ChampionX Corp

NASDAQ:CHX

Earnings Call Transcript 2018-Q2

[Operator]

Good morning and welcome to Apergy Corporation's Second Quarter 2018 Conference Call. Your host for this morning's call is David Skipper, Vice President and Treasurer at Apergy. I will now turn the call over to Mr. Skipper. You may begin.

[David Skipper, executive]

Thank you. Good morning, everyone. With me today are Soma Somasundaram, President and CEO of Apergy, and Jay Nutt, Senior Vice President and CFO of Apergy.

Yesterday, Apergy released its results for the second quarter of 2018. If you have not received a copy you can find the information on the company's website at www.apergy.com, including the slides referred to in today's call.

During today's call, Soma will make some opening comments about the second quarter and briefly discuss Apergy's vision and operating philosophy. Jay will then discuss our second quarter results and outlook for the remainder of 2018. He will be referring to the slides posted on apergy.com. Finally, Soma will provide an update on our growth initiatives which we shared at our Investor Day earlier this year. We will then open up the call for questions.

I want to remind listeners that the news release issued yesterday by Apergy, the company's prepared remarks on this conference call and the related question-and-answer session include forward-looking statements. These forward-looking statements include projections and expectations of the company's performance and represent the company's current views and beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning risk factors that could affect the company's performance and other unforeseen challenges and uncertainties could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press release as well as in Apergy's registration statement on Form 10 and notes set forth from time to time in Apergy's filings with the Securities and Exchange Commission, which are currently available at www.apergy.com. Except as required by law, the company expressly disclaims any intention or obligation to revise or update any forward-looking statements.

In addition, our discussion today will include non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted segment EBITDA, adjusted segment EBITDA margins and adjusted net income. For reconciliations of our non-GAAP financial measures to our GAAP results, please see today's press release and our Form 8-K furnished to the Securities and Exchange Commission.

I will now turn the call over to Soma.

[Soma Somasundaram, executive]

Thank you, David. Good morning, everyone. I would like to start by welcoming our shareholders, our analysts, our employees to our first Apergy earnings conference call. Thank you for your interest in Apergy.

We had a great quarter. We executed well in the quarter. We delivered solid results, achieved key milestones and made tremendous progress on our growth initiatives which we shared with you at our Investor Day in April.

On May 9, we completed our separation from Dover Corporation. We are excited to begin our journey as Apergy. Our team did an exceptional job of successfully completing our separation from Dover while maintaining continued focus on our customers and generating strong results.

We have continued to make progress on building out our corporate team. Our teams are now largely in place and gaining momentum operating as Apergy. I want to thank all of our employees and customers for their support through this transition.

Turning now to our financial results from the second quarter, revenues increased by $50 million, or 19% year-over-year. Our revenue growth was driven by solid results in both of our operating segments. Consolidated adjusted EBITDA increased by 33% year-over-year, reflecting strong execution and operating performance in both of our segments. As a result, consolidated adjusted EBITDA margins increased to 25% from 22% in the second quarter of 2017. Cash from operating activities in the quarter was $52 million, a significant increase both sequentially and year-over-year.

Both of our segments performed very well in the second quarter.

Production & Automation Technologies continues to benefit from our full suite of artificial lift technologies. Because of this capability, we are aligned with our customers and well positioned to assist them in selecting the right artificial lift technology to achieve their production in the most economic manner. Artificial lift posted robust revenue growth driven by constructive market activity and continued strong penetration in the USA markets. Digital products recorded significant growth at 43% year-over-year, driven by strong market activity and increasing adoption of our new products.

In Drilling Technologies, revenues increased 13% year-over-year, in line with the average North American rig count increase, up 13%, and outpacing worldwide rig count increase of 7%.

Before I turn the call over to Jay to take you through the details of the total company results as well as our 2 segments, let me take a few minutes to talk about Apergy, our strategic vision and operating philosophy.

At Apergy, we provide highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world. We are organized in 2 segments, Drilling Technologies and Production & Automation Technologies. Within our Drilling Technologies segment, we provide highly specialized diamond cutters used in drilling oil and gas wells, as well as specialized diamond bearings. Our Production & Automation Technologies segment offers full range of artificial lift technologies, digital and other production equipment.

Over 95% of our revenue comes from onshore applications. Our products are highly engineered. Our businesses and brands are amongst the most trusted in the industry and have long been recognized globally for quality, performance and outstanding customer service.

The other distinctive strategic vision -- that is focused on improving the lives of our customers, our employees, our shareholders and the communities where they live and work. Our powerful vision helps us to attract great talent and aligns the organization to achieve extraordinary results.

Our operating philosophy is built on 3 simple tenets. First, we will always be relentless advocates for our customers. If our customers win, we win, too. Second, we develop and deploy technology with the impact that drives safety, efficiency and productivity. And third, we are driven to improve with a culture of continuous improvement.

Our strategy and the work we do are highly focused around providing products and technologies that drive our customers' success. This customer-centric strategy allows for decision making that is closer to the customer and guides our operating philosophy. We believe focus, speed, quality, service and customer-driven innovation are clearly the differentiators that sets Apergy apart.

But ultimately at the heart of Apergy is a highly motivated team of over 3,200 employees that are focused on a collaborative approach to solving problems for our customers. We have a deeply rooted cultural foundation and we are driven to helping our customers succeed. We clearly view this culture as a competitive advantage.

Now let me turn the call over to Jay.

[Jay Nutt, executive]

Thanks, Soma.

As David mentioned, I'll be referring to the slides posted on our website.

Beginning with Slide 4, Apergy posted an outstanding quarter. Revenue was $306 million for the quarter, an increase of $50 million, or 19%, compared to second quarter 2017 performance, and an increase of $22 million, or 8%, sequentially. Revenue growth in the United States was 25% year-over-year, outpacing U.S. average rig count growth of 16%. Non-U.S. revenue growth was just over 2% year-over-year, in line with non-U.S. rig count growth.

Adjusted diluted EPS was up $0.12, or 46% year-over-year, as both of our segments continued to perform well in the current operating environment.

With regard to cash flow, cash generation was strong in the quarter as we produced $52 million of cash flow from operating activities.

We exited the quarter with increasing book-to-bill ratios, as both of our operating segments continued to experience good order activity.

Finally, besides the successful completion of the separation from Dover during the quarter, we also had some key customer wins in artificial lift and our digital platforms and we continued to advance our capabilities in diamond sciences through further growth of our diamond bearings offerings.

Turning to Slide 5, from a macro viewpoint the backdrop continues to be favorable for our businesses. Oil and gas prices have been steadily improving and relatively stable. Worldwide rig count is expanding and the growing E&P spending is continuing to increase. Accordingly, we're capitalizing upon opportunities with our customers in both segments.

Moving to Slide 6 and looking at consolidated second quarter performance, net income in the quarter was $22 million and diluted earnings per share was $0.29. After taking into consideration the impact of spinoff-related items, as well as restructuring and other related expenses in the quarter, adjusted net income was $29 million, or $0.38 per diluted share, in the quarter.

We generated adjusted EBITDA of $77 million during the second quarter compared to $57 million in the second quarter of 2017. Sequentially, adjusted EBITDA improved $12 million on the $22 million revenue increase, as our businesses continued to take advantage of the favorable market conditions to drive improved profitability and returns to our shareholders.

During the quarter adjusted EBITDA benefited from approximately $2 million of reduced cost driven by lower expenses as a result of Dover's continued ownership of Apergy through May 8. In the second quarter net interest expense was $6 million. We closed our high-yield notes offering into escrow on May 3 and our credit facility became effective on May 9. As a result, in the second quarter we only incurred a partial quarter of interest expense on our debt facilities.

Our effective tax rate in the second quarter was 30%. The quarterly tax rate was unfavorably impacted by separation-related tax effects. The negative tax rate impact of the separation-related items was approximately 5 percentage points during the quarter.

Capital expenditures in the second quarter of 2018 were $17 million compared to $14 million in the first quarter of 2018. Spending was in line with expectations as we execute on our internal investment plan for the year, including ongoing investment in our leased asset portfolio in support of profitable ESP market penetration. Given the improved cash flow from operating activities in the quarter of $52 million, after deducting for capital spending we achieved an adjusted EBITDA conversion ratio of 45% during the quarter.

Jumping ahead to Slide 7, Production & Automation Technologies revenue came in very strong at $241 million in the second quarter, an increase of $43 million, or 21%, from $198 million in the second quarter of 2017. The second quarter performance represented an increase of $26 million, or 12% sequentially. The revenue performance was due to continued growth in our artificial lift offerings and, in particular, further penetration of the U.S. onshore ESP market. Additionally, we experienced robust revenue growth from our digital products portfolio and capitalized upon improving international market conditions, which are stabilizing and supported by current oil prices.

Adjusted segment EBITDA rose 48% to $54 million in the second quarter from $37 million in the year-ago period. Similarly, adjusted segment EBITDA increased 36% sequentially from $40 million in the first quarter of this year. The growth in adjusted segment EBITDA in the second quarter was primarily due to stronger revenue performance as a result of improved market activity, including increased market penetration and share gains from our ESP offering.

Adjusted segment EBITDA margin was 23% for the quarter compared to 19% in both the second quarter of 2017 and the first quarter of 2018. The margin improvement reflects focused cost discipline and solid operational leverage of the increased volume experienced during the quarter.

Our Production & Automation Technologies business continued to have a healthy book-to-bill ratio at 1.04x compared to 0.96x in the second quarter of last year and 1.01x during the first quarter of this year.

Moving to Slide 8, Drilling Technologies revenue was $65 million in the second quarter, representing an increase of $7 million, or 13%, from $58 million in the second quarter of last year. The revenue growth was a result of higher year-over-year rig count levels experienced during the current quarter compared to the prior year. Combined with increased market share in the premium diamond cutter market and growth in the diamond bearings for drilling tools.

Compared to first quarter 2018, Drilling Technologies revenue decreased 6%, as expected, from $69 million. The sequential revenue decline was primarily due to anticipated declines in the North America average rig count in which the growth in the U.S. average rig count sequentially could not fully offset the seasonal Canadian rig count decline during the same period. As we exited the quarter, order rates rebounded with increasing Canadian rig count.

Adjusted segment EBITDA increased 5% to $24 million in the current quarter from $23 million in the second quarter of 2017. The year-over-year earnings growth was the result of increased drilling activity compared to prior year levels. Sequentially, adjusted segment EBITDA decreased 11% from $27 million in the first quarter, primarily due to lower overall revenue in the quarter.

Adjusted segment EBITDA margin was 37% in the second quarter of 2018 compared to 40% in the second quarter of 2017 and 39% in the first quarter of this year. The slightly lower adjusted segment EBITDA margin was primarily due to increased expenses required to scale up and support the growth of our diamond bearings offerings.

In the quarter, our Drilling Technologies business continued to have a strong book-to-bill ratio at 1.08x compared to 1.05x in the second quarter of 2017 and 1.00x during the first quarter of this year.

Moving ahead to Slide 9, on the balance sheet second quarter ending debt was $707 million, net of debt discounts and deferred financing costs. Cash at the end of the quarter was $31 million, representing an increase of $14 million from March 31.

As I noted earlier, our businesses produced strong cash flow from operating activities during the quarter, so we continue to see opportunities and remain focused on improving our customer collections and accelerating overall working capital turnover to drive additional flow over the balance of the year. At June 30, Apergy's total leverage ratio was 2.8x and our available liquidity was $272 million.

Turning to Slide 10, I'd like to take a moment to discuss our financial outlook for the remainder of the year.

We believe the outlook for the second half of 2018 is constructive, supported by stable oil and gas prices. Accordingly, we see stable to continued E&P spending to support that outlook. At this time we see no change in our full year 2018 revenue growth of 16% from 2017 levels, and full year 2018 adjusted EBITDA of $280 million.

As Soma noted earlier, we've made considerable progress putting the corporate infrastructure in place. As we've progressed forward from the separation date we continue to utilize the transition service capabilities that are available to us from our former parent as we complete the build-out of our infrastructure, fill remaining positions within the organization and implement the remaining necessary systems and tools necessary to operate. Our ramp-up costs associated with these activities are embedded in our earnings outlook.

With regard to other factors pertaining to our outlook, our tax rate is expected to be between 23% and 25% for the balance of the year. We anticipate interest expense of just over $10 million per quarter and our capital spending forecast continues to be approximately 3% of revenue for infrastructure-related growth and maintenance, plus an additional $25 million to $30 million for capital investment directed at expanding our portfolio of ESP leased assets.

With respect to challenges associated with takeaway capacity in the Permian, we've not seen to date any meaningful impact. We are engaged in continuing conversations with our customers as our plans evolve. If there is some pullback in the Permian, we believe producers will redirect capital to other basins in which we are well positioned to serve their needs.

And finally, with regard to the potential impact of recently announced tariffs, as you know, the situation continues to evolve and our outlook for the balance of 2018 does not project any material impact. While some of our products may see some impact due to tariffs and other associated increases in input costs, we are offsetting these additional costs through expanded productivity improvement initiatives.

At this time I'll now turn the call back over to Soma for some closing comments before we open the lines for Q&A.

[Soma Somasundaram, executive]

Thank you, Jay.

We had a great quarter to kick off our journey as a public company. We are excited about our future. Our portfolio and technologies are well positioned to take advantage of the continued recovery and positive trends in the market. This, combined with our strong execution focus and cost discipline, will help us deliver a differentiated performance in the industry.

Before we open the call to questions, I would like to update you on our key growth initiatives for 2018 and beyond, which we talked about during our Investor Day in April.

Our first growth initiative is in our ESP product line where we are focused on driving significant growth and share gain by continued penetration of the U.S. onshore ESP market. We achieved solid growth in the second quarter, exceeding our expectations. Our strong product offering, industry-leading service and the established relationship with customers is continuing to help us drive deeper penetration in the market. We believe we have sustainable momentum in this business.

Our second growth initiative is focused on conversion to rod lift on existing wells as the production declines. As we head into the back half of 2018, we believe we will see some switching to rod lift on existing wells. In the second quarter, we received a 30-well commitment from an existing ESP customer and an 8-well commitment on a competitive ESP system for conversion to our rod lift solution.

While it is hard to predict the precise timing, we believe that conversions to rod lift will begin to accelerate in 2019 and beyond. Rod lift remains the artificial lift technology of choice for low-flow wells. We are a market leader in rod lift and we believe we are well positioned to capture the growth that will come as a result of the conversions.

Our third growth initiative involves driving significant growth in our automation and digital business. We remain focused on driving adoption of those digital products and services through our fit-for-purpose solutions that improve customer productivity and operational economics. Our recent new product called Windrock Spotlight, which is a cloud-based remote monitoring and predictive analytics platform monitoring reciprocating compressors, is gaining significant interest in the industry. The business model includes hardware sales and an ongoing monthly subscription for the monitoring and optimization platform.

Adoption of our recent new product launches combined with strong market activity resulted in 43% increase in year-over-year revenues in the second quarter. We have additional new product launches planned in the coming quarters and we expect to see continued strong growth in our digital products and services.

Our fourth growth initiative is the continued innovation and advancement of our technology in our polycrystalline diamond cutters to improve drilling productivity. To that end, our Drilling Technologies segment has had 22 new patents issued in 2018 so far, bringing the total issued patents since the beginning of 2008 to 695.

We also continue our advancement in [ shaped ] cutters. Customer adoption continued to remain strong for our new technology and this resulted in 61% of our revenues in this segment in second quarter coming from new products.

Our final growth initiative we shared with you is focused on driving continued adoption of our diamond bearings in downhole applications, including mud motors and rotary steerables. Compared to traditional bearings, diamond bearings provide higher load capability, significantly longer life and lower repair costs.

In the second quarter, we saw adoption momentum continue, with strong book-to-bill ratio in this product line of well over 1.5. Revenues from our diamond bearing business now represents about 10% of our Drilling Technologies revenue. We are investing to expand our capacity in bearings to meet the strong demand. We expect the strong revenue growth in diamond bearings to continue as there is more adoption [ run rate left in ] the downhole applications.

We see a clear path to strong performance in 2018 and beyond, driven by the above growth initiatives and constructive markets. We remain focused on strong execution, productivity improvements and our cost discipline. We are confident we will continue to deliver differentiated performance in the industry.

Once again, I want to thank all of our employees for their continued effort and passion in improving the life of our customers, our employees, our shareholders and our communities.

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

[Operator]

[Operator Instructions] Our first question is from James West of Evercore ISI.

[James West, analyst]

Congrats on your first conference call as a newly public [ company ]. So Soma, you're in front of your customers every single day. I hear that feedback constantly. And so with the Permian, I guess, and specifically in takeaway capacity issues, I know -- I heard Jay's comments. I saw your comments in the press release that capital will be reallocated. And you guys cover all the major basins. But do you think it's a one-for-one transition where activity maybe slows or goes sideways in the Permian and you still see growth elsewhere, where it offsets each other equally? Or is there some chance that we're going to see a little bit of an air pocket here in the second half or early '19?

[Soma Somasundaram, executive]

Yes, James. Clearly we are -- this is top of mind for us as well and we have constant communication with our customers. As you know, we are a short-cycle business so this is really important to us, to constantly be in touch with customers. The outlook is still evolving in Permian. So as of now, every conversation we have had with our customers has not indicated that any -- they are planning to pull back or slow down at this point. Something that is important here is we believe that at this commodity price level it's still economical and attractive for our customers to grow production. So I think that's where we believe that if there is a pullback in Permian our customers will, to the extent possible, allocate some of their capital to the other basins. Because we are highly levered to the production side of the business, so that's where our viewpoint comes from. And we are not changing any plans internally. We continue to stay focused on our execution and the growth initiatives we talked about. So we are constantly in communication with the customers.

[James West, analyst]

Okay. [indiscernible] [ other ] service providers. [indiscernible] question for me is on the transition to rod lift that you're anticipating here and [ somewhat underwriting in your growth ] [indiscernible] the expectation for you guys. [indiscernible] projects to come here. But can you maybe take a broader macro step back and talk a little about what [indiscernible] are saying as they think about their transition from ESP [indiscernible] rod lift. Or is this kind of a -- is this going to happen and we shouldn't worry about it I guess is the question.

[Soma Somasundaram, executive]

Yes. Jim, so the call was breaking up as you were talking. But let me make sure that I understood your question. So what you're looking for is to see what is our -- what are we seeing in terms of the ESP-to-rod-lift conversion.

[James West, analyst]

Exactly.

[Soma Somasundaram, executive]

Where the gas lift comes into play. And so as you know, this is an important growth aspect for us as well. So we want to make sure that we are in constant communication with our customers on this. So what we are seeing is there is a continued evolution, particularly in places like Permian, between use of ESP and gas lift. And that conversation is mostly around the initial artificial lift usage. And what we are seeing is it is very specific to customers. It's not across the board that's ESP or gas lift. It's very specific to the individual customers, the scale of their operation, what they want to -- whether they have access to gas infrastructure. So what we believe is, I think both have a significant role to play. So we are seeing the continued use of ESP. We are seeing customers continuing to ask for -- the demand for ESP has continued to be strong. But we are also having conversations on gas lift. And one advantage of being a full-suite artificial lift player is we can provide the right technology and the right solution for the customer. Now with respect to your question on transition to rod lift, I think as you saw in second quarter, we saw customers starting to have conversations around it and there are customers who have planned to move to rod lift. So that is continuing. And everything we are seeing customers have not told us that, "Oh, we have no use for rod lift." Customers have always told us, "Look, it is the preferred technology of choice for us as we go towards the lower flow rate." So that's why we said it's hard to predict the timing, but definitely we see continued commentary from customer they'll eventually move to rod lift as their flow rate declines.

[Operator]

Our next question is from Byron Pope of Tudor, Pickering, Holt.

[Byron Pope, analyst]

Congratulations on solid execution in what's been a really busy year for your team. Soma, I want to try to get a feel for just the overall top line growth drivers, I guess starting within Production & Automation Technologies. It certainly sounds as though with the success you're having in penetrating the ESP market, especially in the Permian, that that's the growth driver this year. But in terms of thinking about the growth drivers for that segment, is it reasonable to think that that becomes more balanced in terms of what drives the growth as we move toward 2019, between ESPs and rod lift in terms of how you think about it?

[Soma Somasundaram, executive]

Correct. And thanks for your kind note. If we look at -- clearly, one thing I would say in the second quarter is our growth was pretty broad-based across product lines. Now clearly ESP, because of our strong penetration, had a significant growth year over year and sequentially. But I want to remind everyone that the growth was across the board in all artificial lift technologies. Now as we move into 2019, we expect that continued conversions do start picking up. So clearly you're right; we still believe we have a long runway in ESP. And as the conversion starts taking shape, our rod lift should start posting higher growth rates as well.

[Byron Pope, analyst]

Okay. And then just a quick second question as it relates to Production & Automation Technologies growth versus Drilling Technologies. And the overall revenue growth expectations are unchanged, of 16% year-over-year. But any way you can help frame for us the growth profile between the 2 business segments?

[Soma Somasundaram, executive]

Yes. So I think I would say because of the momentum in our bearings product lines and the continued growth in the diamond cutters, I would say for the full year you will see a fairly balanced growth between the 2 segments.

[Operator]

Our next question is from Dave Anderson of Barclays.

[John Anderson, analyst]

Question on the margins on the Production & Automation Technologies. You had really impressive margin expansion in the second quarter, about 400 basis points. Can you talk about what went into that? I know digital was part of it. That's your highest margin business. But still, it's only about 10% of that business. And I guess more importantly, how sustainable is this margin level kind of going forward?

[Soma Somasundaram, executive]

Yes, thanks, Dave. I'll tell you, I want to give a lot of credit to our Production & Automation team in their strong execution in the quarter. And to answer your question, the margin is sustainable. And the reason for that is if you look at the margin improvement as you've gone through each of these product lines, we have done significant work to move the needle on margin improvement on the major product lines, and particularly our ESP business. And compared to last year that business sequentially every quarter has demonstrated margin improvement. And that is a combination of, one, in the early part -- compared to if you go to the early part of the year last year we had a lot of ramp-up costs as the volume increased. So those ramp-up costs have receded now. So we are in a good rhythm of growth. So we feel that our execution efficiency is good on that. Second, we have systematically improved our pricing with wherever we have opportunities as the recovery and the demand is strong in the business. And third, we have worked on a lot of productivity improvements in our supply chain. So we feel the margin profile is very sustainable.

[John Anderson, analyst]

On the digital side, should we just continue to expect this to kind of continue to kind of grow from here? Sounds like -- you had kind of talked about a service component and the equipment component. I'm just curious. How much of that $30 million in the quarter here was I guess a recurring level here? I'm curious about that part of this digital business.

[Soma Somasundaram, executive]

Yes. I think if you look at our hardware versus our software business, I think if you look at it our software part of the business to a large extent is the recurring part of the business. It's about 15% to 20% of our overall revenue of the business. Now that is the part of the business we expect that 3 years from now will continue to become a bigger part of the business because as I mentioned in my prepared remarks, the approach we are taking is not just for the initial hardware sale, the business model. It's also in the ongoing monthly subscription, too, monitoring and optimization platform. So as we look at our various product lines in our digital, I would say that in this quarter all of the product lines grew. It is not that it was disproportionately driven by one product line or not. So we feel the continued strong growth is a combination of customer adoption of our new product launches -- should continue, and that you should expect our recurring revenue portion of it over a period of time to continue to grow.

[John Anderson, analyst]

Great, thanks. Just another question, if I might. The 30 well commitment on the ESPs that you highlighted in there, can you just tell me how that works? I'm curious. With the customer, is that 30 wells over a certain amount of time? Also, can you just talk to me about kind of how the cost and revenue recognition kind of flow through over that time? I'm just kind of curious what the progress is, or how we should be thinking about this.

[Soma Somasundaram, executive]

Yes. So the 30-well commitment for us in -- if you take that particular example, is over a period of a 6-to-8-month period. Now obviously every month our customers update us on their readiness on how they want to continue to convert it. And the way it works for us is -- so this would be completely replacing an existing artificial lift system that could be an ESP system in this case, or it could be another form of artificial lift, like a gas lift. So when we're ready -- as you know, we don't have the full -- we don't make the pumpjack. So we have a partner with whom we work with for this pumpjack because we provide the full solution. So we provide [ they ] outside of the pumpjack everything else, which includes the rod, the pump, and the controllers associated with it. So at every month, we replace certain number of wells we recognize revenue as we go forward.

[John Anderson, analyst]

So the 6 to 8 months, is that sort of standard with customers? I'm sure it varies for everybody. I'm just kind of curious kind of what that runway looks like for you in your visibility.

[Soma Somasundaram, executive]

Yes. I mean, if you looked at the 30 wells plus 8 wells, you should expect that to flow through in the next 6 to 8 months, within our P&L. Yes.

[John Anderson, analyst]

Okay. And I just wanted to squeeze in one more here if I might. You talked about international being a growth area for the production side. Can you just talk about where some of those opportunities are? I don't think you have very much international at all right now. Are you -- I'm just wondering, is this ESPs in the Middle East that would seem to be the biggest opportunities? Are there other areas? Can you just kind of expand a little bit on as you look across international what you're seeing?

[Soma Somasundaram, executive]

Yes, sure. So if you look at the second quarter, our U.S. revenue was roughly about 78%. And the rest is non-U.S. revenue. So about 22% of our revenues are non-U.S. Where we are seeing the growth piece of this is primarily in the Middle East and also in Asia-Pacific, particularly in places like Australia. And also, as the Canadian seasonal recovery happens, we see the second half in Canada to be sequentially better as well. And Argentina, if you recall, we made that acquisition in October of last year. So we see continued penetration in that as well. With respect to product lines, the primary product lines where these revenues today come from, if you think about our ESP product lines, today we are very focused on the U.S. onshore application. We have not focused on the international onshore application. And that's deliberate because we see the biggest opportunities in the U.S. today. So the international is still an untapped market for us. So today the growth in international is not related to ESP. The growth in international is in artificial lift. It's related to our rod lift business, the progressive cavity pump business, which is very popular in places like Australia, places like Argentina. And then we are also starting to see some improved sales for our digital business, particularly our hardware and software business as we start focusing in that area.

[Operator]

Our next question is from Scott Gruber of Citi.

[Scott Gruber, analyst]

I'll reiterate the congrats on a good first quarter out of the gate here. Soma, typically with higher oil prices the domestic E&Ps ramp CapEx, drill more wells. We're starting to see a transition in behavior here. Obviously have the physical constraints potentially impacting the cadence of activity in the Permian. But also there's a lot greater desire for investors to see better returns and cash distributions from the domestic E&Ps. I'm curious. How does that impact demand for your digital offering? Are you seeing a boost for your digital offering, given the convergence of these factors?

[Soma Somasundaram, executive]

Yes. I mean, I think if you look at the digital adoption itself -- and my comments are very limited to what I would call it, our focus area, which is the production well site. Right? So I'm talking about the digital adoption in production well site. The key we have seen is 3 elements in that. One is to deeply understand where customers are on their digital journey. Because every customer is on a digital journey, so it's important to understand that. Second, we find -- can you clearly show economic value through the adoption of digital? And so that is important. The third is the cost of adoption. So to your question, to your commentary about the higher Cap- -- the focus on CapEx and making sure that the capital discipline within our customers. So if the initial cost of digital solutions are high, or the technology cost is high, the customers are not as interested in adoption. So where we are focused very primarily on, what I would call a fit-for-purpose solution, which means depending on the type of well and the economic value of the well, we want to make sure that the initial cost and the ongoing cost is attractive for customers to adopt the solution. And that's where this new products we are launching is all about fit-for-solutions, so that customers can see the economic value, but also the initial adoption is not very difficult from a capital perspective.

[Scott Gruber, analyst]

Got it. That's very interesting. And a question for Jay. How much of the ESP CapEx of $25 million to $30 million has been already invested in the first half? How much is planned for the second half? And what is the build cycle for the equipment? I'm curious if there is a pronounced slowdown in the Permian how quickly can you dial it back. How quickly can you ramp it back up?

[Jay Nutt, executive]

Sure, Scott. Good question. So we've authorized and deployed most of the capital that we expect to spend on ESP already through the first half of the year. And then in fact, we put a little bit of restraint on capital as we're watching what's happening in the Permian. The build cycle is approximately 6 months due to supply chain in order to get the components to build/test for the customer requirements and get the equipment deployed. So we believe that most of the capital that we need to spend for the year has already been authorized and is already in motion. And most of that equipment is going to be fully deployed before the end of the year.

[Operator]

Our next question is from Saurabh Pant from Jefferies.

[Saurabh Pant, analyst]

I'll echo the others in congratulating you for a successful spinoff and obviously a solid first quarter to start with. So quickly, Soma, going back to others' lines of questioning on the potential Permian slowdown, I guess we are used to thinking about that from a new well perspective, not so much from a production standpoint because your exposure is different from a lot of other companies that [ I used to rate ]. So if you can help us understand on how operators might react from an artificial lift standpoint. Because I guess there are 2 parts to it, new completions, which is more type renewal activity, and then currently active wells, which are either already on some form of lift or are naturally slowing. Right? It's slightly more complicated. So if you can talk a little about that, that would be helpful.

[Soma Somasundaram, executive]

Yes. Thank you, Saurabh. So the way we think about it is -- again, the macro aspect of this is around the commodity prices. So we feel the commodity prices [indiscernible] are relatively stable and constructive. So as you think from that, then for our customers, at that level it is still attractive to grow production. So if there are constraints in growing the production primarily from the new wells, then we believe the customers will start looking at, "How do I grow production in other basins or how to grow production more from our existing wells?" So that's where we believe that any pullback, potential pullback, in Permian, there will be an offsetting factor. And to what extent of that offsetting factor is hard to predict. But we do believe there is an offsetting factor from other basins and also growing from the existing production.

[Saurabh Pant, analyst]

Right, right, right. Okay. Are they done with the lag rate? Because there's normally call it a 6-month lag between forced production and putting it with an artificial lift. Is that the right way to think about the lag of any impact on new electivity and impact on artificial lift?

[Soma Somasundaram, executive]

Yes. I mean I would say that's an average. It can be anywhere from 3 to 4 months all the way up to 9 months. So an average of 6 months is a good number.

[Saurabh Pant, analyst]

Right, right, right. Okay. And then a quick clarification. You did talk about seasonality from Canada on the drilling side. Should we assume there was any impact of seasonality on the artificial lift side as well? Or was it negligible in your mind?

[Soma Somasundaram, executive]

Yes. No, there is definitely seasonality that happens in artificial lift as well, depending on where those wells are. So particularly those wells which are hard to reach during the spring thaw you'll see a seasonal impact on that as well. But you will see it more pronounced it in the drilling, primarily because the drilling rig count dramatically goes down in Canada during that time.

[Saurabh Pant, analyst]

Right, right, right. Okay, last one for me. Jay, I will direct that to you. In terms of trying to think about the $35 million in standalone public company corporate costs that you've talked about in the past, how much of that is already included in the reported adjusted EBITDA numbers for the second quarter? And how should we adjust for that, because I'm trying to reconcile the second quarter EBITDA with the full year 2018 $280 million EBITDA guidance?

[Jay Nutt, executive]

Yes, Saurabh, good question. What we would ask you to be focused on is the $280 million rather than the $35 million. As we commented in our prepared remarks, due to the timing of the spinoff, we had a benefit from a partial ownership of Apergy during the quarter. We also shared that our teams are largely in place and built out. Coming to the end of the quarter, that being said, we had not hit our run rate for standalone corporate costs exiting the quarter. And the ramp-up costs associated with putting the rest of the teams in place and infrastructure is built into our full year guidance. So we would, just as we focus on it -- we're focused on the overall Apergy business performance, not just the $35 million.

[Saurabh Pant, analyst]

Right, right. Okay. So the impact would be more in the second half then what you released on the second quarter. Right? Because you're saying that did not impact anyway.

[Jay Nutt, executive]

That's correct.

[Operator]

Our next question is from Marc Bianchi of Cowen and Company.

[Marc Bianchi, analyst]

I guess looking to maybe some more near-term expectations for the business, I appreciate that you're sticking with the guidance for the year. Can you talk about how you see third quarter? Should get some seasonal improvement from drilling. You mentioned the backlog is strong there. Curious in the automation side how that's shaping up for the third quarter, barring any unforeseen issues with the Permian.

[Soma Somasundaram, executive]

Yes. So definitely we are seeing the rebound of auto rates in the -- as we see in July in auto and technologies side as the Canadian rig counts are recovering. On the automation side, our pipelines are good. If you look at your adoption by new customers, our pipeline remains good. So we feel good that the near term in automation should be good. I'm answering specifically Q3. And as we walk into -- through July, I can tell you that the order rates continues to stay to our expectations in our artificial lift business. So the order rate stays to our expectations in July. And again, I would remind you that we are a short-cycle business. So as of July, we see our order rates remaining to our expectations.

[Marc Bianchi, analyst]

Okay. And then with that growth that you'll have, you had some very strong margins on the additional revenue that you added in the second quarter. Should we think about that kind of operating leverage on any growth that we're going to assume for the third quarter? Would you expect to have that kind of progression?

[Soma Somasundaram, executive]

Yes. The only thing there I would moderate there, Marc, is that Jay mentioned that our corporate costs will continue to hit our full run rate in the second half. So as we mentioned before, typically you should expect in a steady state for us. You should expect a low 30s conversion. But our execution continues to stay strong. And so it could be a little bit higher than that. But the only thing I would moderate compared to the second quarter is the corporate costs that would continue to ramp up. Other than that, there was no other item contributing to the leverage, any specific item.

[Marc Bianchi, analyst]

Okay. And so putting that together with the guidance, Soma, you've got what seems like a sequentially higher EBITDA number in the third quarter. Going to be somewhat offset by some more corporate but still probably sequentially higher. It should put you on a run rate to be quite a bit above the $280 million. Is that just conservatism in not increasing that guidance at this point? Is there something you see in the fourth quarter in terms of seasonality? Just trying to think about sort of where you are today in the third quarter versus in the context of the $280 million.

[Soma Somasundaram, executive]

Yes. So I mean I think, Marc, the way I would [indiscernible] is that definitely we are pleased with our second quarter because that demonstrates our continued focus on execution and cost disciplines. Right? But again, as being a short-cycle business we are constantly in communication with customers. The outlook, things like Permian, is still evolving. So given these factors, we feel it is prudent -- I wouldn't use the word "conservative," but more prudent not to change the outlook at this point. As I mentioned, we have not changed our plans internally. We are continuing to stay focused on the growth initiatives we talked about and our execution. We just feel it's prudent to -- given that kind of continued evolving situation it's good to be prudent.

[Operator]

Our last question is from Jim Wicklund of Credit Suisse.

[James Wicklund, analyst]

What is your target margin on your ESP business over the next couple of years?

[Soma Somasundaram, executive]

Jim, good to hear your voice. But we're not in a position where we are willing to give the out-year ESP margin . . .

[James Wicklund, analyst]

Well, I think it would be higher than you are now. I mean, I look at the technology and I look at the acceptance and I'm frankly a little surprised that margins are as low as they are. And I just didn't know if you guys had an ambition that you could share with us, that's all, just something more esoteric but longer term.

[Soma Somasundaram, executive]

Yes. I mean, I would just say margins are -- we are pleased with our ESP margins. Let me put it that way.

[James Wicklund, analyst]

Okay. Okay.

[Soma Somasundaram, executive]

And we are continuing to stay focused on improving it and we still see opportunities to improve it. And yes, that's what I would say.

[Operator]

Thank you. We have no further questions. I'll turn the call back over for closing remarks.

[Soma Somasundaram, executive]

Well, thanks again, everyone, for your continued interest in Apergy. And once again, I want to thank our employees for their great contribution during the -- their continued contribution during the quarter. And we look forward to talking to you again next quarter and updating you on our business. Thank you.

[Operator]

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