Good morning, and welcome to the ChampionX Third Quarter 2021 Earnings Call. My name is Brandon and I'll 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 this conference is being recorded.

I will now turn the call over to Byron Pope, Vice President, ESG and Investor Relations. And you may begin sir..

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

Let me remind all participants that some of the statements we 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 filing and our other SEC filings for a discussion of some of the factors that could cause actual results to differ materially. Our comments today may also include non-GAAP financial measures.

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

Thank you Byron. Good morning everyone. I would like to welcome our shareholders, employees and analysts to our third quarter 2021 earnings call. Thanks for joining us today. I would like to start by expressing my sincere gratitude to our global ChampionX team.

I'm very proud of how remarkably well our organization continues to perform and adapt to the short-term supply chain and logistics bottlenecks, which have emerged this year as global economic activity rebounds from pandemic levels.

Our employees around the world have remained laser-focused on improving the lives of our customers and communities, and I want to thank each of them for their continued dedication and commitment. We are pleased with the continued top line growth momentum we saw in the third quarter.

All of our business segments posted strong sequential growth, outperforming the market for the second consecutive quarter. In addition, our revenue growth outperformed the industry both in North America and internationally.

Our third quarter results demonstrate the attractive growth profile of our global business portfolio and further illustrates the strong free cash flow generation capacity of the company. As the global economic and energy industry recoveries further gain momentum heading into the next year, ChampionX is well positioned to continue to outperform.

We have made further progress toward our targeted cost synergy and we are well positioned to deliver the full targeted cost synergies of $125 million within 24 months of our merger closing. We remain encouraged by our customer reception to our Better Together efforts with our combined technologies, products and services offering.

As a purpose-driven company, we always start with our organizational North Star on slide number 4, which is improving the lives of our customers, employees, shareholders and communities.

As an example of how our employees regularly volunteer their time and effort to improve the local communities in which we live and work, our ChampionX team in Azerbaijan organized a volunteer group and participated in World Cleanup Day last month.

The team partnering with volunteers from one of our customers improved their community by collecting over 3,300 pounds of waste along the coastline. Turning to slide 5. We are honored to be named a Best Energy workplace winner by ALLY Energy.

We were selected from nearly 400 nominations globally from oil and gas, power and utilities, wind, solar, climate, tech startups and academia. We believe this is a further validation of our purpose of improving lives of all our stakeholders and the positive culture within the organization. We work on this every day.

Later in my comments, I will share more with you on the tremendous growth opportunities before us in helping our customers reduce their greenhouse gas emissions.

But first on slide six, let me give you a quick example of one of the less visible, but very impactful ways in which we are already helping our customers produce the hydrocarbons that the world needs in a more sustainable fashion.

One of our customers in Azerbaijan uses production chemical to break up the emission and prevent foam formation in their production stream. Historically, these products were blended with raw materials and solvents imported from other regions.

Our ChampionX team developed a solution which enables us to replace imported solvent with locally sourced inputs with no adverse impact on product quality or effectiveness. The end result is a sustainable reduction in CO2 emissions related to seaborne and land-based transport of materials.

Ken will take you through our third quarter financial results shortly. So, let me just share a few high-level comments. As the cyclical recovery in demand for energy services and equipment has gained momentum during the course of this year.

Our business portfolio has proven not only its resiliency, but we have delivered industry-leading topline growth in each of the last two quarters. This speaks to the attractive organic growth opportunities within our global business.

In the third quarter, our teams continue to capitalize well on the growth opportunities in our shorter cycle North America land-oriented businesses and we delivered double-digit sequential international topline growth during the period.

Our digital business grew 28% sequentially including the newly acquired Scientific Aviation business with relatively broad-based participation across our portfolio of digital technologies. We expect the pipeline of new product launches in our digital business to drive further healthy growth in the coming quarters.

In Drilling Technologies, customers continue to adopt our newer technologies resulting in 79% of Drilling Technologies revenues coming from products that were less than three years old for the second consecutive quarter.

Raw materials, labor, and logistics-related cost inflation continues to be a challenge and our teams are working diligently to deliver price increase realization and productivity to offset the impact in our Chemical Technologies and Artificial Lift businesses.

We remain focused on delivering on our margin improvement expectation of exiting this year above our 2020 exit rate. Regarding capital allocation, there is no change to our philosophy. We continue to make good progress toward achieving our target leverage of one times net debt to EBITDA with further debt pay down in Q3.

We remain committed to reviewing our alternatives a sustainable return of capital mechanism after we reach our target leverage and based on existing market conditions.

