David Skipper - Vice President and Treasurer Sivasankaran Somasundaram - President and CEO Jay Nutt - SVP and CFO.

James West - Evercore ISI Byron Pope - Tudor, Pickering, Holt Dave Anderson - Barclays Scott Gruber - Citi Marc Bianchi - Cowen and Company Jim Wicklund - Credit Suisse.

Good morning and welcome to Apergy Corporation’s Second Quarter 2018 Conference Call. Your host for this morning's call is David Skipper, Vice President and Treasurer at Apergy. I’ll now turn the call over to Mr. Skipper. You may begin..

Thank you. Good morning, everyone. With me today are “Soma” Somasundaram, President and CEO of Apergy and Jay Nutt, Senior Vice President and CFO of Apergy. Yesterday, Apergy released its results for the second quarter of 2018.

If you have not received a copy, you can find that information on the company's web site at www.apergy.com, including the slides referred to in today's call. During today's call, Soma will make some opening comments about the second quarter and briefly discuss Apergy’s vision and operating philosophy.

Jay will then discuss our second quarter results and outlook for the remainder of 2018. He will be referring to the slides posted on apergy.com. Finally, Soma will provide an update on our growth initiatives, which we shared at our Investor Day earlier this year. We will then open up the call for questions.

I want to remind listeners that the news release issued yesterday by Apergy, the company's prepared remarks on this conference call and the related question-and-answer session include forward-looking statements.

These forward-looking statements include projections and expectations of the company's performance and represent the company's current views and beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements.

Information concerning risk factors that could affect the company's performance and other unforeseen challenges and uncertainties could cause actual results to differ materially from those in the forward-looking statements can be found in the company’s press release and well as in Apergy’s registration statement on Form 10 and those set forth from time to time in Apergy’s filings with the Securities and Exchange Commission, which are currently available at www.apergy.com.

Except as required by law, the company expressly disclaims any intention or obligation to revise or update any forward-looking statements. In addition, our discussion today will include non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted segment EBITDA, adjusted segment EBITDA margin and adjusted net income.

For reconciliations of our non-GAAP financial measures to our GAAP results, please see today's press release in our Form 8-K furnished with the Securities and Exchange Commission. I will now turn the call over to Soma..

Thank you, David. Good morning, everyone. I would like to start by welcoming our shareholders, our analysts, our employees to our first Apergy earnings conference call. Thank you for your interest in Apergy. We had a great quarter. We executed well in the quarter.

We delivered solid results, achieved key milestones and made tremendous progress on our growth initiatives, which we shared with you at our Investor Day in April. On May 9, we completed our separation from Dover Corporation. We are excited to begin our journey as Apergy.

Our team did an exceptional job of successfully completing our separation from Dover, while maintaining continued focus on our customers and generating strong results. We have continued to make progress on building out our corporate team. Our teams are now largely in place and gaining momentum, operating as Apergy.

I want to thank all of our employees and customers for their support through this transition. Turning now to our financial results from the second quarter, revenues increased by 50 million or 19% year-over-year. Our revenue growth was driven by solid results in both of our operating segments.

Consolidated adjusted EBITDA increased by 33% year-over-year, reflecting strong execution and operating performance in both of our segments. As a result, consolidated adjusted EBITDA margin increased to 25% from 22% in the second quarter of 2017.

Cash from operating activities in the quarter was 52 million, a significant increase both sequentially and year-over-year. Both of our segments performed very well in the second quarter. Production and Automation Technologies, continues to benefit from our full suite of Artificial Lift Technologies.

Because of this capability, we are aligned with our customers and well positioned to assist them in selecting the right artificial lift technology to achieve their production in the most economic manner. Artificial lift posted robust revenue growth, driven by constructive market activity and continued strong penetration in ESP markets.

Digital products recorded significant growth at 43% year-over-year, driven by strong market activity and increasing adoption of our new products. In drilling technology, revenues increased 13% year-over-year, in line with the average North American rig count increase of 13% and outpacing worldwide rig count increase of 7%.

Before I turn the call over to Jay to take you through the details of the total company results as well as our two segments, let me take a few minutes to talk about Apergy, our strategic vision and operating philosophy.

At Apergy, we provide highly engineered equipment and technology that helps companies drill for and produce oil and gas safely and efficiently around the world. We are organized in two segments, drilling technologies and production and automation technologies.

