ChampionX Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 9 speakers on the call.

Operator

Good morning. Welcome to ChampionX Corporation's 4th 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.

Operator

You may begin.

Speaker 1

With me today are Soma Somasundaram, President and CEO of ChampionX and Ken Fisher, our Executive Vice President and CFO. During today's call, Soman will share some of our company's highlights. Ken will then discuss our 4th quarter results and the first quarter outlook before turning the call back to Soma for some summary thoughts. We will then open the call for Q and A. During today's call, we will be referring to the slides posted on our website.

Speaker 1

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 ks 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 Q4 press release, which is available on our website.

Speaker 1

I will now turn the call over to Soma.

Speaker 2

Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, employees and analysts to our Q4 2023 earnings call. Thanks for joining us today. For Champion X, 2023 was a year of continued strong earnings momentum and best in class capital returns As we expanded our adjusted EBITDA margin by 4.30 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.

Speaker 2

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 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 4th quarter highlights on Slide number 5. Our solid performance during the period illustrates the benefits of our geographically diversified and production oriented portfolio.

Speaker 2

4th 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 Q4, flat sequentially, which demonstrates our ability to sustain what is our highest margin level as ChampionX.

Speaker 2

International growth was strong in the 4th 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 4th quarter. Turning to our key performance metrics on Slide 6.

Speaker 2

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 $400,000,000 of free cash flow and achieved return on invested capital of 18%, which is 400 basis points higher than prior year. We returned 3 $43,000,000 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.

Speaker 2

Adjusting for Russia exit, end of Ecolab cross sale 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 USA in 2023, driven by U. S. Land and Gulf of Mexico activities.

Speaker 2

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 emission business.

Speaker 2

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 twenty twenty two, 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.

Speaker 2

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 Champion X, both internationally and in North America, led by our production oriented businesses, which benefit as upstream and midstream operators increase 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 geography, But one of the cornerstones of the ChampionX portfolio is our ability to differentiate through our technology and service excellence.

Speaker 2

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 Q4 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 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 $250,000,000 around the same time as part of our comprehensive capital allocation framework.

Speaker 2

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 $800,000,000 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 $1,500,000,000 of its stock, which is an increase of $750,000,000 to the program previously increased in the Q4 of 2022. In addition, we are increasing our regular cash dividend by 12%, which reflects our demonstrated strong free cash flow generating capability.

Speaker 2

We remain committed to converting 50 percent 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 4th quarter results and our Q1 outlook.

Speaker 3

Thank you, Soma. Good morning, everyone. Thank you for joining us today. Before I move to 4th 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.

Speaker 3

We believe this metric best reflects the business performance of continuing operations. After a review of our OFSE peer group and consideration of our Comparative adjusted EBITDA metric, beginning with the Q4 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 Q4, FX losses were predominantly attributable to the recent devaluation of the Argentine peso. As a reminder, our market guidance for 4th quarter did not include any foreign exchange losses.

Speaker 3

To assist investors and analysts, we have provided the comparative periods utilizing the revised definition in our earnings release. As seen on Slide 10, 4th quarter 2023 revenue was $944,000,000 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 grew 8%, while North American revenues were up 2%. As U. S.

Speaker 3

Oilfield activity softened into the year end holidays and some customers de stocked 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.

Speaker 3

Year over year 4th quarter North American revenues were flat, while international revenues declined 11%, primarily on lower sales to a large customer in Latin America. 4th quarter GAAP net income for company was $77,000,000 or $0.39 per diluted share versus $78,000,000 in the 3rd quarter and $68,000,000 in the Q4 of 2022. As seen on Slide 11, ChampionX delivered consolidated adjusted EBITDA in the 4th quarter of $198,000,000 Flat on the previous quarter and an increase of 10% versus the prior year period. This represents a $6,000,000 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.

Speaker 3

In the 4th quarter, we delivered very strong consolidated adjusted EBITDA margin of 21%, consistent with the 3rd quarter and up 280 basis points over the Q4 of 2022. 4th quarter free cash flow of $140,000,000 reflected strong cash flow from operations and our continued focus on working capital management. The $140,000,000 free cash flow represented 71 percent conversion of free cash flow from adjusted EBITDA. Cash from operating activities was $169,000,000 and capital investments were $29,000,000 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.

Speaker 3

Production Chemical Technologies generated 4th quarter revenue of $634,000,000 up 5% from the 3rd quarter and flat year over year. Geographically, international revenue increased 8% sequentially and North America increased 2%. Segment adjusted EBITDA was $139,000,000 up 5% sequentially and 15 percent higher than the Q4 of 2022. Higher volumes and productivity projects drove the sequential improvement. Volume, increased selling price and productivity projects grew, drove the strong year over year improvement.

