Welcome to the ChampionX Second Quarter 2022 Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session [Operator Instructions] As a reminder, the conference is being recorded.

I'll now turn the call over to Byron Pope. Sir, 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, we will share some of the company's highlights.

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

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

Therefore, I refer you to our latest 10-K 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 second quarter press release, which is available on our website. I will now turn the call over to Soma..

Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, employees and analysts to our second quarter 2022 earnings call. Thanks for joining us today. I'm pleased with ChampionX's second quarter results.

Our teams executed well, our performance was driven by robust top line growth across our business portfolio in both our international and North American markets, increasing price realization and we are well positioned to deliver strong adjusted EBITDA and adjusted EBITDA margin growth in the back half of the year.

As we have shared before, we see our culture as a source of sustainable competency advantage, which is why we always talk with our organizational purpose as shown on Slide number four.

We hold ourselves accountable for being tireless customer advocates, being committed to our employees, delivering technology that is impactful in helping solve customer problems and having a continuous improvement mindset.

Speaking of our purpose, I would be remiss if I did not recognize that June 3 marked the two-year anniversary of our transformational merger. We are proud of how remarkably well our organization has executed on behalf of all of our stakeholders over the last two years. We are truly better together.

Consistent with our purpose of improving life, as you can see on Slide number five, we celebrated our two-year anniversary by volunteering over 1,400 hours of service in communities around the world. It is humbling to see our team's commitment to our purpose put into action in such tangible ways.

Now, Ken will take you through our second quarter financial results shortly. So let me just share a few high level comments. Our business portfolio once again delivered superior top line growth in the second quarter.

Year-over-year, our North America and international revenue grew 27% and 20% effectively illustrating the attractive organic growth opportunities within our global businesses, as each of our businesses contributed to this strong performance.

In particular, in our first quarterly earnings call, we mentioned that we expected our production chemical technologies business to experience top line growth for the full year 2022 approaching mid-teens percentage.

Given the robust top line first half of 2022, we now expect our production chemical technologies business to deliver full year 2022 revenue growth in the high teens percentage. Revenues from digital products, which includes our emission management products increased 54% year-over-year and 14% sequentially in the second quarter.

We continue to remain excited about the long-term organic growth prospects in this business and investing appropriately to support it. Our teams are delivering price increase realization to offset the impact of raw materials, labor and logistics related cost inflation that we have experienced in our portfolio of businesses.

Last quarter, we shared with you that we expected our chemical selling price to catch up to and exceed raw materials inflation exiting the second quarter and our teams delivered on that objective. As such, we confidently expect to see healthy EBITDA margin improvement in the second half of this year.

We have previously shared with you our capital allocation priorities. During the second quarter, we demonstrated our commitment to returning capital to shareholders by returning over 60% of our free cash flow generated during the period to our investors via our regular cash dividend and by repurchasing 20 million of ChampionX stock.

We remain fully committed to creating value for our ChampionX shareholders and to increase capital return as our free cash flow grows in the second half of this year. Now I would like to turn the call over to Ken to discuss our second quarter results and our third quarter outlook..

Thank you, Soma. Good morning and thanks everyone for joining us. Today. I will be commenting on adjusted EBITDA for sequential and year-over-year comparisons. We believe this metric best reflects the business performance of continuing operations.

As seen on Slide 7, second quarter 2022 revenue was $933 million up $67 million or 8% sequentially and up 24% year-over-year, as we posted solid revenue growth in all of our operating segments. Geographically, North America revenue grew 6% and international revenue was up 11% sequentially.

Included in our quarterly revenues were $36 million of cross sales to Ecolab associated with post-merger supply agreements. We do not recognize EBITDA margin on these sales and the associated revenue is allocated to corporate and other in our financial statements.

We expect these Ecolab sales to continue at a declining rate through mid-2023, the third anniversary of our merger closing date. Second quarter GAAP net income for the company was $27 million or $0.13 per diluted share versus $37 million in the first quarter and $7 million in the second quarter of 2021.

Second quarter net income included a $23 million charge to reduce the carrying value of the chemical technologies Russia business to its estimated fair value as this business was classified as held for sale during the quarter.

