a lag effect right.

But we have tried correlating this multiple times, whether it is a three month lag six month lag nine month lag.

And we are tight and doing that and it's a little harder to pin down.

How much is the lag effect because of couple of things number one is as you know the ESP.

Which is the primary business that tend to get impacted by completion slowdown.

David Anderson: Your next question comes from the line of David Anderson from Barclays. Please go ahead. Hey, good morning so much. I have a few questions around the North America side of PCT. So the US recount contract to 20% this year, but if I look on the EIA numbers, onshore production periods have actually increased, at least through July. Now, you said lower PCT revenue was due to the rig count falling, but I thought there was a little bit longer term, longer cycle relationship there.

It.

Customers it tends to.

Ron <unk>, two times and three times into the fame well nowadays.

So sometimes it's very hard to kind of.

It's not one to one so it's always been a bit harder to really quantify exactly how the lag effect works, but I do agree with you that that is a lag effect and but it's just hard to quantify and predict.

David Anderson: Is it in production really the driver here? Am I missing something in terms of that? I'm surprised it was that much of a relationship. Yeah, Dave, I think let me make sure to clarify, I think in the slide deck, we had a slide which showed the sequential bisagment, US versus non-US. So, if you look at that, the PCT business actually grew sequentially 6%, where we had the real issues where in PAT and DT in the US land.

And we saw that in because as we got into September.

We are clearly could see our ESP installed rate starting with how we entered the quarter in Q3, and how we exited the quarter in Q3 was lower.

Uh-huh uh-huh, okay. Okay. Okay, no. So am I know you've talked about the secondary tertiary installations in the past so that that obviously offset that to some extent.

But no that is helpful. Okay. So my thank you I'll turn it back.

Sure Sarah Thank you.

David Anderson: So, this goes to show the long term relationship and the resilience of our PCT business. So, PCT US business grew 6%, Q2 to Q3. Okay, so that held up there better. So, it's a PAT side in the relationship. There's the completions with ESPs. Okay, that makes sense. So, if we think about kind of longer term drivers in NAM for PCT, US onshore is sort of in manufacturing mode. We're not going to see a whole lot of production growth for next several years.

Your next question comes from the line of Doug Becker from capital One. Please go ahead.

Thank you.

Somewhat continuing with.

Hi.

Company received top marks from the kimberlite artificial lift survey, but.

But the growth in ph, you said, a little bit slower than I would've thought even factoring in the U.

U S activity.

Given that some others have talked and pointed to lift as an area of strength. So really just wanted to get your thoughts on the competitive landscape with the lift.

David Anderson: So, how should we think about the drivers in NAM for PCT from here? Is there an underlying kind of increasing chemical intensity story here? How should we think about kind of growth in this business relative to production over time? Yeah, Dave, I think that's exactly right. And even if you look at, you know, our continued growth in the US business in PCT, it's a combination of two things. One is definitely the growth in the intensity.

And if there's any market share shifts taking place there.

Yes, so I think Doug.

From a.

Competitive landscape standpoint, I think if you if you look at it.

The market.

Kind of differentiate it in.

If you look at the two major forms of lift and artificial lift which is the ESP and.

David Anderson: And then the second aspect is, you know, you know, Gulf of Mexico continues to grow as well. If you look at our offshore growth, Q2 to Q3, we grew 13 at 12 percent sequentially in the offshore markets globally. And Gulf of Mexico was an important part of that as well. So, as we go into 2024, we continue to expect the intensity improvements as well as, you know, the Gulf of Mexico growth as well.

And Rod left so when you look at the ESP market landscape I think our competitive position remains strong there and we feel there.

The activity is the major driver behind any type of slowdown we see.

Now when it comes to Rod lift.

That is a lot of players in rod lift and especially when you go to the lower end of it particularly in components in it a pass shops, and so on and so forth. So sometimes in rod lift do you will see.

David Anderson: So, even in a flat, let's just say, hypothetically, US onshore production is flat. Should PCT still continue to grow with higher, with higher, basically, chemicals to production over time? Is that a trend you were expecting to see? Okay. And then secondly, it's sticking on US onshore. ENP consolidation is obviously a big theme with Exxon and Chevron. Can you talk about what that means to your business? And I guess I'm curious just how fragment, we know the offshore business is sort of very moody around that.

Some.

Okay.

Pricing pressures and issues in the fringes youll see but the way we focus on our rod lift is in terms of the type of value. We provide so when I looked at our Walden.

