ChampionX Corp (CHX) 2020 Q4 法說會逐字稿

Hello, and welcome to the ChampionX Fourth Quarter and Full Year 2020 Earnings Call. My name is Zanera, and I'll be the operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the call over to Mr. Byron Pope. Byron, you may begin.

Thank you. Good morning, everyone. With me today are Soma Somasundaram, President and CEO of ChampionX; and Ken Fisher, our Executive Vice President and CFO. During today's call, Soma will share some of our company's highlights during the quarter. 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. I would like to remind our 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. Information concerning risk factors that could affect the company's performance and uncertainties that could cause material differences to actual results from those in the forward-looking statements can be found in the company's press release as well as in ChampionX's annual report on Form 10-K and those set forth from time to time in ChampionX's filings with the Securities and Exchange Commission, which are currently available at championx.com. Except as required by law, the company expressly disclaims any intention or obligation to revise or update any forward-looking statements.

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 and slide presentation for this call, which are available on our website.

I will now turn the call over to Soma to discuss ChampionX's fourth quarter achievements.

Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, our analysts and our employees to our fourth quarter 2020 earnings call. Thanks for joining us today. Hope you and your families are continuing to stay safe and healthy.

I would like to start by welcoming Ken Fisher to our team. As you know, Ken joined our executive team on February 1 as Executive Vice President and CFO, and he came to this role already having a deep understanding of our businesses, strategy and organization, having previously served on our Board of Directors over the last 3 years. We are excited to have Ken as part of our team.

Now this past week, Texas and parts of the neighboring states experienced an unprecedented winter storm that left millions of people without power and safe drinking water. Our prayers and support are with our employees, customers and the communities as we all work to recover from the severe winter storm. Our teams have been working diligently to recover after the storm and minimize disruptions to our customers and our own operations.

Before turning to our business results, let me first take a moment to express to all of our employees how proud I am of how remarkably well our organization performed during 2020, which was, in many ways, a year unlike any other that our energy industry and our world has experienced. Against the backdrop of the global pandemic, the health and safety of our employees has remained our most important priority, and we will continue to take the necessary steps to protect our employees who have truly been essential workers as they have helped our customers sustainably unlock energy that our global economy needs. And they did so while delivering what was a record year for our company in terms of safety performance in 2020.

With that, let me turn to our fourth quarter performance. In what was just our second full quarter since the successful transformational merger of legacy Apergy and legacy ChampionX, our fourth quarter results speak to how the strong business portfolio and financial profile of the combined company positions us well to outperform, both against the near-term challenges of the current environment and during the long-term global energy transition. We continue to execute well in realizing our targeted cost synergies, and our pipeline of revenue synergy opportunities continues to expand as we leverage our global footprint and as customers recognize the value of our combined offering in delivering the full suite of production optimization technologies, products and services.

On Page 4 of the slide deck, as a purpose of one company, we always start with our organizational North Star of improving the lives of our customers, employees, shareholders and communities. Now more than ever, we see our 4 operating principles being relentless customer advocates; being committed to our employees; delivering impactful technology and helping solve problems; and having an infectious culture of continuous improvement as crucial in differentiating our company and serving our internal and external stakeholders very well.

As part of our continuous improvement culture, we periodically conduct employee engagement surveys to gauge how employees feel about the company's culture and progress on key issues as well as get feedback on what we are doing well and what we need to improve. We just concluded our recent global employee engagement survey, and I am pleased to report we had about 4,600 survey participants, which is a global participation rate of 71% from our employees. I'm also pleased to report that 89% of the participants reported that they feel very aligned to the company's purpose and 88% of the employees reported that they feel the company is committed in upholding the operating principles. We feel our purpose and operating culture is a sustainable, competitive advantage.

We continue to develop and deploy technologies that help our customers achieve their objectives. A recent example of this, on Page 5 of the slide deck, you will see the new ESP motor we introduced to the market. This innovative design helps our customers increase production in 5.5-inch wells by as much as 150%, improving their economics. Equally important, this technology helps our customers with their carbon-reduction goals by consuming less power. This technology has received great reception from our customers.

Ken will take you through our fourth quarter financial results shortly, so I will just share a few high-level thoughts. In each of our first 2 full quarters as a new company, our strong results illustrate the promise and power of our combined portfolio and enhanced global scale as well as the cost synergy opportunities. We generated $706 million of consolidated revenue and $109 million of adjusted EBITDA. We once again delivered robust positive free cash flow in the fourth quarter at $108 million. We are encouraged by the double-digit sequential revenue growth experienced by both our North American and international operations during the fourth quarter. All of our segments posted positive sequential growth led by our Drilling Technologies segment.

I would now like to 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. First, let me say that I'm very excited to take the CFO role at ChampionX. ChampionX is a unique, purpose-driven company with great leadership and a talented team. It's great to be on that team full time.

Second, I would like to thank Jay Nutt. I worked with Jay for 3 years during my Board service and appreciate his contributions to ChampionX and his support to me personally for a smooth transition. I look forward to getting to know our investors and analysts who I've not yet met over the next few days and weeks ahead.

Today, I will be commenting on the adjusted EBITDA for sequential comparisons. We believe this metric best reflects the business performance of continuous operations. I will also refer to the pro forma results on a full year and year-over-year basis to provide for better comparability.

As seen on Slide 7, fourth quarter 2020 revenue of $706 million increased by $73 million or 11% sequentially with all 4 of our business segments contributing strong top line growth. Geographically, we experienced sequential revenue growth in both North America, up 11%; and internationally, up 12%. Included in our quarterly revenues were $46 million of cross-supply sales to Ecolab. As mentioned on our prior earnings calls, those cross-sales are associated with post-merger agreements with Ecolab under the transaction agreement. We do not recognize margin on these sales from an EBITDA perspective. And within our financial statements, revenue associated with these sales is allocated to the Corporate and Other segment. We expect these sales will continue for approximately 3 years from the date of the merger closing.

For the quarter, GAAP net income was $7.5 million, a favorable variance sequentially to the third quarter loss of $7.3 million. We delivered strong consolidated adjusted EBITDA in the fourth quarter of $109 million, a 25% sequential increase. This increase was primarily driven by higher volumes in all 4 of our businesses.

We also delivered strong cash flow from operating activities of $121 million during the fourth quarter and generated $108 million of free cash flow during the period, a free cash flow to revenue ratio of a robust 15%. Cash contributors included sequentially improved operating earnings and strong working capital performance.

In the fourth quarter, we invested $13 million in capital expenditures, primarily for maintenance activities at the funds on integration-related requirements.

For the full year 2020, we generated free cash flow of $265 million, a free cash flow to revenue ratio of 14%, excluding $84 million of merger, transaction and integration-related expenses, we generated free cash flow of approximately $349 million or at 18% to revenue ratio.

Turning to the business segment. Production Chemical Technologies generated fourth quarter revenue of $447 million, up 9% from the third quarter. The sequential increase was driven by strong Latin American orders, continued recovery in the North American land business and higher seasonal international volumes. Geographically, North American revenue increased 5% sequentially, while international revenue grew 12% sequentially. Profitability improved sequentially on higher sales volumes. Segment adjusted EBITDA was $78 million, up 9% versus the third quarter. Adjusted EBITDA margin was 17%.

Production & Automation Technologies segment revenue was $159 million, up 16% sequentially due to higher volumes as customer spending continued recovering from the low levels experienced in mid-2020. Also of note, digital revenue increased 16% sequentially driven by stronger customer spending in certain U.S. basins. As customers place a greater focus on leveraging digital solutions to improve cost structure and drive efficiencies, we expect increased adoption of our modular fit-for-purpose approach through time. PAT fourth quarter segment adjusted EBITDA was $29 million, up 17% sequentially. The PAT team continues their strong execution with fourth quarter segment adjusted EBITDA margin of 18%. As you will recall from our third quarter results were helped by $2.8 million of nonrecurring items, which resulted in a normalized margin of 16% for the third quarter. The sequential margin improvement in PAT was driven primarily by leverage from higher volumes.

Moving to Drilling Technologies, they experienced much improved customer demand as the active U.S. rig count increased during the fourth quarter. Segment revenue was $24 million in the fourth quarter, a 50% increase sequentially, which significantly outpaced the 22% U.S. industry rig count increase during the period, and we saw strong restocking of inventories. As expected, Drilling Technologies returned to profitability during the fourth quarter as segment adjusted EBITDA was $3 million, up $5 million sequentially from the third quarter, driven by the combination of higher volumes and continued, rigorous cost control.

Reservoir Chemical Technologies revenue for the fourth quarter was $31 million, a 45% increase sequentially, driven by an increase in global well construction and completion activities. Segment adjusted EBITDA was $2 million, a $4 million sequential improvement, which was primarily driven by the higher volumes. Current quarter results were also positively impacted by $1.6 million of nonrecurring items during the fourth quarter related to the sales of previously reserved inventory.

Merger synergies. We remain laser-focused on maximizing merger synergies. We have a program management office in place and are coordinating activity across the company to capture all potential integration benefits as well as cost improvements and revenue synergies. Slide 8 in the presentation deck summarizes these efforts.

As mentioned in our third quarter earnings call, we expect to exit 2020 with a run rate of $70 million to $80 million of targeted annualized cost synergies. We exited the year at an $82 million run rate. Further, we still expect to achieve our targeted $125 million of annualized cost synergies within 24 months of the merger closing. We'll continue to share with you the progress on this front in coming quarters.

