Good morning. Welcome to ChampionX Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. Your host for this morning's call is Byron Pope. I will now turn the call over to Mr. Pope..

With me today are Sivasankaran 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 results and first 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 a material difference in our results from those projected in these statements. Therefore, I refer you to our latest 10-K filing and 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..

Good morning, everyone. I would like to welcome our shareholders, employees and analysts to our fourth quarter 2023 earnings call. Thanks for joining us today.

For ChampionX, 2023 was a year of continued strong earnings momentum and best-in-class capital returns as we expanded our adjusted EBITDA margin by 430 basis points delivered adjusted EBITDA growth of 25%, converted 53% of that adjusted EBITDA to free cash flow and returned 83% of that free cash flow to our shareholders.

In 2023, we achieved our highest level of performance in key financial metrics since our transformative merger in 2020. In addition, I'm excited about the foundation we have established in 2023 for continued revenue and earnings growth, margin expansion and strong free cash flow generation in 2024 and beyond.

I'm grateful to all of our employees for their laser focus on delivering value to our customers' day in and day out as that is the heartbeat which drives our strong financial engine. Turning to the fourth quarter highlights on Slide number 5.

Our solid performance during the period illustrates the benefits of our geographically diversified and production-oriented portfolio. Fourth quarter revenue was flat sequentially despite softer U.S. land drilling and completions-related activity, especially into the year-end holidays.

Our largest business, Production Chemical Technologies delivered high single-digit sequential revenue growth internationally and grew in North America during the period. Our adjusted EBITDA margin was 21% in the fourth quarter, flat sequentially which demonstrates our ability to sustain what is our highest margin level as ChampionX.

International growth was strong in the fourth quarter at 6% sequentially, led by 15% growth in Middle East and Africa region, followed by Latin America at 7% growth sequentially.

In North America, sequential growth in Production Chemical Technologies business was offset by typical seasonal decline in our production and automation technologies and decline in our Drilling Technologies business, driven by softer U.S. land drilling activity in fourth quarter. Turning to our key performance metrics on Slide 6.

We delivered strong adjusted EBITDA growth of 25% year-over-year, achieved adjusted EBITDA margin of over 20% which expanded 430 basis points. We generated over $400 million of free cash flow and achieved return on invested capital of 18% which is 400 basis points higher than prior year.

We returned $343 million to our shareholders in 2023 which is up 52% from 2022. Our financial position is strong with record liquidity and low leverage. Turning to full year revenue details on Slide 7. Adjusting for Russia exit end of Ecolab cross-sell agreement and our RCT product line exit, our full year normalized revenues grew 3.4% in 2023.

And I would like to point out some key highlights of growth in 2023. Our Production Chemical Technologies business grew 16% in the U.S.A. in 2023, driven by U.S. land and Gulf of Mexico activities. Production & Automation Technologies business grew 16% internationally in 2023 and our Drilling Technologies business grew 11% internationally.

Our digital business continued the strong growth momentum in 2023, growing 16% year-over-year. Growth in digital was broad-based led by our production optimization and emission technology offerings. We remain excited and confident in our continued growth momentum in our digital portfolio.

We expect the recent final ruling of methane standards by EPA to drive accelerated growth in our emissions business. Turning to Slide 8. I would like to highlight the resilience and steady growth nature of our production chemicals business.

As you can see from the slide, in North America, the business exhibits a steady growth trajectory as total fluids produced continues to grow along with chemical intensity, pricing and share gains. Internationally, the business continues to grow, driven by similar factors as North America but with seasonality during the year.

In addition, during the second half of 2022, we had unusually higher order activity in Latin America, driven by customer inventory build impacting our 2023 growth comparison.

As we look to 2024, we are entering the year with strong financial position, continued earnings momentum, solid pipeline of productivity projects that gives us confidence to grow earnings and expand margins during 2024. Despite near-term market uncertainty with respect to the timing and trajectory of U.S.

land drilling and completions activity, we expect 2024 to be a growth year for ChampionX, both internationally and in North America, led by our production-oriented businesses which benefit as upstream and midstream operators increased OpEx spend to keep their cash flow generating assets performing optimally.

We support the view we are in an overall constructive environment for our sector. There are certainly ups and downs across geographies but one of the cornerstones of the ChampionX portfolio is our ability to differentiate through our technology and service excellence.

We have seen the benefit of this in 2023, allowing us to capture growth in markets with tailwinds but also protecting us when volume goes down and we expect to continue to see the benefit of this in 2024.

Ken will take you through the details of our fourth quarter financial results shortly but let me first touch on our commitment to value creation for our shareholders. We first shared our capital allocation framework with you 2 years ago.

As we reached our through-the-cycle target leverage ratio of 1x net debt to EBITDA, we delivered on our commitment to begin returning capital to our shareholders by initiating a regular quarterly dividend which we anticipated would grow over time with free cash flow growth.

In addition, we initiated a share repurchase authorization of $250 million around the same time as part of our comprehensive capital allocation framework. I'm pleased to say that we have delivered on our commitment to return excess cash to shareholders.

Since we first shared our capital allocation priorities and framework in early 2022, ChampionX has generated over $800 million in free cash flow which demonstrates the best-in-class cash flow generating capability of our capital-light portfolio of businesses.

We have returned 71% of that free cash flow to our shareholders through our regular cash dividend and share repurchases.

As an indication of our continued commitment to our shareholders, our Board of Directors approved an increase to our share repurchase program which authorizes ChampionX to repurchase up to $1.5 billion of its stock which is an increase of $750 million to the program previously increased in the fourth quarter of 2022.

In addition, we are increasing our regular cash dividend by 12% which reflects our demonstrated strong free cash flow generating capability. We remain committed to converting 50% to 60% of our adjusted EBITDA into free cash flow and to returning at least 60% of free cash flow to our shareholders through the cycle.

Let me now turn the call over to Ken to discuss our fourth quarter results and our first quarter outlook..

Thank you, Soma. Good morning, everyone. Thank you for joining us today. Before I move to fourth quarter and total year results, I want to make a few points about our reporting today. For sequential and year-over-year comparisons, I will be commenting on adjusted EBITDA.

We believe this metric best reflects the business performance of continuing operations. After a review of our OFS peer group and consideration of our comparative adjusted EBITDA metric, beginning with the fourth quarter of 2023, we revised the definition of adjusted EBITDA to remove the impact related to foreign currency gains and losses.

We believe this change provides a more consistent basis for comparing underlying operating performance versus our peers. In the fourth quarter, FX losses were predominantly attributable to the recent devaluation of the Argentine peso. As a reminder, our market guidance for fourth quarter did not include any foreign exchange losses.

To assist investors and analysts, we have provided the comparative peers utilizing the revised definition in our earnings release. As seen on Slide 10, fourth quarter 2023 revenue was $944 million, up slightly sequentially and 4% lower year-over-year.

Revenue was up 5% sequentially in our largest business, Production Chemical Technologies based on expected seasonal strength in international operations which create percent, while North American revenues were up 2%. As U.S. oil field activity softened into the year-end holidays and some customers destocked inventory, our shorter-cycle U.S.

land businesses were impacted. As a result, Production Automation Technologies revenue was down 6% sequentially, while Drilling Technologies and Reservoir Chemical Technologies revenues were each down 15% sequentially. Geographically, North American revenue declined 3% and international revenue increased 6% sequentially on the PCT seasonal strength.

Year-over-year fourth quarter North American revenues were flat, while international revenues declined 11%, primarily on lower sales to a large customer in Latin America. Fourth quarter GAAP net income for the company was $77 million or $0.39 per diluted share versus $78 million in the third quarter and $68 million in the fourth quarter of 2022.

As seen on Slide 11, ChampionX delivered consolidated adjusted EBITDA in the fourth quarter of $198 million, flat on the previous quarter and an increase of 10% versus the prior year period. This represents a $6 million outperformance versus the midpoint of our guidance range.

Higher volumes, productivity, cost management and higher selling prices primarily drove this improvement in net income and adjusted EBITDA. In the fourth quarter, we delivered very strong consolidated adjusted EBITDA margin of 21%, consistent with the third quarter and up 280 basis points over the fourth quarter of 2022.

Fourth quarter free cash flow of $140 million reflected strong cash flow from operations and our continued focus on working capital management. The $140 million free cash flow represented 71% conversion of free cash flow from adjusted EBITDA.

Cash from operating activities was $169 million and capital investments were $29 million, net of proceeds from asset sales. Turning to our business segments, I will cite sequential and the same quarter for the year-over-year comparisons.

Production Chemical Technologies generated fourth quarter revenue of $634 million, up 5% from the third quarter and flat year-over-year. Geographically, international revenue increased 8% sequentially and North America increased 2%. Segment adjusted EBITDA was $139 million, up 5% sequentially and 15% higher than the fourth quarter of 2022.

Higher volumes and productivity projects drove the sequential improvement. Volume increased selling price and productivity projects drove the strong year-over-year improvement.