Speaker 3

Segment adjusted EBITDA margin was 21.9 percent consistent with 3rd quarter levels and up 2.90 basis points from the prior year period, driven again by higher volume selling prices and the productivity initiatives previously noted. Production and Automation Technologies 4th quarter segment revenue of $241,000,000 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 4th 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.

Speaker 3

We expect future digital revenues to continue to benefit from this industry trend. PAT 4th quarter Segment adjusted EBITDA was $53,000,000 down 11% sequentially and up 3% year over year. Segment adjusted EBITDA margin was 22%, down 126 basis points versus the 3rd 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 $47,000,000 in the 4th quarter, down 15% sequentially and 13% lower year over year. As expected, we experienced a decline in sales in the 4th quarter in line with the trend in U.

Speaker 3

S. Land rig count and customer year end activity slowdowns and destocking. Drilling Technologies delivered segment Adjusted EBITDA of $10,000,000 during the 4th quarter, down $3,000,000 sequentially and $2,000,000 lower compared to the Q4 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 4th quarter was $21,000,000 15% lower sequentially and 17% lower year over year.

Speaker 3

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.

Speaker 3

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 $6,000,000 in the 4th quarter, up $1,000,000 versus the 3rd quarter and up $2,000,000 compared to the corresponding prior year period. Segment adjusted EBITDA margin was 26% in the quarter, an 897 basis point sequential improvement and over a 1,000 basis point improvement versus the prior year period, as 4th quarter 23 included the benefit of a year end LIFO inventory favorability. Moving to our balance sheet, as shown on Slide 13, we ended the 4th quarter in very strong position with $289,000,000 of cash on hand $959,000,000 of total liquidity, including available revolver capacity. That is a record level of liquidity for the company.

Speaker 3

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 to surplus capital to our shareholders. During the Q4, we returned 96% of free cash flow to shareholders in the form of $17,000,000 in regular quarterly dividends and $118,000,000 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 $1,500,000,000 which doubles the size of the prior authorization.

Speaker 3

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 fleet 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 Turn on invested capital or ROIC metric. We are making strong progress to our 20% plus ROIC target.

Speaker 3

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 Q1, We expect revenue in the range of $908,000,000 to $938,000,000 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 179,000,000 to $189,000,000 From the seasonally low starting point of 1st quarter, we our revenue and adjusted EBITDA margin to improve progressively throughout the year. We expect capital investment to be in the range of 3.5 percent of revenues in 2024.

Speaker 3

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 toward the back half of each year. Thank you. And now back to Soma.

Speaker 2

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 opportunity gives us confidence and line of sight for continued earnings growth and margin expansion.

Speaker 2

What you can expect from us is a 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

And your first question will be from Steven Bragaro at Stifel. Please go ahead.

Speaker 4

Good morning, everybody. Good morning, Kevin. 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 as 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?

Speaker 2

Yes. So, Stephen, 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 strong growth in our international activity. 2nd, 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 growth incremental production growth in North America as customers are very much focused on incremental production growth.

Speaker 2

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, January is we have gotten through January.

Speaker 2

Consistent with our expectations, We can see the activity improved from Q4 to Q1, particularly in North America.

Speaker 4

Great. Thank you. That's helpful. And then just as a follow-up, you've had good progression On the PC on the production chemicals margins over the last couple of years, should we start thinking about that in terms of Kind of the incrementals that I think you've talked about in the past, I think we've talked about kind of 30% incrementals in that business. Is that a reasonable starting point?

Speaker 2

That's correct, Stephen.

Speaker 4

Okay, great. That's all for me. Thank you. Thank you.

Operator

Thank you. Next question will be from Marc Bianchi at TD Cowen. Please go ahead.

Speaker 5

Hi, thanks. I wanted to ask about your revenue progression over the course of 2023 because it seems like you fell short of your guidance on revenue for several quarters in 2023, but you did quite well on EBITDA. So I'm curious if there's kind of any high level explanation for that. Is it Perhaps turning away some lower profitability business? Do you think you're losing share?

Speaker 5

Just any commentary on the revenue progression would be appreciated.

Speaker 2

Yes, Mark, 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 timeframe, The U. S. Land activity based 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.

Speaker 2

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, Mark, what I wanted to 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, right? So what you're seeing in our ability to Drive continuous earnings growth despite some softness or flattish type revenue is primarily driven by our ability to continuously drive productivity growth.

Speaker 2

And I have 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.

Speaker 5

Okay, great. Thanks for The other question I had related to the Q1 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?

Speaker 2

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

Speaker 2

So the increase in freight cost in the Q1 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 the less international particularly in PCT less international than offshore. So that tends to drive also some higher decremental. So those are the three factors.

Speaker 2

But as we have said in our prepared comments, you should expect from that point, I think our midpoint guidance for Q1 was about 20 margin for Champion X, I think you should expect that to kind of progressively improve through the year.

Speaker 1

Very good. Thank you. I'll turn it back.