Turning to Slide 9 and our financial position. We had $201 million of cash on hand at the end of the year at approximately $551 million of total liquidity, including available revolving credit facility capacity. As a result of our continued strong operating cash flow, we repaid another $80 million of debt during the fourth quarter, including $23 million of our senior notes, which were retired via a tender offer. Since the merger date, we have paid down $160 million of debt obligations or 15% of the total outstanding as of the merger date. At December 31, our net debt to trailing 12-month pro forma adjusted EBITDA. Was 1.8x compared to our net leverage of 1.9x at September 30.

One additional point on our leverage. As we've communicated, the merger was a deleveraging transaction. The combined enterprise is far stronger on leverage metrics than legacy Apergy would have been, particularly considering the pandemic-induced industry downturn.

Moving forward, we remain highly focused on operating and free cash flow delivery, working capital management and maintaining our strong liquidity. We will continue to execute on our capital allocation framework with a priority of using our free cash flow to invest in technologies to support high-margin growth initiatives and using available excess cash in the near term to pay down debt to reduce leverage to our long-term target of approximately 1x debt to EBITDA.

Moving to our outlook for first quarter, we turn to Slide 10. We expect a sequential decline in revenue in the first quarter with revenues, including Ecolab cross-sales, in the range of $650 million to $700 million. This range does not include the potential impacts of last week's extreme weather in Texas and Oklahoma. We are working to fully quantify the impacts of that -- of those events to revenue and cost. The sequential revenue change is primarily driven by typical seasonal trends in our international operations, partly offset by anticipated continued positive momentum in the shorter-cycle North American land-oriented businesses. We also anticipate some near-term cost pressure as energy and commodity prices have strengthened and oilfield activity levels have increases versus the pandemic-driven lows experienced in mid-2020. The chemical segments are seeing some related raw material commodity inflation. They're in the process of adjusting selling prices, but we expect some margin impact in the first half of the year until these selling prices catch up with the raw material inflation.

Additionally, as we have previously shared, we are reinstating certain employee salary and benefits, reversing the temporary cost actions taken to address the 2020 pandemic-related downturn. We appreciate the sacrifices our employees made to address the health of our business during a very challenging 2020. Meanwhile, with our synergy initiatives and ongoing cost and productivity actions, we expect year-over-year margin rate improvement as we exit the year. For the first quarter, we expect EBITDA in the range of $90 million to $100 million, again, excluding any extreme weather impacts.

On this slide, we also provide some additional specifics related to our first quarter outlook. We expect CapEx to be in the range of 2.5% of revenue for the year and be slightly front-end loaded to the first half of the year due to infrastructure needs to support transition services, exits from Ecolab and our ESP leased asset pool. We remain pleased with our robust cash flow performance, and we are confident that we will maintain free cash flow EBITDA conversion ratio in the 50% to 60% range for 2021.

Before turning the call back to Soma, I would also like to mention that the company is on track to clear all 6 material weaknesses in our financial processes identified in 2019 in the coming 2020 Form 10-K filing. This is a result of significant effort and process improvements in our PAT business and corporate segment. Now back to Soma.

Thank you, Ken. Before we open the call to questions, I would like to turn your attention to Slide 12 of our deck, which highlights the 5 strategic priorities of ChampionX. On our third quarter earnings call, I mentioned that we would periodically update you, our stakeholders, on the progress we are making on each of these priorities, and so we are taking this opportunity today to do just that.

Starting with realizing our Better Together potential, as Ken shared with you, we exited 2020 having realized $82 million of our targeted $125 million of annualized cost synergy. We remain laser-focused on achieving our cost synergy goals and continue to make good progress on this plan. Our pipeline of opportunities and revenue synergies continue to build.

In addition, our recent employee engagement survey indicated that our global employees are overwhelmingly positive about the merger and the combined company.

Strategic priority 2: accelerating digital and digitally enabled revenue stream. We are making good progress on development and deployment of our fit-for-purpose modular digital solutions. We are continuing to see customer interest in digital solutions that deliver tangible value. While our overall digital revenues, which includes hardware and software, declined in 2020 due to the pandemic-related downturn, it's important to note our software revenues grew 8% in 2020. This indicates the increased adoption of our monitoring, predictive analytics, failure analysis and optimization software products by our customers.

Turning to leveraging global footprint to grow non-U.S. revenues. In the fourth quarter, non-U.S. revenues accounted for 54% of our revenues. Our pipeline of revenue synergy prospects continues to expand as our artificial lift and chemical teams leverage our combined offering and relationships. In addition, we are continuing to build artificial lift capabilities in the prioritized country. An example of this initiative is evidenced by our first shipment of sucker rod from our JV plant in Argentina. We continue to remain very excited about the international growth opportunity.

Strategic priority #4 is building our enterprise-wide continuous improvement rigor. As part of our continuous improvement journey, we have established a focused operational excellence team consisting of expert practitioners of lean principle. We will deploy these experts to high-impact opportunities to help build out the CI culture within the organization. Our CI efforts continue to help us drive productivity across the enterprise that eventually helps us to expand margin and increase cash flow.

The last strategic priority of evolving our portfolio for sustained growth. As evidenced by our third quarter and fourth quarter actions, we continue to use our free cash flow to further pay down debt towards our target level. That said, we will continue to concurrently evaluate opportunities to leverage our core capabilities across the energy markets and natural adjacencies to enhance ChampionX's position for sustained growth through the energy transition.

In addition, we have made further progress towards developing our ESG framework. Our ESG priority assessment work is well underway, and we look forward to communicating the results with you soon.

ChampionX is a global production-oriented technology provider, and we are well positioned to be a long-term winner in our industry and continue to deliver strong financial performance for our shareholders. We are excited about the opportunity set ahead for our company. We expect 2021 to be another year of solid performance driven by improvement in North American activity and the strength in the second half of 2021 as international activity gains momentum.

Finally, I want to take a moment to acknowledge Jay Nutt, who is here with us today. As previously announced, Jay will be retiring from ChampionX, but he has graciously agreed to remain with us through the second quarter of this year to ensure a smooth transition. I want to personally thank Jay for his leadership and important contributions to our organization over the last several years as we became a standalone, publicly-traded company and later completed our successful transformational merger with ChampionX during a challenging period for our energy industry. Jay has been a trusted business partner, and all of us here at ChampionX wish him the very best in his next chapter of life. Thank you, Jay.

Again, I want to thank all of our ChampionX employees around the world for your continued efforts and passion in improving the lives of our customers, our employees, our shareholders and our communities. I'm proud of your dedication, focus and resolve during these unprecedented and challenging environment. It is a privilege for me to lead such a great team.

With that, I would like to open the call for questions.

(Operator Instructions) Your first question comes from David Anderson with Barclays.

So just want to start with the Production Chemicals business. Could you talk a bit about the international performance this quarter? You had highlighted Latin America, but did any other region really stand out to you? And I guess, kind of more importantly, which regions are you expecting to improve the most over the next 12 months internationally as global oil recovers?

Yes. David, so thank you. I would say that with Production Chemical Technologies, pretty much across the board, all the international regions improved sequentially, and this is the seasonal strength we see in Q4. I wouldn't call this as an international recovery, I would call it as seasonal strength. So across the board sequentially from Q3 to Q4, we saw strengthen all the international regions, led by Latin America.

So the other regions which saw strong performance are Europe. This includes Caspian. This includes Russia. And then we also saw in the Middle East strong performance, high single-digit growth in Middle East sequentially, so we saw across all regions.

With respect to your question of where we see as we walk into 2021, as the international recovery starts setting in where we see the biggest growth, I think the areas we will see will be in Middle East, West Africa and followed by Latin America.

And then staying with the Production Chemical side and just looking at your margin profile, we don't have a ton of information going historically. But just kind of looking a little bit further out and if we assume that kind of going into next year that a lot of the synergies are going to be in this side of the business, I was wondering if you could just comment kind of where you think kind of margins can kind of normalize here?

If we look at kind of the prior peak, which we don't have a ton of information on, it looks like margins will be structurally higher, going forward, in Production Chemicals. If that is true, why -- what are the reasons behind that? And maybe it's not true, but that's what it looks like, anyways.

Yes. So Ken is also here, so I'll ask him to make some comments. But let me give you some thoughts around how we see, at least, the Production Chemicals margin. So clearly, as we talked about in the calendarization of the margin would be that we will have some margin pressure in the beginning of the year, the first half of the year due to raw material cost inflation and some cost resets. But the synergies, as we talked about, a good portion of the synergies comes into Production Chemicals. And typically, it's a combination of the price improvements, the synergies. The volume improvement also helped in plant absorption. We truly believe this business, over a longer period of time, can get to the 20% EBITDA margin. So this year, we would expect we will exit the second half of this year with a better margin than where we exited Q4. So that's -- so Ken, any thoughts there?

I think that's it. They get a lion's share of the synergies. And as they get their prices up in response to the industry, raw material inflation and more volume on a seasonal basis, you should see their margin improve to the second half of the year and on an exit rate versus year-end 2020.

But Soma, if I could add just kind of one little follow-up there. You just talked about 20% kind of thinking a little bit further out. That is structurally higher than it was before. Isn't it?

That's correct. And I mean, from a volume -- equivalent volume perspective as it is, and that has got a lot to do with the productivity improvements and the synergy benefit contributing to that. So I think we feel 20% EBITDA margin is a very realistic target for us in the coming years.

And your next question in queue comes from Chase Mulvehill with Bank of America.

It's Mike Sabella on for Chase. He had to actually step away for a sec. I was wondering if maybe we could just talk about the 1Q guide. It looks like relatively heavy decrementals in 1Q. You kind of touched on the moving pieces. There's some costs coming back, and then there are some synergies. Are you able to just kind of help us quantify some of the moving pieces? And then if you could just talk about 4Q, if there was anything one-off that helped 4Q.