Segment adjusted EBITDA margin was 21.9%, consistent with third quarter levels and up 290 basis points from the prior year period, driven again by higher volume selling prices and the productivity initiatives previously noted.

Production & Automation Technologies fourth quarter segment revenue of $241 million decreased 6% sequentially, driven primarily by the seasonality of our North American business. Year-over-year, revenue was down 1%.

Digital revenue was down 9% in the quarter and down 3% year-over-year as customers deferred purchases in the fourth quarter to optimize inventory and cash flows.

For the full year 2023, digital revenue grew 16% and we continue to see strong customer focus on leveraging digital technologies to reduce emissions, drive operational improvements and realize cost efficiencies. We expect future digital revenues to continue to benefit from this industry trend.

PAT fourth quarter segment adjusted EBITDA was $53 million, down 11% sequentially and up 3% year-over-year. Segment adjusted EBITDA margin was 22%, down 126 basis points versus the third quarter on lower volumes, seasonality and product mix.

Adjusted EBITDA margin was up 94 basis points versus the prior year period due to higher volumes and favorable mix. Drilling Technologies segment revenue was $47 million in the fourth quarter, down 15% sequentially and 13% lower year-over-year. As expected, we experienced a decline in sales in the fourth quarter, in line with the trend in U.S.

land rig count and customer year-end activity slowdowns and destocking. Drilling Technologies delivered segment adjusted EBITDA of $10 million during the fourth quarter, down $3 million sequentially and $2 million lower compared to the fourth quarter of 2022 adjusted EBITDA level.

Segment adjusted EBITDA margin was 22% in the quarter a 300 basis point sequential decline driven by the lower revenues. Margin was up 168 basis points year-over-year driven by productivity improvements. Reservoir Chemical Technologies revenue for the fourth quarter was $21 million, 15% lower sequentially and 17% lower year-over-year.

The sequential decline was a function of lower volumes in U.S. land into the year-end holidays. The year-over-year decline was primarily driven by the exit of certain low-margin RCT product lines last year. This was consistent with our purposeful strategy to drive higher margin rates in this business.

The product line exit resulted in lower revenues but a strong improvement in overall profit margin profile in this segment. The segment posted adjusted EBITDA of $6 million in the fourth quarter, up $1 million versus the third quarter and up $2 million compared to the corresponding prior year period.

Segment adjusted EBITDA margin was 26% in the quarter and 897 basis point sequential improvement and over 1,000 basis point improvement versus the prior year period as fourth quarter 2023, included the benefit of a year-end LIFO inventory favorability. Moving to our balance sheet.

As shown on Slide 13, we ended the fourth quarter in a very strong position with $289 million of cash on hand and $959 million of total liquidity, including available revolver capacity. That is a record level of liquidity for the company. At December 31, our leverage ratio was 0.4x net debt to trailing 12-month adjusted EBITDA.

In alignment with our capital allocation framework, we remain committed to the return of surplus capital to our shareholders. During the fourth quarter, we returned 96% of free cash flow to shareholders in the form of $17 million in regular quarterly dividends and $118 million of share repurchases.

For the full year 2023, we returned a sector-leading 83% of free cash flow to shareholders. Consistent with our continued commitment to return surplus capital, our Board has approved an increase to our share repurchase program to $1.5 billion which doubles the size of the prior authorization.

In addition, we are increasing our regular quarterly dividend by 12% to $0.095 per share per quarter. These actions demonstrate our commitment to capital discipline and our confidence in our free cash flow generation capability moving forward.

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

As we discussed at our March 2023 Investor Day and as you can see on Slide 14, our disciplined capital allocation and continuous improvement in productivity are driving continued improvement in our return on invested capital or ROIC metric. We are making strong progress to our 20% plus ROIC target.

For the full year 2023, ROIC improved to 18%, up 400 basis points year-over-year. We expect this trend to continue as we move forward into 2024 and beyond. Turning to Slide 15 and our forward outlook for the first quarter, we expect revenue in the range of $908 million to $938 million.

With projected sequential decline driven by typical international seasonality, partially offset by sequential increases in our North American businesses. For adjusted EBITDA, we expect a range of $179 million to $189 million.

From the seasonally low starting point of first quarter, we expect our revenue and adjusted EBITDA margin to improve progressively throughout the year. We expect capital investment to be in the range of 3.5% of revenues in 2024.

We remain confident in our 50% to 60% free cash flow to adjusted EBITDA conversion ratio guidance through the cycle and we expect a free cash flow conversion ratio of at least 50% in 2024. A reminder, our free cash flow delivery is typically weighted towards the back half of each year. Thank you and now back to Soma..

Thank you, Ken. Before we open the call to questions, let me share a few thoughts with you.

ChampionX's positioning as a leading global provider of production optimization solutions for the energy industry, places us at the sweet spot of helping our upstream and midstream customers maximize the value of their producing and operating assets in the most sustainable and cost-effective way possible.

As such, we remain confident in the favorable demand tailwinds for our businesses in 2024 and beyond. In addition, our strong pipeline of productivity opportunities gives us confidence and line of sight for continued earnings growth and margin expansion.

What you can expect from us is the laser focus on delivering continued revenue and earnings growth, further expanding our adjusted EBITDA margin, generating strong free cash flow, investing in high-return growth opportunities and returning excess capital to you, our shareholders.

With that, let me thank all of our 7,100 ChampionX employees around the world for your tireless dedication to our purpose of improving the lives of our customers, our employees, our shareholders and our communities; you inspire me daily. With that, I would like to open the call for questions..

[Operator Instructions] Your first question will be from Stephen Gengaro at Stifel..

Well, thanks for all the details. I guess I'd start with, when we think about what we've been hearing from some of your peers about give or take, 10% revenue growth internationally next year and maybe North America being down slightly year-over-year, maybe 0% to 5%.

How do you guys perform in that environment in 2024?.

Yes. So let me frame our assumptions as we go into 2024. So we believe the international activity, we agree with the market view that it continues to be robust and we expect a strong growth in our international activity. Second, in North America, as you know, we are highly exposed to the operating expense spending.

So we believe the operating expense spending will be incrementally stronger to drive incremental production growth in North America as customers are very much focused on incremental production growth. And thirdly, our digital product portfolio, we believe, will continue to grow strong.

So when you put that all together for us, the international revenue growth will be primarily for us led by Middle East, Sub-Saharan Africa and Latin America. And then in North America, our Production Chemical Technologies business combined with our digital portfolio will lead the growth.

In our PAT business, we expect incremental growth but it will be probably more weighted to the second half. Now when I look at January, as you know, we have gotten through January. Consistent with our expectations, we can see the activity improved from Q4 to Q1, particularly in North America..

Great. That's helpful. And then just as a follow-up, you've had good progression on the production chemicals margins over the last couple of years. Should we start thinking about that in terms of the incrementals that I think you've talked about in the past, I think we've talked about 30% incrementals in that business.

Is that a reasonable starting point?.

That's correct, Stephen..

Next question will be from Marc Bianchi at TD Cowen..

I wanted to ask about your revenue progression over the course of '23 because it seems like you fell short of your guidance on revenue for several quarters in '23 but you did quite well in EBITDA.

So I'm curious if there's any high-level explanation for that? Is it perhaps turning away some lower profitability business? Do you think you're losing share? Just any commentary on the revenue progression would be appreciated..

Yes, Marc. Thanks for that.

So if you look at our segments, you can see our largest segment, the Production Chemical Technologies consistently is growing in North America and we expected in Q4, the international growth was strong in our Production Chemical Technologies, where we tend to have issues with respect to some shortfall is in our driven by our short-cycle North American business and particularly when you look at what happened in our Q3, Q4 time frame, the U.S.

land activity base short-cycle business, particularly our Drilling Technologies business, you probably noticed, we expected a 12% sequential decline in our Drilling Technologies in Q4 as we guided. It came in a little bit more than that. So that is somewhat tough to predict, the short-cycle North American business.

But more importantly, Marc, what I wanted to say is we are very focused on what we can control. And what we can control are those productivity efforts and the ability to deliver on those, along with some targeted share gains.

So what you're seeing in our ability to drive continuous earnings growth despite some softness or a flattish-type revenue, is primarily driven by our ability to continuously drive productivity growth. And I've mentioned this before, this comes from our industrial heritage DNA, where there is a constant pipeline of productivity efforts.

And that's what we focus on controlling because in the short cycle business, sometimes revenues can be up and down. So what you should expect from us is a continued delivery on that productivity efforts that drives our earnings growth..

The other question I had related to the first quarter guidance for EBITDA which seems to be reflecting some very high operating leverage, like a 70% decremental at the midpoint.

Can you discuss that at all? And if there's anything unusual that might be occurring?.