Speaker 2

Thanks, Mark.

Operator

Thank you. Next question will be from Saurabh Pant at Bank of America. Please go ahead.

Speaker 5

Hi, good morning, Soma

Speaker 6

and Ken.

Speaker 2

Good morning, Saurabh.

Speaker 6

So maybe let's touch on the productivity improvement pipeline you talked about, I think several times in your prepared remarks And in response to Mark's question, can you give us a little more color on that, Soma? What kind of initiative, 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 2024. 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, right?

Speaker 6

So based on things just that are in your control.

Speaker 2

Yes. So Saurabh, Thanks for that question. So when you look at our productivity improvements, I would put it in 2 buckets. 1 is, as We operate with the lean manufacturing principles. We call it a continuous improvement journey.

Speaker 2

So all of our operations are in a lean manufacturing continuous improvement journey. So that drives the continuous improvement employees driving daily improvements. Then on top of that is what we call it Yes, 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 bought out components.

Speaker 2

So we have teams working on how do we continue to drive productivity or reducing cost of that through best cost country sourcing, strategic spend leverage and so on and so forth. So that's one example 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.

Speaker 2

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, Right. 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.

Speaker 6

Okay. No, that's very helpful, Soma. And then quickly, maybe a follow-up on shareholder returns. So obviously very strong free cash flow, right, you returned 83% of that to shareholders in 2023. That's a lot more than your minimum threshold of 60%.

Speaker 6

I know it's at least 60%.

Speaker 7

So it got to

Speaker 6

be more than that, but 83% is very strong. Maybe Soma, you or maybe Ken, you want to go through that, but maybe just refresh us on your capital allocation priorities and maybe talk a little bit on M and A, where do you see opportunities on the M and A side of things? And maybe talk to your emissions monitoring business a little bit as well?

Speaker 2

So when you look at our capital allocation framework, which we published in 2022, If we are very much disciplined way sticking to that, right? 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 and 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.

Speaker 2

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 80 percent as you said, because we didn't feel the M and A opportunity. It's not like we are not looking at M and A opportunities, but it we have a high bar on our M and A opportunities.

Speaker 2

So when we 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.

Speaker 2

Now with respect to your question on M and A, I think if you 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. We continue to look at them, right? But again, it's a high bar for us and you should expect us to And that's why we say at least 60%.

Speaker 2

Can it be more? Sure. We have demonstrated it can be more. So And 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.

Speaker 2

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 1,000,000 regulated facilities now. So we are excited about our emissions technology offering. As you know, we offer everything from area surveys to leak detections to optical gas imaging to continuous monitoring. So we have a full portfolio of emissions technologies offering.

Speaker 2

So you should see our emissions business continue to grow in an accelerated way in the coming years.

Speaker 6

Okay, fantastic. Soma, I know I rolled a lot of questions into that one. So thank you for answering all of those. Thank you, Soma. I'll turn it back.

Speaker 2

Sure, Saurabh.

Operator

Thank you. Next question will be from Adi Modak at Goldman Sachs. Please go ahead.

Speaker 2

Hi, good morning team. Good morning, Art.

Speaker 7

On 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?

Speaker 2

Yes. So, Arik, with respect to Production Chemical Technologies in particular, you will see our You can see the North American business is a very steady growth consistent business as the fluids produced 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, right? 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.

Speaker 2

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 uncertain surround, 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.

Speaker 7

Great. 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?

Speaker 2

Yes, Adi. So from a customer 60 customer perspective, the predominant large set up those customers today are in North America. And the reason is, as you can imagine, there's a lot of more public in North America and the commitments they have made to emission reductions. So there's a really great mix of In North America for us IOCs, large independent, mid operators, midstream operators. So it's really a great mix and it continues to grow.

Speaker 2

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 suite of technologies just like we had in artificial lift, so that the customers Yes, I 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.

Speaker 2

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 multi $1,000,000,000 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.

Speaker 7

Yes, that makes sense. Thank you for taking the questions.

Operator

Thank you. And your next question is from Doug Becker at Capital One. Please go ahead.

Speaker 8

Thank you. Selman, you've 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 wanted to get your thoughts if you think pricing and costs are flat, up or down this year versus last year?

Speaker 2

Yes. So I would say the pricing and raw material, If you look at that price draw, 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 We continue to opportunistically put through pricing just like I mentioned about our freight cost increases.

Speaker 2

So we'll opportunity as we introduce new technologies. So productivity will be the bigger driver for margin expansion in 2024 along with volume.

Speaker 8

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 drilling 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?

Speaker 2

Yes. This is something We are carefully watching, right? 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.

Speaker 2

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.

Speaker 2

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

Speaker 8

encouraging. Thank you very much.

Operator

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

Speaker 2

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

Operator

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.

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Earnings Conference Call
ChampionX Q4 2023
00:00 / 00:00