David Anderson: But how about US onshore? Is that more fragmented? And does this potentially create more market share opportunity for you onshore? Yeah, you know, I think when you look at this consolidation, so the positive aspect for us is, you know, we have stronger relationships as, you know, with the IOCs. And, you know, you saw with Exxon, you know, we won the supplier of the era world. So, as the consolidation is driven by the IOCs, you know, our presence and our long-term relationship with our IOCs should help us continue to maintain and gain positions in the, in this consolidation.

Our one data.

I don't see a lot of market share loss per se.

Are some in the fringes, but I wouldn't call that as the biggest driver of Florida.

The any type of slowdown in in both it is largely an activity.

Driven and we have.

Today in the U S.

As you know that we have a pretty good market share position in all forms of lift and some of the lift of categories. We are the leading share position, but if you look at across all lift positions.

Positions we have.

Really good market share positions.

I think I would say that.

The growth issue, which we are experiencing.

In the second half year.

It is largely an activity issue.

That's helpful context.

David Anderson: Now, the thing we have to really be watching for is to make sure, obviously, you know, as they consolidate, the DNPs will also look for, you know, efficiencies and savings along the way. But we do feel given our long-term relationship and given the global way we support our customers in this area, I think, you know, we will see it will be a net positive for us. Okay, so aside from any U.S, onshore production growth, the two main drivers of NAMP are going to be increasing revenue, sorry, increasing chemical intensity and market share on top of kind of any other inherent growth. So, okay, that makes a lot of sense. All right, thank you very much, Soma. Thanks, Dave.

One last one just curious if theres been any nuances or change to the revenue category you talked about from 'twenty one to two.

Let's say high single digits still plenty of time, but wondering if this year is maybe shaded or may be at the high end less likely.

Yes, so Doug.

Sure.

If you if you look at 2023.

If you normalize for the various.

Elements such as Russia.

ICI exert.

The cross sales.

Terminating as well as them.

Some of the <unk> product line exit we did as part of our RCT restructuring if we normalize for all of that and at the midpoint of our guidance is somewhere in the 4% in.

Scott Gruber: Your next question comes from the line of Scott Gruber from City Group. Please go ahead. Yes, good morning. Good morning, Scott. Soma, you know, it does look like your EBITDA margin is going to stagnate here in 4Q, given this North American weakness. But if I heard you correctly, I think you mentioned margin expansion in 24. Can you walk through some of the major drivers for continued margin expansion? And do you think getting back to that 21% level later next year is a realistic goal?

In 2023.

4% slightly better so when you. So when you look at that obviously, when we gave our high single digit CAGR.

We werent expecting the second half.

This level of act.

Activity weakness in what we expected.

So it makes it harder right because if you are starting with a lower year than we anticipated. So it makes it harder but we.

We are not giving up on that but but I will acknowledge that it makes it harder given that we start with the fourth.

Scott Gruber: Do you think you did better? Yeah, you know, Scott, if you look at for the last two to three years, we have consistently expanded margins every year. And clearly, there is a bit of a calendarization in our margin performances quarter to quarter. You know, given Q1 tends to be a softer quarter, you know, if it tends to Q4 to Q1, you typically will see a bit of a margin drop and then we will pick up our expansion efforts from there.

4% desktop plus per year.

Yeah makes sense. Thank you so much.

Thanks, Doug.

There are no further questions at this time I would now like to turn the call back over to Mr. Sanderson for any closing remarks.

Well, thanks, everyone for joining today's call and we look forward to talking to you in our next quarter's earnings call. Thank you and have a great day.

Scott Gruber: So when we look at 2023, you know, or when we look at 2022 versus 2023, at the midpoint of our guidance, you know, we will expand margins close to 300 basis points, right? So you will see, you know, as we go into 2023, continued expansion of that. And that will be driven by, you know, a couple of things. Number one, we do expect a positive growth for full year in 2024. So that incremental will help.

Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.

Okay.

[music].

Okay.

[music].

Scott Gruber: The second is our continued productivity efforts and continued growth in higher margin businesses, i.e, our digital business and, you know, our emissions business. So we do think that, you know, the mix of our businesses in the growth will also help. So to answer your question, we do expect continued margin expansion in 2024. Got it. And looking specifically at really, you know, that that business used to, you know, post margins, you know, closer to 30%.

Scott Gruber: It was close to the 25% and I realized, you know, it's going to take a hit here in 4Q. But just thinking about the medium term, you know, is 25% to mean normal or should we be expecting something better than that high 20%. 30%. What work in that business get back to? Yeah, Scott, you know, it's a great question. I think, you know, there is a structural element around, you know, the continued drilling, efficiency that are driving, you know, the volume growth challenges in that business is what a period of time.

Sure.

Yes.

