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.

Yeah.

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

Thank you.

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 differences in our results from those projected in these statements.

Therefore, I refer you to our latest 10-K filing.

Filing and our other equity 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 comment.

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

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

Im appreciative of all of our employees for their focus on padlocked 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.

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

Onsite methane Ami can detect them.

In 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 or <unk> Pamela 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.

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 and sustainability benefits for our customers.

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

Today more than 50 customer use our two key 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 cone on slide number 10.

But EBITDA margin expansion.

Despite experiencing $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.

Remain confident in our ability to further expand our adjusted EBITDA margin.

Through 2024.

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 up a 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.

Of 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 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 up share repurchases, we returned 74% of our free cash flow to shareholders.

Since we began our capital return program in the second quarter of 2022, we have returned <unk>.

$134 million of capital to shareholders through dividends and stock repurchases.

This represents.

The percent 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 Soma 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 the 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 on a geographic basis sequentially North America and international revenue.

<unk> 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 PCP NPA peak year.

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

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.

Of 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 versus $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.

Third quarter was $190 million up 2% versus the previous quarter and up <unk>.

14% increase year over year.

Third quarter adjusted EBITDA included the impact of approximately $7 million.

A foreign exchange loss related to the devaluation of our peso exposure in Argentina during the period.

In the third quarter champion X 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% 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 virtually impacted by the aforementioned 7 billion, Argentina foreign exchange loss during the period.

Sequentially, 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.

<unk> four.

472 basis points from the prior year period, driven again by the higher volume selling prices end up.

Productivity initiatives previously noted.

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

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 offering.

Third quarter segment, adjusted EBITDA was $59 million.

Lower 2% sequentially, while up 14% year over year.

Pigment 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 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 20.

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.

This exit resulted in lower revenues, but a significant improvement in the margin profile of this business.

Operator: Good morning.

Byron Pope: Welcome to ChampionX Corporation's 3rd 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.

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 point, driven by the product line exit and related director rig active.

Byron Pope: With me today are Somasundaram, President and CEO of ChampionX, and again, 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 3rd quarter results and 4th 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.

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, and our available revolver capacity.

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. Additional details on reconciliation to the most directly comparable gap financial measures can be found in our 3rd quarter press release, which is available on our website.

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 remain committed to the return of surplus capital to our shareholders during.

During the third quarter, we returned approximately 74% of quarterly free cash flow to shareholders, including $17 million in regular quarterly dividends and $68 million of share repurchases year to date, we have returned 76% of free cash flow to shareholders.

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

Moving forward 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.

Sivasankaran Somasundaram: Good morning, everyone. I would like to welcome our shareholders, employees, and analysts to our 3rd quarter 2023 earnings call. Thanks for joining us today. We demonstrated the benefits of our geographically diversified portfolio in the 3rd quarter, as we delivered adjusted EBITDA growth and margin expansion despite some near-term cross-currents in our stock 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 on wireless dedication to delivering value to our customers day in and day out.

We're 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.

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

Sivasankaran 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 say one example of the many types of campaign act innovation, which emerged from being relentless advocates for our customers and delivering technology with impact. Our Sufi 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 detections, and this case study illustrates how our Sufi system helped one of our customers detect and avoid a catastrophic leak at one of its production facilities in real time.

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.

Rejected fourth quarter revenue sequential gain 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 end holidays.

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

Sivasankaran Somasundaram: Resulting in environmental and financial savings. Our aura, optical gas imaging or OGA camera, is a natural complement to our Sufi system and is designed to help our customers meet current and future emissions monitoring needs by accurately detecting and documenting even small methane leak. 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 drilling and completion activity.

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

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.

Sivasankaran 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 speedcorp-focused digital solutions, including our emissions management technologies that drive tangible productivity and sustainability benefits for our customers. Our continuous emissions monitoring technology installation continued to grow along with the recurring revenues.

Thank you and now back to XOMA.

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 other 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 titled U S land businesses.

We expect U S activity to start growing in early 2024 as customer budget creep that we remain confident in the favorable demand tailwind for our business in 2024 and beyond.

Sivasankaran Somasundaram: Today, more than 60 customers use our Sufi continuous emissions monitoring technology. We continue to deliver strong EBITDA performance during the first nine 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 nine months of 2022.

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.

Kenneth Fisher: Ken will take you through the details of our third quarter financial results shortly.

Sivasankaran Somasundaram: But let me first touch on three 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 six 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 as we step through 2024.

