Welcome to the ChampionX Second quarter 2021 Earnings Conference Call. My name is Hogue and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Byron Pope, Vice President, ESG & Investor Relations. Mr. Pope, 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.

Ken will then discuss our second quarter results and third quarter outlook before turning the call back to Soma for some summary thoughts. We will then open the call for Q&A. During today's call, we will be referring to the slides posted on our website.

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

Therefore I refer you to our latest 10-K filings and our other SEC filings for discussion of some of the factors that could cause actual results to differ materially. Our comments today may also include non-GAAP financial measures.

Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our second quarter press release which is available on our website. I will now turn the call over to Soma..

Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, employees and analysts to our second quarter 2021 earnings call. Thanks for joining us today. Before turning towards business results, let me first take a moment to note that June 3, marked the one year anniversary of a transformational merger.

We could not be more proud of how remarkably well our organization has pulled together and executed on behalf of our customers and communities over the last year. During what was a dynamic, unprecedented market environment for our energy industry, we are truly better together.

Consistent with our purpose of improving lives, we celebrated our one year anniversary by volunteering over 1500 hours in communities around the world. I'm truly inspired by our team's commitment to our purpose. With that, let me turn to our recent performance.

We are pleased with the top line growth momentum we saw in the second quarter, all of our segments posted sequential growth outperforming the market. Our second quarter results demonstrate the attractive growth profile of our global business portfolio and further illustrate the strong free cash flow generation capacity of the company.

As the global economic and energy industry recoveries further take hold in the second half of this year and beyond, ChampionX is well positioned to outperform.

We continue to make good progress on our target at cost synergies and we are well positioned to deliver the full target at cost synergies of $125 million within 24 months of the merger closing. In addition, our field team members are increasingly able to visit in-person with customers.

We are very encouraged by how receptive customers our - customers are to our better together efforts, with our combined technology, products and services offering. We are a purpose-driven company.

So we will always start with our organization of guiding light on the slide number four, which is improving life’s of customers, employees, shareholders and community. We see our culture as a source of sustainable competitive advantage.

So we feel that it is important for all of our stakeholders to know that we hold ourselves accountable for being relentless customer advocates, being committed to our employees, delivering technology with impact to help solve customer problem and having a continuous improvement mindset.

On slide five, speaking of technology with impact, we are excited to welcome Scientific Aviation to our ChampionX team.

As we have listened to the voice of our customers with respect to their operational goals and plans for the energy transition, it became crystal clear that companies across the energy value chain are making the reduction of greenhouse gas emissions, one of their highest ESG priorities.

As a market leader in both site-specific and regional methane emissions monitoring solutions for continuous and periodic monitoring, Scientific Aviation will accelerate our growth pathway of building out our emission management portfolio to help our customers achieve their emissions reduction goals.

This acquisition is consistent with our energy transition pathways for growth we shared with you before.

We are excited about the future growth potential, as we combined Scientific Aviation's industry leading methane emission detection and monitoring solution with our extensive expertise and presence in the upstream production wellsite and midstream solutions. Ken will take you through our second quarter financial results shortly.

So let me just share a few high level comments. Over the last year as a combined company, our portfolio resiliency, robust top line growth and strong free cash flow generation speak to the power of our combined global business.

In the second quarter, our teams capitalized well on the continued growth in our shorter cycles North American land-oriented businesses, as well as the emerging rebound in our international sales. Our Digital business grew 12% sequentially, driven by strong growth in our production optimization offerings.

We are excited about the pipeline of new product launches in our Digital business that will drive healthy growth in the coming quarters. In Drilling technologies, customer adoption of new technologies accelerated, resulting in 79% of the Drilling Technologies revenues in the second quarter came from products that were less than three years old.

The healthy volume growth in the second quarter, along with the beginning of price increase realization, more than offset the impact of short term raw material cost inflation in our Chemical Technologies and artificial lift businesses.