As seen on Slide 8, ChampionX consolidated adjusted EBITDA in the second quarter was $138 million up 11% versus the previous quarter and an increase of 31% versus the prior year period.

Higher volumes and selling prices primarily drove this improvement in net income and adjusted EBITDA and more than offset the impact of raw material and other cost inflation. In the second quarter, we delivered consolidated adjusted EBITDA margin of 14.8% higher by 41 basis points sequentially and up 76 basis points over the second quarter of 2021.

Our second quarter free cash flow of $54 million reflects effective working capital management as we supported the strong top line growth of the business during the quarter. Cash from operating activities was $74 million and capital investment was $21 million net of proceeds from asset sales.

Turning to our business segments, Production Chemical Technologies generated second quarter revenue of $552 million up 7% from the first quarter and up 24% year-over-year. The sequential increase was led by solid international growth. Geographically North America revenue increased 4% while international revenues increased 11% sequentially.

Segment adjusted EBITDA was $78 million up 17% sequentially and 27% higher than the second quarter of last year. Volume growth and selling price increases drove the sequential and year-over-year improvement. Segment adjusted EBITDA margin was 14.2% up 118 basis points sequentially and 36 basis points up from the prior year's period.

We had strong revenue growth in the first half of this year, and we continued to realize the benefit of our pricing actions offset by somewhat higher raw material and logistics costs in the quarter.

Our price realization caught up to raw material inflation during the second quarter, and we still expect to deliver healthy sequential EBITDA margin rate improvement in the second half of 2022.

Given in sanctions imposed by the United States European Union and United Kingdom, we have initiated a plan to sell our operations in Russia, which has included in our Production Chemical Technology segment. This business was classified as held for sale at the end of the second quarter and written down to expected fair value.

Production and automation technology's second quarter segment revenue of $242 million increased 10% sequentially primarily due to activity increases, market share capture and increased pricing. Year-over-year, revenue was up 29%. Digital revenues increased 14% sequentially in the quarter and 54% year-over-year.

We are seeing continued customer focus on leveraging digital to reduce emissions and drive operational improvements and cost efficiencies. Our revenues are benefiting from these trend. PAT second quarter segment adjusted EBITDA was $49 million up 8% sequentially and 20% up year-over-year.

Segment adjusted EBITDA margin was 20% down 40 basis points versus the fourth quarter, primarily due to materials and freight cost inflation in the period.

Drilling Technology's segment revenue was $58 million in the second quarter up 2% sequentially and 54% year-over-year, as we experienced continued demand growth in North America and internationally as well as increased pricing.

Drilling technologies delivered segment adjusted EBITDA of $17 million during the second quarter, flat sequentially and up approximately two times on second quarter of last year. Segment margin was 29.5% in the quarter, a 93 basis points sequential decline, but roughly 700 basis points above the year-over-year comparable.

Revenue Chemical Technologies' revenue for the second quarter was $44 million, which is an increase of 11% sequentially and up 33% year-over-year. The segment experienced a small adjusted EBITDA loss driven by raw materials cost inflation.

As noted on Slide 9, during the quarter, after a strategic review, we decided to exit certain RCT product lines and the associated manufacturing capacity to improve the overall profitability of this business moving forward.

We incurred approximately $5 million in restructuring charges during the second quarter related to these efforts and expect further restructuring charges in the third quarter related to manufacturing capacity rationalization.

Moving to our financial position and balance sheet, as shown on Slide 10, we ended the second quarter in strong position with $167 million of cash on hand and approximately $740 million of total liquidity, including available revolver capacity, an increase of $200 million versus the prior quarter.

During the quarter, we successfully refinanced our existing credit facilities with a restated senior secured credit facility and we redeemed all of our outstanding senior notes. The restated agreement provides a $625 million term loan B and a $700 million five-year revolving credit facility.

The successful execution of the debt refinancing further simplified our balance sheet, extended our nearest debt maturity to 2027 and enhanced our strong liquidity position. At June 30, our leverage ratio was one times net debt to adjusted EBITDA. We remained committed to the return of surplus capital to our shareholders.