Within our drilling technologies segment, we provide highly specialized diamond cutters used in drilling oil and gas wells as well as specialized diamond bearings. Our production and automation technologies segment offers full range of artificial lift technologies, digital and other production equipment.

Over 95% of our revenues come from onshore applications. Our products are highly engineered, our businesses and brands are amongst the most trusted in the industry and have long been recognized globally for quality, performance and outstanding customer service.

We have a distinctive strategic vision that is focused on improving the lives of our customers, our employees, our shareholders and the communities where we live and work. Our powerful vision helps us to attract great talent and aligns the organization to achieve extraordinary results. Our operating philosophy is built on three simple tenets.

First, we will always be relentless advocates for our customers, if our customers win, we win too. Second, we develop and deploy technology with the impact that drives safety, efficiency and productivity. And third, we are driven to improve with a culture of continuous improvement.

Our strategy on the work we do are highly focused around providing products and technology that drive our customer success. This customer-centric strategy allows for decision making that is closer to the customer and guides our operating philosophy.

We believe focus, speed, quality service and customer driven innovation are clearly the differentiators that sets Apergy apart. But ultimately at the heart of Apergy is the highly motivated team of over 3200 employees that are focused on a collaborative approach to solving problems for our customers.

We have a deeply rooted cultural foundation and we are driven to helping our customers succeed. We clearly view this culture as a competitive advantage. Now, let me turn the call over to Jay..

Thanks, Soma. As David mentioned, I will be refereeing to the slides posted on our website. Beginning with slide 4, Apergy posted an outstanding quarter. Revenue was $306 million for the quarter, an increase of $50 million or 19% compared to second quarter 2017 performance and an increase of 22 million or 8% sequentially.

Revenue growth in the United States was 25% year-over-year, outpacing US average rig count growth of 16%. Non US revenue growth was just over 2% year-over-year, in line with non-US rig count growth. Adjusted diluted EPS was up $0.12 or 46% year-over-year as both of our segments continued to perform well in the current operating environment.

With regard to cash flow, cash generation was strong in the quarter, as we produced 52 million of cash flow from operating activities. We exited the quarter with increasing book-to-bill ratios, as both of our operating segments continue to experience good order activity.

Finally, besides the successful completion of the separation from Dover during the quarter, we also had some key customer wins in artificial lift and our digital platforms and we continue to advance our capabilities in Diamond sciences through further growth of our diamond bearings offering.

Turning to slide 5, from a macro viewpoint, the backdrop continues to be favorable for our businesses. Oil and gas prices have been steadily improving and relatively stable. Worldwide rig count is expanding and the global E&P spending is continuing to increase. Accordingly, we are capitalizing upon opportunities with our customers in both segments.

Moving to Slide 6 and looking at consolidated second quarter performance, net income in the quarter was $22 million and diluted earnings per share was $0.29.

After taking into consideration the impact of spin-off related items as well as restructuring and other related expenses in the quarter, adjusted net income was $29 million or $0.38 per diluted share in the quarter. We generated adjusted EBITDA of $77 million during the second quarter compared to $57 million in the second quarter of 2017.

Sequentially, adjusted EBITDA improved $12 million on the $22 million revenue increase, as our businesses continue to take advantage of the favorable market conditions to drive improved profitability and returns to our shareholders.

During the quarter, adjusted EBITDA benefited from approximately $2 million of reduced costs, driven by lower expenses as a result of Dover’s continued ownership of Apergy through May 8. In the second quarter, net interest expense were $6 million.

We closed our high yield notes offering in to escrow on May 3 and our credit facility became effective on May 9th. As a result, in the second quarter, we only incurred a partial quarter of interest expense on our debt facilities. Our effective tax rate in the second quarter was 30%.

The quarterly tax rate was unfavorably impacted by separation related tax effects. The negative tax rate impact of the separation related items was approximately 5 percentage points during the quarter. Capital expenditures in the second quarter of 2018 were $17 million compared to $14 million in the first quarter of 2018.

Spending was in line with expectations, as we execute on our internal investment plan for the year, including ongoing investment in our leased asset portfolio in support of profitable ESP market penetration.

Given the improved cash flow from operating activities in the quarter of $52 million, after deducting per capita spending, we achieved an adjusted EBITDA conversion ratio of 45% during the quarter.

Jumping ahead to slide 7, production and automation technologies’ revenue came in very strong at $241 million in the second quarter, an increase of $43 million or 21% from $198 million in the second quarter of 2017. The second quarter performance represented an increase of $26 million or 12% sequentially.

The revenue performance was due to continued growth in our artificial lift offering and in particular, further penetration of the US onshore ESP market.

Additionally, we experienced robust revenue growth from our digital products portfolio and capitalized upon improving international market conditions, which are stabilizing in support of the current oil prices. Adjusted segment EBITDA rose 48% to $54 million in the second quarter from $37 million in the year ago period.

Similarly, adjusted segment EBITDA increased 36% sequentially from $40 million in the first quarter of this year. The growth in adjusted segment EBITDA in the second quarter was primarily due to stronger revenue performance as a result of improved market activity, including increased market penetration and share gains from our ESP offering.

Adjusted segment EBITDA margin was 23% in the quarter, compared to 19% in both the second quarter of 2017 and the first quarter of 2018. The margin improvement reflects focused cost discipline and solid operational leverage of the increased volume experienced during the quarter.

Our production and automation technologies business continue to have a healthy book-to-bill ratio at 1.04 times compared to 0.96 times in the second quarter of last year and 1.01 times during the first quarter of this year.

Moving to slide 8, drilling technologies revenue was $65 million in the second quarter, representing an increase of $7 million or 13% from $58 million in the second quarter of last year.

The revenue growth was the result of higher year-over-year rig count levels experienced during the current quarter compared to the prior year, combined with increased market share in the premium diamond cutter market and growth in diamond bearings for drilling tools.

Compared to first quarter 2018, drilling technologies revenue decreased 6% as expected from $69 million.

The sequential revenue decline was primarily due to anticipated declines in the North America average rig count in which the growth in the US average rig count sequentially could not fully offset the seasonal Canadian rig count decline during the same period. As we exited the quarter, order rates rebounded with increasing Canadian rig count.

Adjusted segment EBITDA increased 5% to $24 million in the current quarter from $23 million in the second quarter of 2017. The year-over-year earnings growth was a result of increased drilling activity compared to prior year levels.

Sequentially, adjusted segment EBITDA decreased 11% from $27 million in the first quarter, primarily due to lower overall revenue in the quarter. Adjusted segment EBTIDA margin was 37% in the second quarter of 2018 compared to 40% in the second quarter of 2017 and 39% in the first quarter of this year.

The slightly lower adjusted segment EBITDA margin was primarily due to increased expenses required to scale up and support the growth of our diamond bearings offering.

In the quarter, our drilling technologies business continued to have a strong book-to-bill ratio at 1.08 times compared to 1.05 times in the second quarter of 2017 and 1 times during the first quarter of this year.

Moving ahead to slide 9, on the balance sheet, second quarter ending debt was $707 million, net of debt discounts and deferred financing cost. Cash at the end of the quarter was $31 million, representing an increase of $14 million from March 31.

As I noted earlier, our businesses produced strong cash flow from operating actives during the quarter, so we continue to see opportunities and remain focused on improving our customer collections and accelerating overall working capital turnover to drive additional cash flow over the balance of the year.

At June 30, Apergy’s total leverage ratio was 2.8 times and our available liquidity was $272 million. Turning to slide 10, I would like to take a moment to discuss our financial outlook for the remainder of the year. We believe the outlook for the second half of 2018 is constructive, supported by stable oil and gas prices.

Accordingly, we see stable to continued E&P spending to support that outlook. At this time, we see no change in our full year 2018 revenue growth of 16% from 2017 levels and full year 2018 adjusted EBITDA of $280 million. As Soma noted earlier, we've made considerable progress putting the corporate infrastructure in place.

As we’ve progressed forward from the separation date, we continued to utilize the transition service capabilities that are available to us from our former parent, as we complete the build out of our infrastructure, build remaining positions within the organization and implement the remaining necessary systems and tools necessary to operate.

Our ramp up costs associated with these activities are embedded in our earnings outlook. With regard to other factors pertaining to our outlook, our tax rate is expected to be between 23% and 25% for the balance of the year.

We anticipate interest expense of just over $10 million per quarter and our capital spending forecast continues to be approximately 3% of revenue for infrastructure related growth and maintenance plus an additional $25 million to $30 million for capital investments direct without expanding our portfolio of ESP leased assets.

With respect to challenges associated with takeaway capacity in the Permian, we've not seen to date any meaningful impact. We are engaged in continuing conversations with our customers, as our plans evolve.

If there is some pullback in the Permian, we believe producers will redirect capital to other basins in which we are well positioned to serve their needs.

And finally, with regard to the potential impact of recently announced tariffs, as you know, the situation continues to evolve and our outlook for the balance of 2018 does not project any material impact.

While some of our products may see some impact due to tariffs and other associated increases in input cost, we are offsetting these additional cost through expanded productivity improvement initiatives. At this time, I’ll now turn the call back over to Soma for some closing comments, before we open the lines for Q&A..

Thank you, Jay. We had a great quarter to kick off our journey as a public company. We are excited about our future. Our portfolio and technology are well positioned to take advantage of the continued recovery and positive trends in the market.

This combined with our strong execution focus and cost discipline will help us deliver a differentiated performance in the industry. Before we open the call to questions, I would like to update you on our key growth initiatives for 2018 and beyond, which we talked about during our Investor Day in April.

Our first growth initiative is in our ESP product line, where we are focused on driving significant growth and share gains by continued penetration of the US onshore ESP market. We achieved solid growth in the second quarter, exceeding our expectations.

Our strong product offering, industry leading service and established relationship with customers is continuing to help us drive deeper penetration in the market. We believe we have sustainable momentum in this business. Our second growth initiative is focused on conversion to rod lift on existing well as the production declined.

As we head into the back half of 2018, we believe we will see some switching to rod lift on existing wells. In the second quarter, we received a 30-well commitment from an existing ESP customer and a 8-well commitment on a competitive ESP system for conversion to our rod lift solution.

While it is hard to predict the precise timing, we believe that conversions to rod lift will begin to accelerate in 2019 and beyond. Rod lift remains the artificial lift technology of choice for low flow valves. We are a market leader in rod lift and we believe we are well positioned to capture the growth that will come as a result of the conversions.

Our third growth initiative involves driving significant growth in our automation and digital business. We remain focused on driving adoption of our digital products and services through our fit-for-purpose solutions that improve customer productivity and operational economics.

Our recent new product called Windrock Spotlight, which is a cloud based remote monitoring and predictive analytics platform, monitoring, reciprocating compressors is gaining significant interest in the industry. The business model includes hardware sales and an ongoing monthly subscription to the monitoring and optimization platform.

Adoption of our recent new product launches combined with strong market activity resulted in 43% increase in year-over-year revenues in the second quarter. We have additional new product launches planned in the coming quarters and we expect to see continued strong growth in our digital products and services.

Our fourth growth initiative is the continued innovation and advancement of our technology in our polycrystalline diamond cutters to improve drilling productivity. To that end, our drilling technology segment has had 22 new patents issued in 2018 so far, bringing the total issued patents since the beginning of 2008 to 695.

We also continued our advancements in shaped cutters. Customer adoption continued to remain strong for new technology and this resulted in 61% of our revenues in the segment in second quarter coming from new products.

Our final growth initiative we shared with you is focused on driving continued adoption of our diamond bearing in down hole applications, including mud motors and rotary steerables. Compared to traditional bearings, diamond bearings provide higher load capability, significantly longer life and lower repair cost.

In the second quarter, we saw adoption momentum continue with strong book-to-bill ratio in this product line of well over 1.5. Revenues from our diamond bearing business now represents about 10% of our drilling technologies revenue. We are investing to expand our capacity in this -- in bearings to meet the strong demand.

We expect the strong revenue growth in diamond bearings to continue as there is more adoption runway left in the down hole applications. We see a clear path to strong performance in 2018 and beyond, driven by the above growth initiative and constructive markets. We remain focused on strong execution, productivity improvements and our cost discipline.

We are confident we will continue to deliver differentiated performance in the industry. Once again, I want to thank all of our employees for their continued efforts and passion in improving the lights of our customers, our employees, our shareholders and our communities. With that, I would like to open the call for questions.

Thanks you. [Operator Instructions] Our first question is from James West of Evercore ISI. Please go ahead..

Hey, good morning, Soma. Good morning, Jay and congrats on your first conference call as a newly public company..

Good morning, James. Thank you..

Soma, you’re in front of your customers every single day. I hear that feedback constantly.

And so with the Permian, I guess specifically and takeaway capacity issues, I know I heard Jay's comments, I saw your comments in the press release that capital will be reallocated and you guys cover all the major basins, but do you think it's a one-for-one transition where activity -- activities maybe slows or go sideways in the Permian and you still see growth elsewhere, where it offsets each other equally or is there some chance that we're going to see a little bit of an air pocket here in the second half or early ’19..

James, clearly, we are -- this is top of mind for us as well and we have constant communication with our customers. As you know, we are a short cycle business, so this is really important to us to constantly be in touch with the customers. The outlook is still evolving in Permian.

So as of now, every conversation we have had with our customers has not indicated that any -- they're planning to pull back or slow down at this point. Something that is important here is, we believe that, at this commodity price level, it's still economical and attractive for our customers to grow production.

So I think that's where we believe that, if there is a pullback in Permian, our customers will, to the extent possible, allocate some of their capital to the other basins, because we are highly levered to the production side of the business. So that's where our viewpoint comes from and we are not changing any plans internally.

We continue to stay as focused on our execution on the growth initiatives we talked about. So, we are constantly in communication with the customers..

[Technical Difficulty].

Yeah. James, the call was breaking up while you were talking, but let me make sure that I understood your question. So what you're looking for is to see what is our -- what are we seeing in terms of the ESP to rod lift conversion, where the gas lift comes into play. And so, this is an important growth aspect for us as well.

So we want to make sure that we are in constant communication with our customers on this. So what we're seeing is a continued evolution, particularly in places like Permian between use of ESP and gas lift and that conversation is mostly around the initial artificial lift usage.

And what we're seeing is, it is very specific to customers, it's not across the board that ESP or gas lift, it’s very specific to the individual customers, the scale of their operation, what they want to -- whether they have access to gas, infrastructure. So what we believe is, I think, both have a significant role to play.

So we are seeing the continued use of ESP, we are seeing customers continuing to ask for the demand for ESP is continuing to be strong, but we're also having conversations on gas lift. And one advantage of being a full suite artificial lift player is, we tend to provide the right technology and the right solution for the customers.

Now with respect to your question on transition to rod lift, I think as you saw in second quarter, we saw customers starting to have conversation around it and there are customers who have planned to move to rod lift, so that is continuing. In everything we are seeing, customers have not told us that we have no use for rod lift.

Customers have always told us, look, it is a technology of choice for us, as we go towards the lower flow rate. So that's why we said it's hard to predict the timing, but definitely, we see continued commentary from customer, they'll eventually move to rod lift as flow rate declines..

Thank you. Our next question is from Byron Pope of Tudor, Pickering, Holt. Please go ahead..

Good morning guys and congratulations on solid execution in what's been a really busy year for your team. Soma, want to try to get a feel for just the overall top line growth drivers.

I guess starting within production and automation technologies, it certainly sounds as though with the success you're having in penetrating the ESP market, especially in the Permian that that's the growth driver this year, but in terms of thinking about the growth drivers for that segment, is it reasonable to think that that becomes more balanced in terms of what drives the growth as we move toward 2019, between ESPs and rod lift in terms of how you think about it..

Correct. Good morning, Byron and thanks for your kind note. As we look at it, clearly, one thing I would say in the second quarter is our growth was pretty broad based across product lines.

Now, clearly ESP -- because of our strong penetration had a significant growth year-over-year and sequentially, but I want to remind everyone that the growth was across the board in our artificial lift technology. Now, as we move into 2019, we expect that continued conversion to start picking up. So clearly, you’re right.

We still believe we have a long runway in ESP and as the conversion starts taking shape, our rod lift should start posting higher growth rates as well. .

Okay. And then just a quick second question as it relates to production and automation technologies growth versus drilling technologies and the overall revenue growth expectations are unchanged, [up] [ph] 16% year-over-year, but any way you can help frame for us the growth profile between the two business segments..

Yeah. So I think I would say because of the momentum in our bearings product line and the continued growth in the diamond cutters, I would say for the full year, you will see a fairly balanced growth between the two segments..

Thank you. Our next question is from Dave Anderson of Barclays. Please go ahead..

Hi, good morning, guys. Question on the margins on the production and automation technologies, you had really impressive margin expansion in the second quarter by 400 basis points. Can you talk about how -- what went into that? I know, digital was part of it, that’s your highest margin business, but still it is only about 10% of that business.

And I guess more importantly, how sustainable is this margin level kind of going forward?.

Yeah. Thanks, Dave. I’ll tell you, I want to give a lot of credit to our production and automation team in their strong execution in the quarter. And to answer your question, the margin is sustainable.

And the reason for that is, if you look at the margin improvement, as we’ve gone through each of these product lines, we have done significant work to move the needle on margin improvement on the major product lines and particularly our ESP business and compared to last year, that business sequentially every quarter has demonstrated margin improvement and that is a combination of, one, in the early part compared to if you go to the early part of the year, last year, we had lot of ramp up cost as the volume increased.

So those ramp up costs have receded now. So we are in a good rhythm of growth. So, we feel that our execution efficiency is good on that. Second, we have systematically improved our pricing with wherever we have opportunities as the recovery and that demand is strong in this business.

And third, we have worked on lot of productivity improvements in our supply chain. So we feel the margin profile is very sustainable..

On the digital side, should we just continue to expect this kind of continue to kind of grow from here, it sounds like you'd kind of talked about a service component and the equipment component. I was curious how much of that 30 million in the quarter here was, I guess, a recurring level here. I'm curious about that part of this digital business..

Yeah. I think, if you look at our hardware versus software business, I think if you look at it, our software part of the business, to a large extent, is the recurring part of the business, is about 15% to 20% of our overall revenue of the business.

Now, that is a part of the business we expect three years from now will be -- will continue to become a bigger part of the business, because as I mentioned in my prepared remarks, the approach we are taking is not just a initial hardware sale of the business model, it’s also an ongoing monthly subscription to our monitoring and optimization platform.

So, as we look at the various product lines in our digital, I would say that in this quarter, all of the product lines grew. It is not that it was disproportionately driven by one product line up, not.

So we feel the continued strong growth is a combination of customer adoption, our new product launches should continue and you should expect our recurring revenue portion of it over a period of time to continue to grow..

Great, thanks. Just another question if I might, the 30 well commitments on the ESPs that you had highlighted. Can you just tell me how that works? I'm curious with the customer, is that 30 wells over a certain amount of time. Also can you just talk to me about kind of how the cost and where the recognition kind of flow through over that time.

I’m just kind of curious what the progress is, how we should be thinking about this..

Yeah. So the 30 well commitment for in -- if you take that particular example is over a period of a 6 month to 8 month period. Now obviously every month, our customers update us on their readiness and how they want to continue to convert it.

And the way it works for us, so this will be completely replacing an existing artificial lift system that could be an ESP system, in this case or it could be another form of artificial lift like a gas lift.

So when we are ready, as you know, we don't have the full, we don't make the pump jacks, so we have a partner with whom we work with for this pump jacks, because we provide the full solution, so we provide, outside of the pump jack, everything else, which includes the rods, the pumps and the controllers associated with it.

So as every month, we replace certain number of wells. We recognize revenue, as we go forward..

So the 6 to 8 month, is that sort of standard with customers. I'm sure it varies for everybody, I'm just kind of curious kind of what that runway looks like in your visibility..

Yeah. I mean if you look at this 30 well plus 8 well, you should expect that to flow through in the next 6 to 8 month within our P&L..

Okay. And I just want to squeeze one more here if I might. You talked about international being a growth area for the production side. Can you just talk about where those opportunities are? I don't think you have very much international at all right now.

Are you, I'm just wondering is this ESPs in the Middle East? That would seem to be the biggest opportunities, are there other areas, can you just kind of expand a little bit on, as you look across international what you’re seeing..

Yeah. Sure. So if you look at in second quarter, our US revenue was roughly about 78% and the rest is non-US revenue. So about 22% of our revenues are non US.

Where we are seeing the growth piece of this is primarily in Middle East and also in Asia Pacific, particularly places like Australia and also as the Canadian seasonal recovery happens, we see the second half in Canada to be sequentially better as well. And Argentina, if you recall, we made that acquisition in October of last year.

So we see continued penetration in that as well. With respective to product line, the primary product lines where these revenues today come from, if you think about our ESP product line, today, we are very focused on the US onshore applications.

We have not focused on the international onshore application and that's deliberate, because we see the biggest opportunities in the US today, so the international is still an untapped market for us. So today, the growth in international is not related to ESP.

The growth in international is in artificial lift is related to our rod lift business, the progressive cavity pump business, which is very popular in places like Australia, places like Argentina and then we are also starting to see some improved sales for our digital business, particularly our hardware and software business, as we start focusing in that area..

Thank you. Our next question is from Scott Gruber of Citi. Please go ahead..

I'll reiterate the congrats on a good first quarter as a gate here. Soma, typically, with higher oil prices, the domestic E&Ps ramp CapEx, drill more wells. We're starting to see a transition in behavior here.

Obviously, we have the physical constraints potentially impacting the cadence of activity in the Permian, but also there's a lot greater desire for investors to see better returns and cash distributions from the domestically E&Ps.

I'm curious how does that impact demand for your digital offering, are you seeing a boost for your digital offering, given the convergence of these factors..

Yeah. I mean I think, if you look at the digital adoption itself and, my comments are very limited to what I would call it our focus area, which is the production well side. Right. So I'm talking about the digital adoption in production well side. The key we’ve seen is three elements in that.

One is to deeply understand where customers are on their digital journey, because every customer is on a digital journey. So, it's important to understand that. Second, we find, can you clearly show economic value for the adoption of digital and so that is important. The third is the cost of adoption.

So to your question, to your commentary about the higher, the focus on CapEx and making sure that the capital discipline within our customers, so if the initial cost of digital solutions are high or the technology cost is high, the customers are not as interested in adoption.

So where we are focused very primarily on, what I would call it fit-for-purpose solution, which means depending on that type of well and the economic value of the well, we want to make sure that the initial cost and the ongoing cost is attractive for customers to adopt the solution and that's where this new product we are launching is all about fit for solution, so that customers can see the economic value, but also the initial adoption is not very difficult from a capital perspective..

Got it, got it. It’s very interesting.

And a question for Jay, how much of the ESP CapEx of the 25 million to 30 million has been already invested in the first half, how much is planned for the second half and what is the build cycle for equipment, I'm curious if there is a pronounced slowdown in the Permian, how quickly can you dial it back, how quickly can you get revenue back up?.

Sure, Scott. So, good question. And so we’ve authorized and deployed most of the capital that we expect to spend on ESP already to the first half of the year.

And then in fact, we put a little bit of restraint on capital, as we're watching what's happened in the Permian to build cycle is approximately 6 months due to the supply chain in order to get the components build test to the customer requirements and get the equipment deployed.

So we believe that most of the capital that we need to spend for the year has already been authorized and is already in motion and most of that equipment is going to fully deployed before the end of the year..

Thank you. Our next question is from [indiscernible] of Jefferies. Please go ahead..

I’ll echo all the others in congratulating you for a successful spin-off and obviously a solid first quarter to start with.

So quickly, Soma, going back to other lines of questioning on the potential Permian slow down, I guess we're used to thinking about that from a new well perspective, not so much from a production standpoint, right, because your exposure is different from a lot of other companies that are used to, right.

So if you can help us understand on how operators might react from an artificial lift standpoint, right, because I guess there are two parts to it, new completions, which is more tied to new well activity and then currently active wells, which are either already on some form of lift or naturally flowing right, so it’s slightly more complicated.

So if you can talk a little about that, that would be helpful..

So the way we think about it again, that the macro aspect of this is around the commodity prices. So we feel the commodity price is relatively stable and constructive. So as you think from that, then for our customers at that level, it is still attractive to grow production.

So if there are constraints in growing the production primarily from the new wells, then we believe the customers will start looking at how do I grow production in other basins or grow production more from our existing wells.

So that's where we believe that any pullback, potential pullback in Permian, there will be an offsetting factor and to what extent that offsetting factor is hard to predict, but we do believe there is an offsetting factor from other basins and also growing from existing production..

Right, right, right. Okay. And in terms of a lag rate, because there is normally, call it, a 6 month lag between first production and putting that well in artificial lift, is that the right way to think about the lag of any impact on new well activity and the impact on artificial lift..

Yeah. I mean, I would say that’s an average. It can be anywhere from 3 to 4 months all the way up to 9 months. So, an average of 6 month is a good number..

And then a quick clarification, you did talk about seasonality from Canada on the drilling side, should we assume there was any impact on seasonality on the artificial lift side as well or was that negligible in your mind?.

Yeah. There is definitely seasonality that happens in artificial lift as well, it depending on where those wells are. So particularly those wells which are hard to reach during the spring fall, you see a seasonal impact on that as well.

But you will see it more pronounced in the drilling, primarily because the drilling rig count dramatically goes down in Canada during that time..

And last one from me, Jay, I would direct that to you.

In terms of trying to think about the $35 million in standalone public company corporate costs that you've talked about in the past, how much of that is already included in the reported adjusted EBITDA numbers for the second quarter and how should we adjust for that right because I'm trying to reconcile the second quarter EBITDA with the full year 2018, $280 million EBITDA guidance..