Yes. Sure, Marc, absolutely. So I would say there are 3 things that are driving to what I would call it more higher decrementals. One is we are expecting an increased freight cost in Q1, particularly driven by the REC situation. Now we will recover those costs through the year as we put through price increases and so on and so forth.

So the increase in freight cost in the first quarter is one element. The second element is we continue to make some incremental investments, particularly in our digital and emissions business to support upcoming growth.

And then the third element is, as you know, the mix tends to be less international, particularly in PCT, less international than offshore. So that tends to drive also some higher decremental. So those are the 3 factors.

But as we have said in our prepared comments, you should expect from that point, I think our midpoint guidance for the first quarter is about 20% margin for ChampionX. I think you should expect that to kind of progressively improve through the year..

Next question will be from Saurabh Pant of Bank of America..

Soma, maybe let's touch on the productivity improvement pipeline you talked about, I think, several times in your prepared remarks and in response to Marc's question.

Can you give us a little more color on that, Soma? What kind of initiatives, what kind of pipeline you are looking at? What's most exciting to you from an incremental contribution, margin contribution standpoint? And then just broad strokes, Soma, I know you said you expect margins to improve in '24.

Is there a way to say on a year-over-year basis, all else equal, productivity improvements can get you a certain way there in terms of margin improvement.

So based on things just that are in your control?.

Yes. So thanks for that question. So when you look at our productivity improvements, I would put them in 2 buckets. One is, as you know, we operate with the lean manufacturing principles. We call it a continuous improvement journey. So all of our operations are in a lean manufacturing continuous improvement journey.

So that drives the continuous improvement of employees driving daily improvements. Then on top of that is what we call it, high impact productivity projects which are teams focused on driving significant productivity on certain projects. So let me give you a few examples of that.

So the first one is, given our large spend in particularly in raw materials and bottle components. So we have teams working on how do we continue to drive productivity or reduce reducing cost of that through best cost country sourcing, strategic spend, leverage and so on and so forth. So that's a one particular project in 2024.

The second project is we have internal digitization efforts that drives productivity. And that's the second element. The third element, for example, is continued utilization improvement as well as yield improvement in our large chemical facilities as well as our drilling technologies facilities and so on and so forth.

So those are high-impact large productivity type projects. So to answer your question around how should we think about the contribution of this, so the way I would think about it is, in an environment even if our revenues are flattish, you should expect us to deliver incrementally more earnings in 2024, even if the revenues are flattish.

So that's how to think about it..

And then quickly, maybe a follow-up on shareholder returns. So obviously, very strong free cash flow. You returned 83% of that to shareholders in 2023. That's a lot more than your minimum threshold of 60%. I know it's at least 60%. So it's got to be more than that but 83% is very strong.

Maybe Soma or maybe, Ken, you want to go through that but maybe just refresh us on your capital allocation priorities and then maybe talk a little bit on M&A. Where do you see opportunities on the M&A side of things and maybe talk to your emissions monitoring business a little bit as well..

So when you look at our capital allocation framework which will be published in 2022, we have very much a disciplined way sticking to that. Just to refresh that, obviously, our first priority is to invest in high-impact organic opportunities, then we want to make sure that we are sustaining our dividend.

As we have said before that we will consistently increase that in line with our free cash flow increases. And third, we said that any bolt-on tuck-in type opportunities for us, technology additions, geographic expansion additions, M&A type opportunities. And then lastly, any excess cash, we will opportunistically deploy to share repurchase programs.

So that's our capital allocation framework which we published in 2022. And you are seeing us really in a disciplined way sticking to that. So 2023, is a good example of that. And even from the inception of our capital return program, you can see that.

For example, in 2023, we returned 83% as you said, because we didn't feel the M&A opportunity, it's not like we are not looking at M&A opportunities but we have a high bar on our M&A opportunities. So we are very disciplined about it. So when we don't have a need for that, we are returning those cash to our shareholders.

And when you look at right from the inception, we have returned 71% of our free cash flow to our shareholders. So it's just a demonstration of establishing a capital allocation framework and being disciplined about it and sticking to that. So you should expect that from us going forward.

Now with respect to your question on M&A, I think we continue to look at opportunities. And as we have said before, it has to be a clear strategic fit into our portfolio. They are bolt-on type opportunities. So we continue to look at them. But again, it's a high bar for us and that's why we say at least 60%.

Can it be more? Sure, we have demonstrated it can be more. So, then your question on emissions. We are pretty excited about the developments that are happening in the emissions.

As you know, the recent final ruling which is adopted on methane standards, the big change in this ruling is the inclusion of existing facilities which includes things like storage tanks includes, things like terminal, includes things like gas processing plants.

So which means the regulated facilities is significantly improving in some by some estimates, it goes from what is 60,000 regulated facilities to as much as 1 million regulated facilities now. So we are excited about our emissions technology offering.

As you know, we offer everything from aerial surveys to leak detections to optical gas imaging to continuous monitoring. So we have a full portfolio of emissions technologies offering. So you should see our emissions business continue to grow in an accelerated way in the coming years..

Next question will be from Atidrip Modak at Goldman Sachs..

Slide 8, you showed PCT North America has delivered steady growth so far.

Can you talk about the expectations for the cadence for the full year with respect to the activity levels that you are expecting in North America?.

Yes. So I think with respect to Production Chemical Technologies in particular, you will see the North American business is a very steady growth consistent business as the fluids produce continues to grow in North America, not just the oil production but the total fluids produced, both in land as well as in Gulf of Mexico.

And that, combined with our continued ability to introduce new technologies, address chemical intensity increases. So you should expect our North American business, particularly the U.S. land, Gulf of Mexico type businesses to continue to increase in 2024.

And with respect to our other businesses, as I mentioned, PAT and Drilling Technologies businesses, we have seen in January, the improvement in activity from Q4. But we think that given the near-term uncertainty around, we still expect these businesses to grow and especially PAT given the digital growth.

But the activity in other forms of lift could be a little bit more second half weighted. But we do expect PAT and Drilling Technologies business to show some growth in 2024 as well..

And then you noted in the release that you have 60 emissions technologies, customers globally now, you also mentioned that you would look at some investments there as well.

So maybe if you can provide some color on both those pieces? What does the customer mix or geographic mix look like? And is there a way to quantify the market opportunity at this point?.

Yes. So from a 60 customer perspective, the predominant large set of those customers today are in North America. And the reason is, as you can imagine, there's a lot of more public companies in North America and the commitments they've made to emission reductions. So there's a really great mix of in North America for us.

I will see large independent, mid-operators, midstream operators, so it's really a great mix and it continues to grow. And they adopt all different types of technology.

And that's why it's really important when you're developing an emissions portfolio to have a suite of technologies just like we had [indiscernible] so that the customers can do a fit-for-purpose type of emissions technology picking, so we can offer them what is right for them.

And there is more opportunities growing internationally and particularly in Middle East. And so we see in the coming years that to continue to grow. Now in terms of your question around, is there a way to quantify the market. With the recent final ruling by EPA, as I mentioned, it's a significant increase in potentially regulated facilities.

So let me just say, it will grow to be a multibillion-dollar market over a period of time. It's very hard to determine how it will go but it's just the movement is in that right direction..

[Operator Instructions] And your next question is from Doug Becker at Capital One..

Someone address the productivity initiatives but EBITDA margins were up by more than 430 basis points last year. Pricing as well as cost management played a role in that.

Just want to get your thoughts if you think pricing and costs are flat, up or down this year versus last year?.

Yes. So I would say the pricing and raw material, if we look at that price raw, we expect that to be pretty stable in 2024 from our Q4 levels. So say it another way, we don't expect pricing to be a major contributor to the margin expansion in 2024 and we expect the raw material cost to stay stable. So productivity will play a bigger role.

Now we'll continue to opportunistically put through pricing, just like I mentioned about our freight cost increases. So we'll opportunity as we introduce new technologies. So productivity will be the bigger driver for margin expansion in 2024, along with volume..

Got it. And then jumping to North America, you're seeing some increasing activity in January. Just if you could expand on that at all. I know in the past, PAT really doesn't get going until February and certainly in the Drilling Technologies business with a flat rig count. It's not obvious that we'd see a restocking on the bit side..

Yes. This is something we are carefully watching. You normally get this pump in January and then February and then how does that flow. I think from an activity perspective, I think from a PAT perspective, we are seeing some good signs of those moving in. But in Drilling Technologies, again, our bearings business is continuing to grow nicely.

As we have noted it grew about 40% in 2023. And it's now almost about reaching closer to 20% of our Drilling Technologies business. And we expect in Q1 that to contribute to some additional growth as well. But we are watching that trend. But so far, in Q1, the activity seems to be as we expected, with a sequential increase in PAT and DT from Q1.

And in PCT also in North America, internationally, the seasonality of going down. But even in in our U.S. land business in our PCT, we are seeing the sequential increase in Q1..

Sounds encouraging. Thank you very much..

Thank you. And at this time, we have no other questions registered. Please proceed..

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

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines..