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Good morning and welcome to the ChampionX First quarter 2021 Earnings Conference Call. My name is Cheryl and I would be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] Please note that this conference is being recorded, I will now turn the call over to Byron Pope, Vice President, ESG & Investor Relations.
Byron Pope, you may begin.
Thank you. Good morning, everyone. With me today are Soma Somasundaram, President and CEO of ChampionX and Ken Fisher, our Executive Vice President and CFO.
During today's call, Soma will share some of our company's highlights. Ken will then discuss our first quarter results and second quarter outlook before turning the call back to Soma for some summary and thoughts. We will then open the call for Q&A. during today's call, we will be referring to the slides posted on our website.
Let me remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore I refer you to our latest 10-K filings and our other SEC filings for 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 first quarter press release which is available on our website. I will now turn the call over to Soma.
Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, employees and analysts to our first quarter 2021 earnings call. Thanks for joining us today. Let me start by recognizing the remarkable resiliency and focus of our ChampionX organization in serving our customers, team mates, and communities well during and after with a strong Uri.
It was an unprecedented weather event challenging for Texas and neighboring state and impacting the wellbeing of many people. Our employees work diligently and tirelessly after the storm to minimize disruptions to our customers and return our facilities to full operation in addition to supporting their colleagues who experience power and water disruptions and damages to their homes.
For their dedication and commitment, I'm tremendously grateful. Let me turn to our recent performance. As we close in on the one year anniversary of our transformational merger of legacy Apergy and legacy ChampionX, our first quarter results further demonstrates that geographic breadth and resiliency of our combined business portfolio and the strong free cash flow generation capacity of the company.
We are well-positioned to outperform the factor irrespective of the energy industry macro environment. Our integration is going well. We continue to make progress on our targeted cost synergies, our customers are increasingly recognizing the value of our better together effort with our combined technologies, products and services offering and we are excited about the growth opportunities in the future from the combined offering.
As a focus driven company, we always begin with our organizations focus of improving life of our customers, our employees, our shareholders and the communities in which we operate. Slide 4 illustrates this common process that unites us and the shared culture and the operating principles by which we execute every day. This will come with no surprise to those of you who have followed our ChampionX story.
Focus is at the heart of how we differentiate our company in the marketplace and we constantly strive to serve all our stakeholders exceptionally well. One of our core operating principles is our customer focus which we passionately describe as being relentless advocate for our customers. We are proud that EnergyPoint Research an independent customer satisfaction research firm which surveyed more than 3300 customers of oilfield products, awarded ChampionX that cut overall ranking plus total customer satisfaction for 2021.
We also ranked first in eight specific categories which you can see here on Slide 5. While legacy Apergy has been recognized as number one in prior years, we are especially encouraged to see our merged company in the top overall spot as well as being number one in production chemicals, artificial lift and digital oilfield segment.
This exceptional industry recognition illustrates the strong customer centric cultural alignment across our organization, the dedication of our employees around the world in supporting our customers and how our combined offering of products and services is truly better together.
Later in my comments, I will share with you where we are headed as we strategically evolve our business portfolio for sustained growth. But first, on Slide 6, let me give you a quick example of one of the ways in which we are already helping our customers produce the hydrocarbon that the world needs in a more sustainable manner.
To our research and development in our Aberdeen Scotland Technical Center of Excellence, our chemical technologies team recently qualified a non-toxic biodegradable corrosion inhibitor which will help one of our customers in the North Sea maximize recovery without sacrificing efficiency. Our portfolio of environmentally speedier corrosion inhibitors will help North Sea operators meet strict environmental regulations while economically and sustainably expanding the life of their assets.
This technology is receiving great reception from our customers. We are also continuing to advance our fit for focus digital technology solutions that help our customers improved efficiency and produce oil and gas in a sustainable manner. In the first quarter, we added autonomous control feature to our industry leading XSPOC production optimization software.