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Scott Gruber: So, you know, the business is definitely at 25% business. There's no question in our mind. Can it get to a closer to 30% margin business is going to very much depend on volume. But what I would say is it's definitely at 25% margin business at the state. It will take a hit in Q4 as I mentioned, you know.

Scott Gruber: Thank you so much. Thanks, Scott.

Saurabh Pant: Your next question comes from the line of Saurabh Pant from Bank of America.

Atidrip Modak: Please go ahead. And his line has just got disconnected moving over to the next question from Atid Modak from Goldman Sachs.

Soma Somasundaram: Please go ahead. Hi, good morning, team. Can you mention that the Argentina revenue exposure doesn't really exist. It's more in the margins and it sounds like there were activity expectations that drove the Delta versus expectations for three Q around guidance, especially some. But I'm wondering if there are any other things, maybe these talking and drilling technology, any other factors you can provide any color on and how do you see those going forward?

Soma Somasundaram: Yeah, you know, if you look at our, you know, short fall to first of all, we are disappointed with that. Right. You know, our short fall to our own guide midpoint guidance is about 35 million dollars in top line. Right. And I would say are the half of that is related to the US land and particularly in PAT, you know, again, this is with respect to our expectation and PAT and drilling technologies.

Soma Somasundaram: So roughly 16, 17 million dollars of that 35 million is shortfall is in US land in PAT as well as in drilling technologies, the remaining 16, 17 million is a combination of two things. One is, you know, short fall in Argentina and and and that is primarily driven by delay in import certifications and that you know and and I last can to comment on that. It's again, this is all related to this devaluation issue and then the remaining is another country, which where we had we had a short fall competitive expectation is in Mexico.

Soma Somasundaram: So Argentina and Mexico together, you know, contributed another about 15, 16 million to the short fall. So there are three primary areas where we had short fall to our expectation, US land, Argentina and Mexico. Yeah, in Argentina was about 5 million of that revenue and that what drove that was we saw the government, and slow down or stop giving import certificates during the course of the quarter. And we weren't the only ones that experienced that.

Soma Somasundaram: We actually engaged with the US Commerce Department and heard that a lot of imports were being similarly treated across a lot of sectors. And then the commerce guys have actually been helpful in trying to get us those certificates and they've started to flow a little bit better recently. Got it.

Soma Somasundaram: Thank you. Just all the follow up. Is there a way for us to gauge what the segment exposure is in Argentina is that even these spread out as they're higher exposure. It's essentially it's all it's all PCT largely PCT. There's not a lot of PAT exposure there. Got it. And the other question I had is you mentioned pre cash flow growth over time. A lot of that from EBDA growth and some margin expansion and just wondering if there is any kind of color you can provide you have a bunch of productivity projects on going is that the main driver or their other operating leverage drivers here into as you think about hitting that 21% target and beyond.

Soma Somasundaram: Yeah, I think the 21% target for us is as I mentioned, you know, is a combination of productivity and and an incremental revenue growth. That's what I would say. And I think the free cash flow conversion of that 50 to 60% for us is very much intact. And, you know, I think you will see our business continues to be a capital light business. And when and will continue, you know, to generate that 50 to 60% free cash flow conversion. Great.

Soma Somasundaram: Thank you. I don't know. Thanks, sorry.

Saurabh Pant: Your next question comes from the line after Rob Pant from Bank of America. Please go ahead. Hi, good morning, Selma. I'm sorry, the line got disconnected for some reason right when you call my name. Sorry about that, but thanks for getting me back on. Good morning, so go ahead. Yeah, Selma, I think basically I'm thinking of how should we think about the level setting expectation for revenue growth from 2020 for perspective.

Saurabh Pant: Because North America has, like you said, has some cross current activity would be improving on a leading edge basis. But on a fuller basis, maybe you can expand on that. How do you see North America behaving in 2024? And then international and offshore should be doing well, right? So how should we think about top line as a whole for 2024 versus 2023?

Soma Somasundaram: Yeah, you know, so let me start by saying, you know, we do expect a positive growth both in North America as well as internationally in 2024. Now, given what we have seen in terms of the Q3 slowdown and now the Q4 slowdown, professional slowdown. I think the base in Q3 particularly for your land that's kind of, you know, lowered a bit right from what we had. So as we go into Q4, like I said, I think we will see, as we go into it next year, you will see in North America, the Q1 revenue to be sequentially better, Q4 to Q1, and then it will progressively get better into Q2 and Q3.

Soma Somasundaram: So from me, again, Q4 of next year is too early to predict right now, but I do expect a positive growth in North America. So what we are seeing right now is a temporary situation in that respect. Nothing in our customer conversations is telling us that 2024 is going to be a growth year in North America. Okay, perfect now Soma, that's helpful.

Saurabh Pant: And then just one quick follow-up on the PAT side of things, because there's obviously a seasonal element here and slow down, budget issues, all of that stuff. But I'm just thinking, is there also an element and how important is it? If you are thinking about the lag effect of lower DNC activity, right, lower completion activity on production, there's obviously a little bit of lag, especially on the ESP side of things. How should we think about just that lag effect versus seasonality?

Saurabh Pant: Because that would tell us how quickly things recover in 2024, that's the reason I'm asking. Yeah, sort of, you know, I think, you know, intellectually and logically, you know, we definitely, we see there should be a lag effect, right? But we have tried correlating this multiple times, you know, whether it is a three-month lag, six-month lag, nine-month lag, and we have tried doing that. And it's a little harder to pin down, you know, how much is the lag effect because of a couple of things.

Saurabh Pant: Number one is, as you know, the ESP, which is the primary business that tends to get impacted by completion slowdown, customers tend to run ESPs two times and three times into the same well nowadays. So sometimes it's very hard to kind of, you know, it's not one to one. So it's always been a bit harder to really quantify exactly how the lag effect works. But I do agree with you that there is a lag effect and but it's just hard to quantify and predict.

Saurabh Pant: And we saw that in, because as we got into September, you know, we clearly could see our ESP installed rate starting where how we entered the quarter in Q3 and how we exited the quarter in Q3 was lower. Okay, okay, okay. No, so I know you've talked about the secondary tertiary installations in the past, so that obviously offsets it to some extent. But no, that's helpful. Okay, so my thank you.

Saurabh Pant: I'll turn it back. Sure, sorry. Thank you.

Doug Becker: Your next question comes from the line of dog background from Capital One. Please go ahead. Thank you. So much continuing with PAT. You know, the company received top marks in the Kimberlite artificial lift survey, but the growth in PAT is a little bit slower than I would have thought, even factor in the U.S, activity dip, given that some others have talked and pointed to lift as an area of strength. So really just wanted to get your thoughts on the competitive landscape of the lift.

Doug Becker: And it was any market share ship taking place there. Yeah, so I think that from a competitive landscape standpoint, I think if you look at the market kind of differentiated in, if you look at the two major forms of lift in artificial lift, which is the ESC and the rod lift. So when you look at the ESC market landscape, I think our competitive position remains strong there. And we feel the activity is the major driver behind any type of slowdown we see.

Doug Becker: Now, when it comes to rod lift, you know, there's a lot of players in rod lift, you know, especially when you go to the lower end of it, particularly in components and repair shops and so on and so forth. So sometimes in rod lift, you will see, you know, some pricing pressures and issues in the fringes you will see. But the way we focus on rod lift is in terms of the type of value we provide.

Doug Becker: So when I look at our own data, you know, I don't see a lot of market share loss per se. You know, there are some in the fringes, but I wouldn't call that as the biggest driver for the any type of slowdown in growth. It's largely an activity driven. And we have, you know, today in the U.S., as you know, Doug, we have a pretty good market share position in all forms of lift.

Doug Becker: And in some of the lift categories, we have the leading share position. But if you look at across all lift positions, we have, you know, really good market share positions. So I think I would say that, you know, the growth issue, which we are experiencing in the second half year, is largely an activity issue.

Doug Becker: Let's hope for context. One last one, just curious that there's been any nuance or change to the revenue category you talked about from 21 to 21, that the annual stay, high single digits, still plenty of time. But wondering if this year is maybe shaded or maybe at the high end less likely? Yeah. So Doug, you know, if you look at 2023, you know, if we normalize for the various elements such as Russia, exit, the crossroads, exit, you know, terminating, as well as some of the product line exit we did as part of our OCT restructuring.

Doug Becker: We normalize for all of that. And at the mid-point of our guidance, it's somewhere in the four- in 2023, 4% are slightly better. So when you look at that, obviously, when we gave our high-single digit caterer, we weren't expecting the second half this level of activity weakness than what we expected. So it makes it harder because if we are starting with the lower year, then we anticipated, so it makes it harder. But, you know, we are not giving up on that, but I will acknowledge that it makes it harder, given that we started with a 4% of the first year.

Operator: Thanks, Soma. Thanks, Doug. There are now further questions at this time.

Soma Somasundaram: I'd now like to turn the call back over to Mr. Somasundaram for any closing remarks. Well, thanks everyone for joining today's call and we look forward to talking to you in our next quarter's earnings call. Thank you and have a great day. Thank you, sir.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

Operator: Thank you.