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 the Pope 17.

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.

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

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

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

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.

Thanks, and good morning, everybody.

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.

Sivasankaran Somasundaram: Third returning capital to shareholders. Our discipline 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 dollars of theory purchases, we returned 74 percent of our three cash flow 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 dividends and stock repurchases.

<unk>.

When you look at the Q3 to Q4 margin progression.

We expect.

Sivasankaran 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.

PCT given the resilience of PCP.

Seasonal improvement in <unk>.

In the international business.

In PCT, we expect PCT margins.

Perform well in Q4 compared to Q3, you should you should see.

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.

As I finish my comment I'll ask.

<unk> talk about that.

Because that impacted the Q3 margin for us.

Kenneth Fisher: Let me now turn the call over to Ken to discuss our third quarter results and our fourth quarter outlook. Thank you, Stoma. Good morning and thank you for joining us today. I will be commenting on adjusted EBITDA offers sequential and year-over-year comparisons. We believe this metrics 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.

When it come at a time to peak.

And.

Drilling technologies when you look at <unk>.

We do expect.

Sequentially.

A business to be softer in U S land.

And we saw as we exited September seven.

<unk> 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.

Kenneth 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 P 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 PAT. 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.

A 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.

It's driven more by the completion side, so tends to be a higher margin.

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

<unk> in Q4, I think that mix will impact the 18, so which means we will see Q3 to Q4 P Mod.

Margin to be somewhat down.

Kenneth 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.

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

You're 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.

So it's very clear that.

Particularly of our.

Dilip for the custom lots of drilling technologies.

Starting to get very focused on Q4 working capital management.

And 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.

Kenneth Fisher: Third quarter gap net income for the company was 78 million dollars or 39 cents per diluted 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. 3rd 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.

Business to be impacted.

If it is similar to last year, you can imagine it could be sequentially down as much as 11, 12%.

So as that business decrements.

A higher so you should expect.

Drilling technologies business to be down now having said all of this.

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. If you look at the quality of the businesses cost still very strong and we can still deliver.

Kenneth Fisher: In the 3rd quarter, ChampionX delivered a strong consolidated adjusted EBITDA margins of 20.2%. This was up 7 points sequentially and up 391 basis points over the 3rd quarter of 2022. Our 3rd 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. Cash from operating activities was $163 million and capital investment was $48 million net of proceeds from asset sales.

<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 expediency, 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, we expect at the <unk> and VF.

We are confident that it will be out of that you get a positive growth in U S land as well as globally.

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

Kenneth Fisher: Production, chemical technologies generated 3rd quarter revenue of $604 million, up 5% from the 2nd 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 3rd quarter of 2022. The 3rd quarter segment adjusted EBITDA was virtually impacted by the aforementioned $7 million Argentina for an exchange loss during the period.

Since that impact out our Q3 margin so Ken Yes, Hi, Stephen.

The PCT business.

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

We had some questions around the.

Devaluation 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 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.

Kenneth Fisher: Sequentially, we saw a positive impact from higher volumes in 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 3rd quarter segment revenue of $256 million increased 1% sequentially. Year-over-year PAT revenue was up 3%.

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.

Repayments to us and delayed our ability to repatriate and so we had built up a balance with the peso exposure in the country 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.

<unk> to mitigate that through.

Try to minimize that balance as much as possible we have.

Kenneth Fisher: Geographically, international revenue increased 9% sequentially while North America revenue was down 1%. Digital revenues was can exhibit some lumpiness quarter to quarter. We're 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. TAC 3rd quarter segment adjusted EBITDA was $59 million lower 2% sequentially while up 14% year-over-year.

Tailed a little business and then we are 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 here over the next couple of quarters as of this week, it's about a $15 million exposure. So should there be another significant devaluation.

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 which results in that.

Major write downs, yes, maybe.

Good point a lot of the peers in the group are certain primarily providing services. So historically they were less able to repatriate and so they built even bigger balances and they accessed.

Kenneth Fisher: 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 Technologies' segment revenue was $55 million in the third quarter, down 4% sequentially, and down 10% year-over-year, with both the clients driven by lower U.S, land recount activity. Billing Technologies' delivered segment adjusted EBITDA of $14 million during the third quarter, flat sequentially, and down 3 million compared to the third quarter of 2022.

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 and losses each period, but we don't exclude it but.

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.

Kenneth Fisher: 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. 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.

Because we're a product provider.