We are highly confident that we will deliver on our margin improvement expectations in the back half of the year, and beyond, driven by continued volume growth, synergy delivery and full impact of the price increases. I would now like to turn the call over to Ken to discuss our second quarter results and our third quarter outlook..

Thank you, Soma. Good morning. Thank you for joining us. Today I will be referencing adjusted EBITDA as the metric for sequential comparisons. We believe this metric best reflects the business performance of continuous operations.

As Seen on slide seven, second quarter 2021 revenue of $749 million increased by $64 million or 9% sequentially, with all of our business segments contributing to this strong top line growth. Geographically North America grew 9% and international was up 10%. Included in our quarterly revenues were $43 million of cross-sales to Ecolab.

As previously communicated, cross-supply sales to Ecolab are associated with our post merger supply agreements executed with the transaction [ph] agreement. We do not recognize margin on these sales from an EBITDA perspective. Within our financial statements these revenues are allocated to corporate and other.

We expect these sales will continuous declining rate for approximately two more years. For the quarter GAAP net income for the company was $7.3 million, up $5.8 million from the first quarter. We delivered strong consolidated adjusted EBITDA in the second quarter of $105 million, a 12% sequential increase.

This increase was primarily driven by higher volumes at all four of our business segments. We delivered solid cash flow from operating activities of $61 million during the quarter and generated $41 million of free cash flow during the period. Our free cash flow to revenue ratio of 5%.

In the second quarter, we invested $20 million in cash, capital expenditures, which included integration related requirements to support the separation from Ecolab. This separation remains well ahead of schedule contemplated in the transaction services agreement.

We continue to expect to fund capital investment in the range of 3 to 3.5% of revenues moving forward. Turning to the business segments. Production Chemical Technologies generated second quarter revenue of $447 million, up 8% from the first quarter.

The sequential increase was driven by seasonally higher international volumes and continued positive sales momentum in our North American business. Geographically, North American revenues increased 4%, while international revenues grew 13% sequentially. Segment adjusted EBITDA was $62 million, up 10% sequentially.

Profitability improved on higher sales volumes, despite experiencing some continued raw materials and logistics costs inflation. Our commercial team has been working with customers diligently to implement the selling price increases we announced earlier this year. Segment adjusted EBITDA margin was 14%.

As volumes continue to grow and realize the impact of price increase actions, we are confident that we will deliver healthy margin improvement in the second half of the year. As we have previously stated, we expect this year's exit margin rate above the prior year end level.

Moving to Production and Automation Technologies, they had revenue of $181 million, which was up 13% sequentially, driven by higher volumes as our E&P customer spending trend continued to approve. Digital revenue increased 12% sequentially, driven by our Spirit [ph] business and our new SMARTEN Controller.

We continue to expect increased adoption of our modular fit for purpose digital solutions through time, as customers are placing a greater focus on leveraging Digital Technologies to improve their cost structures and drive efficiencies. In VAT second quarter segment adjusted EBITDA was $38 million, up 7% sequentially.

Segment adjusted EBITDA margin was 20%, down slightly versus the first quarter, due primarily to some cost inflation experienced during the period. But we expect to fully offset this cost inflation with announced price increase actions to maintain a 20% plus margin profile in the second half of the year.

Drilling Technologies experienced the third consecutive quarter of improved customer demand, as the active US recount continued to increase during the second quarter. Although it was offset a little bit by seasonal headwinds from the Canadian spring fall period.

Segment revenue was $38 million in the second quarter, a 7% increase sequentially, which outpaced the North American recount during the period. Drilling technologies drilled - delivered segment adjusted EBITDA of $8 million during the second quarter, up $1 million sequentially, driven primarily by higher volumes.

Reservoir Chemical Technologies revenue for the second quarter was $33 million, and a 11% increase sequentially driven by higher US well completion activity.

As expected, the Reservoir Technology - Chemical Technology segment EBITDA improved in the second quarter moving above breakeven, a $1 million sequential improvement which was primarily driven by the higher volumes.