Yes, Mike. So with respect to 4Q, clearly, the seasonal strength we saw in the international market was very helpful. It was better than we expected. And also, I would want to remind that, in PAT, you may recall, we had -- in our Q3 call, we had kind of said that we expect a year-end seasonal budget exhaustion and holiday weakness. But North American activity improvement and our won share gain really outperformed any holiday weaknesses we saw. You saw the sequential growth in our PAT was almost 16%. So I think that volume leverage really, really helped us as well over deliver on our EBITDA.

Now as we walk into Q1, the 2 factors, I would say -- I mean, 3 factors, I would say that contributes to this, the sequential decline. One is the international volume decline with -- particularly in PCT, and we also see normally that in our artificial lift segment as well.

The second aspect is the raw material cost inflation, which we just talked about. And that's a function of -- and this is particularly in the PCT. That's a function of commodity prices, inflation. And as Ken pointed out, it's normal for us to start working on our price improvements, and many of our contracts are commodity price indexed. So it's a matter of working those and getting those price improvements in place. And then the third -- and there's always a time lag between the raw material cost inflation and then when we get to our price improvement.

And then the third element, which we talked about was the cost reinstatement and benefit reinstatement. And as Ken pointed out, I'm so proud of our teams, all the employees around the world, who rallied and made sure that we are executing well, and they also made some sacrifices. And I think with our return of the strong performances, I think it's the right thing for us to make sure that we reinstate some of the benefits and the salaries that some of the temporary reductions we had. But we are very confident that the productivity, the synergies, the price improvements, which we are looking forward to that -- the first half margin impact will be offset. And in the second half, you should see the margin progressively improve, and we will exit a better margin as we exit the 2021 than even 2020.

Understood. And then just a quick follow-up. So you all still are clearly targeting debt reduction, will use free cash flow to pay down debt. It looks to us, at least, like you maybe get to or below that 1x target in the back half of this year. Can you just talk about next steps there? Is it -- can you just talk us through whether you would consider dividends or buybacks and how you're thinking about those 2 options and returning cash to shareholders?

Yes. Mike, as we have always said that once we get to what we consider as a reasonable target for our leverage, which is onetime, we said we will adopt a balanced capital allocation, which includes a return to the shareholders, and we are very committed to that.

And along with that, we are also looking at -- as part of the energy transition, we are also looking at the further pathway for growth. And our teams are -- we have a project going on where we have engaged outside resources tools, chart out those pathways for growth in the world of energy transition. And you'll hear about this more as we complete those projects.

So to get to our target leverage, which is that 1x, we kind of set ourselves, implement a balanced capital allocation, which includes a return to the shareholders, and then along with that, make sure that we are investing in pathways to growth. And based on some of the things we are seeing in the pathways to growth, we feel good about -- for our portfolio to have pathways to growth in the energy transition. So, Ken, anything more to add on that?

No. I think the question was when you think we can get to the target leverage, and I think that's more like sometime in '22. If you'll recall that we have the first quarter strong comparison versus last year, and so we'll drop that -- compares that first quarter 2020 EBITDA in the leverage calculation. So that will put a little pressure on near-term leverage. But the glide path, to your point, gets us to the 1x probably sometime in 2022.

And your next question in queue comes from George O'Leary with Pickering Co.

The production revenue growth was really strong in the fourth quarter, and people have asked about this a few different times, so I'll leave that there. But just thinking about the international headwinds that you mentioned in the first quarter of 2021, is that the business that we should expect to see the most revenue, most top line pressure in the first quarter? And is there any help you could provide in quantifying that for us?

Yes. So George, this is a seasonal issue, and we have went back and looked at our Production Chemical Technologies business, which is the most international business in our portfolio. And every year, you'll see this phenomenal Q4 to Q1. There is a seasonal decline.

It varies from year-to-year to see how much it is, right, depending on how strong the Q4 was, right? So it had varied anywhere from 3% to 5% in the past from the analysis we have seen, right? But again, it again depends on how strong they are. So this year, it could be a little bit more because of the strong Q4 performance we had, right? But it is a seasonal issue, and we see that every year. And so that's what I can; say.

That's very helpful, Soma. And then just thought it was interesting. This is a question more borne out of curiosity than trying to drill into numbers on anything. But the commentary on the 5.5-inch casing and the AFFIRMED PowerFit system, curious if you could frame how often you're seeing those opportunities arise or what the market opportunity might be.

And then any color on -- and I realize some of this, you probably don't want to share. But any broad brush strokes with respect to how you get the increased efficiencies, the lower output and the strong resiliency of the system. Just curious. That struck me as an intriguing portion of the presentation.

Yes. No. We are very excited about this new product, which our team -- it's really a great innovative design. 5.5-inch wells are really popular and important for our customers because it reduces drilling and completion costs.

So what you saw, we mentioned that in the slide, in the first year of introduction, we have already have more than. 107 wells in operation. And we think that as the -- as all of our customers are continuing to start looking at carbon-reduction goals, this type of technology is going to get increasingly popular. It's not just improving the well economics, but it's also helping the customers reduce their carbon footprint. So I think we are seeing some really great adoption with our customers. And I think I'm -- we are very pleased with the pace at which this technology has been adopted.

And your next question in queue comes from James West with Evercore ISI.

So Soma, it seems like you had some good success in Latin America with cross-selling your products now with 2 months under the belt -- or 2 quarters, excuse me, under the belt with the combined company. I'm curious kind of what region should we look for that success to occur in kind of next?

And maybe if you have some color on how easy or not easy that was? It seems to me that it was -- it looks like the synergies are so clear. Revenues are just so clear that it's probably an easy sale, but I'd love to hear any context you can provide.

Yes. James, I think the opportunity, when we look at the pipeline of opportunities, we have a very -- really, our team -- the work streams have a really good process by which they assembled opportunities, qualify them. So we have a really good stage-gate process where we know what is the total set of opportunities in the pipeline right now, which ones are hot prospects and going after them, right? So they are continuing to assemble. And when I see that pipeline, to your point, it's really encouraging the kind of prospects that are building.

So what we are -- what -- I feel that as the pandemic-related situation recedes, I think we will see more of these opportunities materialize. We are seeing several of them come through, but they are smaller ones. They come through quickly, particularly in Permian, particularly in -- and we have shared with you a couple of big wins we have had internationally. So I feel it's a matter of the pandemic-related uncertainty receding. I think most of these opportunities will come through.

Now the ones where we are doing what we call it the digital and artificial lift and chemical to help customers optimize their production, we have currently about 3 solid trials going on, and these are with the large customers. And so we are also pleased about the interest in bringing these 3 together to help customers optimize sale of their production as well. So I think these are always hard to predict how quickly it will come. But let me put it this way: We are encouraged by the pipeline.

Okay, okay. Fair enough. And then maybe just an unrelated question. But with the situation in Texas that we've seen over the last week or so, could you provide any color or context on how the restart process -- given that a lot of your equipment and your technology is going to be used here, how the restarting process is going and what we should expect?

Yes. Again, we are about 3 days into the week after that storm. So what we are -- again, what we are seeing on a preliminary basis here is I think as the customers restart the wells, and we mentioned this in our slide, that we think on the production automation side, particularly artificial lift, I think there is a potential that we will be able to recover the volume, and we are watching the workover rig activity increases. I think we expect the workover activity will increase as customers are starting to bring back the wells, and we think there could be some incremental opportunity in March for our artificial lift, particularly rod lift type of opportunities, where customers have to replace maybe some parts of the pump, rod strings to bring the well back online. So we feel, March, there could be some uptick in that activity. That's why in Production & Automation, we feel we may be able to recover some of that volume in Q1.

With respect to Production Chemicals, I feel, James, that -- because it's tied to lost production, so it's probably unlikely we'll be able to recover that lost volume.

And then drilling and completion, I feel like in our Drilling Technologies, there will be some impact, but we still expect our Drilling Technologies to have a sequential growth from Q4 to Q1.

And your next question in queue comes from Marc Bianchi with Cowen.

First, following up to the line of questioning around kind of the pace of revenue here. Maybe if we take the effect of the storms out of the equation and just sort of think about where you were in fourth quarter, where you'll be in first quarter and then where you go from there, is there any aspect of the business -- obviously, we have it in drilling where there's a catch-up of restocking. But if I look at the Production & Automation business, had a nice recovery from the lows of 2020. Was there a catch-up in installation of some lift equipment? And as we get beyond first and second quarter, there could be a normalization? Or if rig count and completion activity just sort of stays flat from where we get to in the first half, you would think that your Production & Automation business sort of does the same thing?

Yes. So Marc, if you recall, going back to the third and fourth quarter of last year, right, as the production shut down and the wells start-up coming back online, we saw that nice recovery. And we saw -- all through the 6 months, we saw sequential improvement month-over-month, and that capped with a 16% Q4 sequential growth. So we feel that the bringing back wells online, that type of activity improvement is behind us. So from here on, I think it's more the completions-driven improvement and incremental maintenance spending that can happen.

So the North American -- if you set aside the winter storm impact, which is still -- we haven't quantified it yet. But if you set aside the winter storm impact, if you look at January, the -- we could see that activity level, particularly in North America, in our Production & Automation Technologies continuing as we saw in January.

So again, we hit the winter storm in February, but I do think that with the strength of the commodity prices, I think as customers regroup and start bringing the wells back online and I think the completions activity continuing, we will see that sequential improvement in our artificial -- in our Production & Automation Technologies. That, from a market perspective.