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

Zero.

Not very appreciated I guess I'd say so.

Hopefully that helps give some color.

Yes.

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

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.

Yes, so I think the PCT margin in Q4, that's not.

Kenneth Fisher: 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. 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 point four times net debt to drilling 12-month adjusted EBITDA.

Contemplate another devaluation and.

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

Got you great. Thank you for the details.

Thanks Steven.

Yes.

Your next question.

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

Hi, Thanks.

I wanted to.

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.

The business because youre, just sort of recapturing the seven the absence of the $7 million hit in the third quarter.

Kenneth Fisher: 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 purchases. Year-to-date, we have returned 76% of free cash flow to shareholders. Moving forward, expect us to continue our discipline capital allocation process at our focus on delivery of operating and free cash flow along with continued improvement in working capital management.

There are some other cross currents that are worth pointing out.

Or maybe I'm not reading that right.

No I don't.

I don't think that if anything significant.

Automate some mix issues that happens within the businesses.

So outside of that I would say mark that if nothing.

Other than that normal variations due to mix that it's in all major.

Any other issues.

Kenneth Fisher: We will also focus on maintaining our robust liquidity level and a strong financial position, and able 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 Act will raise.

Okay.

And then some of you had mentioned that.

An expectation for growth and entering 2024, but I know typically there is some some seasonality that occurs in the fourth during the first quarter with PCT falling off can you just sort of walk us through.

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

Yes, Mark.

Hum.

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

And in the past we have provided some color around.

Historically, how that has worked in Nevada PCT business.

So on a if you look at over the last seven or eight years, the PCT business.

Kenneth 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 year at holiday.

And on average.

At a mean Q4 to Q1 revenues have declined about 5%.

The 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 because seasonally driven.

And historically like I said it could be.

Kenneth Fisher: We expect our drilling technology business to experience a 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% 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.

5%.

And then.

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

Drilling technologies business to rebound in Q1, and again, we have shown historically when Q4 tend to be that high.

Of Q4, we are expecting Q1 will rebound.

<unk>.

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

You want to be.

Good rebound in Nevada.

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

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

<unk>.

But just 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 as the budgets start getting into place in February we will exit the Q1 quarter, which are much stronger run rate than when we had.

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

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

Sivasankaran Somasundaram: Before we open the call to questions, let me state 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 midstream customers maximize the value of their producing and operating assets in a sustainable and cost-effective way. 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 research.

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

Q1 tends to be.

The lower quarter, and Q2 Q3 continued to sequentially improve from there.

And Q4.

Mark that 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 that will be growth and we'll see growth Q1 to Q2 and Q2 to Q3.

Sivasankaran Somasundaram: We remain confident in the favorable demand tailwind for our businesses in 2024 and beyond. We are laser focused 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.

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

Thanks Mark.

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

So 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.

Sivasankaran 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 lives of our customers or employees, our shareholders, and our communities. I am honoured and humbled to lead the purpose of our team.

<unk> is in production really the driver here am I missing something in terms of that I'm surprised it was that much of a relationship.

Yes, Dave I think I think let me make sure to clarify I think in the <unk>.

In the in the slide deck.

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

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 grew sequentially, 6%, where we had the real issues we had in <unk>.

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

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.

Stephen Gengaro: Pant, The first question comes from the line of Stephen Gengaro from Beefle, please go ahead. Thanks, and good morning, everybody. Can you help us maybe understand your fourth quarter expectations a bit?

Okay.

That held up better.

So as the <unk> 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.

The us onshore is sort of a 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.

Sivasankaran Somasundaram: I'm sort of thinking about what's normally a margin improvement in production chemicals, and I understand in 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're looking at? Yeah, good morning, Stephen. So, you know, when you look at Q3-Q4, margin progression, we expect a, you know, PCT, given the resilience of PCT and seasonal improvement in the international business in PCT, we expect PCT margins to perform well in Q4, you know, compared to Q3. You know, you should see it had a strong performance in Q3, you should see similar performance are even slightly better in Q4.

Yes, David I think that's exactly right and even if you look at our continued growth in the U S business in in PCT.

A combination of two things one is definitely the growth in the intensity and then the second aspect is.

Gulf of Mexico continues 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.

The density improvements as well as the off the Gulf of Mexico growth as well.

Sivasankaran Somasundaram: And I think, Stephen, this will be an important time, you know, also to talk about this Argentina devaluation. And so, you know, as I finish my comment, I'll ask Ken to talk about that because that impacted the Q3 margin for us. When you come to PAT and during technologies, when you look at PAT, we do expect sequentially the business to be softer in U.S, land. And we saw, as we exited September, so when we entered Q3 in, and how we exited September, we could see in September the weakness of getting more pronounced in the U.S, land activity in September.

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.

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 the consolidation so the positive aspect for us is.

We have stronger relationships as you know with.

Sivasankaran Somasundaram: And so, we do expect that as we go into the Q4, the normal seasonal slowdown will be fully present, you know, we saw some signs of that already starting to happen in September. So, and it is also the mix in PAT as you know, you know, the completion side is primarily, you know, ESP is driven more by the completion side. So, it tends to be a higher margin in the PAT side.

With the I will see and you saw with Exxon.

One of the supplier of the year award at the consolidation Thats driven by the <unk>.

Our.

Presence.

Our long term relationship with that I will cease.

Should help us continue tool.

Maintain and gain positions in the.

In this consolidation now.

The thing we have to really be watching.

Watching for is to make sure obviously as they consolidate.

Sivasankaran Somasundaram: So, that along with some slowdown in the... Hardware Digital, Purchases in Q4, I think, you know, so that mix will 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.

The E&ps, but also look for.

<unk> alright.

And savings along the way.

But we do feel.

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.

Sivasankaran Somasundaram: 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 already 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 all percent.

Thanks, Dave.

Okay.

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

Yes, good morning.

Morning, Scott.

So 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 2004.

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 or do you think you can do better.

Sivasankaran Somasundaram: 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, your over your strong exit margin improvement.

Yes, Scott.

If you look at.

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

Sivasankaran Somasundaram: And you will still see strong cash generation, you'll still see strong capital returns. So these we see these as temporary US 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 set and we are, you know, we are confident it will be another year of positive growth in US land as well as globally.

And clearly that is a bit of a calendar ization in our margin performance as quarter to quarter, given 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 there.

So when we look at 2023.

When you look at 2022.

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

<unk>.

At.

Close to three laboratory in 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 we.

We do expect a positive growth for full year in 2024, so so that so that incremental 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.

Stephen Gengaro: So with that, I do want Ken to talk about the Argentina devaluation just to because since it impact our Q3 margin, so Ken. Yeah, hi, Steven, the PCT business historically has done business in Argentina profitably. We have roughly about a hundred million of annual sales there that we had some questions around the devaluation impacts of one of the clear about that. It's not really a revenue issue in that we're US dollar functional accounting there.

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%.

Stephen Gengaro: And we have many contracts are essentially indexed to the dollar so that when we invoice, we 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 US 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.

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

Is it 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.

Stephen Gengaro: And so we had built up a balance with a peso exposure in the country that then right after the election, they they change the exchange rate and we were hit with 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 con.

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 us it will take a hit in Q4 as I mentioned right.

Got it thank you so much.

Thanks Scott.

Stephen Gengaro: 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 this to do a blue chip swap, which results in a major write down.

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

And his line of Jessica disconnected and 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 TQ around guidance essentially so im wondering if that or any other things maybe destocking in drilling technology or any other factor.

Stephen Gengaro: 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 that losses each period.

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

Yes, if you look at the hour.

Shortfall too.

First of all we are disappointed with that type of a shortfall to our Walden.

Midpoint guidance.

It's about $35 million in top line right and.

And I would say.

Stephen Gengaro: 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 build 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, you know, not very appreciated, I guess I'd say. Hopefully that helps give some color. Yeah, that does.

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

<unk>.

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 that.

The remaining $670 million is a combination of two things one is.

Shortfall in Argentina.

Stephen Gengaro: Thank you. Just one quick follow-up for me. And that is the, when I think about the sequential PCT 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.

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

And I'll ask Ken to comment on that is 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.

Mark Bianchi: Your next question from the line of Mark Bianchi from PD, Karen. 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. And the 7 million, the absence of the $7 million hit in the third quarter. Are there some other cross currents that are worth pointing out?

What drove that was we saw 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 then 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.

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 it was all in it's essentially it's all it's all PCT largely PC Tam.

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.

It's there's not a lot of people.

<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 or are there other operating leverage drivers here.

Marc Bianchi: Okay, and then some of you had mentioned an expectation for growth in entering 2024, but I know typically there's some some seasonality that occurs in the fourth in the first quarter with PCT falling off. 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.