In addition we will continue to remain disciplined about our capital allocation and our value creation framework will continue to guide how we allocate capital to both organic and inorganic opportunities. I would now like to turn the call over to Ken to discuss our third quarter results and our fourth quarter outlook..

Thank you, Soma. Good morning everyone. Thank you for joining us. Today, I will be commenting on the adjusted EBITDA for sequential comparisons. We believe this metric best reflects the business performance of continuing operations. As seen on slide nine, third quarter 2021 revenue of $819 million increased by $70 million or 9% sequentially.

All four business segments contributed to this strong top line growth for the second consecutive quarter. Geographically we experienced robust sequential revenue growth with international revenues up 10% and North America up 9% including in our quarterly revenues were $39 million of cross sales to Ecolab.

As previously communicated, cross-supply sales to Ecolab are associated with post-merger supply agreements. We do not recognize margin on these sales from an EBITDA perspective. Within our financial statements revenue associated with these sales is allocated to corporate and other.

We expect these sales will continue at a declining rate for approximately three years from the merger closing date. In the quarter, GAAP net income for the company was $56.8 million, up from $7.3 million in the second quarter. The increase was primarily driven by a gain on the sale of our chemical manufacturing facility in Corsicana, Texas.

We also delivered incremental margins on higher volumes and a reduction in G&A costs due to fewer integration-related charges associated with the merger. We delivered strong consolidated adjusted EBITDA in the third quarter of $124 million, a 17% sequential increase. This increase was primarily driven by higher volumes in all four of our businesses.

We delivered solid cash flow from operating activities of $89 million during the quarter and generated $67 million of free cash flow during the period. Our free cash flow to revenue ratio of 8%. In the third quarter, we invested $21 million in capital expenditures.

And moving forward, we continue to expect to fund capital investment in the range of 3% to 3.5% of revenues each period. Turning to the business segments. Production Chemical Technologies generated third quarter revenue of $488 million, up 9% from the second quarter.

The sequential increase was driven by higher volumes and continued positive sales momentum, both internationally and in our North American business. Geographically, North America revenue increased 5%, while international revenue improved 13% sequentially. Segment adjusted EBITDA was $71 million, up 15% sequentially.

Profitability improved on higher sales volumes despite experiencing continued raw material inflation. Our team continues to work with customers diligently to implement selling price increases that we announced earlier this year.

Segment adjusted EBITDA margin was 14.6%, as volumes continue to grow and the full impact of our pricing actions is realized, we remain confident that we will realize healthy margin improvement in our production chemical business.

Moving to Production and Automation Technologies, segment revenue of $204 million grew 9% sequentially due to higher volumes as our E&P customer spending continued to improve.

Digital revenue increased 28% sequentially, with a relatively broad-based growth across our digital portfolio and our recently closed emissions monitoring acquisition contributing to revenues in the quarter.

Looking forward, we expect increased adoption of our modular fit-for-purpose approach, as our customers are clearly placing a greater focus on leveraging digital technologies to improve their cost structures and drive efficiencies. Third quarter segment adjusted EBITDA was $40 million, up 5% sequentially.

Segment adjusted EBITDA margin was 19.6%, down slightly versus the second quarter, driven primarily by materials and logistics cost inflation. Given recent selling price increases, we expect to maintain a 20% plus profit margin profile in this business. Moving to Drilling Technologies.

The segment experienced the fourth consecutive quarter of improved customer demand, as the active U.S. rig count continued to increase during the third quarter, along with the seasonal rebound of Canadian drilling activity after the spring thaw period.

Segment revenue was $49 million in the third quarter, a 31% increase sequentially, which comfortably outpaced the North American rig count additions during the quarter.

Drilling Technologies delivered segment adjusted EBITDA of $15 million during the third quarter, up $7 million sequentially, driven primarily by the higher volumes and a favorable product mix. Reservoir Chemical Technologies revenue for the third quarter was $38 million, a 15% sequential increase, driven by higher U.S. well completion activity.

Segment adjusted EBITDA in the third quarter was $1 million, a small sequential improvement which was primarily driven by the higher volumes. During the third quarter we completed the sale of our Corsicana, Texas chemical manufacturing plant.

This sale is consistent with our ongoing initiatives to optimize the chemical global supply chain and improve the cost structure of our Reservoir Chemical Technology business, to enhance profitability and improve flexibility. Moving to slide 10, merger synergies. We demonstrate that we continue to make progress towards maximizing merger synergies.

Our coordinated activity across the company is enabling us to capture potential integration benefits, as well as cost improvements and increasingly revenue synergies.

We still expect to achieve our targeted $125 million of annualized cost synergies within 24 months of the merger closing and we exited the third quarter at $118 million annualized run rate, up $15 million from the 2Q exit rate. We will continue to share progress with you on both the cost and revenue synergies front.

Turning to slide 11, our balance sheet and financial position. We ended third quarter with $254 million of cash on hand and approximately $613 million of total liquidity, including available revolver capacity. During the quarter, we repaid $97 million of debt.

In fact, since the merger date, we have paid down $326 million of debt obligations or 30% of the then total outstanding. At September 30, our net debt to trailing 12-month pro forma adjusted EBITDA was 1.2 times compared to our net leverage of 1.6 times at the end of the second quarter.

We remain highly focused on operating and free cash flow delivery, working capital management and maintaining our strong liquidity position.

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 our high-margin growth initiatives, while using excess available cash in the near term to further reduce leverage to our long-term target of approximately 1 times net leverage.

Turning to slide 12 and our near-term outlook. We expect a sequential increase in revenue in the fourth quarter, with revenues including Ecolab cross sales in the range of $820 million to $860 million.

The sequential change is primarily driven by anticipated continued volume growth, primarily in our international businesses, as well as the typical seasonality in North America. We expect a moderating pace of U.S. rig count growth to influence our drilling-oriented businesses.

With our selling prices catching up with raw materials inflation, coupled with our synergy initiatives and ongoing cost and productivity actions, we continue to expect year-over-year exit rate margin improvement as we conclude 2021. In the fourth quarter, we expect EBITDA in the range of $130 million to $140 million.

On this slide, we have also provided some additional specifics related to our fourth quarter outlook. We remain pleased with our strong cash flow performance and we are confident that we'll maintain free cash flow, EBITDA conversion ratio in the 50% to 60% range for the full year of 2021. Now back to Soma..

Thank you, Ken. Before we open the call to questions, I would like to turn your attention to slide 14 of our deck, which provides a glimpse into one of our most exciting growth pathways for the energy transition, which is greenhouse gas emissions management.

During our last earnings call, we highlighted our recent acquisition of Scientific Aviation the market leader in continuous methane emission monitoring solutions.

Coupled with our investment earlier this year in QLM technology, we are focused on building out our portfolio of emissions measurement and management technologies to help our customers achieve their emission reduction goals. We expect a strong secular growth in the North American methane emissions market in the coming years.

In addition, we see emerging opportunities to serve customers in the international geo markets as the momentum behind reducing greenhouse gas emissions has global and structural underpinning.

We are excited to launch our advanced emission research lab which will be focused on industry thought leadership and advancing applied research in emissions to enable decarbonization of global energy systems. 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 for our shareholders, the remainder of this year and in the years to come.

Again, I want to thank all of our ChampionX employees around the world, for their tireless dedication to our purpose of improving the lives of our customers, our employees, our shareholders and our communities. I'm humbled and inspired to lead, such an extraordinary 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] And from Barclays, we have Dave Anderson. Please go ahead..

Thank you. Good morning, Soma..

Good morning, Dave..

So question on the pressure chemicals business, I heard the year-over-year margins improving, but I was wondering, if you could just dig in a little bit more specific on production chemicals and sort of the path to margin expansion here.

You've talked in the past that as being kind of a 20% normalized margin business, obviousl, you've got a lot of inflationary issues that are kind of weighing on things today.

But I was just wondering if you could just kind of walk through kind of how we get there? Maybe kind of help us understand, how much is sort of being weighed down by these inflationary issues that will get passed through but on the other side kind of where is the growth next year? And what are the markets you think are going to grow the fastest next year? I think we're under a view that maybe Middle East is probably the strongest I guess question is that accurate? But I'm also interested in understand we're offshore fits, because I think that's going to be one of your higher-margin regions out there, so sorry a bunch of things to that question if you wouldn't mind.

Thanks..

Yeah. No. Thank you, David. Look, first and foremost, I'll say, our production chemicals team is doing an extraordinary job, given the circumstances around raw material inflation and supply disruptions. You know very well right from the beginning of the year that has been a series of events that have created significant challenges for the team.

And we are very much so proud that we have maintained the supply assurance store customers, throughout this period and that's been an extraordinary effort by the team. The other aspect I would say, Dave is the margin expansion delivery from Q2 to Q3, on our production Technical Technologies business is extraordinary.

When I say compared to the kind of inflationary pressures in this area. And I'm just so proud of the team, that how well they have executed on price increases. We have executed on our productivity.

But I can also tell you, today, it's not that we are covering all of that inflation yet, right? So in spite of all that we have delivered margin expansion in that business. So given that backdrop, so as you walk forward, right, there are three elements that's going to drive further margin expansion in our PCT business.

So first and foremost is our continued price realization. So if volume doesn't increase at all. If the volume remains the same you should expect margin expansion in this business. Now let me phrased that by saying, today we have accounted for everything we know with respect to inflation in this business.

If you look at our fourth quarter guidance that incorporates everything we know today about, the inflationary pressures. But if there are new issues that come up we will deal with it. But just if the volume remains the same, you should expect this business to continue to deliver, because the price realization is going to continue to increase.

You might have head that we in October we put through October 1st, an additional level of price increases. Second, we do believe, that there will be continued volume increases. Now I want to say Q4 to Q1, you will typically see a seasonal volume drop, right? So you will see that.

But when you look at the year-over-year, you will see continued volume increases.

And we expect the international markets to grow faster in our PCT business than the US land market, but Gulf of Mexico can also grow right? So if you look at even in Q3, the international markets for our PCT business, our international revenues grew much higher than the US revenue.

US revenue grew as well, right? But the international revenue grew faster in Q3 to Q2. So we are very confident that if the economic conditions continue to stay and the commodity prices continue to be where they are, you will see a nice growth in PCT business. Clearly international business will grow faster than that the domestic business.

And then the third element is we are -- as we mentioned we are continuing to work on our synergy delivery, our supply chain optimization, network optimization. So these are again factors well within our control.

And that type of execution is what delivered the margin expansion today for ChampionX and that all the inflationary pressure, right? So I think there is more to come. Our teams are working on it. So these three elements continued price realization, continued volume growth and on top of it, the continued productivity efforts.

So that's what we are pretty excited about. I mean, we are delivering margin expansion under some extraordinary conditions today. And that eases -- you're going to see the margin -- the coming years the margin is going to expand to that..

Very good to hear Soma. Switching gears over to your Drilling Tech business. It’s literally the tip of the spear when it comes to global drilling activity.

Is there a particular region that's seeing the greatest demand right now? And should we expect this restocking of drill bit inserts to last well into next year? And maybe just separately if you could just discuss some of the IP in this business.

There seems to be some concerns out there about patents expiring, but I believe that's primarily on the leaching process, which shouldn't impact you, so if you wouldn't mind answering those two questions? Thank you..

Yeah. Let me start with the drilling activity here. As you have seen Dave that this business directly is driven by the rig count increases. So you've seen sequentially from Q2 to Q3, the US rig count went up 10%.

Seasonally, obviously, Canadian recount went and significantly higher -- so North America sequentially went up on an average rig count perspective Q2 to Q3 went up about 24%. But the international piece is also continuously growing. We have thought international rig count on an average went up about 5% Q2 to Q3.

So I think that that is -- I feel next year there is going to be a robust drilling activity. Clearly there have been some reductions in dug well. So there is clearly more drilling is going to be needed to maintain production particularly in the US land.

So I feel that the US land as well as the international activity will continue to grow in drilling next year. And this business as you know Dave, it does really well. And as rig counts continue to grow, the -- our customers continue to be prepared to keep stocking levels appropriate.

So that's why we say in a growing rig count environment, if we should expect this business to outperform the rig count growth. And you saw that in Q2 to Q3. So we feel good about the activity in business. With respect to the leasing license, I think it's an emerging situation.

As you know the leasing license is provided by one company to a lot of the drillbit manufacturers. So clearly, we are going to see the drillbit manufacturers considering the implications of the leasing license. We are watching the situation closely. We have excellent relationship with all of them, right? So we are watching the situation closely, Dave..

From Bank of America we have Chase Mulvehill. Please go ahead..

Yes, hey. Good morning, everybody. Soma, a quick question for you just kind of keeping on production chemicals. You navigated the supply chain and raw material cost inflation better than one of your larger peers.

So maybe if you could just take a moment and maybe explain to us why you think you outperformed your peers in Production Chemicals? And do you think it's just kind of more mix your North America focused, or are you more offshore-focused? Do you have a broader chemicals manufacturing footprint execution? Like what is it that led you to materially outperform your larger peer during the quarter?.

Yes. Chase, again, I can only talk to specific to what we do, right? So, one of the things that we always focus on is to, say, look, the market is the same for everybody, right? So what we have to focus on is focus on what we can control and make sure that we are delivering a differentiated performance to the market.

So that's kind of foundational focus we have within the organization. That keeps the organization really focused on things we can control and execute on things we can control. And that's what you are seeing the benefits of that.

The second is a very focused approach to these things, right? So we have like from the beginning when this thing started we have a great team, as I mentioned. They've been focused on -- we have daily.

We have wardrooms and daily -- because things are changing quite a bit, because this is a global supply chain, right? So you have to be on top of it daily.

And we always believe that uncertainty increases, the frequency of reviews and frequency of actions have been increased with it, right? So there is a quite a bit of review that happens right from my level, tense level on a weekly, bi-weekly reviews on what the supply chain issues or however pricing realization is happening and where we are getting availability.

And so, I would say, it's all about -- clearly we have a very global footprint, right? And -- but I would say it has got a lot to do with how we operate within the company and the focus we have on these issues and the great team we have..

Well, job well done. Obviously, you put up some pretty solid numbers considering the environment in 3Q. So, I guess a follow-up, I guess a two-part question on returning capital to shareholders. Number one, in the presentation, you mentioned, a 1.2 times leverage ratio.

And I guess, I'm getting one times just using your EBITDA that you put in the press release over the past four quarters. So number one, I guess maybe help us understand the difference between the 1.2 and 1.

If you want to we can take it off-line, but I'm getting the difference there? And then number two, how should we think about the timing and the magnitude and how you will actually start returning cash to shareholders?.

Okay. Thanks for the question Chase. Let me ask Byron or Ken to first clarify the first one about the leverage ratio difference. And then, I come back to the comment on mechanism of return..

Hey, Chase. This is Byron. Just keep in mind that the denominator is the trailing four quarter EBITDA. So, I think that's -- that will get you to the difference..

Does that helpful, Chase?.

Yes. Thanks..

Okay. So look, as we have said, our philosophy hasn't changed, as I mentioned. We remain committed to looking at our options what is the best option to return to their shareholders. So you should see us clearly look at that and review that and as we achieve this one times leverage. So, more to come on that Chase..

And from Stifel we have Stephen Gengaro. Please go ahead..

Thanks. Good morning, everybody. Just a question. When we think about the revenue synergies from the merger and sort of how they unfold.

Can you maybe talk a little bit more about the opportunities there? And how you think that maybe impacts your growth relative to the overall market over the next year or two?.

Yes Steve, great. Look I think as you have seen, as part of the contribution of our top line growth momentum is also the revenue synergies. So we kind of included some elements of that in our slide deck on Slide 10, as we talk about revenue synergies.

So we expect the outperformance to the market what we expect in the coming quarters and coming years is going to be partly due to the contribution of these revenue synergies. So as we have talked before it comes in three distinct buckets. One is the cross-sell opportunities in the US market.

Second is leveraging our international footprint and relationships of our chemical technologies business to further enhance our market penetration for our artificial list and digital products. And then the third is new offerings combining our artificial lift, digital and production chemical business.

So we are pursuing all three fronts and we are seeing benefits in all three fronts. So I think you should expect that to be a continuing focus for us in the coming quarters..

Great. Thank you. And then just back to the production chemicals for a second. Do you – and I know you talked a little bit about this but when you look out at the drivers of what's driven sort of your raw material cost rising and some of the issues there that you've navigated so well.

How – do you have good visibility or sort of internal intelligence on how those things start to normalize and sort of a time frame for normalization, or is it still too early to sort of see how that plays out over the next year?.

Yes, Steve, so our team internally we have a team that our supply chain team and our finance team, aggressively tracks these key raw materials and these are all index pays. I think we have said before, the key things we watch for our key inputs into our raw materials propylene, ethylene, methanol, Xylene, tloluene, HDPE.

So there are a series of hydrocarbon derivatives right which we use to track and there are index prices which you can track. What has been challenging this year is how quickly those indexes are changing. That's been there.

So even though we have forward visibility because all these indexes have forward visibility but the reliability of that forward visibility has been the challenge from month to month, sometimes it changes quickly, right? And that's got a lot to do with the supply chain disruptions we saw either the winter storm or the Hurricane Ida, hover shortage issues in China, there are a multitude of things that this year it's been.

So we have a very active management of this. So if you look at the visibility of these, definitely the indices show as we get to the middle of next year, these things should start easing. But again, that's what today the indices show. But again, this year those have been changing rapidly.

So I think we have taken a conservative assumption in our views on these because of that right? And that's why I said if you look at our Q4, guidance it includes everything, we know of today, right? But as we walk into next year we'll monitor it. It will monitor it. But -- but it's a pretty active process internally..

From Citigroup, we have Scott Gruber. Please go ahead. .

Yes. Good morning. So some of the emissions monitoring opportunity is super exciting. And so as the hockey stick chart on Slide 14. But curious, when the opportunity starts to impact your financials.

Is that something we could see in, 2022? And if so, what type of revenue run rate is possible as we exit 2022 from the business?.

Yes. I'll start absolutely. This is -- we are excited about this opportunity. It's the emerging pretty rapidly. And so with respect to, how it impacts the financials as we mentioned this is a fairly small business today but growing rapidly.

And you see that getting impacted on our digital because this is part of our digital portfolio because it includes our digital products. It includes our enterprise platform. So this is part of our digital portfolio. So it's already contributing, to the active growth in that area.

So I think I would expect as we get into 2022 and as the year progresses I expect this business to get more meaningful. .

Got you. Got you. And I think it's a fairly sound conclusion to assume that the fugitive initiative really globalizes. So what's your pathway to commercialize your efforts internationally when it comes to emission monitoring it? I assume there's a testing and acceptance phase and potentially like some of the other products.

Have you started discussions that we started pushing, for acceptance testing? How long until international revenues could be part of the mix, when it comes to emission monitoring?.

Yes. So Scott, if you look on the emissions monitoring we have talked about the periodic monitoring which is the airborne type periodic monitoring using plans and drones.

And then you have this continuous monitoring, which is the new product, we introduced and what you saw on our slide on the left-hand side of that slide what we call the SOOFIE the SOOFIE are the continuous monitoring that goes on a well site or a gas processing plant which are continuously monitoring for the leak.

So when it comes to the airborne monitoring with plans we already do quite a bit of those work internationally as well. In fact, we have people today in crane and doing the airborne-type monitoring. So that is a work that happens for us. There the growth would be a continuous growth on airborne monitoring.

So that I think we are well positioned to continue to benefit from it. The exciting opportunity is in the continuous monitoring. And so there clearly, we are starting to have conversations now with international customers. And the uptake has been pretty fast particularly in the US land customers.

Meaning, when if you have taken on to test it, making sure that works and pretty much what you see this graph is all mostly driven by US and some Canada. So the international we are already starting to have conversations with a couple of them particularly one in Middle East. And so they have expressed aspirations to start testing.

So I expect in the next three to four months we'll start testing in some of the -- at least one, if not two, international customers..

From Tudor Pickering and Holt, we have Taylor Zurcher..

Thanks Soma and Ken. Thanks for taking my question.

Most of my questions have been answered but I wanted to follow up on international growth opportunities in artificial lift and PAT in the press release you talked about some contract wins with operators in Latin America, the Middle East and Asia Package, and you also talked about some continued momentum for on the production oriented joint sell efforts in markets like Egypt, Angola and Romania.

So I mean, as we piece that all together, I just wanted to see, if we could get an update on how the – the targeted expansion into the seven countries for PAT is progressing thus far? And how you're thinking about international growth within PAT for 2022?.

Yeah. No, I think we are very optimistic about our PAT growth into 2022. Both the combination of constructive market dynamics, as well as the unique growth opportunities we have, because of the better together efforts. What you saw in the slides are some evidence of those seven countries, and how we are progressing on those.

As we mentioned before, the time line was a little bit impacted due to the COVID situation, as particularly in internationally different countries had different COVID protocols. And so that impacted a little bit of the time line.

But if you walk into 2022, we feel this will pick up pace as the global vaccination continues to improve and the access to visiting customers having those meetings improve. So I think we are seeing good signs of that here. So I feel like 2022, we are very optimistic for our PAT business internationally..

All right. Good to hear. And we've kind of beaten into the ground the supply chain dynamics within PAT, but I haven't talked as much about the similar dynamics going on in PAT, and there I think mostly about steel cost inflation.

But I was hoping you guys could give us just an update on what sort of raw materials cost inflation and logistics issues that you're dealing with today in PAT? And how we should think about margin progression Q4 and beyond in that segment as some of these issues hopefully normalize over the next few months?.

Sure. I think, clearly, the margin issue which is where we dipped below the 20% in PAT is completely due to the supply chain and logistics inflation, and a bit of availability, I would say, as well. So the main items as you pointed out are the steel cost is one, but there's also resume cost, because PAT uses a residence.

So when you think about the -- in the lift you get those guides that go on top of – around the sucker rod. So we use a lot of resin in that area. So steel cost resin costs and logistics costs, it's been well published the cost increases and particularly availability of containers for steel freight and how that cost is.

So I think what you're seeing – what you saw in third quarter was a bit the impact of that. But as Ken mentioned in his prepared remarks, as we look into Q4 and beyond I think the actions we have taken, we feel good that this segment will return to a 20% plus margin in the coming quarters.

And again, I want to reiterate that, we have accounted for everything we know. So everything we know today, I think this is the segment should return to a 20%-plus margin in Q4 and beyond..

From Piper Sandler, we have Ian Macpherson. Please go ahead..

Thanks. Good morning, Soma, Ken..

Good morning, Ian..

Soma, I was wondering, if you could update us on the leading-edge trends and US land lift, how the relative growth rates are looking across ESPs and gas and rod lift? And how you see those unfolding into this next up cycle, there's a different customer complexion than we've had prior cycles with more obviously private E&P weighting.

But there's also the gradual maturation of the shale basin, which we know ultimately points towards that secular long tail for rod.

It doesn't seem like that has really taken off yet, but maybe update us on your thoughts on the timing for that as well?.

Yes. I think, Ian the what we are seeing clearly is with all forms of artificial lift are starting to show growth, right? And in the early part we talked about the rod lift was showing the biggest growth in the early part of the recovery. So this time going back to Q3 and Q4 of last year.

Now as the completion started picking up we have seen ESPs starting to grow as well. But I would say that the list continues to show good growth is continuing to grow. And I would say that's partly driven by market, but partly also our teams have done a nice job of incrementally gaining share in the US land.

And so I would say as you look forward I think we are very constructive about US land artificial lift growth, I think our positioning in the key basis which we expect to grow are good.

I think the combined team of our production chemical team and our artificial lift team with our digital solution provides us a differentiated opportunity to continue to expand. And so I think we are very, very positive about the US land growth for our Artificial Lift business..

That's great. Thanks. Soma. I wanted to follow-up on some earlier questions. There's obviously a lot of anticipation for the industry and in particular for ChampionX on returning cash to shareholders.

But you've also begun to cultivate this nice emissions monitoring platform with seemingly boundless growth opportunity especially internationally where Scope one emissions is still hardly even addressed as a market opportunity compared to the U.S.

So are those two opportunities in competition for capital, or do you see an opportunity for the company to pursue a bigger emissions monitoring and decarbonization platform that's not necessarily so capital intensive for the company?.

Yes. So Ian like mentioned our capital allocation philosophy hasn't changed. We expect both to coexist.

So as we get to the 1 times leverage we are committed to make sure that we fully review our options for return of capital right? The emissions growth as you know this portfolio the CampX portfolio of businesses generate good cash, right? You've seen that and the demonstrated good cash generation.

And the emissions portfolio what we are building is very capital-light. So it's a digital intensive, it's analytical model intensive. The hardware if you look at our suite hardware we don't manufacture many of the hardwares internally we assemble them. But the sensors the boards the -- we don't manufacture internally.

So we as -- so we maintain very capital-light model. And that's part of our value creation framework is to make sure that we build a portfolio that's capitalized highly cash generative. So I do feel -- I feel our ability to advance our emissions decarbonization portfolio can happen along with our commitment to return of capital to shareholders.

Operator.

Understood. Thank you, Soma..

Thanks, Ian..

From Coker Palmer we have Vaibhav Vaishnav. Please go ahead..

Hi. Good morning and congratulations on a solid execution. Soma I think like we have tried to ask the question on inflation. So maybe if I try to do it other way you talked about like all the inflation that we know of has been already -- you have put in the pricing increases.

But if I think about the leading edge rate of change of those chemicals inflation how would you characterize that? Is that accelerating, stabilizing, declining just trying to think if you will need more pricing increases to be put through? \.

Yes.

I mean, so it -- what we saw this year was unpredictability of it, right? And that's largely because of upset conditions, right? When it asset conditions I'm talking about the hurricanes and the winter storms and things like that, right? So if you look forward and say that there are not going to be any of those upset conditions then I expect the rate of change to be fairly slowing down, right? Because if you look at the commodity prices, the natural gas price, the commodity price.

Now if there is a price shock our commodity then again you will see an increase in the input cost. But barring any upset conditions, I do think the rate of change will moderate and stabilize looking forward..

Okay. That's helpful. Now then if I think about PCT margins, we are talking year-over-year margins. EBITDA margin should be higher. So maybe I don't know 17 5 [ph] is a good number to think about.

But if I then think about where can we go from here on given all the inflation and everything, you're still able to get some pricing is maybe 100 bps to 200 bps year-over-year a good way of thinking about where the PCT margins could end by the end of 2022?.

I mean, I want to be careful not to give any guidance here for 2022, because that's not what we are doing. But as I mentioned, you should expect the margin to go up, right, because of all that. So, the year-over-year margin 2022 to 2021 should be significantly up.

Again, I want to remind what I mentioned at the beginning, the Q4 to Q1 you will see a volume decrease, right, because that's seasonal Q4 to Q1. So that volume will have some impact on the margin from Q4 to Q1. But what you will see is that Q1 2022 margin will be meaningfully higher than the Q1 2021 margin.

Just to see that continued margin progression, but sequentially Q4 to Q1 because of the volume usually we see a seasonal volume drop. So if that happens, you will see that margin progression slightly down. But -- so 2022 PCT margins should be meaningfully higher than PCT margin..

From Goldman Sachs, we have [Indiscernible]. Please go ahead..

Hey, Soma. Thanks for taking my question..

Sure..

As you think about the long-term Production Chemicals outlook.

Is there a way to quantify the degree of chemistry intensity that you talked about in the past that will add to the base production volume growth as you think about total demand for oil over time?.

Yes. There are multiple factors that goes into this area, and I think we have talked about this before. While the growth, because it's a consumable, while the base growth is dependent on the world is a function of volume growth.

But it's not a one-to-one, because as the volume grows, the customers operating budgets expand and their intention to spend more on production improvement goes up. So the other factors that really impact us is you've mentioned the intensity of production chemical and the type of production.

So if you think about it, most of the EC access oil are mostly done, right? So the next generation of oil, which is being produced whether it is deepwater in Guyana, whether it is the shales, whether there's enhanced oil recovery those things are all very highly chemistry intensive.

The third element, I would say is in an expanding volume growth environment, customers tend to upgrade their chemistry, because they want the best chemistry it to be used. So they will upgrade their chemistries. And then the last piece is the continued price improvement you get in a volume environment.

So sometimes there's a tendency to think that the production chemicals are going to grow just with the production volume. That is true on a base level, but there are three or four factors which come on top of it.

Now I haven't even mentioned our market share growth, right? So I think the Production Chemical -- now it's not going to grow like a drilling business in a growth environment. But it's not a low growth type of business either. So I just want to clarify that..

Got it. And then curious about the market share today you have in emissions control. I think you guys are the leader, but if there's a way to think about -- as you think about a 20% growth rate and given that some of your peers have started to talk about some emissions control monitoring offerings.

How do you think about the competitive landscape going forward?.

Yeah. I think the emissions competitive landscape is emerging, right because there's a lot of what I would call a start-up companies in this area and pursuing different technologies in some cases. Again, some are focused on airborne type emissions monitoring, some are focused on drones and then some are focused on continuous monitoring.

So clearly on the continuous monitoring, we have the market leadership based on everything we know today. And we measure that today by the number of units installed, particularly in the US and Canadian market for continuous monitoring. So as -- again, I want to point out that two keys we talk about on our slide deck is our continuous monitoring.

So I do think that the competitive landscape will evolve. The other aspect that's going to kind of also determined the competitive landscape on which technology goes faster than the others. There's also regulations, right? So depending on -- as you know the EPA has made methane emissions as their number one priority.

So the tighter the regulations, the more frequencies, you will probably see is fair to assume our base case assumption is continuous monitoring will grow faster because as you know the other type of monitoring is all episodic. So you will miss -- you can have one day an airborne monitoring and everything is fine.

And then the next day, you can have an episode where you have a problem, right? So we do believe the continuous monitoring will grow fastest. So we feel we have a good leadership position there. I'm very excited about the scientific aviation labs which we are launching.

I think this is going to be one of the key as we know an advanced emissions lab which we are establishing. And I'm excited that we will lead thought leadership, applied research and play a part in the decarbonization of the energy system..

And from [Indiscernible] we have Ameren Lockridge. Please go ahead..

Hey, good morning. Thanks for taking my questions guys..

Sure, Kevin [ph]..

So just one more try the PCT margin progression and what you're seeing in that segment. I see that pricing and volumes both are playing a roll in the revenue growth as well as keeping margins at a reasonable level.

Just wondering if you could separate those two out and rank order, what you're seeing there in terms of volume and pricing, what's happening a bigger impact? And how do you see that progressing as we move into 2022?.

Yeah. I mean, look I think clearly the pricing given that it completely drops to your earnings.

In the early stages of the progression, the pricing clearly is going to have a bigger impact, which is why I said in the beginning, even if our volume doesn't grow, you should see the margin continues to progress for our PCT business, if volume stays flat, you should still see margin progression enough.

So I would say in the early stages, early quarters, I think it's going to be still -- pricing is going to be an important element. And then after that it's going to be more driven by volume and our productivity..

Got it. That's helpful. Thank you, Soma..

Sure..

And then just switching to RCT asset sale this quarter that definitely provided a nice cash infusion help reduce your debt levels.

Just curious, if you could provide any other commentary around additional potential sales in the business that can get you closer to your leverage target and then ultimately close to some sort of dividend or buyback?.

Yeah. No, I think -- look I think you should expect us to continue to generate good cash and focus on paying down the debt and getting to that target leverage we talked about. Right now with our RCT business what we are very focused on is to make sure we continue to improve the profitability and margin in the business.

So that's what we are currently focused on..

At this time, we have no further questions..

Well, thank you again for your continued interest and we look forward to talking to you in the next quarter call. Thank you..

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