ChampionX Corp

NASDAQ:CHX

Earnings Call Analysis

ChampionX Reports Stable Growth and Strong Shareholder Returns

In a challenging environment with a 10% decline in U.S. rig counts, ChampionX managed to slightly increase its revenue by 1% sequentially, thanks to growth in international sectors, although U.S. land activities lagged. Digital revenues surged with a 17% year-over-year increase. The company's diligent approach yielded a 28% rise in adjusted EBITDA year-over-year and anticipated adjusted EBITDA margin expansion by 370 basis points for the full year 2023. ChampionX showcased their ability to generate robust free cash flow, amounting to $115 million, which is 60% of adjusted EBITDA, and returned 74% of it to shareholders through dividends and repurchases, affirming its commitment to deliver at least 60% of free cash flow back to investors.

Financial Performance and Margin Expansion

The company had a strong quarter with a Digital Analytics (DA) margin of 20.7%, which was an increase from both the previous quarter and the same period last year. This improvement was largely driven by higher selling prices and productivity initiatives. The Production and Automation Technologies (PAT) segment saw a modest increase in revenue, with significant geographical variations – international revenue up 9%, while North America was slightly down. Adjusted EBITDA for the PAT segment was $59 million, showing resilience with a 14% year-over-year growth despite a sequential dip. The Drilling Technologies segment revenue dipped both sequentially and year-over-year due to a lower U.S. land rig count, but this was offset by robust adjusted EBITDA margins of 25.1%. The Reservoir Chemical Technologies segment suffered a year-over-year revenue decrease of 29%, attributable to the exit of certain low-margin product lines, which paradoxically led to a massive increase in segment margin to 16.6%.

Future Revenue and EBITDA Guidance

Looking ahead, the company provided a revenue outlook for the fourth quarter between $930 million and $970 million, which considers an expected uptick in international business balanced against a seasonal slowdown in North America. For adjusted EBITDA, the forecast is $187 million to $197 million, a promising increase that also hints at margin improvements. This guidance, particularly for EBITDA, does not factor in significant currency devaluation, such as the Argentine peso, which has been a recent challenge for the company. Despite these risks, the company maintains a strong free cash flow to adjusted EBITDA conversion ratio guidance of 50-60% through the cycle, reinforcing its cash generation capability.

Strategic Focus and Shareholder Value

The company's strategic direction encompasses production optimization solutions, with a particular emphasis on sustainable and cost-effective operations. Despite current softness in the U.S. land businesses, there is confidence in activity growth come 2024, suggesting a stronger future for the U.S. market. The company aims for solid bottom-line growth, EBITDA margin expansion, strong cash generation, and a disciplined capital allocation framework designed to create shareholder value. This includes high-return investments and the continued return of excess cash to shareholders. The company's dedication to this framework is evidenced by its ongoing commitment to return at least 60% of free cash flow to shareholders.

Addressing International Currency Risk

Argentina's economic situation posed a significant currency risk for the company, resulting in delayed ability to repatriate funds and subsequent exchange rate losses. However, the company is actively working to mitigate these risks by minimizing balances held in Argentine pesos, curtailing some business, and negotiating with customers to pay outside Argentina in U.S. dollars. These measures aim to reduce exposure over the coming quarters.

EBITDA Margin Outlook

The company is steering towards a higher EBITDA margin in the fourth quarter, specifically suggesting that if no further devaluation occurs, the margin could approach 21%. Furthermore, they predict ongoing margin expansion in 2024, fueled by positive revenue growth, productivity improvements, and the strong performance of higher margin businesses, notably in Digital and Emissions.

Growth Prospects and Market Expectations

Overall, the company expects continued margin expansion and brings attention to consistent margin growth over recent years. Margin expansion next year is anticipated to surpass 300 basis points as per the midpoint of current guidance. This will be driven by positive growth across the board in 2024, productivity efforts, and growth in higher margin businesses. Notably, with specifics discussed, the Drilling business previously achieved margins closer to 30%, suggesting that a return to higher margins could be a target, provided market conditions are favorable.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. Welcome to ChampionX Corporation's Third Quarter 2023 Earnings Conference Call. Your host for this morning's call is Byron Pope.I will now turn the call over to Mr. Pope. You may begin.

[Byron Pope, executive]

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 third quarter results and fourth quarter outlook before turning the call back to Soma for some summary thoughts. We will then open the call for Q&A. During today's call, we will be referring to the slides posted on our website. Let me remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore, I refer you to our latest inpayfilings and our other SEC filings for a discussion of some of the factors that could cause actual results to differ materially. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our third quarter press release, which is available on our website. I will now turn the call over to Soma.

[Soma Somasundaram, executive]

Thank you, Byron. Good morning, everyone. I would like to welcome our shareholders, employees and analysts to our third quarter 2023 earnings call. Thanks for joining us today. We demonstrated the benefits of our geographically diversified portfolio in the third quarter as we delivered adjusted EBITDA growth and margin expansion despite some near-term cross currents in our stock cycle U.S. land businesses. We once again delivered robust free cash flow generation and returned excess capital to our shareholders. I am appreciative of all our employees for their focus on tireless dedication to delivering value to our customers day in and day out. On Slide #4, we begin our earnings call with our corporate vision, purpose and operating philosophy because we wake up every day, committed to improving the lives of our customers, our employees, our shareholders and our communities. On Slide #5, we still one example of the many types of Cantex innovation, which emerge from being relentless advocates for our customers and delivering technology with impact. [indiscernible] continuous emission monitoring system, which was designed from the ground up to be an effective and accessible solution for our continuous monitoring of on-site methane emitting detection and this case study illustrates how our 2P systems helped one of our customers detect and avoid that at a profit league at one of its production facilities in real time, resulting in environmental and financial savings. Our oral optical gas imaging or [indiscernible] is a natural complement to our 2P system and is designed to help our customers meet current and future emittance monitoring needs by accurately detecting and documenting even small methane leaks. Now turning to third quarter performance. Our third quarter revenue increased 1% sequentially as strong international growth in our Production Chemical Technologies and Production & Automation Technologies businesses were largely offset by lower activity in U.S. land, driven by lower drilling and completion activity. In Q3, U.S. rigs declined almost 10% sequentially and U.S. completions activity declined over 9% sequentially, impacting revenues in our Drilling Technologies and PAT segment. Our digital revenues increased 17% year-over-year. We remain highly encouraged by the continued strong adoption of our fit-for-purpose digital solutions, including our emissions management technologies that drive tangible productivity and sustainability benefits for our customers. Our continuous emission monitoring technology installation continue to grow along with the recurring revenues. Today, more than 60 customers use our 2P continuous emission monitoring technology. We continue to deliver strong EBITDA performance during the first 9 months of 2023, our adjusted EBITDA grew 28% year-over-year, and our adjusted EBITDA margin expanded 437 basis points compared to the first 9 months of 2022. Ken will take you through the details of our third quarter financial results shortly, but let me first touch on 3 key business highlights, which are shown on Slide #6. First, EBITDA margin expansion. Despite experiencing $7 million of foreign exchange losses related to Argentina currency devaluation, we delivered an adjusted EBITDA margin of 20.2% in the third quarter, which represents our sixth consecutive quarter of sequential adjusted EBITDA margin improvement. Based on the midpoint of our Q4 guidance, for full year 2023, we will deliver an adjusted EBITDA margin expansion of 370 basis points compared to 2022. We remain confident in our ability to further expand our adjusted EBITDA margin as we step through 2024. Second, free cash flow. We delivered another strong free cash flow quarter, having generated free cash flow of $115 million, which represented 60% of adjusted EBITDA. This further demonstrates the best-in-class free cash flow generating capability of a capital-light portfolio of businesses and illustrates our high degree of confidence in converting at least 50% of EBITDA to free cash flow in 2023 and delivering between 50% to 60% conversion of EBITDA to free cash flow through the cycle. We expect our free cash flow to continue to grow in the coming years, driven by EBITDA growth and margin expansion. Third, returning capital to shareholders. Our disciplined capital allocation framework is designed to create value for our shareholders. And in the third quarter, we once again delivered on our commitment to return the excess cash to our shareholders. In the third quarter, between our regular cash dividend of $17 million and $68 million of share repurchases, we returned 74% of our free cash flow to shareholders. Since we began our capital return program in the second quarter of 2022, we have returned $434 million of capital to shareholders through dividends and stock repurchases. This represents 66% of the free cash flow generated during the same period. We expect our capital returns to grow as we grow our free cash flow in the coming years, and we remain committed to return at least 60% of free cash flow to our shareholders this year and through the cycle. Let me now turn the call over to Ken to discuss our third quarter results and our fourth quarter outlook.

[Kenneth Fisher, executive]

Thank you, Soma. Good morning, and thank you for joining us today. I will be commenting on adjusted EBITDA for sequential and year-over-year comparisons. We believe this metric best reflects the business performance of continuing operations. Our third quarter 2023 revenue was $940 million, up 1% versus our second quarter 2023 revenues, while 8% lower than third quarter of 2022. On a geographic basis, sequentially, North America and international revenues were up 1% and 2%, respectively. Drilling down overall U.S. revenues were flat quarter-over-quarter with PBT up 6% and PADT down 3% and 7%, respectively. Meanwhile, the rest of the world revenues were up 3% sequentially, driven by solid growth in PCT and PAT. Year-over-year, North American revenues declined 2%, while international revenues were 17% lower. In the third quarter, our largest business, Production Chemical Technologies generated solid sequential revenue growth of 5% with both North America and international contributing positively. With declining U.S. rig count and lower new well completion activities, our shorter-cycle U.S. land businesses were impacted in the quarter, with production and automation technology revenue is up slightly at 1% and Drilling Technologies down 4% versus the second quarter of 2023. As previously communicated, sales to Ecolab under the cross sales agreement ended with the passing of the third anniversary of our merger date. As such, any sales to Ecolab are now reported in the Production Chemical Technology segment and no longer reported in corporate and other. Third quarter GAAP net income for the company was $78 million or $0.39 per diluted share versus $96 million in the second quarter and $23 million in the third quarter of 2022. As seen on Slide 10, ChampionX consolidated adjusted EBITDA in the third quarter was $190 million, up 2% versus the previous quarter and a 14% increase year-over-year. Third quarter adjusted EBITDA included the impact of approximately $7 million of foreign exchange loss related to devaluation of our peso exposure in Argentina during the period. In the third quarter, ChampionX delivered a strong consolidated adjusted EBITDA margin of 20.2%. This was up 7 points sequentially and up 391 basis points over the third quarter of 2022. Our third quarter free cash flow of $115 million reflected strong cash flow from operations and our continued focus on working capital management. The $115 million represented 60% conversion of free cash flow from adjusted EBITDA. Cash from operating activities was $163 million and capital investment was $48 million, net of proceeds from asset sales. Production Chemical Technologies generated third quarter revenue of $604 million, up 5% from the second quarter and 6% lower year-over-year. Sales were strong in North America and internationally, where respective revenues were up 5% and 6% sequentially. Segment adjusted EBITDA was $125 million, up 7% sequentially and 22% higher than the third quarter of 2022. The third quarter segment adjusted EBITDA was inversely impacted by the aforementioned $7 billion Argentina foreign exchange loss during the period. Sequentially, we saw a positive impact from higher volumes and productivity projects. Volume growth, increased selling price and productivity projects drove the strong year-over-year improvement. Segment adjusted EBITDA margin was 20.7%, up 37 basis points sequentially and up 472 basis points from the prior year's period, driven again by the higher volume selling prices and the productivity initiatives previously noted. Production & Automation Technologies third quarter segment revenue of $256 million increased 1% sequentially. Year-over-year, PAT revenue was up 3%. Geographically, international revenue increased 9% sequentially, while North America revenue was down 1%. Digital revenues, which can exhibit some lumpiness quarter-to-quarter were down 4% sequentially, while increasing 17% year-over-year. We continue to see increased customer focus on implementing digital and emissions technologies to reduce emissions and drive operational and cost improvements. We remain very excited about expected future revenue growth from digital, including our emission offering. PAT third quarter segment adjusted EBITDA was $59 million lower 2% sequentially, while up 14% year-over-year. Segment adjusted EBITDA margin was 23.2%, down 73 basis points versus the second quarter and up 213 basis points from the prior year due to higher volumes and selling prices. Drilling Technologies segment revenue was $55 million in the third quarter, down 4% sequentially and down 10% year-over-year, with both declines driven by lower U.S. land rig count activity. Drilling Technologies delivered segment adjusted EBITDA of $14 million during the third quarter, flat sequentially and down $3 million compared to the third quarter of 2022. Segment adjusted EBITDA margin was 25.1% in the quarter, flat sequentially. Reservoir Chemical Technologies revenue for the third quarter was $25 million, up 5% sequentially and a 29% decrease year-over-year.As previously discussed, the year-over-year revenue decline was driven by the exit of certain low-margin RPP product lines last year. This exit resulted in lower revenues, but a significant improvement in the margin profile of this business. The segment posted adjusted EBITDA of $4 million during the third quarter, flat with second quarter and up $1.5 million versus the corresponding prior year period. segment adjusted EBITDA margin was 16.6% in the quarter, a 110 basis point sequential decline. Year-over-year, the segment margin increased 914 basis points driven by the product line exit and related restructuring actions. Moving to our balance sheet. As shown on Slide 11, we again ended the third quarter in a very strong position with liquidity of $954 million, including $285 million of cash on hand and our available revolver capacity. At September 30, our net leverage ratio was 0.4x net debt to trailing 12-month adjusted EBITDA. In alignment with our capital allocation framework, we remain committed to the return of surplus capital to our shareholders. During the third quarter, we returned approximately 74% of quarterly free cash flow to shareholders, including $17 million in regular quarterly dividends and $68 million of share repurchases. Year-to-date, we have returned 76% of free cash flow to shareholders. Moving forward, expect us to continue our disciplined capital allocation process and our focus on delivery of operating and free cash flow along with continued improvement in working capital management. We are also focused on maintaining our robust liquidity level and a strong financial position and able to continue returning at least 60% of free cash flow to shareholders. As we continue to drive disciplined capital allocation and continuous improvement in productivity, as you can see on Slide 12, we continue to improve our return on invested capital or ROIC. We are making good progress toward our targeted 20%-plus ROIC. Our trailing 12-month ROIC has improved to 17%, up approximately 400 basis points over the 2022 full year actual rate. Now turning to Slide 13 on our forward outlook for fourth quarter. We expect revenue in the range of $930 million to $970 million. The projected fourth quarter revenue sequential change is primarily driven by continued positive momentum in our international businesses offset by expected seasonal slowdown in our North American businesses as they move into the year-end holiday. We expect our drilling technology business to experience a sequential revenue decline similar to that of the fourth quarter of 2022 as some of our customers act to manage their working capital and free cash flow in the year-end. For adjusted EBITDA, we expect a range of $187 million to $197 million, which at the midpoint represents a 7% increase over the fourth quarter of 2022. At the midpoint, this represents an approximate 200 basis points improvement year-over-year in the company's adjusted EBITDA margin rate. Please note for clarity, this fourth quarter adjusted EBITDA guidance does not anticipate any further significant devaluation in the Argentine peso during the period. Moving forward, we remain confident in our 50% to 60% free cash flow to adjusted EBITDA conversion ratio guidance through the cycle, and we expect a free cash flow ratio of at least 50% for fourth quarter and the full year of 2023. Thank you. nd now back to Soma.

[Soma Somasundaram, executive]

Thank you, Ken. Before we open the call to questions, let me share a few thoughts with you. As a leading global provider of production optimization solutions for the energy industry, we are particularly well positioned to help our upstream and midstream customers maximize the value of their producing and operating assets in a sustainable and cost-effective ways.Despite the short-term softness we are experiencing in our short cycle U.S. land businesses, we expect U.S. activity to start growing in early 2024 as customer budget reset. We remain confident in the favorable demand tailwinds for our businesses in 2024 and beyond. We are laser-focused on delivering solid bottom line growth, adjusted EBITDA margin expansion and strong cash generation, and we remain fully committed to creating value for our shareholders through our disciplined capital allocation framework with crystal clear priorities for capital deployment, which includes high-return investments and returning excess cash to our shareholders. With that, I would like to thank all of our 7,300 ChampionX employees around the world for their tireless and inspiring commitment to our focus of improving the lives of our customers, our employees, our shareholders and our community. I'm honored and humbled to lead the purpose even team. With that, I would like to open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Stephen Gengaro from Stifel.

[Stephen Gengaro, analyst]

Can you help us maybe understand your fourth quarter expectations a bit. I'm sort of thinking about what's normally a margin improvement in production chemicals, and I understand the North American softness in some of the other areas. But can you kind of help us understand a little bit maybe on a segment basis, the margin progression you're looking at?

[Soma Somasundaram, executive]

When you look at the Q3 to Q4 margin progression, we expect PCT, given the resilience of PCT and seasonal improvement in the international business in PCT, we expect PCT margins to perform well in Q4 compared to Q3. You should see -- it had a strong performance in Q3, you should see similar performance or even slightly better in Q4. And I think, Stephen, this will be an important time also to talk about the Argentina devaluation. As I finish my comments, I'll ask Ken to talk about that. Because that impacted the Q3 margin for us. When it comes to PAT and drilling technologies, when you look at PAT, we do expect sequentially the business to be softer in U.S. land. And we saw, as we exited September. So when we entered Q3 and how we exited September, we could see in September, the weakness getting more pronounced in the U.S. land activity in September. And so we do expect that as we go into the Q4, the normal seasonal slowdown will be fully present. We saw some signs of that already starting to happen in September. It is also the mix in PAT. As you know, the completion side is primarily -- ESP is driven more by the completion side. So it tends to be a higher margin in the PAT side. So that, along with some slowdown in the hardware digital purchases in Q4, I think -- so that mix will impact PAT, so which means we will see Q3 to Q4, a PAT margin to be somewhat down. And then when you look at the DT, DT is where we are going to see a bigger impact, and this is going to be very similar to because the conversations with customers are very similar to the type of conversation that happened last year.So it's very clear that particularly our for the customers of drilling technologies are starting to get very focused on Q4 working capital management. And we have already received calls to push out deliveries and those types of conversations are already happening. So that's why we expect our drilling technologies business to be impacted. If it is similar to last year, you can imagine it could be sequentially down as much as 11%, 12%. So as you know, that business decrements higher, so you should expect the Drilling Technologies business to be down. Now having said all this, Stephen, I would say we see a lot of this type of seasonal slowdown and customers managing working capital towards Q4 to be very temporary issues. If you look at the quality of the businesses are still very strong. We have still deliver year-over-year strong exit margin improvement. And you will still see strong cash generation. You'll still see strong capital returns. So we see these as temporary U.S. land weaknesses, which we are experiencing, which started towards the end of the third quarter and then now we see it playing out in the fourth quarter. So we expect 2024 -- as we enter into early 2024, we expect the budget to reset, and we are confident it will be another year of positive growth in U.S. land as well as globally. So with that, I do want Ken to talk about Argentina devaluation because since it's impacted our Q3 margin. So Ken?

[Kenneth Fisher, executive]

Yes. Stephen, the PCT business historically has done business in Argentina profitably. We have roughly about $100 million of annual sales there. We had some questions around the devaluation impact. I wanted to be clear about that. It's not really a revenue issue in that we're a U.S. dollar functional accounting there. And we have many contracts that are essentially indexed to the dollar, so that when we invoice, we invoice at the current rate then. But the issue was that historically, we've been -- as primarily a product supplier, we've been able to repatriate monies to the U.S. out of Argentina regularly. And so it had never been an issue before, but late last year and then through this year, we've seen the government make a series of changes to both regulation and practice that's delayed repayments to us and delayed our ability to repatriate. And so we had built up a balance with the peso exposure in the country that then right after the election, they changed the exchange rate and we were hit with the loss that we noted. So in the meantime, we've been working to mitigate that through trying to minimize that balance as much as possible. We have entailed a little business, and then we're negotiating and in fact, have some customers agreed to start to pay us outside of the country in U.S. dollars. So we'll continue to work that exposure down here over the next couple of quarters. As of this week, it's about a $15 million exposure. So should there be another significant devaluation, we would have an issue, but we're working hard to minimize it.

[Soma Somasundaram, executive]

And I think, Stephen, as you know, some of the companies have approached this to do a blue-chip swap, which results in a major write-down.

[Kenneth Fisher, executive]

Yes. Maybe that's a good point. A lot of the peers in the group are primarily providing services. So historically, they were less able to repatriate. And so they built even bigger balances. And they accessed a parallel market called the blue-chip swap and took big losses. They excluded those losses from their EBITDA. We treat FX today as part of normal adjusted EBITDA. So you get some small gains and losses each period. But we don't exclude it, but some of the peers took some pretty substantial write-downs on the blue-chip swaps at late last year and early this year because they build up even more significant balances. So because we're a product provider, we are able to repatriate normally, the government actions recently have been adverse and not very appreciated, I guess, I'd say. So hopefully, that helps give some color.

[Stephen Gengaro, analyst]

Just one quick follow-up for me. And that is the -- when I think about the sequential PC, key margin performance in 4Q, is that after taking into account the $7 million, i.e., a cleaner number being flat to maybe slightly up in the fourth quarter?

[Soma Somasundaram, executive]

So I think the PCT margin in Q4 does not contemplate another devaluation. And under that scenario, it should be closer to the 21%.

[Operator]

Your next question is from the line of Marc Bianchi from TD Cowen.

[Marc Bianchi, analyst]

I wanted to ask another one on this Argentina situation because it seems like if you're going to have 21% margins here in PCT in fourth quarter, there really isn't any operating leverage in the business because you're just sort of recapturing the absence of the $7 million hit in the third quarter. Are there some other cross currents that are worth pointing out or maybe I'm not reading that right?

[Soma Somasundaram, executive]

No, I don't think there's anything significant. I mean, there's always some mix issues that happens within the businesses. So outside of that, I would say, Marc, there's nothing of -- other than the normal variations due to mix. There is no major -- any other issues.

[Marc Bianchi, analyst]

And then, Soma, you had mentioned an expectation for growth in entering 2024, but I know typically, there's some seasonality that occurs in the first quarter with PCT falling off. Can you just sort of walk us through the typical progression? And if you have any particular insight about early 2024?

[Soma Somasundaram, executive]

Yes, Marc, great observation because we always see this Q4 to Q1 seasonality and in the past, we have provided some color around historically how that has worked in our PCT business. So if you look at over the last 7 or 8 years, the PCT business on an average at a mean Q4 to Q1 revenues have declined about 5%. That is a pure seasonality. And some quarters, it's much worse. Some quarters, it's better depending on how Q4 is. So there will be a Q4 to Q1 decline in our PCT revenue, which is seasonally driven. And historically, like I said, it could be 5%. And then when you look at the DT Drilling Technologies, we do expect the Drilling Technologies business to rebound in Q1 and again, we have shown historically when Q4s tend to be the type of Q4 we are expecting, Q1 will rebound. And typically, in some years, it's a sharper rebound, but we do expect Q1 to be a good rebound in our Drilling Technologies business. We expect PAT business Q4 to Q1 to be sequentially better as well because the budgets typically reset in the early part of Q1. So normally, what we will see in the PAT businesses, it will start a little slow in January. But as the budget starts getting into place in February, we will exit the Q1 quarter with a much stronger run rate than when we entered Q1. So in summary, we'll expect PCT to be seasonally down Q4 to Q1. We expect PAT to be Q4 to Q1 up, we expect DT to be up Q4 to Q1. And then as we look in the quarter -- as we look at the rest of the year in 2024, Q1 tends to be the lower quarter and Q2, Q3 tend to sequentially improve from there. And Q4, as you know, Marc, that like we are seeing this year, sometimes we run into these type of issues, but that's too early to predict what Q4 of 2024 may look like. But we are confident Q4 to Q1, there will be growth, and we'll see growth Q1 to Q2 and Q2 to Q3.

[Operator]

Your next question comes from the line of David Anderson from Barclays.

[John Anderson, analyst]

I have a few questions on the North America side of PCT. So the U.S. rig count contracted 20% this year. But if I look at the EIA numbers, onshore production periods have actually increased, at least through July. Now you said lower PCT revenue was due to the rig count falling. But I thought there was a little bit of a longer term -- longer cycle relationship there. Is it production really the driver here? Am I missing something in terms of that slide? I'm surprised it was that much of a relationship.

[Soma Somasundaram, executive]

I think in the slide deck, we had a slide which showed the sequential by segment, U.S. versus non-U.S. So if you look at that, the PCT business actually grew sequentially 6%, where we had the real issues with in PAT and DT in the U.S. land. So this goes to show the long-term relationship and the resilience of our PCT business. So PCT U.S. business grew 6% Q2 to Q3.

[John Anderson, analyst]

So that held up there [indiscernible]. So it's the PAT side and the relationship there is the completions with the ESPs. Okay. That makes sense. So if we think about kind of longer-term drivers in NAM for PCT, U.S. onshore is sort of a manufacturing mode. We're not going to see a whole lot of production growth over the next several years. So how should we think about the drivers in them for PCT from here? Is there an underlying kind of increasing chemicals intensity story here? How should we think about kind of growth in this business relative to production over time?

[Soma Somasundaram, executive]

I think that's exactly right. And even if you look at our continued growth in the U.S. business in PCT, it's a combination of 2 things. One is definitely the growth in the intensity. And then the second aspect is Gulf of Mexico continues to grow as well. If you look at our offshore growth Q2 to Q3, we grew 12% sequentially in the offshore markets globally, and Gulf of Mexico was an important part of that as well. So as we go into 2024, we continue to expect the intensity improvements as well as the Gulf of Mexico growth as well.

[John Anderson, analyst]

So even in a flat -- let's just say hypothetically U.S. onshore production is flat, should PCT still continue to grow with higher basically chemicals to production over time? Is that a trend you're expecting to see? And then second -- and then sticking on U.S. onshore, E&P consolidation is obviously a big theme with Exxon and Chevron. Can you talk about what that means to your business? And I guess I'm curious just how frankly, we know the offshore business is sort of very multi around that. But how about U.S. onshore? Is that more fragmented? And does this potentially create more market share opportunity for you onshore?

[Soma Somasundaram, executive]

I think when you look at this consolidation, so the positive aspect for us is we have stronger relationships, as you know, with the IOCs. And you saw with Exxon, we won the supplier of the year award. So as the consolidation is driven by the IOCs, our presence and our long-term relationship with our IOCs should help us continue to maintain and gain positions in this consolidation. Now the thing we have to really be watching for is to make sure, obviously, as they consolidate, the E&Ps will also look for efficiencies and savings along the way but we do feel, given our long-term relationship and given the global way we support our customers in these areas, I think we will see -- it will be a net positive for us.

[John Anderson, analyst]

So aside from any U.S. onshore production growth, the 2 main drivers in NAM here are going to be increasing revenue -- sorry, increasing chemical intensity and market share on top of kind of any other inherent growth.

[Operator]

Your next question comes from the line of Scott Gruber from Citigroup.

[Scott Gruber, analyst]

Soma, it does look like your EBITDA margin is going to stagnate here in 4Q, given this North American weakness. But if I heard you correctly, I think you mentioned margin expansion in '24. Can you walk through some of the major drivers for continued margin expansion? And do you think getting back to that 21% level later next year is a realistic goal? Do you think you do better?

[Soma Somasundaram, executive]

Yes. Scott, if you look at for the last 2 to 3 years, we have consistently expanded margins every year. And clearly, there is a bit of a calendarization in how our margin performances quarter-to-quarter given Q1 tends to be a softer quarter. Items Q4 to Q1, you typically will see a bit of a margin drop, and then we'll pick up our expansion efforts from there. So when we look at 2023, so when you look at 2022 and versus 2023, at the midpoint of our guidance, we will expand margins close to -- a little over 300 basis points, right? So you will see as we go into 2023, continued expansion of that. And that will be driven by a couple of things. Number one, we do expect a positive growth for full year in 2024. So that incremental will help. The second is our continued productivity efforts and continued growth in higher-margin businesses, i.e., our digital business and our emissions business. So we do think that the mix of our businesses in the growth will also help. So to answer your question, we do expect continued margin expansion in 2024.

[Scott Gruber, analyst]

And looking specifically at drilling, that business used to post margins closer to 30%. It was closer to 25%. And I realize it's going to take a hit here in 4Q. But just thinking about the medium term, is 25% the new normal? Or should we be expecting something better than that high 20s, 30%? Where can that business get back to?

[Soma Somasundaram, executive]

Yes, Scott, it's a great question. I think there is a structural element around the continued drilling efficiencies that are driving the volume growth challenges in that business is over a period of time. So the business is definitely a 25% business. There's no question in our mind. Can it get to a closer to 30% margin business is going to very much depend on volume. But what I would say is it's definitely a 25% margin business at this stage. It will take a hit in Q4, as I mentioned.

[Operator]

Your next question comes from the line of Saurabh Pant from Bank of America. And his line has just got disconnected. Moving over to the next question from Atidrip Modak from Goldman Sachs.

[Ati Modak, analyst]

Can you mention that the Argentina revenue exposure doesn't really exist. It's more in the margins, and it sounds like there were activity expectations that drove the delta versus expectations for 3Q around guidance, especially but I'm wondering if there were any other things maybe destocking and drilling technologies, any other factors you can provide any color on? And how do you see those going forward?

[Soma Somasundaram, executive]

Yes. If you look at our shortfall to -- first of all, we are disappointed with it, right? So our shortfall to our own midpoint guidance is about $35 million in top line, right? And I would say the half of that is related to the U.S. land and particularly in PAT, again, this is with respect to our expectation and PAT and drilling technologies. So roughly $16 million, $17 million of that $35 million is -- a shortfall is in U.S. land, in PAT as well as in Drilling Technologies. The remaining $16 million, $17 million is a combination of 2 things. One is a shortfall in Argentina, and that is primarily driven by a delay in import certifications and I'll ask Ken to comment on that. Again, this is all related to this devaluation issue. And then the remaining -- another country where we had a shortfall compared to expectation is in Mexico. So Argentina and Mexico together contributed another about $15 million, $16 million to the shortfall. So there are 3 primary areas where we had shorter expectation. U.S. land, Argentina and Mexico.

[Kenneth Fisher, executive]

In Argentina, it was about $5 million of that revenue and that -- what drove that was we saw the government slow down or stop giving import certificates during the course of the quarter. And we weren't the only ones that experienced that. We actually engaged with the U.S. Commerce Department and heard that a lot of imports were being similarly treated across a lot of sectors. And then the commerce guys have actually been helpful and try to get us those certificates, and they've started to flow a little bit better recently.

[Ati Modak, analyst]

Just as a follow-up, is there a way for us to gauge what the segment exposure is in Argentina is it evenly spread out? Is there a higher exposure.

[Soma Somasundaram, executive]

It's all PCT. Largely PCT. There's not a lot of PAT exposure there.

[Ati Modak, analyst]

And the other question I had is you mentioned free cash flow growth over time, a lot of that from EBITDA growth and some margin expansion. I'm just wondering if there is any kind of color you can provide, you have a bunch of productivity projects ongoing. Is that the main driver? Are there other operating leverage drivers here in -- as you think about hitting that 21% target and beyond?

[Soma Somasundaram, executive]

Yes. I think the 21% target for us is, as I mentioned, is a combination of productivity and incremental revenue growth. That's what I would say. And I think the free cash flow conversion of that 50% to 60% for us is very much intact. And I think you will see our business continues to be a capital-light business and we'll continue to generate that 50% to 60% free cash flow conversion.

[Operator]

Your next question comes from the line of Saurabh Pant from Bank of America.

[Saurabh Pant, analyst]

I think basically, I'm thinking of how should we think about level setting expectation for revenue growth from a 2024 perspective? Because North America has, like you said, has some cross-currency activity would be improving on a leading-edge basis. But on a full year basis, maybe you can expand on that. How do you see North America behaving in 2024 and then international and offshore should be doing well, right? So how should we think about top line as a whole for 2024 versus 2023?

[Soma Somasundaram, executive]

So let me start by saying we do expect a positive growth both in North America as well as internationally in 2024. Now given what we have seen in terms of the Q3 slowdown and now the Q4 slowdown a seasonal slowdown. I think the base in Q3, particularly for U.S. land, has kind of lowered a bit, right, from what we had assumed. So as we go into Q4, like you said, I think we will see -- as we go into next year, you will see in North America, the Q1 revenue to be sequentially better Q4 to Q1 and then it will progressively get better into Q2 and Q3. So for me, it's -- again, Q4 of next year is too early to predict right now, but I do expect a positive growth in North America. So what we are seeing right now is a temporary situation in that respect. Nothing in our customer conversations is telling us that 2024 is going to be -- it's not going to be a growth year in North America.

[Saurabh Pant, analyst]

And then just one quick follow-up on the PAT side of things because there's obviously a seasonal element, year-end slowdown, budget issues, all of that stuff. But I'm just thinking, is there also an element and how important is it if you are thinking about the lag effect of lower D&C activity, right, lower completion activity on production, there's obviously a little bit of a lag, especially on the ESP side of things. How should we think about just that lag effect versus seasonality? Because that would tell us how quickly things recover in 2024. That's the reason I'm asking.

[Soma Somasundaram, executive]

I think intellectually and logically, we definitely -- we see there should be a lag effect, right? But we have tried correlating this multiple times, whether it is a 3-month lag, 6-month lag, 9-month lag, and we have tried doing that. And it's a little harder to pin down how much is the lag effect because of a couple of things. Number one is, as you know, the ESP, which is the primary business that tends to get impacted by completion slowdown. Customers tends to run ESPs 2 times and 3x into the same well nowadays. So sometimes, it's very hard to kind of -- it's not 1:1. So it's always been a bit harder to really quantify exactly how the lag effect works. But I do agree with you that there is a lag effect but it's just hard to quantify and predict. And we saw that because as we got into September, we clearly could see our ESP installed rate starting how we entered the quarter in Q3 and how we exited the quarter in Q3 was lower.

[Saurabh Pant, analyst]

Soma, I know you've talked about the secondary torch installations in the past so that obviously offsets it to some extent.

[Operator]

Your next question comes from the line of Doug Becker from Capital One.

[Doug Becker, analyst]

Thank you. So continue with PAT. The company received top mark and the Kimberlite Artificial Lift survey, but the growth in PAT has been a little bit slower than I would have thought even factoring in the U.S. activity dip given that some others have talked and pointed to lift as an area of strength. So I really just wanted to get your thoughts on the competitive landscape with risk and if there's any market share shifts taking place there?

[Soma Somasundaram, executive]

Yes. So I think from a competitive landscape standpoint, I think if you look at the market kind of differentiated in -- if you look at the 2 major forms of lift in artificial lift, which is the ESP and rod lift. So when you look at the ESP market landscape, I think our competitive position remains strong there, and we feel the activity is the major driver behind any type of slowdown we see. Now when it comes to rod lift, there's a lot of players in broad lift, especially when you go to the lower end of it, particularly in components and repair shops and so on and so forth. So sometimes in broad lift, you will see some pricing pressures and issues in the fringes, you will see. But the way we focus on a rod lift is in terms of the type of value we provide. So when I look at our own data, I don't see a lot of market share loss per se. There are some in the fringes. But I wouldn't call that as the biggest driver for the -- any type of slowdown in growth. It's largely an activity driven. And we have today in the U.S. As you know, Doug, we have a pretty good market share position in all forms of lift in some of the Lyft categories, we are the leading share position. But if you look at across all Lyft positions, we have really good market share position. So I think I would say that the growth issue, which we are experiencing in the second half year is largely an activity issue.

[Doug Becker, analyst]

One last one. Just curious if there's been any nuance or change to the revenue CAGR you talked about from '21 and 0.5% at the Analyst Day, high single digits, still plenty of time, but wondering if this year is maybe shaded or maybe at the high end, less likely.

[Soma Somasundaram, executive]

Doug, if you look at 2023, if you normalize for the various elements such as Russia exit, the cross-sales terminating as well as the -- some of the product line exit we did as part of our CT restructuring, we normalize for all of that. And at the midpoint of our guidance, it's somewhere in the 4% in 2023. 4% or slightly better. So when you look at that, obviously, when we gave our high single-digit CAGR, we weren't expecting the second half this level of activity weakness than what we expected, right? So it makes it harder, right, because if we are starting with the lower year than we anticipated. So it makes it harder. But we are not giving up on that, but I will acknowledge that it makes it harder given that we started the fourth with 4% as the first year.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Mr. Soma for any closing remarks.

[Soma Somasundaram, executive]

Well, thanks, everyone, for joining today's call, and we look forward to talking to you in our next quarter's earnings call. Thank you, and have a great day.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.