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

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

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.

Marc Bianchi: So on a if you look at over the last seven or eight years, you know, the PCT business in an average or at a mean Q4 to Q1 revenues have declined about 5%. You know, that was a pure seasonality 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%.

I think you will see our business continues to.

The capital light business and win.

We will continue.

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

Great. Thank you Eduardo.

Thanks Avi.

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 am thinking of how should we think about the level setting expectation 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.

Marc Bianchi: And then but when you look at 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, 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 to PAT business Q4 to Q1 to be sequentially better as well, because you know, the budgets typically reset in the early part of Q1.

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.

2020 forward versus 2023.

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.

Marc Bianchi: So normally what we will see in the PAT businesses, it will start a little slow in January, but as the budget starts getting into place in February, we will exit the Q1 quarter, which are much stronger run rate than when we entered Q1. So in summary, we will expect the 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.

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.

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

As we go 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 is.

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

But I do expect a positive growth.

Marc Bianchi: 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 will see growth Q1 to Q2 and Q2 to Q3.

In North America so.

What we are seeing.

Right now it is.

It's a temporary situation and that in there.

With respect nothing in our customer conversations is telling us.

That 2024.

It's going to be at.

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

Marc Bianchi: Great, that's very helpful summary. Thank you.

David Anderson: Thanks, Mark. Your next question comes from the line of David Anderson from Barkley. Please go ahead.

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.

David Anderson: Hey, good morning, so I have a few questions around the North America side of PCT. So the US Recon 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 counts falling, but I thought there was a little bit longer term, longer cycle relationship there. It isn't production related to driver here.

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.

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

David Anderson: Am I missing something in terms of that side? I'm surprised it was that much of a relationship. Yeah Dave, I think let me make sure we clarify, you know in the slide deck we had a slide which showed the sequential bisegment 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. So this goes to show the long-term relationship and the resilience of our PCT business.

Over into early 2000, <unk>, that's the reason I'm asking.

Yes Sara.

<unk>.

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 have tight at 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.

David Anderson: So PCT US business grew 6% due to Q3. Okay so that held up there, so it's a PAT side in the relationship there is the completions with ESPs. Okay that makes sense. So if we think about kind of longer-term drivers in NAM for PCCT, so US onshore is sort of in manufacturing mode, we're not going to see a whole lot of production growth over the next several years. So how should we think about the drivers in NAM for PCT from here?

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

It.

Customers it tends to.

Ron <unk>, two times and three times into the same 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.

David Anderson: 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 I think that's exactly right and even if you look at 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 then the second aspect is you know Gulf of Mexico continues to grow as well.

But it gets hot.

Quantify and predict.

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

David Anderson: So if you look at our offshore growth Q2 to Q3, we grew 12% 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 the Gulf of Mexico growth as well. So even in a flat, let's just say hypothetically US onshore production is flat. Should PCP still continue to grow with higher, with higher basically chemicals to production over time?

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

Sure Sarah Thank you.

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

Thank you.

Somewhat continuing with <unk>.

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

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

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 with the lift.

David Anderson: Is that a trend you were expecting to see? Okay and then sticking on US onshore, EMP 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 we know the offshore business is sort of very moty around that but how about US onshore? Is that more fragmented and does this potentially create more market share opportunity for you onshore?

David Anderson: Yeah you know I think when you look at this consolidation so the positive aspect for us is we have stronger relationships that you know with the IOCs and you know you saw with Exxon you know we won the supplier of the era award. 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 this company.

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.

And that are 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 and repair shops, and so on and so forth. So sometimes in broad left you will see.

Some.

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 these areas, 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.

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

Our one data.

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

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

The any type of slowdown in.

And both it is largely an activity.

Driven and we have.

Today in the U S.

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.

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?

Positions we have.

Really good market share positions, so 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.

One last one just curious if theres been any nuances or change to the revenue category you talked about through 2001 to two.

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

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.

Scott Gruber: So, when we look at 2023, you know, or when you look at 2022 versus 2023, at the midpoint of our guidance, you know, we will expand margins close to three, little more 300 basis points, right? So, you will see as 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.

Yes, so Doug.

If you if you look at <unk>.

Thousand 23.

If you normalize for the various <unk>.

Elements such as Russia.

As I say I exert.

The cross sales.

Terminating as well as them.

Some of that 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.

In 2023.

4% slightly better so.

So when you look at that obviously you know when we gave our high single digit CAGR.