Moving to slide eight of the presentation, merger synergies demonstrates that we continue to make progress towards maximizing synergies from our transformational merger. Our coordinated activity across the company is enabling us to capture potential integration benefits, as well as cost and efficiency improvements and revenue synergies.

We still expected to achieve our targeted $125 million of annual cost synergies within 24 months of the merger closing date. And we exited the second quarter at a $103 million running rate. We will continue to share with you progress on this front. Turning to slide nine, our financial position.

We had $239 million of cash on hand and approximately $592 million of total liquidity, including available revolving credit facility capacity at the end of the second quarter. We repaid $62 million of debt during the quarter. And since the merger date, we have paid out $230 million of debt obligations or 21% of the then outstanding total.

At June 30, our net debt to trailing 12 months pro forma adjusted EBITDA was 1.6 times compared to our net leverage of 1.9 times at March 31, this despite having now rolled off all the strong EBITDA pre-pandemic quarters.

We remain highly focused on operating and free cash flow delivery, working capital management and maintaining our strong liquidity position. We continue to execute on our capital allocation framework with a priority of using our free cash flow to invest in technologies to support our high margin growth initiatives.

And while using available excess cash in the near term to further reduce our leverage to our long term target of approximately one time, net debt to EBITDA. Turning to slide 10 and our third quarter outlook.

We expect a sequential increase in revenue in the third quarter with revenues including Ecolab cross sales in the range of $765 million to $805 million.

The sequential change is primarily driven by anticipated continued volume improvement in our international operations, and further positive momentum in our shorter cycle North American production oriented businesses. Our growing oriented businesses are expected to benefit from continued US recap growth or be at into moderating pace.

With our selling price catching up with the raw materials inflation, and coupled with our synergy initiatives and ongoing cost and productivity actions, we continue to expect year-over-year margin rate improvement as we move to the end of the year. For third quarter, we expect EBITDA in the range of $119 million to $125 million.

On this slide, we have also provided some additional specifics related to our third quarter outlook. We remain pleased with our strong cash flow performance. And we are confident that we will maintain free cash flow EBITDA conversion ratio in the 50% to 60% range for 2021. Now, back to Soma. Soma Somasundaram 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 high strategic priorities of ChampionX we have previously shared with you. Last quarter, we shared with you a few high level thoughts on how we are positioning our portfolio for sustained growth as the energy industry evolves.

Today, let me frame for you how we think about another one of our strategic priorities, which is leveraging our global footprint to expand international sales. We have shared with you our plans to expand our artificial lift business in key international geo markets by leveraging the already global footprint of our Chemical Technology businesses.

One year into our merger, we are encouraged by the reception we are receiving from, IOCs, NOCs, an independent upstream customers around the world and our pipeline of opportunity continue to expand. As a reminder, we have strategically prioritized seven countries for international artificial lift expansion.

These are countries in which our Chemical Technologies businesses are already well established, but in which we have limited to no artificial lift presence today. These countries collectively represent an estimated $1.5 billion in artificial lift market. And we see the potential to capture 10% to 15% share over the first half of this decade.

We are starting to see the results of our efforts in this area. In the second quarter, our Production and Automation Technologies international revenue growth significantly outperformed the market growing 15% year-over-year, and 11% sequentially, primarily driven by our artificial lift growth.

As international oilfield activity levels start to grow next year and beyond, we are excited about organic growth opportunities ahead for both of our artificial lift and Production Chemical businesses.

Regarding capital allocation, we will continue to use our strong full cycle free cash flow generating the ability to further pay down debt to our target level. And our value creation framework will continue to guide how we allocate capital to both organic and inorganic opportunities.

In addition, we remain committed to the path toward a sustainable return of capital mechanisms to our shareholders over time. We are very pleased with the progress we are making towards this objective.

In closing, ChampionX is a global production oriented technology provider and we are well positioned to be a long term winner, as our energy industry continues to evolve.

Through our differentiated products and technology, attractive growth opportunities and strong free cash flow generation, we are focused on delivering strong financial performance to our shareholders in the second half of this year, and in the future.

Again, I want to thank all of our ChampionX employees around the world for their continued dedication to our purpose of improving the lives of our customers, our employees, our shareholders, and our communities. I'm both humbled and inspired to lead such a phenomenal team. With that, I would like to open the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from George O'Leary from Tudor, Pickering, Holt. Please go ahead..

Morning, guys.

Can you hear me?.

Good morning, George. Yes, we can hear you fine..

Can you hear me?.

We can hear you, George..

We seem to have lost Mr. O'Leary. We'll go to the next question. The question comes from Scott Gruber from Citigroup..

Yes, good morning..

Good morning, Scott..

So the emissions detection opportunity is very intriguing, given the developments on the E&P side.

How do you see this market developing? What's the growth potential for ChampionX here? What type of revenues do you think you could be generating from emission detection in say three to five years?.

Yes, Scott. We are very excited about this opportunity. And you may recall in the previous call, we shared the pathways we are exploring, the three pathways we shared for sustainable growth for energy transition.

And one of them we talked about was we called it decarbonisation of oil and gas production with an emphasis on emissions monitoring or greenhouse monitoring.

The idea behind it is clearly, methane emissions are our number one priority for you know, all of our E&P customers and production wellsites and midstream plants and pipeline are sources of these methane emissions and as we all know, methane emissions are 80 times more potent than equivalent [ph] carbon dioxide type emissions.

So - and we feel that given our presence of the wellsite and the midstream solutions, the number of production wellsites we have access to, this is a clearly an area where we can help our customers and make a difference. So we are excited to have the opportunity to be able to acquire Scientific Aviation.

And Scientific Aviation you know, they have a full suite of solution, everything from airborne to drone based, as well as the continuous monitoring at the production wellsite. Scientific Aviation, you know, from all the work we have done, we could tell that they have a clear, early mover advantage in the area.

And with the largest installations, especially that across the board, that I will see with large independence, as well as with the mid tier solutions. So we are pretty excited about that. You know, the market is going to - in our view, it's going to grow really, really fast on this area.

And that we are seeing that from just the requests from our customers and wanting to know more about the solution.

We have been very pleased with the uptake of interest in the area, and, you know, the market, the adoption on the market, you know, when you think about it, just from a business perspective, you have typical site, the production wellsite may require between $6,000, to let's say, $8,000 worth of equipment.

And in addition to that, you are going to see an ongoing revenue stream related to monitoring and analyze - the analytics and quantifying the solutions.

So, you know, conservatively, even if you think about, when you have million wellsites in there, in the US alone, conservatively, if you think about even 20% of the wellsites getting this type of equipment in place, because not all wellsites are emitting the same way.

You know, the market, can be anywhere between, at 100,000 wellsites, can be on a low end, $600 million to billion, billion plus dollars in the near term. And so we clearly see that this is a area where things will grow really fast. So, obviously, you know, we are one month into the acquisition. We are pleased by this.

So, hopefully that gives you an idea of, you know, the size of the market, and how the growth can – how the growth can happen..

Yes. It does. And I appreciate that. It's certainly exciting.

Given the acquisition and your own internal capabilities on the Digital side, do you feel like the portfolio is routed out at this point to capture the opportunity? Or do you still need to go out and either buy or to develop some more technology to really capture the opportunity in front of you?.

Yes. Great question, Scott. We have a great start with that initial offerings, and so - but we are continuously looking to make sure that we are covering the full suite of solutions.

And that will require, I would say, an addition of some service capability, which we can do with organically, you know, because of what we've given our already field service network. And there may be, you know, one or two other additional of technology we might have to do.

But I think from a production wellsite standpoint, I think we have a very good initial solution, but we will build out the service offerings around it over a period of time..

Got it. [indiscernible] Soma. Thank you..

Thanks, Scott..

Thank you. And Mr. O'Leary back. Let's go ahead and take his question. Please go ahead. Mr. O'Leary..

Sorry about that, guys. My internet cut out, right, as I was about to ask the question. Just Q3 guidance is very strong. I wonder if you could provide some incremental color on kind of the moving pieces underneath that, by business. The geographic commentary was helpful. You touched on Drilling Technologies.

But what about PAT and Production Chemicals? How do you think that plays out?.

Yes. George, I think we - as we mentioned, we are pleased with the top line momentum in our businesses and I want to thank our teams because they are executing extremely well, navigating, you know, the top line growth, at the same time, the inflationary aspects and the associated price increases.

So when you look at Q3, we expect all of our segments to grow across the board, given both the momentum starting to show in the international side, as well as the North American short cycle activity. So we expect all of them to grow. Production Chemicals is going to benefit from their continued international recovery. So we feel really good about that.

So, I think you should expect all of our segments to show growth. Now, on the raw material side, as I mentioned, our teams are doing great job navigating this. And so we are continuing to stay focused on making sure that we manage the inflationary pressure and the associated price increases. But I will also say that, we have multiple levers.

In addition to price increase, we are working on, that includes everything from our productivity effort, synergy delivery. So we have done multiple scenarios of inflation was - you know, our price increase, as well as our other levers. And based on that, we feel really confident about the step up delivery in the margin expectations, as you can see.

And the other thing we are excited about is, given the top line growth, when the inflation starts easing, at some point, you know, whether it is towards the end of the year, beginning of next year, I think you should see a margin acceleration in our business, given the top line growth.

So, while the near term raw material inflations are there, we got multiple levers to navigate that and deliver on that second half margin improvement. So we feel really good about that..

Very helpful. Thank you so much. And then the, smart chemical skid solution, the subtle line in the presentation, that that'll be commercialized in July, and it was something kind of around the time of the merger that was brought up pretty frequently and people are clearly interested in.

Can you just remind us, what all that offering is and how its differentiated? And then the kind of a market opportunity and the strategic plan of attack [ph] for rolling that out?.

Yes, absolutely. I think, the idea around the smart chemical injection skid is to make sure that, you know, we are doing the chemical injection on demand, and make sure that the right type of chemicals and the right quantities are injected at the right time.

And this has a significant impact for our customers, both from a perspective of their operating expenses, well optimization, as well as when you think of the ESG implications associated with it.

And the second aspect of the smart injection skid is also the last mile optimization, you know, as you know, that it's still a common practice of using three trucks [ph] to go and you know, inject chemicals.

So, the smart injection skid will be focused on the eliminating the need for those type of treatment plants, which has, again, safety and, and environmental implications, if we can avoid all these trucks going through.

So we have customers who are right now, you know, piloting these chemical injection skids with the objective of eliminating these treatment plant - need for treatment plant, and so on, so forth.

So given our access to the market, given our chemistry, domain expertise, and combining that with our digital, so that typical smart injection skid will have a complete skid, including all the mechanical hardware required, which will include everything from pump to the associated fittings and tanks, as well as a power pack, you know, if there is no electric power available with the solar power packs, as well as a controller with the embedded software, which has the intelligence to control and optimize.

So that's the whole pack of the skids, and we are very pleased with the way it is progressing. So they should again, as I mentioned in my prepared comments, the pipeline of the digital products, this should deliver a healthy growth..

Thank you, guys. Thanks, Soma..

Thank you. Operator Thank you. Our next question comes from David Anderson from Barclays..

Hi, Good morning, Soma. Just going back to your comment you made about artificial lift and international penetration, I think if I heard you right, I think you were talking about maybe a 10% to 15% market share by the end of the decade internationally.

I know this has been sort of one of the - one of the ideas behind ChampionX is to kind of leverage the footprint that you had over there, what Ecolab had over there. I wqas wondering if you could kind of talk about where you are in that process today? I think you had a couple of kind of smaller kind of Middle East countries that you are working on.

But geez, in the last six months, we've seen a ton of artificial contracts out there from some of the bigger service contract companies. So I'd love to kind of get your take on kind of that strategy, how you see that going.

And also kind of maybe comment on the pricing, what was your take on sort of the pricing of those contracts that you saw out there. Is that like, not kind of where you wanted to be, or just because I just don't really have a good sense as to kind of where those ended up..

Yes. Good morning, Dave. So just to clarify, as you know, we already have some artificial presence internationally, and particularly in areas like Oman, and Australia, and Argentina and Colombia. So the framing of the commentary around the seven countries, the $1.5 billion market size, is specific to the initial focus for seven incremental countries.

So these seven incremental countries where in our chemical technologies have a really good footprint, where our artificial lift products have either limited or no presence in the market. So the framing is, these seven countries represent the $1.5 billion market in artificial lift, these seven countries.

And we think we will be in a position to get to about 10% to 15%, in that seven countries as a market share. So that's the framing. So we are making really good progress on it. As we said before, there is a bit of what I would call it, slowness in during the pandemic time for because of not being able to make joint visits to the customer.

And even in some cases, the customers, you know, ability to qualify and approve, because they were working remotely, and so on and so forth, right? But our teams are doing a really nice job, getting through that, and you can see the results of that, when you look at how our PAT international business and which is pretty much largely driven by artificial lift grew internationally.

So we have winning contracts. But again, I want to talk about these seven countries, because unless you can understand for competitive reasons, we are not in a position to talk about which are those seven countries. But we are focused on these seven countries.

And I would say that Dave that we are pleased with what we are seeing and the evidence of that is the growth you are seeing in our international business in artificial lift..

So what are some of the challenges that in order to kind of get to that market share that you're targeting there.

Is it brand recognition? Is it just getting sort of country approvals, is it footprint? Kind of when you think about how to get there, what are some of the kind of the hurdles you'd have to get past?.

Yes, great question. From a brand recognition standpoint, fortunately, for us Dave, that, you know, we – since we have some of the gold standard brands in artificial lift, like whether it's Harbison-Fischer, Norris or Oil Lift, I think you know that is not as an issue.

The key aspect is, you know, making sure that there is enough service capability on the ground, so that the customers can feel comfortable and confident that they have a local service capability on the ground. And that's where the existing Chemical Technologies footprint helped.

So we can - since we already have an existing footprint it is - it accelerates our ability to add incremental, artificial lift service capabilities quickly, including things like, there is legal entity in place, there is a HR support structure in place, there is ability to do local business in place.

So just making sure that you're able to do business locally, and you have the service capability locally, and you have the support capabilities locally is the key. And I think that's where the Chemical Technologies business will accelerate.

And I think as that market and reopens more in these areas, I think you will see this moving - our building up this capability is moving much more quickly..

And those seven countries that you just mentioned, you already have a presence there, you already had kind of infrastructure on the ground, correct?.

That's exactly right. And that's why we particularly chose those countries because they have good artificial lift market with - our product lines can immediately participate. And our Chemical Technologies business already have that footprint in place..

Okay. Thank you, Soma..

Thanks, Dave..

Thank you. Our next question comes from Chase Mulvehill from Bank of America..

Hey, good morning. I guess a couple of questions on international, it all start on the Chemical side for international. i think everybody kind of knows that there's a little bit of competitive forces out there with some of the larger cap guys trying to take some market share on the Chemical side.

So maybe if you can kind of just talk about what you're seeing out there in the market today, how competitive it is? Obviously it sounds like you've been able to kind of push price.

But then, you know, maybe also talk about some of the large tenders in the pricing that you're seeing on some of the large tenders? I know that one of the largest diversified service companies recently announced a tender award in Oman. So just kind of give us an update there.

And what you're seeing on the international Chemical side, from the competitive dynamics?.

Yes. Chase. In fact, I spent yesterday with our international sales teams, and I would say that, I'm very pleased with how focused they are, and in continuing to maintain our leadership position in those countries. So from international perspective, you know, we are pleased with the recovery we are seeing.

So, clearly, we saw sequential growth in our international revenues, in our PCT business, which, in fact, the international revenues grew faster than the North American revenues in our PCT business. So it's good to see that momentum starting to come through.