Now aiding that a little bit more would be our share gain opportunities, particularly with our new products and also the digital, we do think that the digital will start -- continuing our sequential growth. So I feel like in our Production & Automation Technologies that 2021 is set up well from that perspective. Now second half, I think if the commodity price continues to stay robust. I think we'll still continue to see the completions activity incrementally improve.

Right. That makes a lot of sense, Soma. I want to go to the energy transition discussion now, where you talked about these pathways that you're exploring. And I know it's still very early days, it seems. But could you provide any direction as to where you might be looking? And perhaps what it is that ChampionX has within the portfolio that might have some application, just to maybe give us something to think about?

Yes. No. Absolutely. I think there are 3 different type of pathways we are exploring, right? So the first one is what are the opportunities within our existing markets with our sector energy transition. So here, a lot of this, Marc, revolves around the idea of decarbonization, particularly as our customers continue to commit for carbon-reduction targets and carbon-reduction goals. And you saw some of the E&Ps are already announcing how much money they will probably start spending on those. I think we have a real opportunity there given our technology portfolio, starting with our production chemistry technologies where we have shared before how these chemistries help customers reduce their carbon footprint, and we are very active with -- particularly the large integrated oil companies in this process.

And then that, combined with our digital, if you look at the -- at one of the digital technologies and products we have, it extends the life of the equipment, emission control, emission management, as well as production optimization. So we feel there is a decarbonization opportunity within the existing -- and our technology is already play very well into that market, just like we've talked about the ESP. That's one pathway, and we are setting up for that.

The second pathway I see is the existing technologies we have, how that can be applied to adjacent markets. And we have shared with you before our diamond sciences, I think we'll continue to share more about that. And as -- and we may deploy more capital into it, and that's what I mentioned when I say energy transition pathways. And we are doing some work to see how we can -- what are the pathway to accelerate the diamond sciences movement.

And the third element is our digital portfolio. So if you look at our digital technologies we have and some of the proprietary hardware we have and the platforms and the analytics we have, that can be used in other verticals. And so we are looking at those pathways and how we will unlock the value in that portfolio outside of the oil and gas, so we are looking into those pathways as well. So these are the type of pathways we are looking at for energy transition.

Jay, really appreciate the time, and good luck going forward.

Thank you, Marc.

And your next question in queue comes from Chris Voie with Wells Fargo.

Just curious if you can help set some early boundaries for the impact of weather this quarter compared to the $90 million to $100 million guidance.

Yes. I mean, like I said, it's too early to do that. That's why we gave you some qualitative commentary. So here's how I think about it, right? In Production & Automation Technologies, there's a chance that we will be able to recover, price, volume, given -- if the customers increase their March workover activities and so on and so forth, right?

Production Chemical Technologies, the way I would think about it, it is tied to the production volume, right? And you can see for -- you know our revenues we get from the U.S. market, right, and you can kind of get a feel for -- since it's a consumable, it's a daily use of things. So to the extent the production volume has been curtailed, you can kind of think about along those lines. We have a week of production shutdown in parts of the U.S., right? So that's the way to think about it.

With respect to Drilling Technologies, it's just a 1-week loss of activity. I don't think that will recover. But as I mentioned, we have good momentum in that business, so we still expect to deliver. So I don't see that as a major impact over the $90 million to $100 million Drilling Technologies as a major impact of the $90 million to $100 million target. I think the primary thing would be our -- around our Production Chemical Technologies, where the lost volume I don't think customers will make it out.

Okay. And then maybe thinking a little bit longer term here. But is Production Chemical Technologies, the margin in the U.S., are they dilutive or accretive compared to international? Just thinking if you get production growth in 2022, would that be dilutive to margin goals if the U.S. outperforms, which I think would be a surprise compared to my forecast but could potentially happen with oil prices where they are.

Yes. No. I mean we don't -- as you know, we don't give margin details by specific regions or specific basins, but here's what I would tell you. For us, when you think of U.S. and North America, there are things which are built around it, right, offshore, deepwater. As we have mentioned to you, those are typically higher margins because of the nature of the applications. Oilsands tends to be higher margins because of, again, the nature of the applications. So there are puts and takes, so I wouldn't say that the U.S. growth will be necessarily dilutive to the margin. But -- and U.S. also, we have some really strong synergies and productivity opportunities going on in the U.S. So that also will add to it. So I wouldn't say the U.S. growth is necessarily dilutive.

Okay. And if I could just squeeze one last one in. The -- you're at $82 million on the run rate for the synergies. Is the remainder mostly going to come in '21? Or is there a big chunk left that's going to hit in 2022?

Most of it will come as we exit 2021. So again, it's in the second half. And the reason for that is, as you know, we -- the -- it comes from the areas of supply chain, some G&A opportunities, so those are in progress. So most of it will come in the second half. So I think we will get most of it as we exit 2021. There will still be some to go as part of the Ecolab separation into 2022, but most of it should come through in 2021.

And your next question in the queue comes from Ian MacPherson with Simmons.

I'd also like to start with a thank you to Jay and hello to Ken. But I wanted to follow up on the question on some on your energy transition pillars. The first one regarding leveraging your existing market opportunities. I would imagine that there are probably some R&D activities unfolding currently with regard to greening your supply chain and your raw materials and feedstock for the chemicals business, not that, that would have been an ESG conquer coming out of Ecolab. But I imagine that, that would be an area with significant runway for improvement. Is that an area that's commanding more R&D at this point as well?

Yes. No. I mean we have stepped up -- the benefits -- have stepped up the efforts. As well as our resources now are more -- our technology resources, R&D, as you know, we have a big R&D technology group within our chemical technologies. They are very focused on the engineering new chemistries, including things like green chemistries and those type of opportunities. Yes, absolutely.

You have a persuasive pathway towards margin uplift over the course of this year, but you also cited in the beginning some squeeze near term in Q1 with chemicals raw materials as well as normalizing some of your payroll. What is the historical experience of that business in terms of passing through your raw material costs in the chemical side? And what lag does that require?

Right. No, Ian, our chemical technologies team is -- really does a good job of this. They're very experienced in doing this because they've been doing it over and over these types of inflationary cost pass-through. So typically, it's between 3 to 4 months, you will see a lag. And that depends on that type of contract, what is the customer contact cloud for and so on and so forth. So typically, about a 3- to 4-month lag.

Okay. That's helpful. And then last one for me, I know it's late. Q4 was a big free cash flow result. Just wanted to get a refresh, if there's any change in your thinking or guidance around free cash flow conversion out of EBITDA for the full year this year.

Yes. So I'll ask Ken to comment on it. So Ian, as we have -- as you know, last year, we increased actually. We used to say $40 million to $50 million, and we've increased it last year to $50 million $60 million. And our teams continue to execute well on those. And so I think, for now, I feel $50 million to $60 million range is the appropriate one as we walk into 2021, but I'll ask Ken to maybe give a little bit more color on it.

Yes. I think -- I mean the guidance for the year is the $50 million to $60 million. I think in the first quarter, you may see a little pressure on that because of some working capital impacts. And then that CapEx may be a little bit higher than 4Q level and so some things to help the Ecolab transition. So -- but overall, I think that guidance is very appropriate. It's baked into our thinking in terms of leverage as well as shareholder return and high-growth investment options in terms of capital allocation.

And your next question in queue comes from Blake Gendron with Wolfe Research.

My first is on artificial lift and specifically ESPs. Just wondering if you could level set for us the lease versus sale mix, whether some of the newer technology is sale versus lease. And to the degree that ESPs get damaged as a result of what's happening in Texas, are you exposed to any of the replacement costs as it pertains to your lease fleet?

Blake, good question. So since Jay is on the call, I'll ask Jay to comment on it. Jay?

Yes, Blake. So as we've shared before, we still have a pretty high proportion of the revenue base in ESP directed at lease. While we've been trying to pull that down to more sales, we're still at about a 75-25 mix in terms of lease versus sale. And then, as you know, those lease assets are ChampionX assets, so we'd be responsible for making sure that we provide the replacement parts or repairs, as necessary, to get those customers back into operation.

That's helpful. Jay, happy retirement. My second question is on the commerciality and the Better Together cross-sell opportunity. It sounds like you've had some real success with some of the smaller customers, which, given the operational volatility and some of the logistical constraints, that makes sense. You have some trials with some of the larger customers.

When I think about NOCs and large IOCs, I think of having an individual for every type of thing in procurement. So wondering, number one, are you able to cross-train the sales force to sell both at the same time, especially to the large customers? And how do you think your large customers potentially could change the way that they source production optimization technology moving forward as a result of what you're doing with the bundling?

Yes. Blake, so I think the way we go about this is we have a very strong what we call the key account management team at our chemical technologies business. So what we do is we -- for each of the accounts, large accounts, particularly the integrated oil companies, we have a focused key account manager and possibly a management team.

What we are doing is we are adding to the team an artificial lift expert to the team because it is -- given the technical aspects, the depth is important as you have conversations with customers, so we add an artificial lift expert to that team. And so now that key account management team is fully capable of selling our whole portfolio, are talking about our whole portfolio to these customers. So that's step number one.

Step number two is the real opportunity, our door-opening opportunity for us is this combination of bringing, I mentioned, the digital artificial lift and chemical technologies together. I think that is the real door opener because customers really see the value in that. And so the trials I talked about in the early part of the Q&A was all opening doors for us. So that's how we demonstrate value to the customers, and that starts the process.

And we have no further questions at this time.

Thank you. Thanks again, everyone, for your continued interest in ChampionX, and we look forward to talking to you on our first quarter earnings call. Thank you.

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