We werent expecting the second half.

This level of ACA.

Activity weak weakness than what we expected.

So it makes it harder right and other <unk>.

We are starting with a lower year than we anticipated. So it makes it harder, but 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: So, that incremental will help. 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 business used to, you know, post margins, you know, close to 30%.

4% is the first year.

Yeah makes sense. Thank you Simone.

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.

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.

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 median term, you know, is 25% the mean normal or should we be expecting something better than that? High 20. 30%. What work in that business get back to? Yes, Scott, you know, it's a great question. I think, you know, that it's a structural element around, you know, the continued drilling efficiencies that are driving the, you know, the volume growth challenges in that businesses or a period of time.

Okay.

[music].

Scott Gruber: So, you know, the business is definitely a 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 a 25% margin business at the state. It will take a hit in Q4, as I mentioned, you know. Thank you so much. Thanks, Scott.

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

Okay.

[music].

Okay.

Understood.

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

[music].

Okay.

[music].

Sivasankaran Somasundaram: Hi, good morning, team. Can you mention that the Argentina revenue exposure doesn't really exist. It's more on the margins and it sounds like there were activity expectations that drove the delta versus expectations for or 3Q around guidance, especially some, but I'm wondering if there were any other things, maybe these talking and drilling technologies, any other factors you can provide any color on and how do you see those going forward. Yeah, you know, if you look at our, you know, short, shortfall to first of all, we are disappointed with that, right.

Sivasankaran Somasundaram: You know, our shortfall to our own guide, midpoint guidance is about $35 million 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. 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.

Sivasankaran Somasundaram: One is, you know, shortfall in Argentina and and and that is primarily driven by a delay in import certifications and, 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 shortfall compared to expectation is in Mexico. So Argentina and Mexico together come, you know, contributed another about 15, 16 million to the shortfall.

Sivasankaran Somasundaram: So there are three primary areas where we had shortfall 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. 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.

Sivasankaran Somasundaram: Scott, 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 is at a higher exposure than in Mexico? It's essentially, it's all PCT. Largely PCT. There's not a lot of PAT exposure there. Scott, and 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, and just wondering if there is any kind of color you can provide.

Sivasankaran Somasundaram: You have a bunch of productivity projects ongoing, is that the main driver, are there other operating leverage drivers here as you think about hitting that 21% target and beyond? Yeah, I think the 21% target for us is, as I mentioned, is a combination of productivity 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 be a capitalized business, and we'll continue to generate that 50% to 60% free cash flow conversion.

Sivasankaran Somasundaram: Great. Thank you. [inaudible] 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. 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.

Sivasankaran Somasundaram: So what we are seeing right now is a temporary situation in that respect. In fact, nothing in our customer conversations is telling us that 2024 is going to be a not going to be a growth year in North America. Okay, perfect now Somas, it's helpful. 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.

Sivasankaran Somasundaram: 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, lower completion activity on production, there's obviously a little bit of a lag, 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 recover in 2024, that's the reason I'm asking. Yeah, sort of, I think intellectually and logically, we definitely, we see there should be a lag effect, but we have tried correlating this multiple times, 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 how much is the lag effect because of a couple of things.

Sivasankaran Somasundaram: Number one is, as you know, the ESP, which is the primary business that tend 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.

Sivasankaran Somasundaram: 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.

Sivasankaran Somasundaram: Okay, so my thank you, I'll turn it back. Sure, sorry, thank you.

Douglas Becker: If 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 lip as an area of strength. So really just wanted to get your thoughts on the competitive landscape of the lift.

Douglas Becker: And if there's any market share ships taking place there. Yeah, so I think 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 ESP and the rod lift. So when you look at the ESP 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.

Douglas Becker: Yeah. 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 a rod lift is in terms of the type of value we provide.

Douglas Becker: So when I look at our own data 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 US, as you know, Doug, we have a pretty good market share position in all forms of lift.

Douglas Becker: And in some of the lift categories, we are the leading share position. But if you look 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 had experiencing in the second half year is largely an activity issue.

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

Douglas Becker: If you normalize for all of that, and at the midpoint of our guidance, it's familiar 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 we are not giving up on that, but I will acknowledge that it makes it harder, given that we start with a 4% of the first year. Thanks, sir. Thanks, Doug. There are now further questions at this time.

Sivasankaran Somasundaram: I'd now like to turn the call back over to Mr. Sundaram 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. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Operator: Have a lovely day.