Harnessing the power of the AI models that is built into our advanced optimization software, the autonomous control feature monitors and recognizes changes to well conditions and equipment operation and autonomously adjust parameters to optimize production without any human interventions. This enhances safety and efficiency of production operations for our customers.
Ken will take you through our first quarter financial results shortly. So let me just share a few high level comments. Through three full quarters of the new company, our portfolio resiliency and strong free cash flow generation a proof point after the power of our combined global business. In the first quarter, continued growth in our shorter cycle North American land oriented businesses helped offset the impact of seasonality in our international operation and short-term raw material cost inflation in our in our chemical technologies businesses.
Our chemical technology team is making excellent progress on price improvements with our customers to offset the raw material cost inflation and we feel confident that we'll be able to fully offset the raw material inflation in the second half. The pricing improvement combined with our synergy delivery and increased volume gives us increased confidence that we will see meaningful margin improvement in the second half. And we will exit 2021 with better margin than 2020 exit rates.
I would now like to turn the call over to Ken to discuss our first quarter result and our second quarter outlook.
Thank you, Soma. Good morning, everyone and thank you all for joining us. Today, I will be commenting on the adjusted EBITDA for sequential comparisons. We believe this metric best reflects the business performance and continuous operations. As seen on Slide 8, first quarter 2021 revenue was $685 million, 3% below a strong fourth quarter of 2020.
Growth in the shorter cycle North American businesses offset as expected by seasonality in our international operations. Sequentially, North American revenues were up 7% while international revenues declined 15% on the afore mentioned seasonality. Included in our quarterly revenues were $41 million of cost sale to Ecolab.
As previously communicated, cost supply sales to Ecolab are associated with post-merger supply agreements under the transaction agreement. We do not recognize margin on these sales from an EBITDA perspective. In our financial statements, revenue associated with these sales is allocated to the corporate and other segment.
We expect these sales will continue at a declining rate for approximately three years from the merger closing date. GAAP net income for the company in the quarter was $5.8 million. We delivered consolidated adjusted EBITDA in the first quarter of $94 million, a 13% sequential decline. This decrease was primarily driven by the seasonally lower volumes, higher raw material cost in our chemical technologies businesses and the impact of Winter Storm Uri on our facilities.
In the quarter, we delivered strong cash flow from operations of $90 million and generated $65 million of free cash flow, a very healthy free cash flow to revenue ratio of 9%. In the first quarter we invested $26 million in capital expenditures primarily integration related requirements in our chemicals businesses including information technology infrastructure to support the separation from Ecolab which is significantly ahead of the schedule in the transition services agreement.
Through time, our CapEx guidance remains consistent, we expect upon capital investment in the range of 3% to 3.5% of revenues. Turning to the business segments. Production Chemical Technologies generated first quarter revenue of $412 million, 8% lower than a strong fourth quarter. This sequential decrease was expected on lower seasonal international volumes partially offset by the continued recovery in our North American land business.
Quarterly revenues were also impacted by the Gulf Coast supply chain disruptions caused by Winter Storm Uri. However, our team did an excellent job ensuring our customers with supported end supply. Geographically, North American revenue increased 6% while international revenue declined 19% sequentially. Segment profitability was adjusted EBITDA of $56 million down 28% sequentially on lower seasonal volumes, higher raw material cost and the impact of the winter storm.
We were impacted by the supply chain disruptions experienced across the Gulf Coast Petrochemicals Complex and the cost of repair and restored our facilities. To address commodity inflation, the chemicals team announced selling price increases in early March and we are working with customers to implement these increases.
Quarterly adjusted EBITDA margin was 14%. We expect first quarter to be a low point for the year as it was impacted by the aforementioned matters. As volume steps up and pricing actions kick in, we expect to see an improved margin trend throughout the year and an exit rate above the prior year's actual year end.