During the second quarter, we returned over 60% of our free cash flow to shareholders in the form of our $15 million regular quarterly cash dividend and with $20 million of share repurchases.

We remain laser focused on disciplined capital allocation, delivering our operating and free cash flow targets, strong working capital management and maintaining our strong liquidity and financial position.

Turning to Slide 11 in our forward outlook, we continue to expect 2022 to be a year of solid revenue growth and sequentially improving EBITDA margin rate. We continue to target the company to exit the year in the 18% margin range up approximately 100 basis points on the 2021 exit rate.

Specific to the third quarter, we expect revenue including Ecolab cross sales in the range of $925 million to $955 million. With chemical selling price increases now exceeding raw materials inflation, coupled with our ongoing cost and productivity actions, we expect our adjusted EBITDA margin to improve healthily in the second half of the year.

For the third quarter, we expect EBITDA in the range of $148 million to $156 million. In the quarter, we also expect sequential revenue improvement in our PCT, PAT and drilling technologies businesses.

We expect some revenue offsets, specifically the impacts of exiting certain product lines within our Reservoir Chemical Technologies business and the expected and previously communicated reduction in cross-supply sales to Ecolab. On this slide, we have also provided additional specifics related to our third quarter.

We continue to expect capital investments to remain in the range of 3% to 3.5% of revenue and while with periods of revenue growth, we will see working capital investment requirements, we remain confident in our 50% to 60% free cash flow to EBITDA conversion ratio target through the cycle.

And we still expect our 2022 free cash flow delivery to be weighted to the second half of the year. 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 13 of our deck, which summarizes our capital allocation framework, which we shared with you earlier this year.

As we mentioned last quarter, now that we have reached our target leverage ratio, our commitment was to begin to return capital to our shareholders while continuing to invest in high return organic growth investments and small bolt-on technology additions. During the second quarter, we utilized our free cash flow to deliver on that commitment.

We expect our free cash flow profile to further improve in the second half of this year and we intend to return a substantial portion of that free cash flow to our shareholders by continuing to execute on our previously announced share repurchase program. We remain committed to our disciplined capital allocation framework.

We are laser focused on delivering strong operational execution. As we shared on our first quarter call, we expected Q1 to be our EBITDA margin low point of the year, with our EBITDA margin progressively improving through the year.

In the second quarter, we saw our production chemical technologies business start to deliver margin expansion as our pricing realization caught up to the raw material inflation that we have been experiencing over the last year and a half.

We expect our Production Chemical Technologies and overall ChampionX EBITDA margin to accelerate in the second half of this year, exiting 2022 at an EBITDA margin rate of 18%. In addition, we have increasing confidence that ChampionX will achieve our intermediate term goal of an EBITDA margin of at least 20%.

Finally, we are excited about the constructive demand tailwind in our businesses. Our market leadership and scale in our key product lines combined with our broad exposure to global basins and customers, positions ChampionX particularly well for the favorable multi-year outlook for our sector.

As an example, there is an increasing evidence that global offshore oil and gas activity levels are improving. Offshore environments, particularly in deep water, tend to be more technically challenging and chemicals intensive and our market-leading Production Chemical Technologies business is especially well positioned in this arena.

In closing, I want to thank all of our 7,000 ChampionX employees around the world for their relentless dedication to our purpose of improving the lives of our customers, our employees, our shareholders and our communities. I draw inspiration daily from leading such a remarkable team. With that, I would like to open the call for questions..

[Operator instructions] And our first question online comes from Mr. Dave Anderson from Barclays. Please go ahead..

Good morning, Soma. So it looks like you're pretty well on track to hit your target production chemicals to recover margins and as you're saying, you're now the pricings start has taken over the -- on the raw material side.

I'd like to talk about what happens to this segment after that, in terms of kind of how the drivers of this business might change, particularly international activity points to ramp up.

I guess my question is, I guess you just said if not mistaken, I think you said 11% increase in international outpaced North America pretty well, but I'm just wondering if we should expect that really to continue all through next year, as we see Middle East volumes ramp up.

And you just mentioned that as what I was really interested about is the offshore coming back, which I think a lot of it's going to be pretty short cycle. So maybe just kind talk about how North America versus international, how you see that playing out a little bit further out..

Yeah, Dave, thank you. Let me first say that I'm fighting a little bit of a scratchy throat. So I apologize if my answers interwoven with a little bit of scratchy throat here.

So going back to the question about, beyond 2022, I think, as you have seen, I think our teams are particularly in Production Chemicals, our teams are executing well on the price increases. So we have seen as we saw in second quarter -- as we exited second quarter, we could see that what price increases are offsetting the raw material inflation.

So we feel good about the margin progression in the segment and overall for ChampionX. As you know, we have a very strong position in deep offshore and as we have shaped before, they tend to be more chemically intensive, technically challenging and we have a strong competitive motor around that area.

To give you an idea, close to about 40% of our revenues in our Production Chemical Technologies comes from deep water and offshore. So as that market, we are seeing increasing evidence that the market is recovering in that area and we have seen a nice growth in that in the second quarter.

So we feel good about in 2023 that our Production Chemical Technology should continue to benefit from that international as well as the deep water and offshore growth..

Are the margins, I'm presumably the margins are much higher in deep water as well..

That's correct. Directionally, as we have said before, deep water offshore margins tend to be better than what you typically see on a conventional..

Going back to the more [ph], that makes sense. On my second, my follow question, I kind have a two part there on the artificial lift side. I was wondering if you could talk about in the US onshore business kind of year-to-date, what you've seen on ESP versus the rod-lift side.

And then secondarily, kind of similar question on the international side, I know you've been trying to build out further on the lift side, but it's been a topic it's come up quite a bit from some of your competitors over the last week or so. So if you wouldn't mind just kind of expanding on both sides, please. Thank you..

Yeah, Dave, absolutely. As you've seen, our artificial lift and PAT, continue to post very strong sequential growth. You saw, we grow 10% sequentially in Q2 and we expect to grow nicely again in Q3 and international has been a really strong growth both in Q2 and we expect another strong growth in Q3.

Going back to specifically on the ESP side again, we have seen nice growth in the ESP continue to be there. And I want to address this issue of what you mentioned about competitors. Again, I want to remind that internationally, today we don't participate in the EFP market.

So, really that's complete Greenfield opportunity for us and we are working on our entry into the international ESP markets and in the coming quarters. So again, today we don't have any presence in the ESP market internationally.

But on the other side, majority of our international growth is driven by our rod lift progressive cavity pumps, our jet pumps, the other forms of artificial left, which we have got a strong position.

And with the -- this is a big focus of our revenue synergy opportunities, which you have been -- we have been reporting on so we expect the revenue synergies to build up. As we've said last year, we got about $30 million of incremental revenue synergy awards across our portfolio. We expect this year to be higher than that.

So the international ESP opportunities are all incremental to that, in the coming quarters and the coming years..

Thank you. Our next question online comes from Chase Mulvehill from Bank of America. Please go ahead..

Hey, good morning, everybody. So I guess first thing on just your guidance, 3Q you kind of gave us obviously revenue and EBITDA, but I wanted to unpack the revenue a little bit. The guidance, it seems tough to kind of get to even the high end of the revenue guidance.

So just walk us through each of the three segments and how we're thinking of -- how you guys are thinking about sequential revenue growth, because it, I must -- I feel like that the reservoir chemicals and the Ecolab revenues must be falling up pretty hard because I think the core segment still should see some really nice growth.

Yeah, Chase. I think, you're thinking about that right in the sense that we expect our PCT, PAT and Drilling Technologies all to have sequential growth in Q3. And that is being offset by the exiting of certain product lines in our RCT business as part of our restructuring. So and then the decline in the cross lab Ecolab.

So, you've seen the momentum in our Q2 top line growth in each of these segments. So, we feel good about the top line growth in the PCT, PAT and Drilling Technologies. So the offsetting factor here is the RCT and the decline in Ecolab sales..

Okay.

And would you hazard to guess which one of those three segments whether it's PAT Drilling Technologies or Production Chemicals will grow the most in 3Q?.

Yeah. PAT will probably grow the most, followed by DT and PCT..

Okay. Right. Perfect. I guess follow-up question is just really on the capital allocation framework and appreciate the slide and the details here.

But, you've obviously hit your leverage ratio target and you bought back a small slither of stock in 2Q but can you talk about how you're thinking about, capital allocation as you go forward? And especially as we think about it between, share repurchases and you mentioned special dividends, your stock is exceptionally cheap.

So, just let us know how you're thinking about buybacks, given where the stock is trading..

Yeah. Okay. As said in the prepared marks, we stay committed to that capital allocation framework. As your pointed out, having gotten to our target leverage and we continue to invest in the organic investments like we talked about, and we feel good about where our portfolio is. So any type of investments in technology additions will be small for us.

So, which means there is the substantial portion of our surplus cash, we expect to return to our shareholders and you saw that in Q2 of 60% of it and we have said that we expect the cash flow profile to improve further in second quarter -- second half and we are committed to increasing our cash flow, a return of cash to the shareholders as that cash flow profile increases.

So you should expect substantial portion of our second half surplus cash to be returned to our shareholders, and we have that $250 million of share repurchase. We do believe that given where our stock is I think if that would be in the second half, that would be our primary mechanism of returning capital to our shareholders.

So, again, our commitment has not changed. I think it'll continue to increase..

Okay. Perfect. Appreciate the color. I'll turn it back over..

Thank you. Our next question on line comes from Stephen Gengaro from Stifel..

Thanks. Good morning, everybody. Two, things for me, if you don't mind what I would start with, I guess, is on the Production Chemical side. You had a step up in margin in the second quarter and you gave some targets for the end of this year.

When you think about the progression and sort of the overall margin target of 20%, is that a goal we should expect during 2023?.

Are you talking about our intermediate target of the 20% we mentioned?.

Yes. Yes..

Okay. So, we are not providing guidance to the 2023 right now. But what I would say is that, given the margin progression we are seeing, and our increasing confidence in the exit rate of 18%, we feel that the 20% is there in the intermediate term, a very achievable number. That's what I would say.

I'm not specifically mentioning that it is a 2023 target at this stage because we are not providing a 2023 guidance at this point..

Okay. Thank you. And then when we think about the PAT business and what you're seeing both in North America internationally on the revenue front, but also, the margin flattish first quarter to second quarter, I think there were some transportation costs around that.

Can you just talk about that business a little bit more and sort of how we should think about that progression of revenue and margin relative to just overall activity and some potential traction you expect to gain on the international front?.

Yeah, Steve, as you rightly pointed out, the Q2 was margin and PT was somewhat flat -- fairly flattish and primarily driven by, as you mentioned, increase in logistics and freight and fuel cost and, in the quarter, we have taken -- we have taken counter measures in terms of price increases and surcharges.

So you should expect as we go into Q3, you should see sequentially that playing out and the margin should start improving.

And Q4, as you know, in typically in PAT in the North American short cycle business, there is a seasonal activity slowdown that could be related to number of working days, holiday period, sometimes weather related things can achieve.

So Q4 sometimes in normal years, you tend to see sequential Q3 to Q4, as you know slowdown in some aspects of revenues driven by the holiday events. But as we walk into 2023, and as we continue to grow, you should expect to see borrowing those seasonal slowdowns, you should see continued revenue and margin progression for this business..

Great. No that's helpful call. Thank you..

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

Thank you. The revenue growth for PCT for this year upgraded to high teens for mid-teens seems to imply very minimal sequential growth for the remainder of the year. Can you talk to the dynamic there? I think previously you had expected price increases to maybe result in some market share loss and it seems like that hasn't occurred.

So maybe just put a little more color around the expectation for the back half, if you could..

Yeah, Mark, I think if you've rightly pointed out that our teams have done a really nice job executing on this and I can tell you based on the tracking we do I would say that in every geographic market we participate, we have actually gained net market share in our PCT business.

So, I feel good about however teams are stayed focused and executing on it. As in the second half, we do expect sequential growth and as, Q3 we expect a sequential growth and Q4 tends to be stronger for our PCT because of the international volume tends to be stronger in Q4.

So it's possible, our top line expectation on PCT may prove little bit conservative in the second half but, we feel confident about the high teams, but the activity is good. Our teams are executing well..

Okay. Super.

And then on the margin the 20% versus exiting at 18%, is the difference there just catching up on the raw material inflation? It sounds like now you're ahead of the curve on that, but is it just more of that or is there mix, or some other reason that's driving the delta from 18% to 20% whenever you end up getting there?.

Yeah, no, I think, it'll be a combination of I think the incremental volume in 2023, as well as the full, we do expect the -- as we walk into 2023, some moderation should happen in some of the raw prices as well, but it's more from 18% to 20%, it'll be more the incremental volume and continued productivity..

Okay. Thank you so much. I'll turn it back..

Thank you. Our next question online comes from [indiscernible] from Goldman Sachs. Please go ahead..

Hey guys, in terms of the capital return strategy, do you think 60% of free cash flow over the longer term is a good way to think about it? What are the variables that you consider as you think about the right level of return -- overall return yield on equity between dividends and buybacks?.

Yeah, again, as I mentioned before, again, I go back to our capital allocation framework and we stay committed to that. So in the second half, you should, as we mentioned, we did over 60% return in of free cash flow in Q2.

We expect in the second half to be higher because of our increased cash flow profile and substantial, we expect the share repurchase to be the main mechanism for that. Now as we have said before, we are very focused on sustainably growing our dividend, as our free cash flow grows.

So with respect to long-term view of what is the right way to think about the capital return percentage of free cash flow, we are currently reviewing that.

And so we will be in a position how we -- we are doing that in a manner to make sure that how do we think about that through the cycle? And so when we are ready, we'll be in a position to communicate that, but I do want to make sure that, returning capital to shareholders is a very integral part of our capital allocation strategy.

As we have said before, we feel good about where we are with our portfolio. We continue to invest in organic growth opportunities. So any type of technology additions of M&A activity will be small for us. So, which means there's a substantial portion of our surplus free cash flow will be returning toward shareholders..

Great. And then, as you think about the international record inflection in the second half of the year, do you think you could see another round of stocking related strength in orders or revenue for the Drilling Technology segment? How do you think about the cadence there for the rest of the year and early '23, if you can..

Yeah, so the restocking or additional stock in orders in our Drilling Technologies tend to be more a step function, which means if there is a step function change in recount addition, then customers tend to add restock more.

In our current forecast for the second half, at least for our drilling technologies, we are not anticipating any additional restocking. It's what is built into our forecast is the regular cadence of orders, which is in line with the account editions..

Thank you. I'll turn it over..

Thank you. Our next question online comes from Mr. Sean Mitchell from Daniel Energy Partners..

Good morning, guys. Thanks for squeezing me in. One thing you guys have historically talked about is a pretty rigorous process on tracking cost of raw materials, and this may be kind of something Mark was trying to get at earlier.

Are you guys seeing any signs of cost going lower with raw materials, or is there anything you can share with us on the cost side or relief within the supply chain in general?.

Yeah, Sean, with the rest in our, particularly it has been a pronounced thing in our Production Chemical side or our Chemical Technologies business.

So our view right now, what we have built into our second half for forecast is in Q3 we expect another small increase in our raw material inflation, which is mostly just over from some of the increases we saw in Q2, and we expect a small increase going into Q3.

And then as we go into Q4, we have a small moderation in our raw material prices in certain categories. So to answer your question, we do expect in Q4 a small moderation in our commodity prices, but Q3, we still have an increase built into our forecast.

And the PAT side, we do expect, some level of moderation in the fourth quarter, particularly in the steel side -- steel and the special bar quality side..

We have no further questions at this time..

Well, I want to thank everyone for your continued interest in ChampionX and we look forward to talking to you again in our next quarter earnings call. Thank you..

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