Welcome to the ChampionX Fourth Quarter and Full Year 2021 Earnings Call. My name is Annette and I will be your operator for today's call. 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. 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 fourth quarter 2021 results and first quarter 2022 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 fourth 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 fourth quarter 2021 earnings call. Thanks for joining us today.

Before turning to our business results, let me first express my sincere gratitude to all of our employees for their focus and dedication in serving our customers and communities during 2021, which marked our first full calendar year as ChampionX.

Against the backdrop of the ongoing global pandemic, the health and safety of our employees remains our most important priority. Our teams have worked tirelessly to help our customers sustainably unlock the energy that our global economy needs and deliver a strong year for ChampionX. With that, let me turn to our fourth quarter performance.

Amid COVID-19 driven productivity challenges and continued raw material inflation, product availability and logistics headwinds, we delivered solid results, driven by a healthy margin improvement in our chemical technologies businesses.

Our execution on pricing and productivity initiatives helped us achieve 110 basis points sequential EBITDA margin expansion exiting the year at 80 basis points higher than last year. We also delivered another quarter of strong free cash flow generation.

We made further progress in our cost synergies and we are well positioned to deliver the full targeted cost synergies of $125 million within 24 months of the merger closing. In addition, our revenue synergy efforts are paying off.

We achieved 30 million of new customer wins in 2021 due to revenue synergy efforts, and we expect this to grow in the coming years.

From the time of legacy Apergy spin-off from Dover Corporation nearly four years ago through the completion of the transformational merger between Apergy and ChampionX in June of 2020 to the fourth quarter of this year, we have been steadfast in our consistent and disciplined approach to capital allocation, which enabled us to reach our target leverage ratio of 1 times net debt to EBITDA during the fourth quarter.

We are pleased to now deliver on our commitment to begin returning capital to shareholders by initiating a regular quarterly dividend, which we believe is sustainable through the cycle and which also maintains our flexibility to invest in attractive organic and the M&A opportunities as well as further pay down debt.

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 engage in the product communities in which we live and work, ChampionX recently partnered with ALLY Energy to sponsor a two-day energy transition event in Houston at Greentown Labs, which is North America's largest climate tech incubator.

This brought together the energy workforce, entrepreneurs, policymakers and leaders to celebrate the diverse perspectives that will help pave the way for the energy transition.

Later in my comments, I will update you on our progress toward our five long-term strategic priority, but first on slide 5, let me give you a quick example of how we are thoughtfully allocating capital to evolve our business portfolio for sustained growth in the energy transition.

We are fully committed to helping our customers decarbonize oil and gas operations through impactful technology solutions, while also enabling customers to maximize the value of their producing assets. Our recent acquisition of Tomson Technologies adds to our suite of technologies that help our customers reduce their carbon footprint.

Tomson’s innovative nano substrate technology solution significantly increases the efficiency of scale treatment, resulting in approximately 3 times more effective life versus traditional scale treatment.

This results a meaningful annual cost savings for our customers as fewer treatments are needed and thus reducing cost and carbon footprint related to transportation, rig up and down time and tanks and pumps rentals. Ken will take you through our fourth quarter financial results shortly. So let me just share a few high level comment.

As the cyclical recovery in demand for energy services and equipment gained momentum last year, our business portfolio delivered industry leading top line growth in 2021. This illustrates that attractive organic growth opportunities within our global business.

While our overall revenue was relatively flat sequentially in the fourth quarter, we delivered 5% growth in North America, offset by supply chain bottlenecks, which constrained international sales during the period, particularly in our chemical technologies business.

In the fourth quarter, our teams executed well on pricing and productivity initiatives to deliver a solid margin improvement. Our digital business grew 6% sequentially in fourth quarter. We expect the pipeline of our new product launches and our digital business to drive further healthy growth in the coming quarters.

In drilling technologies, customers continue to adopt our new technologies, resulting in approximately 80% of drilling technologies revenues coming from products that were less than three years old for the third consecutive quarter.

Our teams continued to work diligently to deliver price increase realizations to offset the impact of raw material, labor and logistics-related inflation that we have experienced in our portfolio businesses. We expect this efforts to drive our continued margin expansion in 2022.

As the energy industry upcycle further gains momentum in 2022 and beyond, ChampionX is well-positioned to continue delivering strong earnings, margin and free cash flow growth. We remain focused on delivering profitable growth, prioritizing quality of growth over chess volume.

While we expect raw material availability and global supply chain bottlenecks to constrain growth somewhat in the first half of 2022, we are confident that we will deliver positive topline and bottom line growth with meaningful margin expansion for the full year.

We expect Q1 to be the low point in our margin performance and we expect progressive improvement through the year existing 2022 at the EBITDA margin rate of 18%. I would now like to turn the call over to Ken to discuss our fourth quarter results and our first quarter outlook..

Thank you so much. Good morning, and thank you for joining us. Today I will be commenting on adjusted EBITDA for sequential comparisons. We believe this metric best reflects the business performance of continuing operations. As seen on slide 7 metric best reflects the business performance of continuing operations.

As seen on slide 7, fourth quarter 2021 revenue was $822 million, up $3 million sequentially. Geographically, we experience solid sequential revenue growth in North America of 5%, offset by a 6% decline internationally, where sales were constrained by a material availability and supply chain and logistics challenges.

Included in our quarterly revenues were $34 million of cross sales to Ecolab. As previously communicated, cross supply sales to Ecolab are associated with post-merger related supply agreements. We do not recognize EBITDA margin on these sales.

And within our financial statements, the revenue associated with these sales to Ecolab is allocated to corporate and other. We expect these Ecolab sales to continue at a declining rate through mid-2023, the third anniversary of the merger closing date.

Net income for the quarter was $43 million in fourth quarter versus $57 million in the third quarter of the year. Third quarter included a gain on the sale of our Corsicana, Texas, chemical facility.

Absent to this portfolio-related gain, net income increased sequentially, driven primarily by realization of selling price increases in our chemicals and PAT segments. As seen on slide 8, ChampionX continued our strong delivery with consolidated adjusted EBITDA in the fourth quarter of $133 million at 8% sequential increase.

This increase was primarily driven by the impact of selling price increases and favorable mix, which help offset raw material cost inflation and the aforementioned product availability and logistics headwinds.

In the quarter, we delivered consolidated adjusted EBITDA margin of 16.2%, up 110 basis points sequentially and up 80 basis points above our 2020 exit rate. This margin outcome was consistent with our 2021 guidance.

In the quarter, we generated cash flow from operating activities of $88 million and delivered $71 million of free cash flow, representing a 53% of 4Q’s adjusted EBITDA. For the full year, we delivered $244 million of free cash flow, also 53% of full year adjusted EBITDA.

Both the quarter and the full year were within the 50% to 60% free cash flow to EBITDA guidance range. During the fourth quarter, we also reached our target net debt to the trailing 12-month EBITDA ratio of 1 times, a very significant post-merger milestone. And in the fourth quarter, we invested $17 million in capital expenditures.

Moving forward in 2022, we expect to fund capital investment in the annualized range of 3.5% of revenues. Turning to our business segments. Production Chemical Technologies generated fourth quarter revenue of $495 million, up 2% from the third quarter.

The sequential increase was driven by strong growth in the North American volumes partially offset by supply chain bottlenecks, which constrained sales in our international business during the period. Geographically, North America revenue increased 9%, while international revenue declined 6% sequentially.

Segment adjusted EBITDA was $82 million up 16% sequentially. Profitability improved on primarily higher customer pricing, despite the experience of continued raw material inflation. Segment adjusted EBITDA margin was 16.6%, a very strong 200 basis point increase over the third quarter.

As we passed the normal seasonality in 1Q and as more of the impact of our pricing actions are realized, we will experience healthy sequential margin rate improvement throughout 2022. In Production & Automation technologies, 4Q segment revenue was $203 million, declining 1% sequentially due to the normal seasonality related to year-end holidays.

Digital revenues increased 6% sequentially in the quarter and 17% annually year-over-year. We continue to expect strong double-digit revenue growth in 2022 from increased adoption of our modular fit-for-purpose approach as customers place an ever increasing focus on leveraging digital technologies to improve cost structures and drive efficiencies.

PAT fourth quarter segment adjusted EBITDA was $39 million, down 2% sequentially. The EBITDA margin was 19.4%, down 17 basis points versus the third quarter, primarily on raw material and logistics cost inflation pressures experienced during the period.

We expect to return to a 20-plus percent margin profile in this business, as we realize the full impact of customer price increases and volumes grow during the first half of 2022.

Drilling Technology segment revenue was $50 million in the fourth quarter, up 1% sequentially as we experience demand growth in North America offset by the sequential decline in international volumes.

Drilling Technologies delivered segment adjusted EBITDA of $13 million during the fourth quarter, down to $4 million sequentially driven primarily by product mix and a temporary increase in cost to serve customers as a result of COVID related labor challenges. We expect drilling technologies to see margin improvement in the first quarter.

Reservoir Chemical Technologies revenue for the fourth quarter was $40 million, a 4% increase sequentially driven by higher international and US well completion activity.

Segment adjusted EBITDA in the fourth quarter was $3 million, a $2 million sequential improvement, which was primarily driven by higher volumes and our continued improvement initiatives. Turning to slide 9 of the presentation, we continue to make excellent progress on maximizing merger synergies.

Our strong synergy focus is enabling us to continue capturing integration benefits as well as operational and functional cost improvements and revenue synergies. We fully expect to achieve our targeted $125 million of annualized cost synergies within 24 months of the merger closing date. We exited fourth quarter at a $121 million annual run rate.

On revenue synergies, we are seeing strong momentum in our production oriented joint sales efforts both in the US and internationally. We will continue to update on progress on this front. Slide 10 details our balance sheet and financial position.

We ended 2021 with $252 million of cash on hand and approximately $611 million of total liquidity, which includes our available revolver capacity. We repaid $47 million of debt during the fourth quarter and since the merger date and paid down $373 million of debt obligations, approximately one third of the then outstanding total.

At December 31, our net debt, the trailing 12-month pro forma adjusted EBITDA, reached our target ratio of 1 time. This compared to our net leverage of 1.2 times at September 30 and 1.8 times at year-end 2020.

Turning to slide 11 and shareholder returns, our disciplined approach to capital allocation, consistently deploying free cash flow to repay debt since the merger has now positioned the company to initiate a capital return to shareholders via a quarterly cash dividend.

We are delivering on our previous message commitment to begin shareholder returns as we reached our target net leverage ratio. We are initiating a regular quarterly dividend of $0.75 per share of common stock. This equates to approximately $62 million per year based on the current share count.

We view this dividend level as sustainable through the cycle and competitive for companies in the energy, equipment and service sector.

With this dividend level, we will maintain the capital capacity to continue to reduce our leverage while reinvesting in technologies to support our high margin organic growth initiatives and to pursue attractive M&A growth opportunities as the energy industry continues its transition.

Additionally, we remain laser focused on our operating and free cash flow delivery, working capital management and maintaining our strong liquidity and financial position. Turning to Slide 12 and our forward outlook, we expect 2022 to be a year of solid revenue growth and sequentially improving margin rate.

We expect the company to exit the year in the 18% margin range, up approximately 180 basis points on the 2021 exit rate. Specific to first quarter, we expect revenue, including Ecolab growth sales in the range of $815 million to $845 million. At the midpoint, this revenue is up 21% year-over-year.

The one quarter sequential change in revenue is primarily driven by traditional seasonal declines in our chemical volumes, offset by a catch up of revenue delayed from 4Q as a result of supply chain challenges. In North America, we expect continued positive activity momentum in our drilling-oriented and in order our automation businesses.

As stated, where selling price is catching up with raw materials inflation, coupled with our synergy initiatives and ongoing cost and productivity actions, we expect our adjusted EBITDA margin to improve healthily throughout the year. For the first quarter, we expect EBITDA in the range of $122 million to $130 million.

At the midpoint, this is approximately a 35% year-over-year growth. In the quarter, we expect TCT will exhibit their historic revenue and margin trend, partially offset by continued improvement in selling prices. Please note that in this slide appendix slide 16, we have provided the historical one quarter revenue seasonality trend for BCD.

We expect PAT will resume sequential revenue growth on strong US activity and realize improved pricing and continued productivity improvement. We have also provided some additional specifics related to our first quarter on the guidance slide.

We remain pleased with our strong cash flow performance and consistent with prior years, we are confident that we will generate a free cash flow, the EBITDA conversion ratio in the 50% to 60% range for the full year of 2022.

First quarter will be that free cash flow low point for the year below the annual range, driven by compensation and employer contribution outflows and the expected continuing working capital pressures we have seen from materials and logistics bottlenecks. Thank you. And 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 summarizes the five long-term strategic priorities that I first shared with you in the fall of 2020, soon after our transformational merger was completed.

At the time, our commitment was to periodically update you, our stakeholders, on the progress we are making on the priorities which we have done on several earnings calls this year. Today, let me highlight the progress we have made on realized Better Together potential and evolve portfolio for sustained growth.

On Better Together potential, we are now 20 months into our merger, and the cultural alignment, which was evident from day one, is even stronger today. Our pipeline of production oriented joint sell opportunities has continued to expand both here in the US and abroad.

Despite waves of COVID variants having limited the extent to which our teams have been able to engage in person with each other and with customers, our teams have delivered 30 million of new customer wins in 2021 driven by revenue synergy efforts.

We are excited about the growing pipeline of opportunities and we expect revenue synergies to continue to grow in the coming years. On cost synergy, we committed that we would remain laser focused on delivering the full $125 million of annualized cost synergies within two years of merger close.

We exited 2020 at an – at an $82 million run rate, and we exited 2021 at a run rate of $121 million. It is in part because of this realized cost synergies that we were able to expand our EBITDA margin during 2021, despite raw material, labor and logistics inflation headwinds, which persisted throughout the year.

On evolving the portfolio for sustained growth, you have seen over acquisition of innovative and disruptive energy transition companies, Scientific Aviation, Tomson Technologies and Group 2 Technologies and our investment in QLM Technology and things [ph].

But what is not visible to you is the progress that our chemical technologies, production and automation technologies, and drilling technologies teams are making in launching new product offerings, which will reap energy transition benefits in coming years.

Our teams are continuing to innovate in the areas of environmentally friendly chemical solutions, energy efficient artificial lift systems, digital solutions that enable customer’s assets to operate more efficiently, diamond cutters that improve the productivity of drilling and technology that detect and help reduce emissions, all with a primary focus of helping our customers to reduce their carbon footprint.

Regarding capital allocation, we will maintain our discipline. We will continue to use our value creation framework to guide how we allocate capital to both organic and inorganic opportunity. And we will use our strong full cycle free cash flow generating ability to sustain our dividend and further pay down debt over time.

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 in 2022 and in the years to come.

Again, I want to thank all of our ChampionX employees around the world for your remarkable dedication to our purpose of improving lives of our customers, our employees, our shareholders and our communities. I could not be more 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] So our first question comes from Scott Gruber. Go ahead, please..

Thanks for taking my question. In thinking about the 18% exit target for EBITDA, can you just provide some color and where you think the segments went in the composition of the 18%? It sounds like to start the year Drilling Tech will bounce back in emerging Production Chemicals steps down a bit.

And just some color on the margins, across the business segments to get to that 18%?.

Yeah, sure, Scott. So first and foremost, Scott, we expect, all of our segments to deliver and fully participate in the margin expansion. The 2022, we expect it to be a year of solid growth.

But I also want to emphasize that our focus is as I mentioned in my prepared remarks will be on the quality of growth, just more than just volume because we believe that, protecting margins in the inflationary environment is really, really important.

So we will continue to prioritize margin expansion because there are things we can control in executing on that margin expansion, which are within our control as well.

So, so when you look at the growth aspects in 2022, we expect clearly Drilling Technologies to drive significant higher revenue growth as a percentage, given the expected spending in drilling side.

And that so clearly Drilling Technologies given our incremental will lead so clearly Drilling Technologies given our incremental lead in terms of margin expansion percentages. I would say our Production Chemical Technologies, you know, in a normal recovery cycle, it tends to grow closer to high single digits.

And so – but the incrementals on our production chemical technologies, we expected to be higher than usual, primarily driven by the pricing improvements which we will see. So you should expect our Production Chemical Technologies to contribute to nice margin expansion in the 2022.

Followed by Production & Automation Technologies, you know we expect that business given our revenue synergies, the international markets should grow nicely and being it is being a short cycle business, we should also see good growth in our US market. So we expect a normal incremental, which tends to be in the high-20s for artificial lift business.

So that's how we think about our margin expansion and how each of the segments will participate in it..

I appreciate all that color. And can you just provide us an update in terms of where chemical pricing sits today relative to the inflation that you've seen, obviously, there's a lag. So you know, will 1Q pricing, you know, fully reflect all the inflation you saw last year, and then there's probably the, you know, some more inflation to start the year.

Is there another round of price increases coming to offset the inflation year-to-date and when will those be reflected in the segment financials?.

Yeah. Scott, first of all, you know let me take this opportunity to thank our Chemical Technologies team in terms of, you know they are laser focused on executing on this pricing and that, and that clearly shows us a differentiated performance, you know, in the industry.

And you know, the chemical inflationary pressures and raw material availability, the well-publicized topics especially, you know, when you see the other chemicals companies and the specialty chemical companies outside of oil and gas also are struggling with that. So I'm very grateful how focused our team is in executing on this.

We will – from the price increases we have already executed, including the ones which we have put forth in Q4. We will see that, you know, by the time we exit Q1, barring any new additional inflationary pressures, you should see are starting to cover our raw material price increases.

So I expect as we get into Q2 that you will start seeing that getting reflected, so the margin progression, as we have said in the prepared remarks that our PCT margin progression should, should, should reflect very much as the ChampionX margin progression, where Q1 will be the low point and then starting in Q2, Q3, Q4, you will see the margin progression continuing to increase..

And our next question is from Chase Mulvehill of Bank of America. Go ahead, please..

I guess, if we can kind of hit on the dividend, really nice to see the dividend initiated here. I guess you're going to have a lot of excess free cash. You've kind of hit your leverage ratios that – that you've been targeting.

You mentioned about paying down more debt over time, but with the excess free cash flow that you have this year, how should we think about how you're going to allocate that between debt pay down, M&A and – and maybe even some buybacks?.

Yeah. Chase, we are pleased that we are able to follow through on our commitment to institute the dividend. We feel the dividend level we have provided, A, is competitive within the oilfield equipment and services market and B, it's – we’re confident we can sustain that level of dividend through the cycle.

Above that dividend, we really see some attractive growth opportunities both organically and in the M&A side, which we will continue to want to keep the firepower to deploy capital to. And we will continue to further paydown debt as part of our continued capital allocation.

With respect to the share repurchase, our own research has shown that particularly in the oilfield services sector, our own research shows that it's not being value enhancing at this point..

Okay. I appreciate the color there.

And I guess the follow-up and – and you talked a lot about in the prepared remarks and – but PCT outlook – and I'm going to kind of ask in – and I don’t know if you can frame how you think certain revenue scenarios would play out this year for PCT? I mean, obviously, we've got OPEC coming back and international doing better.

But do you think it's possible for PCT revenues to be up in the low teens this year? And then, I heard mention of the 20% PCT margin target again, but I don't know if I heard that it would be – that you could hit that this year or that was just kind of a longer term target? So if you could just kind of comment on those two things?.

Yeah Chase, let me start by saying, the margin – we are very focused on that margin expansion in the PCT. We will not be hitting that 20% EBITDA margin in PCT this year in terms of exit margins. That's not in our plan today.

In terms of a growth scenario, we have done a lot of work looking at the history and the revenue growth projections and the historically PCT in normal recovery cycles have shown closer to high-single digits type of revenue growth. So that's what we are expecting for this year high-single digits type up our revenue growth.

And the other thing I also want to mention Chase, is that, we are prioritizing quality of growth over just volume because for us that margin expansion is important. And we do believe that the high pricing realization is important. So we are prioritizing, quality of growth over, over just volume.

So with all that, we feel that, the normal recovery target of high – and closer to high-single digit is more appropriate for the PCT business..

Okay. Got it. Appreciate the color there. I'll turn it back over. Thanks Soma..

Okay. And the next question comes from Taylor Zurcher with Tudor, Pickering and Holt. Go ahead, please..

Hey, Soma and Ken, thanks for taking my question. My first one, I already asked and answered on capital allocation, but I just wanted to dig a little bit deeper on M&A. You've done a number of I sort of tuck-in bolt-on type deals recently and at least one recently in the traditional oil and gas space with the ESG angle.

So as we think about potential M&A opportunities moving forward that you might be looking at or might look at moving forward, just curious how we should, how we should be thinking about them from a sort of energy transition type, type focus versus the legacy oil and gas focus, and also from a just a, just a relative size focused over the last few deals you've done, all largely been pretty small, but you do have quite a bit of capital allocation flexibility.

So just curious, if we might see some, some chunk of your deals come over the near-term horizon? Thank you..

Sure. Taylor. So let me start with the first one in terms of the type of opportunities, we have, as we have said before, there are three distinct areas we are looking at as part of our ability to sustain growth through the energy transition over the longer time – longer period. It starts with the emission management.

So you've seen that we have starting to make deals in the emissions management side. And this tends to be generally smaller deals, because there is not large scale emissions companies today, because it's a very nascent environment and that a lot of startup companies in this area.

So we are continuously evaluating and looking at making those acquisitions. So these tends to be smaller ones. We are also continue to want to expand our digital offerings. So you should see us continue to look at enhancing our digital offering both to help the customers in the oil and gas industry.

But we are also looking at opportunities in the adjacent industrial markets, where similar type of assets exist such as engines and compressors and reciprocating and rotating assets, where our digital technologies can be used. So we will look at some opportunities there as well.

And then the third element is we have talked about industrial adjacencies. So that's an area we will look at – look at making deals. Now, in the oil and gas sector, clearly, we will evaluate those opportunities that are highly synergistic to us and provides higher value enhancements.

But as I mentioned before, there the – the bar is high for us, because we want to make sure that they are consistent with our value creation framework. But we will evaluate those opportunities in – with that lens. In terms of the size of the deals, I would say that, clearly, we’re pleased with where we are with achieving the 1 times net leverage.

But we also want to be conscious that we want to continue to pay down some more debt. But it does give us the – the flexibility if the right type of opportunity arises to do even a little chunkier deal than what we have done in the last couple of years..

Okay. Very helpful. Thanks for that. My follow-ups on – on revenue synergies. You had some – some nice momentum over the course of 2021, but – but largely weighted towards North America. So my question is as we get into 2022, we should have a more constructive international activity backdrop.

And I’m just hoping you could frame for us what you're – you're seeing in here and as it relates to potential revenue synergies on the international what you're seeing and hearing as it relates to potential revenue synergies on the international side getting into 2022..

Yeah, sure. First let me again take this opportunity to acknowledge our global sales team. I've been so proud of the way they’ve found ways to work together in executing these revenue synergies, you know, given that the COVID restrictions.

So I mean, if you look at 2021, what we delivered out of that $30 million of new wins we had, $24 million of it came from the US and $6 million of it came from outside of the US. And there are a couple of reasons for that for that mix.

One is the US, as you know, the US business tends to be more short cycle in nature, and the international businesses tend to be kind of driven long cycle in nature. So that's one reason. And the second reason is the restrictions related with COVID.

Clearly, you know, a bit higher vaccination rates in the US and more access to or as 2021 progressed to be able to do in-person meetings, the teams are able to get together as well as meet the customers. So that enabled our ability to execute, you know, on higher revenue opportunities in the US.

What gives me a lot of a lot of encouragement, given that, you know that the pace at which our teams could execute in the US, so it validates as we move into more international where our teams are able to meet more often out with each other as well as with the customers.

I think that, it gives us more encouragement and confidence on their ability to execute more on the revenue synergies internationally. And I think the pipeline and when I look at the pipeline, Taylor, I think it shows that in the coming years, this revenue synergy opportunities will continue to grow.

coming years, this revenue synergy opportunities will continue to grow..

Okay. And the next question comes from Ian Macpherson with Piper Sandler. Go ahead, please..

Thanks. Good morning, everyone..

Good morning, Ian..

Soma, can you speak to the demand elasticity with higher oil prices to the PAT business, especially here in lower 48, I think that's still the dominant part of that business, I don't know if you would care to kind of roughly size it, I think it used to be as much as 75% of PAT, I doubt that's still quite the case now, but given the, yeah, the melt up and not only, the front month of crude.

But the strip, it would, it would strike me that there's maybe not as much top line surge for PAT as we'll see in drilling technologies, but that could be an underappreciated area of top line growth this year.

So I wanted to get your maybe your booking expectations for the top line for that business this year, given higher, you know, the higher oil price deck?.

Yeah, Ian, first of all, you are, you are correct that you know, the PAT today, the big part of the business is in North America, it's in the 70% plus range in North America. You know, last year, if you look at 2021, this business grew close to 24%, right, so and it is a short cycle business.

So we know that this business will respond extremely well to that when the activity grows. Right. So the question is, you know, how much growth is going to be there in the activity.

So to answer your question, we feel comfortable that the this business will grow extremely nicely with, with activity and this team have demonstrated that ability to grow, as activity grows.

So whether what we are looking at that is 14% or 15% or 13% growth is conservative whether if the spending increases dramatically and activity increases, absolutely, this business can grow with that. But being short cycle nature of this business is that it's hard for us to really forecast a full year how this will play out.

So today we feel it's appropriate to kind of think about 2021 growth for this business like mid-teens..

Okay. All right. That's helpful. Thanks, helpful and seemingly with, with a conservative, conservative bent. My other questions were answered and I appreciate all the color today and I appreciate the dividend initiation. Thanks..

And next question is from Neil Mann [ph] with Goldman Sachs. Go ahead, please..

Good morning, and Soma, thanks for all the insights here today. I guess want to get back to the capital returns point, your balance sheet’s in very good shape, your leverage levels clearly on its way below 1 times EBITDA. You've initiated a dividend here and you're going to do some M&A, but it sounds like it's more tuck-in in nature.

So given where the balance sheet is, it sounds like you're going to still have cash left over.

And so I'm trying to figure out is what do you do with the excess cash? Is that incremental unit of excess cash beyond M&A going to be deployed to dividend growth? Or do you actually think that there's value in introducing a share repurchase program if the – the constructive environment sustains?.

Sure, Neil. I think, like I mentioned in – before that I think our own analysis in the oilfield services, it shows that share repurchases have not been value enhancing.

With respect to what we do with – what we do with the excess cash, I think as I've mentioned before, we would like to continue to further pay down debt, given the cyclical nature of the industry, which will further enhance our firepower more.

And I think – so that – I would say that further paying down debt is in the mix of our capital allocation priorities, because once we sustain our dividend and deploy capital on the M&A opportunities, on organic growth opportunities, then I think we’ll continue to pay down – pay down further pay down debt. That’s – that's what I would say, Neil..

Thanks, Soma. And the follow-up is just your latest thoughts on international markets.

Take us into the customer conversations that you're having with crude having listed, are you seeing some potential growth outside of the US? As we saw, 4Q was a little bit lighter than what we expected, but we were thinking there could be some catch up here in the path of 2022..

Yeah. Absolutely, Neil. I think we are – we are very positive about international growth in 2022.

Like we said in the prepared remarks that the near-term growth, particularly in our chemicals business in – in 2022 is – particularly in the first half of the year is more constrained by continued raw material availability issues and supply chain bottlenecks.

To give you a couple of quick examples of what type of things we see, right, so when you think about raw material availability, you know the primary raw materials before we talked about, like the propylene, ethylene, methanol, these type of things are starting to improve, but there are the next set of materials where, like, for example, the raw materials that are linked to phosphorus.

For example, yellow phosphorus is an important raw material, while it is not the highest in the spend, but it is an important raw material that goes into various formulations, including corrosion inhibitors and emulsifiers and so on and so forth.

But yellow phosphorus is also a compound that gets used in multiple other industries, including skin care products, surfactants, detergents.

So the global demand, you know, for these products have significantly gone up and the supply, significant supply source of this type of raw material is China, and there has been a lot of restrictions in China, whether it is the energy curtailments and so on and so forth.

So that's an example of raw material availability, a similar one will be mono ethanol, I mean, right, you know, this is again another material that gets used in multiple industries and the global demand, particularly in skin care products and so on and so forth.

So I think in the near-term, it's a constraint is not so much the demand as much as the availability of these raw material. In the logistics constraints and bottlenecks, what we are seeing is, the longer lead times that is taking for transportation, for example, in Q4, the Selling time between Singapore and Africa, for some of our material extended.

So we couldn't get to be, get to, get to some of our customers on time. Same thing, when you look at in areas like Algeria or Libya, where customers picked up – pick up the finished product from our facilities and they couldn't get there.

So the near-term supply chain bottlenecks and raw material availability is the more constraining part in the growth. But what we look, what – when we look at the demand part of it in the international side, it's growing really, really nicely and we expect a pretty strong growth in the international market.

We do see these raw material availability and supply chain to kind of ease in the first half. We are seeing signs of it. So we will see it will ease. So that's why, we feel, we will still result in a really solid growth in 2022. Hope that gives some color Neil..

A lot of good color. Thank you, Soma..

Okay. And next question comes from Mr. Vaishnav from Coker & Palmer. Please go ahead..

Maybe if I missed, I apologize.

But can you, can you speak about how should we think about EBITDA conversion to free cash flow for 2022, given the working capital consumption that could happen in 2022? Are we still thinking that 50% to 60% or can we be, can it be below that level?.

So Vaibhav, I'll make some opening comments and Ken can give you some more color. As Ken said in the prepared remarks, because of some of the things we talked about in terms of supply chain raw material availability you will see some working, definitely some working capital pressure in the past, you know, for top of the year.

And then – but we still feel that 50% to 60% for the year is a achievable number, so I'll turn it over to Ken..

Yeah.

No, I mentioned in my remarks that we were, you know, continuing to expect that our free cash flow conversion from EBITDA would be in that 50% to 60% range, typically 1Q’s a lower quarter, it's almost if you look back over the last three years or four years, 1Q’s usually been the low, the low point, there's some employee comp and employer contributions that fall into that quarter.

So you have that's a specific one. And then we are seeing the impact on in-transit inventory from some of the things Soma mentioned.

So as I said in my remarks, we won't be in that 50% to 60% range within the first quarter, but we feel confident for the year that we can achieve that, because that, you know, that's kind of, in a sense, the normal cadence of our business delivery.

And to your point, working capital will move, you know, that will be is as you grow the business, you have to invest some in that working capital. So we continue to be very focused on how do we optimize each element of that..

And maybe if you can talk about the free cash flow use, we have talked about already on the call, but maybe we've reached out one times net debt EBITDA target that we were aiming for.

We still have around called $750 million of debt, is there like a comfortable level of debt that you would like to target before we think about additional shareholder returns?.

As we mentioned, you know the as we mentioned, you know that that the dividend level we have looked at and we feel good about that, this can be sustained through the cycle and still gives us a lot of optionality to invest in attractive growth opportunities and further pay down debt. So I think we are going to stay on that path.

And then if there is a reason to reconsider it, I think that will be something the board will take up and reconsider at that point..

Okay. All right. Thanks for taking my questions..

Absolutely..

Okay. And at this time, there are no more questions..

Well, thanks for joining our Q4, 2021, you know, and full year earnings call. We appreciate your interest and we look forward to speaking to you again in our next earnings call. Thank you..

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