Competitively, you know, we are very focused on our customers and making sure that we are executing on our value proposition with our customers. So the recent announcement made by one of the service companies, we are aware of it. We are not incumbent in that in that account.

So, you know, we are defending our share very well, as well, as you know, we are continuing to execute on incremental share gains as well. So I think I would say that when I look at our own Production, Chemical Technologies growth, I'm, you know, we are pleased with how our teams are executing. And I think it's outperforming the market..

Really, perfect. Appreciate the color, Soma. As a quick follow up is sticking on the international theme. Some of the larger diversified service companies have noted some confidence - that they have some confidence that the top line can increase double digits next year on a percentage basis.

And I totally realized that your portfolio is you know, a little bit is definitely different than some of the diversified companies.

But you know, I would have figured that kind of production related services would outperform some of the other kind of drilling and completion related services next year is more kind of OPEC production comes back online.

So I guess, maybe trying to look out to 2022, how comfortable are you that your international top line can increase kind of double-digit percentages on a year-over-year basis?.

Yes, So, Chase, you know, obviously, I'm – we are not going to provide 2022 guidance on this. But having said that, I will say that, when I look at the macro market environment, I think they are feeling much more constructive, as we go into 2022.

And then when you look at, you know, the announcements from OPEC suppliers, and our own internal efforts around you know, we recently talked about PAT and the international growth opportunities there, that the momentum we are starting to see. So I feel very good about outperforming the market in the international growth.

So I think we are well positioned and in addition to the market momentum, we also have unique to ChampionX, the ability to expand incremental sales outside, given our revenue synergy opportunities and leveraging the global footprint. So I feel really good that we can outperform the market..

All right. Good to hear. Thanks, Soma. I'll turn it back over..

Thanks, Chase..

Thank you. Our next question comes from Marc Bianchi from Cowen..

Hi, thank you. If I'm interpreting the message correctly, for the year here and for the exit, PCT as well as the whole company would have higher year-over-year margins in the fourth quarter.

So if that's going to be the case, I just assume we need to make quite a bit of progress on PCT here in the third quarter, so that it would have the kind of highest incrementals among the four. Correct me if that's wrong.

And then the follow up to that is, you know, as you fully get the price increases, implemented, assuming no change to raw materials, what is the margin look like for that segment? Whether it's fourth quarter or sometime in 2022?.

Yes, I mean, Marc, I think, let me start with your first question. We do expect PCT and the whole company to exit Q4, with a higher margin rate than last year - last year exit rates. So you're right in your assumption that PCT will have a very healthy incremental in the third quarter.

And so I think that the - as I mentioned, as the price increases continues to take hold, and the other levers, including our costs synergy delivery, and productivity, we feel good about 2022 margin expansion. And, as I also mentioned, as the inflation eases, that will also help us get more of margin expansion in 2022.

What I'm really pleased Marc is that if you look at our PAT segment, its already past the pre-pandemic margin levels, right, you know, given the cost, the volume growth and the productivity, as well, as, the price - the continued price improvement we are implementing.

So, I think we are well positioned that 2022 margin expansion, that we can execute on a really healthy margin expansion in 2022, as well. So, I think our - we are very focused on that. And you should see the exit rate this year, both in PCT, and for the whole company, to be much better than last year..

Okay, great. Thank you. Following on to that discussion, and in terms of the evolution into '22, I think you mentioned earlier some expectation that raw materials ease.

Can you just remind us what raw materials, if I'm going to try to pull something up on my screen I should be watching, and what gives you confidence that there's going to be some easing there?.

Yes. I think, as I mentioned Marc that, let me dive into the – the top three raw materials, we track top 10 raw materials very closely for us, but let me share with you the top three, particularly, our Chemical Technologies is propylene, ethylene, and methanol, are the three.

And in addition to that, obviously, in our artificial left, we monitor the steel and particularly the special bar quality steel, which are used in, particularly in product lines, like rods. The other elements we monitor is also freight [ph] right. So those are the types of things we monitor very, very closely.

To the question of, you know, what gives us confidence there could be some easing. Obviously, we depend on forecasts of these indices, forward looking forecast.

But also, if you look at some of the things that drove the tightness in the market, you know, going back to the winter storm in first quarter, and how the Gulf Coast, a lot of the plants were taken offline, and now they are trying to bring back those plants.

We feel that most of those plants, if not all of them, will - should operate and get to operate in full capacity by the time we get to the fourth quarter. So those are the factors that are giving us more confidence in terms of the, there could be some ease of inflation.

Now, let me also be clear that, we are not depending on that to be our reason for margin expansion. As I mentioned before, we are working on multiple levers for margin expansion. So, I always believe, we always believe at ChampionX, we have to control what we can control really well, and execute. And, that's what we are we are doing.

But hopefully that helps you with our feel on why we think there could be some easing of raw material pressure, particularly in Chemical Technologies, as we get to the end of the year..

Yes. Its very helpful. Thank you very much..

Thanks, Marc..

Thank you. Our next question comes from [indiscernible].

Hey, good morning, and thank you for taking my questions. Soma, I think obviously, you guys have a very good, very strong free cash flow profile, you guys have done a very good job on working capital.

As we think about international on North American revenues improving from here on, more so International, do we need to think about, how should we think about that working capital to sales? Typically, I think of international DSOs has been more than NIM [ph]. But maybe that's not the case. So if you could just help on that..

Yes. Good morning, Vaishnav. Thanks for the question here. Look, we are very pleased with the profile of our free cash flow profile we have and we are particularly focused on that, and our portfolio is built that way. You know, we, we feel good about the 50% to 60% free cash flow conversion from EBITDA, which we have shared with you.

Depending on the quarter, there will always be some variation, depending on the growth profile, and from quarter to quarter, there's always going to be some variation. So, I would say that you should look at the 50% to 60% is, you know, for the year, that's a good number.

And then let me turn it over to Ken to specifically address some additional detail on the working capital.

Ken?.

Thanks, Soma. We were very confident on the guidance of the 50% to 60% free cash flow conversion from EBITDA. For the year, we took working capital into account as we gave that guidance. So you'll see, you know, as the business grows, you'll have some more need for working capital.

But similar on the margin side, we work hard on making sure that we have other levers to pull. So digitalization of the – our interface with customers help - will help us continue to work the DSO side, and then continuing to work on the automation of the BPO side as well.

So I look for continued improvement overall, in the working capital performance of the business, which will support that 50% to 60% free cash flow from EBITDA conversion rate..

That's helpful. And maybe I think we have tried to ask different ways. So maybe I'll try it one more time on just PCD. And so overall revenue guidance is call it about mid single digits growth. But we did, on PCT like 8% revenue growth. So my at least thinking is maybe the growth rate from 2Q should accelerate into 3Q, 4Q.

Is that fair? And maybe if, if at least, like just doing monkey math, if I just think about well, we get - need to get to like 400 bps improvement in margins, we should see maybe a couple of 100 bps margin improvement, 3Q, and another one in 4Q.

Would that be a fair way of thinking about how second half progresses?.

Yes, I mean, look, I think you should see a nice step up from second quarter to the third quarter in PCT margin, and then a further improvement in the fourth quarter margin from third quarter to fourth quarter margin in PCT.

So you rightly pointed out, you know, the step up in the second half will be coming both from frequently from Q2 to Q3, and Q3 to Q4. Because we look at it, you know, in some ways, our Q3 margin for the company at ChampionX, right, you know, is at 15, at the midpoint.

We are already, you know, at a rate of exiting last year's, right? So there's going to be a really good step up coming through in the PCT. And that's a good way to think about it..

All right, thanks for taking my question..

Yes..

Thank you. At this moment, we show no other questions..

So thanks, everyone for your continued interest in ChampionX. And we look forward to talking to you again in our Q3 earnings call. Thank you, and have a great day..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect..