Hello and welcome to the ChampionX Fourth Quarter and Full Year 2020 Earnings Call. My name is Anara [ph] and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Please note this conference is being recorded. I'll now turn the call over to Mr. Byron Pope. Byron, you may begin..

Thank you. Good morning, everyone. With me today are Soma Somasundaram, President and CEO of ChampionX and Ken Fisher, our Executive Vice President and CFO. During today's call, Soma will share some of our company's highlights during the quarter.

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

I would like to remind our participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that cause material difference in our results from those projected in these statements.

Information concerning Risk Factors that could affect the company's performance and uncertainties that could cause material difference to actual results from those in the forward-looking statements can be found in the company's press release as well in ChampionX's Annual Report in Form 10-K and those set forward from time to time in ChampionX's filings with the Securities and Exchange Commission, which are currently available at championx.com.

Except as required by law, the company expressly disclaims any intention or obligation to revise or update any forward-looking statements. Our comments today may also include non-GAAP financial measures.

Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release and slide presentation for this call, which are available on our website. I will now turn the call over to Soma to discuss ChampionX's fourth quarter achievements..

Thank you, Byron. Good morning, everyone. I'd like to welcome our shareholders, our analysts and our employees to our fourth quarter 2020 earnings call. Thanks for joining us today. Hope you and your families are continuing to stay safe and healthy. I'd like to start by welcoming Ken Fisher to our team.

As you know, Ken joined our Executive team on February 1st, as Executive Vice President and CFO and he came to this role already having a deep understanding of our businesses, strategy and organization having previously served on our Board of Directors over the last three years. We're excited to have Ken as part of our team.

Now this past week, Texas and parts of the neighboring states experienced an unprecedented winter storm that left millions of people without power and safe drinking water. Our prayers and support are with our employees, customers and the communities as we all work to recover from the severe winter storm.

Our teams have been working diligently to recover after the storm and minimize disruptions to our customers and our own operations. Before turning to our business results, let me first take a moment to express to all of our employees how proud I am, of how remarkably well our organization performed during 2020.

Which was in many ways a year unlike any other that our energy industry and our world has experienced.

Against the backdrop of the global pandemic, the health and safety of our employees has remained our most important priority and we will continue to take the necessary steps to protect our employees who have truly been an essential worker as they've helped our customers sustainably unlock the energy that our global economy needs.

And they did so, while delivering what was a record year for our company in terms of safety performance in 2020. With that, let me turn to our fourth quarter performance. In what was just our second full quarter since the successful transformational merger of legacy Apergy and legacy ChampionX.

Our fourth quarter results speak to how the strong business portfolio and financial profile of the combined company positions us well to outperform both against the near-term challenges of the current environment and during the long-term global energy transition.

We continue to execute well in realizing our targeted cost synergies and our pipeline of revenue synergy opportunities continues to expand as we leverage our global footprint and as customers recognize the value of our combined offering in delivering the full suite of production optimization technologies, products and services.

On Page 4 of the slide deck, as a purpose driven company we always start with our organizational North Star of improving the lives of our customers, employees, shareholders and communities.

Now more than ever, we see our four operating principles being relentless customer advocates, being committed to our employees, delivering impactful technology and helping solve problems and having an infectious culture of continuous improvement as crucial in differentiating our company and serving our internal and external stakeholders very well.

As part of our continuous improvement culture, we periodically conduct employee engagement surveys to gage how employees feel about company's culture and progress on key issues as well as get feedback on what we're doing well and what we need to improve.

We just concluded our recent global employee engagement survey and I'm pleased to report we had about 4,600 survey participants which is a global participant rate of 71% from our employees.

I'm also pleased to report that 89% of the participants reported that they feel very aligned to the company's purpose and 88% of the employees reported that they feel company is committed and upholding the operating principles. We feel our purpose and operating culture is a sustainable competitive advantage.

We continue to develop and deploy technology that help our customers achieve their objectives. A recent example of this on Page 5 of the slide deck you'll see the new ESP motor we introduced to the market. This innovative design helps our customers increase production in five and a half inch wells by as much 150% improving their economics.

Equally important, this technology helps our customers with their carbon reduction goals by consuming less power. This technology has received great reception from our customers. Ken will take you through our fourth quarter financial results shortly. So I'll just share a few high-level thoughts.

In each of our first two full quarters of new company, our strong results illustrate the promise and power of our combined portfolio and enhanced global scale as well as the cost synergy opportunities. We generated $706 million of consolidated revenue and $109 million of adjusted EBITDA.

We once again delivered robust positive free cash flow in the fourth quarter at $108 million. We're encouraged by the double-digit sequential revenue growth experienced by both our North American and international operations during the fourth quarter. All of our segments posted positive sequential growth led by our drilling technologies segment.

I would now like to turn the call over to Ken to discuss our fourth quarter results and our first quarter outlook..

Thank you, Soma. Good morning, everyone. Thank you for joining us. First, let me say that I'm very excited to take the CFO role at ChampionX. ChampionX is a unique, purpose driven company with great leadership and a talented team. It's great to be on that team full time. Second, I'd like to thank Jay Nutt.

I worked with Jay for three years during my Board service and appreciate his contributions to ChampionX and his support to me personally for a smooth transition. I look forward to getting to know our investors and analysts, who I've not yet met over the next few days and weeks ahead.

Today, I'll be commenting on the adjusted EBITDA for sequential comparisons. We believe this metric best reflects the business performance of continuous operations. I will also refer to the pro forma results on a full year and year-over-year basis to provide for better comparability.

As seen on Slide 7, fourth quarter 2020 revenue of $706 million increased by $73 million or 11% sequentially with all four of our business segments contributing strong top line growth. Geographically, we experienced sequential revenue growth in both North America up 11% and internationally up 12%.

Included in our quarterly revenues were $46 million of cross supply sales to Ecolab. As mentioned on our prior earnings calls, those cross sales are associated with post-merger agreements with Ecolab under the transaction agreement.

We do not recognize margin on these sales from an EBITDA perspective and within our financial statement revenue associated with these sales is allocated to the corporate and other segment. We expect these sales will continue for approximately three years from the date of the merger closing.

For the quarter, GAAP net income was $7.5 million a favorable variant sequentially to the third quarter loss of $7.3 million. We delivered strong consolidated adjusted EBITDA in the fourth quarter of $109 million, a 25% sequential increase. This increase was primarily driven by higher volumes in all four of our businesses.

We also delivered strong cash flow from operating activities of $121 million during the fourth quarter and generated $108 million of free cash flow during the period. A free cash flow to revenue ratio of a robust 15%. Cash contributors included sequentially improved operating earnings and strong working capital performance.

In the fourth quarter, we invested $13 million in capital expenditures primarily for maintenance activities and to fund some integration related requirements. For the full year 2020, we generated free cash flow of $265 million, a free cash flow to revenue ratio of 14%, excluding $84 million of merger transaction and integration related expenses.

We generated free cash flow of approximately $349 million or at 18% to revenue ratio. Turning to the business segment, Production Chemical Technologies generated fourth quarter revenue of $447 million up 9% from the third quarter.

The sequential increase was driven by strong Latin American orders continued recovery in the North American land business and higher seasonal international volumes. Geographically, North American revenue increased 5% sequentially while international revenue grew 12% sequentially.

Profitability improved sequentially on higher sales volumes, segment adjusted EBITDA was $78 million up 9% versus the third quarter. Adjusted EBITDA margin was 17%.

Production & Automation Technologies segment revenue was $159 million up 16% sequentially due to higher volumes as customer spending continued recovery from the low levels experienced in mid-2020. Also of note, digital revenue increased 16% sequentially driven by stronger customer spending in certain US basin.

As customers praised a greater focus on leveraging digital solutions to improve cost structure and drive efficiencies. We expect increased adoption of our modular fit-for-purpose approach through time. PAT fourth quarter segment adjusted EBITDA was $29 million up 17% sequentially.

The PAT continues their strong execution with fourth quarter segment adjusted EBITDA margin of 18%. As you'll recall from our third quarter results were helped by $2.8 million of non-recurring items which resulted in a normalized margin of 16% for the third quarter.

The sequential margin improvement in PAT was driven primarily by leverage from higher volumes. Moving to drilling technologies, they experienced much improved customer demand as the active US retail increased during the fourth quarter.

Segment revenue was $24 million in the fourth quarter a 50% increase sequentially which significantly outpaced the 22% US industry read count increase during the period. And we saw strong restocking of inventories. As expected, drilling technologies return to profitability during the fourth quarter as segment.

Adjusted EBITDA was $3 million up $5 million sequentially from the third quarter driven by the combination of higher volumes and continued rigorous cost control. Reservoir chemical technologies revenue for the fourth quarter was $31 million, a 45% increase sequentially driven by an increase in global well construction and completion activities.

Segment adjusted EBITDA was $2 million, a $4 million sequential improvement which was primarily driven by higher volumes. Current quarter results were also positively impacted by $1.6 million of non-recurring items during the fourth quarter related to the sales of previously reserved inventory.

Merger synergies, we remained laser focused on maximizing merger synergies. We have a program management office in place and are coordinating activity across the company to capture all potential integration benefits as well as cost improvements and revenue synergies. Slide 8 in the presentation deck summarizes these efforts.

As mentioned in our third quarter earnings call, we expect to exit 2020 with a run rate of $70 million to $80 million of targeted annualized cost synergies. We exited the year at $82 million run rate. Further we still expect to achieve our targeted $125 million of annualized cost synergies within 24 months of the merger closing.

We'll continue to share with you the progress on this front in coming quarters. Turning to Slide 9, in our financial position. We had $201 million of cash on hand at the end of the year and approximately $551 million of total liquidity including available revolving credit facility capacity.

As a result of our continued strong operating cash flow, we repaid another $80 million of debt during the fourth quarter including $23 million of our senior notes which will retire via a tender offer. Since the merger date, we've paid down $160 million of debt obligations or 15% of the total outstanding as of the merger date.

At December 31, our net debt to trailing 12-month pro forma adjusted EBITDA was 1.8 times compared to our net leverage of 1.9 times at September 30th. One additional point on our leverage, as we communicated the merger was a deleveraging transaction.

The combined enterprise is far stronger on leverage metrics than legacy Apergy would have been particularly considering the pandemic induced downturn. Moving forward we remain highly focused on operating and free cash flow delivery, working capital management and maintaining our strong liquidity.

We will continue to execute on our capital allocation framework with a priority of using our free cash flow to invest in technologies to support high margin growth initiatives and using available excess cash in the near term to pay down debt, to reduce leverage to our long-term target of approximately one-time debt to EBITDA.

Moving to our outlook for first quarter. We turn to Slide 10. We expect a sequential decline in revenue in the first quarter with revenues including Ecolab cross sales in the range of $650 million to $700 million. This range does not include the potential impacts of last week's extreme weather in Texas and Oklahoma.

We're working to fully quantify the impacts of those events, the revenue and cost. The sequential revenue change is primarily driven by typical seasonal trends in our international operations partly offset by anticipated continued positive momentum in the shorter cycle, North American land-oriented businesses.

We also anticipate some near-term cost pressure as energy and commodity prices have strengthened and oil field activity levels have increases versus the pandemic driven lows experienced in mid-2020. The chemical segments are seeing some related raw material commodity inflation.

They're in the process of adjusting selling prices but we expect some margin impact in the first half of the year until these selling prices catch up with the raw material inflation.

Additionally, as we've previously shared, we're reinstating certain employees, salaries and benefits, reversing the temporary cost actions taken to address the 2020 pandemic related downturn. We appreciate the sacrifices our employees made to address the health of our business during a very challenging 2020.

Meanwhile, with our synergy initiatives and ongoing cost and productivity actions. We expect year-over-year margin rate improvement as we exit the year. For the first quarter we expect EBITDA in the range of $90 million to $100 million again excluding any extreme weather impacts.

On this slide, we also provide some additional specifics related to our first quarter outlook. We expect CapEx to be in the range of 2.5% of revenue for the year and be slightly front end loaded to the first half of the year due to infrastructure needs to support transition services exits from Ecolab and our ESP leased asset goal [ph].

We remain pleased with our robust cash flow performance and we're confident that we will maintain free cash flow, EBITDA conversion ratio in the 50% to 60% range for 2021.

Before turning the call back to Soma, I would also like to mention that the company is on track to clear all six material weaknesses in our financial processes identified in 2019 in the coming 2020 Form 10-K filing. This is a result of significant effort in process improvements in our PAT business and corporate segment. Now back to Soma..

Thank you, Ken. Before we open the call to questions. I would like to turn your attention to Slide 12 of our deck.

Which highlights the five strategic priorities of ChampionX? On our third quarter earnings call, I mentioned that we would periodically update you our stakeholders on the progress we're making on each of these priorities and so we're taking this opportunity today to do, just that. Starting with realizing our better together potential.

As Ken shared with you, we exited 2020 having realized $82 million of our targeted $125 million of annualized cost synergies. We remain laser focused on achieving our cost synergy goals and continue to make good progress on this front. Our pipeline of opportunities and revenue synergies continue to build.

In addition, our recently employee engagement survey indicated that our global employees are overwhelmingly about the merger and the combined company. Strategic priority two, accelerating digital and digitally-enabled revenue stream. We're making good progress on development, deployment of our fit-for-purpose model of digital solution.

We're continuing to see customer interest in digital solution that deliver tangible value. While our overall digital revenues which includes hardware and software declined in 2020 due to the pandemic related downturn. It's important to note, our software revenues grew 8% in 2020.

This indicates the increased adoption of our monitoring predictive analytics, failure analysis and optimization software products by our customers. Turning to leverage in global footprint to grow non-US revenue. In the fourth quarter, non-US revenues accounted for 54% of revenues.

Our pipeline of revenue synergy prospects continues to expand as our artificial lift and chemical teams leverage our combined offering and relationships. In addition, we're continuing to build artificial lift capabilities in the prioritized country.

An example of this initiative is evidenced by our first shipment of sucker rods from our JV plant in Argentina. We continue to remain very excited about the international growth opportunity. Strategic priority number four, is building our enterprise-wide continuous improvement rigor. As part of our continuous improvement journey.

We have established a focused operational excellence team consisting of expert practitioners of lean principle. We will deploy these experts to high impact opportunities to help build out the CI culture within the organization.

Our CI efforts continue to help us driven productivity across the enterprise that they eventually help us to expand margin and increase cash flow. The last strategic priority of evolving our portfolio for sustained growth. As evidenced by our third quarter and fourth quarter action.

We continue to use our free cash flow to further pay down debt towards our target level. That said, we will continue to concurrently evaluate opportunities to leverage our core capabilities across energy market and natural adjacencies to enhance ChampionX's position for sustained growth through the energy transition.

In addition, we have made further progress towards developing our ESG framework. Our ESG priority assessment work is well underway and we look forward to communicating the results with you soon.

ChampionX is a global production-oriented technology provider and we're well positioned to be a long-term winner in our industry and continue to deliver strong financial performance for our shareholders. We're excited about the opportunities set ahead for our company.

We expect 2021 to be another year of solid performance driven by improvement in North American activity and the strength in the second half of 2021 as international activity gains momentum. Finally, I want to take a moment to acknowledge Jay Nutt who is here with us today. As previously announced, Jay will be retiring from ChampionX.

But he has graciously agreed to remain with us through the second quarter of this year to ensure a smooth transition.

I want to personally thank Jay for his leadership and important contributions to our organization over the last several years as we became a standalone publicly traded company and later completed our successful transformational merger with ChampionX during a challenging period for our energy industry.

Jay has been a trusted business partner and all of us here at ChampionX wish him the very best in his next chapter of life. Thank you, Jay. Again, I want to thank all our ChampionX employees around the world for your continued efforts and passion in improving the lives of our customers, our employees, our shareholders and our communities.

I'm proud of your dedication, focus and resolve during these unprecedented and challenging environment. It is a privilege for me to lead such a great team. With that, I would like to open the call for question..

[Operator Instructions] your first question comes from David Anderson with Barclays. Your line is open..

I just want to start with the production chemicals business. Could you talk a bit about the international performance this quarter? You'd highlight Latin American.

But did any other region really standout to you? And I guess more importantly, which regions are you expecting to improve the most over the next 12 months internationally as global oil recovers?.

David, so thank you. I would say that production chemicals technologies pretty much across the board all the international regions improved sequentially and this is the seasonal trends we see in Q4. I wouldn't call this as an international recovery. I would call it seasonal strength.

So across the board sequentially from Q3 to Q4, we saw strength in all the international regions led by Latin America. The other regions we saw strong performance are Europe. This includes Caspian. This includes Russia and then we also in Middle East.

The strong performance high single-digit growth in Middle East sequentially, so we saw across all regions. With respect to your question of where we see as we walk into 2021 as the international recovery start sitting in, where we see the bigger growth.

I think the areas where we'll see will be in Middle East, West Africa and followed by Latin America..

And then stay with Production chemicals side and just looking at our margin profile. We don't have a ton of information going historically. But just kind of looking a little bit further out. If we assumed that going into next year that a lot of the synergies are going to be in this side of the business.

I was wondering if you could just comment kind of where you think not margins can normalize here. Which we're looking kind of the prior peak we don't have a ton of information on. It looks like margins will be structurally higher going forward production chemicals.

If that is true, what is the reasons behind that? And maybe not true, but that's what it looks like anyways..

Yes, so Ken is also here so I'll ask him to make some comments. But let me give you cost thoughts around how we see the production chemicals margin. So clearly as we talk about in calendarization [ph] of the margin would be - it will have some margin pressure in the beginning of the year.

The first half of the year due to raw material cost inflation and some cost resets. But the synergies as we talked about a good portion of the synergies comes into production chemicals. And typically with the combination of the price improvements, the synergies, the volume improvement also helps in plant absorption.

We truly believe this business over a longer period of time can get to the 20% EBITDA margin. So this year, we would expect we will exit the second half of this year. With a better margin than maybe exited Q4.

So Ken any further color?.

No, I think that's it. The lion's share of the synergies and as they get their prices up in response to the industry raw material inflation and more volume on the seasonal basis. You should see their margin improvement to the second half of the year and raised [ph] rate versus year end 2020..

But Soma, if I can add just kind of one little follow-up there. You just held by 20% of thinking little bit further out.

That is structurally higher than it was before, isn't it?.

That's correct. From a volume equivalent volume perspective, yes it. And that has got lots to do with the productivity improvements and the synergy benefits contributing to that. So I think we feel 20% EBITDA margin is a very realistic target for us in the coming years..

Great. Thank you..

And your next question in queue comes from Chase [indiscernible] with Bank of America. Your line is open..

It's Mike Sabella on for Chase. He had to actually step away for a sec. I was wondering maybe we could just talk about the 1Q guide. It looks like relatively heavy decrementals in 1Q. You kind of touched on the moving pieces, there are some cost coming back and then there are some synergies.

Are you able to just kind of help us quantify some of the moving pieces and then if you could just talk about 4Q, if there was anything one off, that helped 4Q?.

Mike, with respect to 4Q clearly the seasonal strength we saw in the international market was very helpful. It was better than we expected. And also, I would want to remind that in PAT, we made a call we had in our Q3 call we had kind of said that, we expect a year end seasonal budget exhaustion and holiday weakness.

But North American activity improvement and our own share gain really outperformed any holiday weaknesses we saw. You saw the sequential growth in our PAT was almost 16%. So I think that volume leverage really, really helped us as well over deliver on our EBITDA.

So as we walk into Q1, the three factors I would say that contributes to the sequential decline. One is the international volume decline with particularly in PCP and we also see normally that in our artificial lift segment as well.

The second aspect is the raw material cost inflation which we just talked about and that's a function of - this is particularly in the PCP, that's a function of commodity prices inflation and as Ken pointed out. It's normal for us to start working on our price improvements and many of our contracts are commodity price indexed.

So it's a matter of working those and getting those price improvements in place. And there's always a time lag between raw material cost inflation and when we get our price improvements. And then the third element which we talked about was the cost reinstatement and benefit reinstatement.

As Ken pointed out, I was so proud of our teams all the employees around the world. Who rallied and made sure that we are executing well and they also made some sacrifices? And I think with our return of a strong performances.

I think it's the right thing for us to make sure that we reinstate some of the benefits and salaries and some of the temporary reductions we had.

But we're very confident that the productivity, the synergies, the price improvement which we're looking forward to the first half margin impact will be offset and in the second half you should see the margin progressively improve and we will exit in a better margin as we exit the 2021, than even 2020..

Understood thanks. And then just a quick follow-up. So you also are clearly targeting debt reduction, will use free cash flow to pay down debt. It looks to us at least like you maybe get two or below that one-time target in the back half of this year.

Can you just talk about next steps there that you know we can just talk us through whether you would consider dividends or buybacks and how you're thinking about those two options and returning cash to shareholders?.

Mike as we've always said, once we get to what we consider is a reasonable target for our leverage which is one time. We said, we will adopt a balanced capital allocation which includes a return to the shareholders and we're very committed to that. And along with that, we're also looking at as part of the energy transition.

We're also looking at for the pathway for growth and our teams are, we have a project going on there. We have engaged outside resources to chart out those pathways for growth in the world of energy transition. And you'll hear about this more as we complete those projects. So get to over target leverage which at one times, we can't upset ourselves.

Implement the balance capital allocation which includes return to the shareholders and then along with that, make sure that we are investing in pathways to growth and based on some of the things we're seeing in the pathways to growth. We feel good about for our portfolio to have pathways to growth in the energy transition.

So Ken, anything more to add on that?.

I think the question was when you think we'll get to the target leverage and I think that's more like sometime in 2022. If you recall that, we have the first quarter strong comparison versus last year and so we'll drop that first quarter 2020 EBITDA in the leverage calculation. So that will put a little pressure on near term leverage.

But the glide path to your point, gets us to the one probably in some time in 2022..

Understood. Thanks everyone..

And your next question in queue comes from George O'Leary with Pickering & Holt. Your line is open..

The production revenue growth was really strong in the fourth quarter and before that a few different times. So I'll leave that there. But just thinking about the international headwinds that you mentioned in the first quarter of 2021.

Is that the business that we should expect to see the most revenue, most top line pressure in the first quarter and is there any help you could provide in quantifying that for us?.

Yes, George this is a seasonal issue and we went back and looked at our production chemical technologies business which is the most international business in our portfolio, and every year, you see this phenomenon Q4 to Q1. There is a seasonal decline.

It varies from year-to-year to see how much it is, right depending on how strong the Q4 was, right? So it has varied anyway from 3% to 5% in the past from the analysis we've seen, right. But again it again depends on how strong there. So this year it could be a little bit more because of the strong Q4 performance we had, right.

But it is a seasonal issue and we see that every year and so that's what I can say..

That's very helpful Soma and then just thought it was interesting [indiscernible] questioning we've run out of curiosity and trying to drill into numbers on anything.

But commentary on the five and a half inch casing and the AFFIRMED PowerFit - curious if you could speak how often you're seeing those opportunities arise or what the market opportunity might be? And then any color on and I realize some of this you probably don't want to hear.

But any broad-brush strokes with respect to how you get the increase efficiencies to lower output and the strong resiliency of the system? Just curious that struck me as an intriguing portion of the presentation..

We are very excited about this new product which our team - it's really a great innovative design. Five and a half inch wells are really popular and brought in for our customers because it reduces our drilling and completion cost.

So what - you saw we mentioned in the slide in the first year of introduction we have already have more than 107 wells in operation and we think as all of our customers are continuing to start looking at carbon production goals. This type of technology is going to get increasingly popular. It's not just improving the well economics.

But it's also helping the customers reduce their carbon footprint. So I think we're seeing some really great adoption with our customers and I think we're very pleased with the pace at which this technology has been adopted..

Thanks Soma..

And your next question in queue comes from James West with Evercore ISI. Your line is open..

Soma, it seems like you had some good success in Latin America with cross selling. Your products now with two quarters under the belt with a combined company. I'm curious what region should we look for that success to occur in kind of next in - maybe if you had some color on how easy or not easy that was.

It seems to me that it looks like the synergies are so clear, represents a clear, probably easy sail. But I would love to hear any context you can provide..

James when we look at the pipeline of opportunities. We have a very - really our team, the works team have a really good process by which they assemble the opportunities, qualify them. So we have a really good stage gate process where we know, what is a total set of opportunities in the pipeline right now.

Which ones are hot prospects and going after them, right? So they're continuing to assemble. And when I see that pipeline to your point, it's really encouraging the kind of prospects that are building. So I feel that as the pandemic related situation recede. I think we will see more of this opportunities materialize.

We are seeing several of them come through but they're smaller ones. They come through quickly particularly in Permian, particularly in - and we've stayed with you couple of big wins, we've had internationally. So I feel it's a matter of the pandemic related uncertainty receiving. I think most of these opportunities will come through.

Now the ones where we're doing what we call it the digital and artificial lift and clinical to help customers optimize their production.

We have currently about three call its trials going on and these are with the large customers and so we're also pleased about that interest in bringing these three together to help customers optimize their - also their production as well. I think these are always hard to predict. How quickly it will come? But let me put it this way.

We're encouraged by the pipeline..

Okay, fair enough. And then maybe just unrelated question. But with the situation in Texas that we've seen over last week or so, could you run any color or context on how the Lestar [ph] process given that lot of your equipment and your technology is going to be used here.

How the restarting process is going and what we should expect?.

Again we're about three days into the week after that storm. So what we're again as what we're seeing on a preliminary basis here is, I think as the customers restart the wells and we mentioned this in our slide that. We think on the production automation side particularly artificial lift.

I think there was a potential that we will be able to recover the volume and we're watching the workover rig activity increases.

I think and we expect that workover activity will increase as customers are starting to bring back the wells and we think there could be some incremental opportunity in March for our artificial lift and a particularly a broad lift type of opportunities where customers have to replace maybes some parts of a pump, [indiscernible] string to bring the well back online.

So we feel, March there could be some uptick in that activity. That's why in production automation we feel, we may be able to recover some of that volume in Q1. With respect to production chemicals, I feel James because it tied to last production. So it's probably unlikely we'll be able to recover that lost volume.

And the drilling and completion, I feel like in our drilling technologies there will be some impacts. We still expect our drilling technologies to have a sequential growth from Q4 to Q1..

Okay, great. Thanks Soma..

And your next question in queue comes from Marc Bianchi with Cowen. Your line is open..

First following up to the line of questioning around kind of the pace of revenue here.

Maybe if we take the effect of the storms out of the equation and just sort of think about where you were in fourth quarter, where you'll be in first quarter and then where you go from there? Is there any aspect of the business obviously we have in drilling where there's a catch up of restocking? But if I look at the production automation business had a nice recovery from the lows of 2020.

Was there a catch up in installation of some lift equipment and as we get beyond first and second quarter there could be a normalization or if rig count and completion activity just sort of stays flat from where we get to in the first half. You would think that your production automation business sort of does the same thing..

So Marc, if you recall going back to the third and fourth quarter of last years, right. As production shutdown and the wells started coming back online. We saw that nice recovery and we saw all through the six-month. We saw sequential improvement month-over-month and that capped with a 16% Q4 sequential growth.

So we feel that the bringing back wells online that type of activity improvement is behind us. So from here on, I think it's more the completions driven improvement and incremental maintenance spending that can happen. So the North American, if you set aside the winter storm impact which is still, we haven't quantified it yet.

But if you set aside the winter storm impact. If you look at January, we could see that activity level particularly in North America in our production automation technologies continuing as we saw in January. So again, we hit the winter storm in February. But I do think that the strength of the commodity prices.

I think as customers regroup and start bringing the wells back online and I think the completions activity continuing we will see that sequential improvement in our production automation technologies, that in from a market perspective.

Now aiding that a little bit more would be our share gain opportunities particularly with our new products and also the digital. We do think that the digital will start continuing out sequential growth. So I feel like in our production automation technologies that 2021 has set us well, from that perspective.

Now second half the commodity price continues to stay, a robust. I think we'll continue to see the completions activity incrementally improve..

Thanks a lot, Soma. Thanks. I want to go to the energy transition discussion now. Where you talked about these pathways that you're exploring and I know it's so very early days it seems.

But could you provide any direction as to where you might be looking and perhaps, what it is that ChampionX has within the portfolio that might have some application just to maybe give us something to think about?.

Yes, no absolutely. I think there are three different types of pathways we're exploring. So the first one is, what are the opportunities within our existing markets with respect to energy transition.

So here lot of this market was around the idea of decarbonization as our customers continue to commit for carbon reduction targets and carbon reduction goals and you saw some of the E&P's are already announcing how much money they will probably start spending on those. I think we have a real opportunity there given our technology portfolio.

Starting with our production chemistry technologies where we have shared before, how these chemistries, how customers reduce their carbon footprint and we're very active with particularly the large integrated oil companies in this process. And then that combined with our digital.

If you look at - one of the digital technologies and products we have, it extends the life of the equipment, emission control, emission management as well as production optimization.

So we feel that is a decarbonization opportunity within the existing and our technologies already play very well into that market, just like we talked about ESP [ph] that's one pathway and we're setting up for that.

The second pathway I see is the existing technologies we have; how that can be applied to adjacent market and we have shared with you before our diamond sciences. I think we'll continue to share more about that and we may deploy more capital into it and that's what I mentioned when I say, energy transition pathways.

And we're doing some work to see how we can - what are the pathway to accelerate that diamond sciences movement.

And the third element is our digital portfolio, so if you look at our digital technologies we have and some of the proprietary hardware we have and the platforms and the analytics we have, that can be used in other vertical and so we're looking at those pathways and how we will unlock the value in that portfolio outside of the oil and gas.

So we're looking into those pathways as well. So these are the type of pathways we're looking at for energy transition..

That's great, thank you and thanks for the answer. Jay really appreciates the time and good luck going forward..

And your next question in queue comes from Chris Voie with Wells Fargo. Your line is open..

Just curious if you can help set some early boundaries for the impact of weather this quarter compared to the $90 million to $100 million guidance..

Like I said, it's too early to do that, that's why we gave you some qualitative commentary. Here's how I think about it. Production automation technologies there's a chance that we will be able to recover, right. As volume given - if customers increase their March workover activities and so on and so forth.

Production chemical technologies the way I would think about it is, it is tied to the production volume and you know our revenues we get from the US market. And you can kind of get a feel for since it's a consumable it's a daily use of thing.

So to extent the production volume has been curtailed you can kind of think about along those lines, week of production shutdown in parts of the US. So that's the way to think about it. With respect to drilling technologies, it's just one week loss of activity. I don't think that will recover but as I mentioned we have good momentum in that business.

So we still expect to deliver. I don't see that as a major impact to our $90 million to $100 million drilling technology as a major impact to the $90 million to $100 million target. I think the primary thing would be around our production chemical technologies where the lost volume I don't think customers will make it out..

Okay, thank you. And then maybe seeing a little bit longer term here.

Is production chemical technologies the margin in the US, are they dilutive or accretive compared to international? Just thinking if you get production growth in 2022, would that be dilutive to margin goals? If the US outperforms which I think will be a surprise compared to my forecast. But could potentially happen with oil prices where they are..

We don't give margin details by specific regions or specific basins. But here's what I will tell you, for us when you think of US and North America there are things which are built around it, right.

Offshore, deepwater, as we've mentioned to you those are particularly higher margins because of the nature of the application, oil sands tends to be higher margin because of the again the nature of the application. So there are puts and takes. So I wouldn't say that the US growth will be necessarily dilutive to the margin.

But in US also we have some really strong synergies and productivity opportunities going on in the US, so that also will add to it. So I wouldn't say the US growth is necessarily dilutive..

Okay, thanks and if I could just squeeze one last, one in. Your $82 million on the run rate for the synergies.

Is there remainder mostly going to come in 2021 or is there big chunk left that's going to hit in 2022?.

Most of it will come as we exit 2021. So again it's in the second half and the reason for that is, as you know we - it's coming from the areas of supply chain, some G&A opportunity. So those are in progress so most of it will come in the second half. So I think, we will get most of it as we exit 2021.

There'll still be some to go as part of the Ecolab separation into 2022. But most of it should come through in 2021..

Okay, thanks for taking my questions..

And your next question in queue comes from Ian MacPherson with Simmons. Your line is open..

I'd also like to start with thank you to Jay and hello to Ken. But I wanted to follow-up on the question on Soma on your energy transition pillars. The first one regarding leveraging your existing market opportunities.

I would imagine that there were probably some R&D activities unfolding currently with regard to reining your supply chain, your raw materials and feedstock for the chemicals business. Not that, that would have been an ESG [indiscernible] coming out of Ecolab.

But I imagine that would be an area with significant runway for improvement, is that an area that's commanding more R&D at this point as well?.

No, I mean we've stepped up, when I say stepped up, we stepped up the effort as well as our resources now, our technology resources, R&D. we have a big R&D technology group within our chemicals technologies. They are very focused on the engineering new chemistry including things like green chemistries and those types of opportunities. Yes absolutely..

You have a persuasive pathway towards margin uplift over the course of this year. But you also cited the beginning some squeeze near term if you want with chemicals, raw materials as well as normalizing some of your payroll.

What is the historical experience with that business in terms of passing through your raw material cost in the chemical side? And what sort of lag does that require?.

No, Ian. Our chemical technologies team really does a good job of - they're very experienced in doing this because they've been doing it over and over and these type of inflationary cost path through. So typically, it's between three to four months you'll see a lag and that depends on the type of contract.

What does the customer contact calls for and so on and so forth? So typically about a three to four months lag..

Okay, that's helpful. Thanks. And then last one from me, I know it's late.

Q4 was a big free cash flow result, just wanted to get a refresh if there's any change in your thinking or guidance around free cash flow conversion out of EBITDA for the full year, this year?.

Yes so, I'll ask Ken to comment on it. So Ian as you know last year we increased actually, we used to say 40 to 50 and we've increased it last year to 50 to 60 and our teams continue to execute well on those. And so I think, for now I feel 50 to 60 it ranges the appropriate one, as we walk into 2021.

But I'll ask Ken to maybe give a little bit more color on it..

I think the guidance for the year is 50 to 60. I think in the first quarter you may see a little pressure on that because some working capital impacts and then the CapEx maybe a little bit higher than 4Q level. [Indiscernible] some things to help the Ecolab transition.

So but overall I think that guidance is very appropriate and it's baked into our thinking in terms of leverage as well as shareholder return and high growth investment options in terms of capital allocation..

Super. Thank you both..

And your next question in queue comes from Blake Gendron with Wolfe Research. Your line is open..

My first is on artificial lift and specifically ESPs. Just wondering, if you could level set forth the lease versus sale mix whether some of the newer technology is sale versus lease. And to the degree that ESPs get damaged as a result of what's happening in Texas.

Are you exposed to any of the replacement costs as it pertains to your lease fleet?.

Blake, good question. So since Jay is on the call. I'll ask Jay to comment on it.

Jay?.

Yes, Blake. So as we've shared before we still have a pretty high proportion of the revenue base in ESP directed at least. Well we've been trying to pull that down to more sales. We're still at about 75-25 mix in terms of lease versus sale.

And then as you know, those lease assets are ChampionX assets so we'd be responsible for making sure that we provide the replacement parts or repairs as necessary to get those customers back into operation..

That's helpful and thanks Jay and happy retirement. My second question is on the commerciality in the better together cross sell opportunity.

It sounds like you've had some real success to some of the smaller customers which given the operational volatility and some of the logistical constraints that make sense, given some trials with some of the larger customers. When I think about NOCs and large IOCs. I think of having an individual for every type of thing in procurement.

So wondering, number one, are you able to cross train the salesforce to sell both at the same time especially to the large customers? How do you think your large customers potentially could change the way that they source production optimization technology moving forward as a result of what you're doing with bundling?.

Blake, so I think the way we go about this is, we have a very strong what we call the key accounts management team, at our chemicals technologies business. So what we do is for each of the large accounts particularly the integrated oil companies. We have a focused key account manager and possibly a management team.

What we are doing is, we are adding to the team an artificial lift expert to the team because it is –given the technical aspects the depth is important as you have conversations with customers.

So we add an artificial lift expert to that team and so now that key account management team is fully capable of selling our whole portfolio or talking about whole portfolio to this customer. So that's number one.

Step number two is, the real opportunity, door opening opportunity for us this combination of bringing I mentioned the digital artificial lift and chemical technologies together. I think that's the - is the real door opener because customers really see the value in that.

And so the trial sites I talked about in the early part of the Q&A it was all opening doors for us. So that's how we demonstrate value to the customers and that starts the process..

Understood. Thanks so much for the time..

And we have no further questions at this time..

Thank you. Thanks again everyone for your continued interest in ChampionX and we look forward to talking to you on our first quarter earnings call. Thank you..

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