Yeah. So, good question. What we would ask you to be focused on is the 280 million rather than this 35 million.

As we commented in our prepared remarks, due to the timing of the spin-off, we had benefits from a partial ownership of Apergy during the quarter, we also shared that our teams are largely in place and built out, coming to the end of the quarter.

That being said, we have not hit our run rate for standalone corporate cost exiting the quarter and the ramp up costs associated with putting the rest of the teams in place and infrastructure is built into our full year guidance. So we would, just as we focus on it, we’re focused on the overall Apergy business performance, not just the 35 million..

Right, right, okay, okay. So the impact would be more in the second half than what you already saw in the second quarter, right, because you are saying that didn’t impact anyway..

That’s correct..

Thanks you. Our next question is from Marc Bianchi of Cowen and Company. Please go ahead. .

Thank you. I guess looking to maybe some more near term expectations for the business, appreciate that you're sticking with the guidance for the year. Can you talk about how you see third quarter should get some seasonal improvement from drilling? You mentioned the backlog is strong there.

Curious in the automation side, how that’s shaping up for the third quarter, barring any unforeseen issues with the Permian..

Yeah. So definitely, we are seeing the rebound of order rates in the -- as we see in July on our drilling technologies aside as the Canadian rig counts are recovering. On the automation side, our pipelines are good. If you look at adoption by new customers, our pipeline remains goods.

So we feel good that our -- the near term in automation should be good. I’m answering specific to Q3. And as we walk into, as of July, I can tell you the order rate continues to stay to our expectations in our artificial lift business. So the order rates stay to our expectations in July. And again I will remind you that, we are a short cycle business.

So as of July, we see our order rates remaining to our expectation..

Okay. And then with that growth that you’ll have, you had some very strong margins on the additional revenue that you added in the second quarter.

Should we think about that kind of operating leverage on any growth that we're going to assume for the third quarter, would you expect to have that kind of progression?.

Yeah. The only thing there I would moderate there, Marc, is as Jay mentioned that our corporate costs will continue to hit our full run rate in the second half. So as we mentioned before, typically, you should expect in a steady state for us, you should expect a low-30s conversion.

But our execution continues to stay strong and so it could be a little bit higher than that, but the only thing I would moderate compared to the second quarter is the corporate cost that would continue to ramp up. Other than that, there was no other item contributing to the leverage, any specific item..

Okay. And so putting that together with the guidance, Soma, you’ve got what seems like a sequentially higher EBITDA number in the third quarter, going to be somewhat offset by some more corporate, but still probably sequentially higher.

It should put you on a run rate to be quite a bit above the 280, is there -- is that just conservatism and not increasing that guidance at this point. Is there something you see in the fourth quarter in terms of seasonality, just trying to think about sort of where you are today in the third quarter versus in the context of 280..

Yeah. So I mean, I think Marc, the way I would – definitely, we are pleased with our second quarter that demonstrates our continued focus on execution and cost discipline, right? But again as being a short cycle business, we are constantly in communication with customers, right. The outlook, things like Permian is still evolving.

So given these factors, we feel it is prudent, I wouldn't use the word conservative, but more prudent on not to change the outlook at this point. As I mentioned, we have not changed our plans internally. We are continuing to stay focused on the growth initiatives we talked about and our execution.

We just feel it's prudent to, given that kind of a continued evolving situation, it's good to be prudent..

Thanks you. Our last question is from Jim Wicklund of Credit Suisse. Please go ahead..

I want to ask the longer question, you’ve answered most of them.

What is your target margin on your ESP business over the next couple of years?.

Jim. Good to hear your voice, Jim, but we are not at a position where we are willing to give our ESP margin..

Well, I would think it would be higher than you are now. I mean, I look at the technology and I look at the acceptance and I'm frankly a little surprised that margins are as low as they are and I just didn't know if you guys had an ambition that you could share with us that's all just something more esoteric, but longer term..

Yeah. I mean I think you -- our ESP margins are, we are pleased with our ESP margins. Let me put it that way and we are continuing to stay focused on improving it and we still see opportunities to improve it and that's what I would say..

Thank you. We have no further questions. I'll turn the call back over for closing remarks..

So, thanks again everyone for your continued interest in Apergy and once again I want to thank our employees for their great contribution during the -- continued contribution during the quarter and we look forward to talking to you again next quarter and updating on our business. Thank you..

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..