Moving to production and automation technologies, segment revenue was $167 million or up 5% sequentially due to higher volumes as our E&P customer spending continue to improve. Digital revenue grew 8% sequentially. As customers continue to place a greater focus on leveraging digital solutions to improve their efficiencies and cost structures, we expect increased adoption of our modular fit for purpose approach.
These secular trends coupled with our better together digital production automation and chemicals combined product and service offering positions us well to drive future digital revenue growth and also other revenue synergies. First quarter segment adjusted EBITDA was $36 million up 21% sequentially. The P-18 theme continues their strong execution with first quarter segment adjusted EBITDA margin returning to historic experience levels.
First quarter adjusted EBITDA was a robust 21%. The sequential margin improvement was driven primarily by leverage from the higher volumes and continued structural cost improvements. We expect this margin rate range to be maintained as we move through the year. Drilling technologies experienced the second consecutive quarter of much improved customer demand as the U.S. active recount continued to increase during the first quarter.
Segment revenues was $35 million in the quarter, an almost 50% increase sequentially which significantly outpace the 27% industry recap growth in the U.S. during the period as we saw customers continue to restock inventories. Drilling technologies delivered segment adjusted EBITDA of $7 million during the first quarter up $5 million sequentially, adjusted EBITDA margin rate was 21% driven by a combination of the higher volumes and continued rigorous cost management.
GAAP earnings also benefited from a settlement on a patent infringement case which we excluded from adjusted EBITDA. We expect EBITDA margins to remain in this range unless we see a further significant step up in U.S. drilling activity driving higher order rates and volumes. Reservoir Chemicals Technology revenue for the first quarter was $30 million, a 3% decrease sequentially driven by delayed well completion activity during Winter Storm Uri.
Segment adjusted EBITDA in the first quarter was a negative $600,000, a $3 million sequential decline primarily driven by lower volumes in the absence of 1.6 million of nonrecurring items which benefitted the fourth quarter. We expect the business to be near breakeven in the second quarter and return to profitability in the second half of this calendar year.
We remain laser focused on maximizing merger synergies. We continue the focus attention across the entire company to capture all potential integration benefits including business and functional cost improvements as well as an exciting pipeline of revenue synergies. Slide 9 in the presentation summarizes these efforts in the progress. We still expect to achieve our targeted $125 million of annualized cost synergies within 24 months of the merger closing.
And we exited the first quarter at a $91 million run rate. We'll continue sharing synergy progress with you in coming quarters. Turning to Slide 10 and our financial position. We ended 1Q with approximately $611 million of total liquidity including $260 million cash on hand and then available revolver capacity. We repaid $7 million of debt during the quarter as a result of our continued strong operating cash flow generation.
This week we have provided notice to the holders of our 6 and 38 Senior Notes due 2026 that we are redeeming $55 million in principle value in the notes on May 07. Including this announced redemption, we will have paid down over $221 million of net obligations since the merger were approximately 20% of the total outstanding. At March 31, our net debt the proforma adjusted EBITDA was 1.9 times compared to net leverage of 1.8 times at the end of 2020.
Leverage was impacted as we roll off the strong pre-pandemic first quarter of 2020. We remain on track to maintain our strong free cash flow generation capability, strong liquidity and our focus on reduction of leverage. We continue to execute on our capital allocation framework with a priority of allocation of pre cash flow to invest in technologies to support high margin growth initiatives and using available excess cash in the near term to reduce our leverage to the longer-term target of approximately one time net leverage.
We remained well on track to these financial objectives. Turning to Slide 11, in our near term outlook. We expect a sequential increase in revenue in the second quarter with revenues including Ecolab cross sales in the range of $700 million to $740 million. The expected sequential change is primarily driven by the seasonal upturn in our international operations and anticipated continued positive momentum in our shorter cycle North American production oriented businesses.
Our growing oriented businesses are expected to benefit from continued U.S. recap growth or be into the moderating pace but they also faced some seasonal headwind on the Canadian Spring Fall period and the likely end of customer restocking. We anticipate a moderate near term cost pressure for our commodities and raw material inflation. As noted, we have begun the process of adjusted selling prices across our businesses and we expect selling prices to catch up with the raw material inflation as we move into the second half of the year.
We also see the full impact of some employee cost and benefit restorations as we move into the second quarter. With our synergy initiatives and ongoing cost and productivity actions, we continue to expect sequential margin improvement throughout the year with an exit EBITDA margin rate above 2020's fourth quarter exit rate. For the second quarter, we expect EBITDA in the range of $97 million to $105 million. On this slide, we also provided some additional specifics related to our second quarter outlook.
Overall, we remain pleased with our robust free 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. Now, back to Soma.
Thank you, Ken. Before we open the call to question, I would like to turn your attention to Slide 13 of our deck. It highlights the price strategic priorities of ChampionX we have previously shared with you. Let me share with you a few high level thoughts on where we are headed over time with respect to our strategic priority of in evolving our portfolio for sustained growth with the energy industry evolution.
We see three distinct growth pathways for our company during the energy transition. Our first growth pathway is in the area of decarbonizing oil and gas operation. This is in our back yard where we play. And we have a strong right to win as our existing upstream and midstream customers increasingly commit to a long-term cost and reduction growth. Our technology portfolio particularly as it relates to production chemistry, digital solution, and artificial lift, will play an instrumental role in helping our customers reduce the carbon intensity of their operations.
In addition, we will judiciously evaluate clean technology investment opportunity that leverage our expertise in upstream production well-sized and mid-stream solution as we did with our recent investment in QLM Technology. QLM has developed a differentiated technology for detecting, visualizing and quantifying methane emission. The second growth pathway involve expanding our digital domain.
Within our digital portfolio, our proprietary hardware platform analytical solution, which today are being employed in the oil and gas industry have applicability across multiple industry and market. So we are selectively evaluating partnerships which facilitate broader industry application of our digital technology. We see opportunities to further expand our digital domain beyond oil and gas. An example of this is in the first quarter we received an order for our real time compressor monitoring and diagnostics solution in the power generation industry.
Lastly, the third growth pathway is in capitalizing on our core capabilities. As we have taken an exhaustive look at our differentiated skill sets across our existing portfolio of businesses we see attractive opportunities to leverage our core capabilities and technology, innovation, supply chain, manufacturing, across a number of target is natural adjacency end market. We are doing this today with respect to our diamond sciences expertise and you will hear more from us over time with regard to some of these identify new and market opportunities.
As we continue to use our full cycle free cash flow generating ability to further pay down debt to our target level please note that we will continue to allocate capital for both organic and inorganic opportunities to evolve the portfolio in a disciplined manner which is consistent with our value creation framework. We also remain committed to the path towards a sustainable return of capital mechanism to our shareholders over time including ChampionX is a global production oriented technology provider and we are well positioned to be a long term winner as our energy industry continues to evolve. Through our differentiated products and technology, attractive growth opportunities and strong free cash flow generation we are focused on delivering strong financial performance for our shareholders this year and in the future.
Again I want to thank all of our ChampionX employees around the world for their continued dedication to our process of improving the lives of our customers, our employees, our shareholders and our community. I'm both humbled and inspired to lead such a phenomenal team.
With that I would like to open the call for questions.
Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from David Anderson from Barclays. Your line is now open.
Hi, good morning, Soma. I was hoping you could share some of your longer term views on global oil production and how that relates to production chemical segment and the 20% margin goal you've talked about previously. Essentially this business, the way I look at is a bit it's a volume story. So how do you see global production trending as it recovers out to ‘23 and then how do you think about volumes beyond that because obviously relates pretty heavily to your this division.
Yes. Good morning David. So we feel the global oil production and driven by the economic recovery as we are seeing starting to unfold here. So the global production will start increasing in the coming quarters and then the years as the demand recovers here. So while our production chemical business is driven by the overall production volume there is also an element here again of the intensity of production chemistry. Depending on the type of production where the growth is the intensity of production chemicals are very different.
So we feel that will add to the production volume story as well. And then on top of that as we showed you the example of what we call it the green chemistry where we are helping our customers reduce their carbon intensity we feel that's a growth element for us and production chemistry really play an important role in that area and as that unfolds, I think you will see another level of growth element to our production chemical business.
Sort of the mix of production itself just kind of get you more closer to that margin goal I guess what you're saying is, as you see these different types of production comes on some more, some of it is more chemical intensive and therefore is that kind of how you can get to those margin goals?
Yeah, the margin goes has two elements. One is the top line growth. So this is just the top line story. But we have a significant effort on the synergy delivery as well as we have talked before a lot of the synergy delivery is going to be benefiting the production chemical business and particularly around supply chain and we have a very-very focused effort with chemical technologies business to drive excellence in supply chain which is driven by our scale footprint. So I would say David it's a combination of both. We feel very good about the march towards that 20% goal.
So my second question is on the artificial lift side. Businesses recovered really nicely last few quarters. It looks like it's only about 19% off of a year ago levels. And assuming this business kind of outperformed spending, I think this would be something on the kind of a 200 million quarterly run rate by kind of by year end. Is that fair? Is that within reason? And I guess the other question is, is there still room for margin expansion? You're already pretty close here to peak marches already. So how do we think about that as well?
Yes, with respect to the artificial lift I'm not going to put a timeframe around the growth but here's what I would say David we feel very good about how that team is executing our position and then the revenue synergy opportunities that will unfold as the quarters go on. So I think you should expect this business to be sequentially increasing throughout this year and don't forget, there's also some shared gains that seems to really executing well. So we feel very-very good about the artificial lift business. And with respect to margins, I think the combination of structural cost execution this business have done along with the volume increases, I think I mean, look in the near term, the margin rates which are seeing 20% to 22% is very real and we should continue to expect that. And as the volume increases I think there is potential for more.
Great. Thank you very much.
Thanks David.
Thank you. Our next question comes from George O'Leary from Tudor, Pickering, Holt & Co. Your line is now open.
Good morning Soma, good morning guys.
Good morning George.
Just on related to the last question but looking at it a little bit differently just curious if you could frame kind of the breadth of artificial orders, artificial lift systems orders from a technology type perspective. Are we seeing a pretty broad array of technology types at this point? Are there any read throughs you might be able to make through make from that as a result of that breadth?
Yes. I think George what I would say is as the completion activity is starting to recover we are clearly seeing the strength in there that in our ESP business and in addition I will say George in the ESP business you may recall that we introduced that new technology which is a powerful motor, which we shared with you last quarter and that is continue to get some strong acceptance. So clearly we are seeing good momentum in the ESP technology partly driven by the recovery and completions and partly the new products in production.
Raw lift has been a really great story. As we recovered from the bottom of the pandemic last year as a sudden wealth came back online and then as the oil price continued to move up we saw we are seeing, continued to see increased [rollout] of activity as customers started spending more on those raw lift out and we are also starting to see the conversion starting to show up now. So again raw lift continues to be a strong story here and our teams are executing well on some share opportunities as well. So those two clearly are the big part of the game. The all forms of artificial lift we are seeing growth George, of all forms of artificial lift we are seeing growth.
Great, that's very helpful and then just the free cash flow generation continues to be very strong for you all. And you mentioned. There are various growth opportunities certainly sounds like plenty of organic growth opportunities on the horizon. But you also want to return cash to shareholders at some point down the road and your CapEx as a percentage of revenues is relatively low compared to the free cash flow generation. Given the strength above and beyond kind of the guided free cash flow to EBITDA levels that we've projected, I mean, you guys have kind of trounced those levels quarter in and quarter out. Any expectation or thoughts around your broad brushstrokes, not looking for exact timing around when you might be able to be in a position to start returning cash to shareholders.
Yes. George, we are very pleased with the free cash flow generation potential and execution of the portfolio. As you mentioned we remain committed to that. I think you should continue to expect us on a full year basis generate between 50 to a convert between 50% to 60% of the EBITDA to cash flow. Some products will be much higher some quarters will be slightly lower, but on a full year basis we feel very comfortable with that 50% to 60%. So if the activity level continues to be constructive I think we will get there sooner than later. But I'm not going to put a timeframe precisely but I just want to re-emphasize we are very clearly focused on that.
Thanks for color Soma.
Thank you.
Thank you. Our next question comes from James West from Evercore ISI. Your line is now open.
Hey, good morning Soma, morning Ken.
Hey good morning, James.
Good morning.
Soma I am curious about your operations around the Middle East as we've restarted the economy here and you alluded to it earlier the reopening old demands about to rip higher and the OPEC barrels have to come back online as we all know. Are they already engaging with you in that process at this point in setting up for that? the as a result of that could you see a nice sequential 2Q, 3Q bump in your production business as a result?
Yes James. We are definitely seeing an increased tender activity in the Middle East area and particularly around our auction business as well as in the production chemical side. But on the production chemical side as you know the tenders tend to be for longer term contracts. So here the question of I think the more of the production chemical activity will be driven by budget releases in the second half as customers, particularly the OPEC countries starting to increase production but definitely we are seeing that tender activity picked up in Middle East. And our teams are well set up for that and so you should expect sequentially all of our international, I mean particularly Middle East continue to show strong growth as we walk into Q2 and then as we are in Q2, and Q3, and Q4. We expect all of our product lines to grow in Q2.
Right. Okay, great. And then just kind of related follow up. You mentioned when you were talking about the decarbonizing of the carbonization excuse me of operations that there could be organic but also inorganic growth. How should we think about the inorganic side? What kind of acquisition or JV or partnership opportunities are out there that we should be considering?
Yes. James great question. And that we are definitely focused on all of those possibilities and that's an example which we pointed out is the technology investment we made in QLM. We are evaluating number of those options, so I think there is number of new technologies which are being developed and we are participating in them.
So it's in terms of how the timing of those things will work it's too early to tell we've got number of things on we are looking at in the area. So you expect us to continue to update on the progress on that. And this is an area we feel really-really good about again, because of the access we have to the production wealth side. We have over 3000 employees who day in day out visit these well side. So we are in a much better position and access to the well side. So you should see us continue to stay focused and you will see more of that for months.
Okay. Got it. Thanks Soma.
Thank you.
Thank you. Our next question comes from Scott Gruber From Citigroup. Your line is now open.
Yes, good morning.
Good morning Scott.
Good morning.
Great to hear the pricing traction in chemicals but obviously we've also seen crude prices continue to inflate here and with the global economic backdrop appearing very constructive through the summer and fall. There does appear to be risk of additional inflation for a variety of commodities. Can you just speak to how you thought about that with the pricing resets. You try to build in some buffer for additional inflation or are there contractual mechanisms to help offset additional inflation. I guess the main question is one, how much additional information can you absorb without putting the year end margin expansion goal at risk? And what's your ability to offset another [bad debt] of inflation in the second half?
Yes. No. Scott this is something which we are watching definitely closely.I would say to your question, I think we have done some sensitivity around these things and given our pricing too much effort plus our productivity and synergy efforts we feel pretty good about our margin execution here and also the exit rate for the year. So I think the sensitivities we have done all point to the fact that we should be able to offset the raw material inflation even if there is a little more than what we are currently experiencing.
Got you. And then yesterday another service company commented on getting drillbit pricing that's above and beyond input cost inflation. Do you have any ability to push pricing for the diamond cutter insert at this point.?
Yes Scott, what we have discussed in the past the way we do piping in our diamond cutter businesses is we don't necessarily have like a price increase type mechanism. What we do is mostly through the innovations we do as more than 50% of the business that comes from new products within the last three years. So that's our primary mechanism for getting price increases and I would say we are encouraged now because the customers are that the market has recovered, it's very clear that the customers focus have turned to technology and differentiated products and technology. So that gives us that opportunity
Got you. Appreciate the color Soma. Thank you.
Thanks Scott.
Thank you. Our next question comes from Chase Mulvehill from Bank of America. Your line is now open.
Hey, good morning everybody.
Good morning.
Good morning, Soma. I guess first question I kind of wanted to talk about was there's a debate out there about completions, momentum kind of stalling as we get into the summer and kind of look into the back half of the year here in the U.S. And so maybe if you could talk about how this could impact. If that happens how they would actually impact the U.S. lift business? I know there's a bit of lag between completions and your lift revenues. So just I don't know if you can kind of bridge the gap. If you start seeing kind of stalling momentum or completions and what kind of impact that may have on the lift business.
Well Chase, I think that the business that gets impacted with the lag is the ESP part of the business if there is a completion slowdown. We don't see in other parts of our portfolio in the lift getting significantly impacted by that. But our conversation so far with our customers does not indicate any type of slowdown but also you may recall in ESP business now a days there is the second and third run on the ESP. So even if the completion slows it's going to take a little bit of time before we see that impact in ESP because of the second and third run.
Awesome. That's very helpful. Appreciate the color. And then I know drilling tech is less impactful these days post the merger but obviously it's had a good couple of quarters here on the restocking then looking at the chart that you guys provided I always appreciate that chart. It looks like you kind of have a roughly a three quarter benefit of restocking, so if we kind of use history and think about what it means for this restocking cycle, it looks like we may have one more quarter of restocking and so you should be able to outperform the rig count in 2Q. Would you agree with that? Or do you think that the restocking is done at this point?
Yeah, I would say the restocking is largely done and the business volume as you rightly pointed out selling technologies business has been is stepped down from a smaller [base]. So the restocking up, I don't expect it to be beyond two quarters. So which means in second quarter we were not anticipating more impact from restocking. But to your point of outperforming rig count we feel good about outperforming the rig count but just at the magnitude of the outperformance won't be as high as what you saw in Q4 or Q1. But we will definitely outperform the rig count.
Okay. And outperformance is really driven by better pricing or market share gains or mix. What's driving the outperformance?
So it's a combination of a couple of things. One is as we have said that in a growing environment customers tend to adopt new technologies quicker and faster. So that gives us the ability to outperform. And then the second thing in particularly in the U.S. rig count since the drillbit is a rental model for as the rig count increases that drill, the fleet of drillbit grows. So typically every rig count, every rig may have three or four bits associated with it. So generally as the U.S. rig count grows that tends to be more throughput can have it.
Got it. That makes sense. Soma we appreciate the color. Thank you.
Thank you Chase.
Thank you. Our next question comes from [indiscernible] from Stifel. Your line is now open.
Thanks, good morning.
Good morning.
The one thing I wanted to ask about was on the revenue synergies and any traction you've seen there thus far and how you think that unfolds over the next sort of one to two years between the two businesses. I guess thus far since the merger and then as we look out here the next couple quarters?
Yeah, Steven irrespective of what's going on with the pandemic our teams have been really collaborating well and really doing a great job of executing on the opportunity. So we have a really good pipeline of opportunities that teams have built up. So if I looked at as we have just to recalibrate, we look at this in three buckets, the first bucket is what we call it as a cross sell opportunity. And that tends to be largely is a short term opportunities are mostly in North America, because international opportunities tend to take a little longer time because they are tender driven and you have to build local capabilities and qualification.
So on the cross sell opportunities in North America the teams have made excellent progress. We have number of examples of success and it's contributing today to some of our PAT revenues and some to also our production chemical but mostly the PAT revenues.
And then the second aspect of the international side we have number of tenders we shared with you one last year which we won. We recently in the first quarter we won a nice opportunity in Argentina because of the joint synergy opportunity. So there's number of those opportunities. The pipeline is really building nicely. So you should see as we walk into the end of this year and next year you should see these opportunities starting to materialize more and more.
Great. Thank you. And then just as a quick follow up to that. On the cost front, I mean, you've sort of outlined very well, kind of the progress you've made to-date and your goals that you have, you set out, are you finding areas that there's potentially upside to those goals longer term?
Steven, we are always in that mode. I think I always say that coming out of an industrial heritage we are constantly focused on productivity day in day out. So we are always looking at that and but right now we are very focused on executing on that 125 million. But I want to assure you that we are always in that mood.
Great. All right. Thank you for the color.
Thanks Steven.
Thank you. [Operator Instructions] Our next question comes from Blake Gendron from Wolfe Research. Your line is now open.
Hey, thanks. Good morning guys. I wanted to come back to the international discussion. Appreciate the commentary that you've given on the Middle East and some of the tendering opportunities broadly. Three specific questions, one for each segment. First on chemicals, we're hearing about some pricing competition in the Middle East kind of across the services board. It's a competitive tendering environment right now. But for chemical specifically there's a larger pier that's trying to get in to that region more. So that's the first question is just on pricing pressure in the Middle East specifically in [indiscernible].
On artificial lift wondering what the opportunity is offshore and whether you expect to maybe become a bigger presence offshore just broadly outside of the Middle East in artificial lift. And then in drill tech, can you remind us what the percentage of PDCs U.S. versus other conventional bits like roller cone because our understanding is that it's mostly PDCs in the U.S. but outside it's fairly mixed? Appreciate those answers.
Yes. Starting with the first one Blake, with respect to the production chemicals and the pricing in the Middle East and especially with the larger competitors trying to enter the market. So clearly we've watched those dynamics, but we focus on our strengths of competing and particularly around our technology differences and the customer responsiveness and that we have seen our teams are very, very focused on that customer centricity, customer responsiveness.
And so we feel good about our competing positions and compete effectively. And one of the reasons we are very focused on making sure that we are driving the synergies and supply chain optimization and our chemical technologies team is doing a really good job of staying focused on it.
It's because we can strategically even share as needed, at the same time continue to expand margin. So we feel good about our roadmap there. On the artificial lift side, when I look at the set of opportunities in front of us we really have so much compelling opportunities in the land side of the business, both in the U.S. as well as internationally. In the near term we don't have currently any plans to enter into offshore. Now if we exhaust our opportunities in the near term with exhaust our opportunities in the land then we'll start looking into the offshore but I feel so much compelling opportunities in the land both in the U.S. and internationally. I think we are going to stay focused on it. Lastly with respect to the drilling technologies business, can you remind me Blake the question on that?
Yes. Just the proportion of PDCs outside of U.S. versus other types of bits.
Thank you. And you rightly pointed out U.S. has mostly moved on to the PDC and that's largely driven by the horizontal drilling and high spec rigs because you need that type of power to drive the PDC. So I think U.S. is mostly have gone to the PDC pipe cutters. Internationally there are still roller cone. I would say that it's probably in the neighborhood of 70% -- 75% PDC and that's still about 30% -- 35% that part in the roller cone.
Very helpful. I got my money's worth with that one. So appreciate it and I'll turn it back.
Thank you Blake.
Thank you. And at this time I am showing no further questions. Thank you. I'd like to turn it back to the presenters for closing comments.
Well, thank you. Thanks again everyone for your continued interest in ChampionX. We are excited about our future and we look forward to talking to you again in the next quarter call.
Thank you. Ladies and gentlemen this concludes today's conference. Thank you for your participation. You may now disconnect.