Q1 2022 Dril-Quip Inc Earnings Call

Sure.

[music].

Good day, and thank you for standing by welcome.

Welcome to the drill quip first quarter 2020 to fireside chat.

I would now like to hand, the conference so, but your speaker today, Mr. Tom Curran from Seaport Research partners. Sir. Please go ahead.

Thank you greetings everyone welcome to drove group's first quarter Fireside chat I am Tom Curran Senior energy technology analysts at Seaport Research partners and joining me. This morning from management are CEO , Jeff Bird and CFO Kyle Mcclure.

Pass the mic to Jeff who will provide a brief summary, and touch on some highlights of the results released last night and then we'll turn to what will be a deep and expansive discussion Jeff.

Thanks, Tom and thanks for hosting the Fireside chat. This morning looking forward to a robust conversation.

Before I jump in I would like to say thanks to the global team for continuing to execute in the quarter, specifically, our new business leaders are new product line business leaders, Don producing Steve as they've started to lead their respective teams and moving from what has largely been a functional organization since the founding of the <unk>.

Company to a more product oriented company.

We continue to be very pleased with the opportunities we see as a result of this reorganization we believe in the second half of the year, we will start to see specific improve.

Improvements in our ability to service our customers and also an improvement in our cost position as we go into the second half of the year and really as we exit 2022 and head into 2023. So just thanks to those.

Those three people and and their respective teams as well.

Looking at the quarter Q1 was really middle of the fairway quarter with what we had talked about a couple of months ago bookings were in line continued strong bookings are definitely larger than what we saw in the in the middle of the pandemic. So pleased with that revenue and EBITDA met expectations free cash flow was a hedge.

Wind, but we always knew that was going to be a headwind going into the quarter and we've got some one time payments that always happened in the first quarter to the year. So that's always a challenge I will see that bouncing back I think later in the year.

If you step back and look Geo politically obviously.

<unk> environment for a lot of people in Ukraine, and Russia right now.

So.

As we look at the resulting inflation. The story continues to be an inflation continues to be an area of keen focus for us.

And our business leaders as we try to match price increases with inbound inflation, it's really hand to hand combat right now if we think about inflation and what we're seeing there.

And despite the inflation headwinds, though the environment overall is very constructive for increased spending. So we're still very optimistic about the order intake over the balance of the year and look forward to a more robust discussion with you on Tom Thanks.

Great.

Start with a few questions on this quarter's results and then pivot to a market update and other topics. So the top line came in at $83 million as you said essentially.

Straight down the fairway, but the company realized the gross margin on that revenue of just 23% which was below expectations.

First question on that margin.

He is on mix does the margin shortfall, partly reflect that you you did hit the top line target, but perhaps with a less favorable mix than anticipated.

Hey, Tom its Kyle.

All of it can be drummed up the mix in the quarter coming out of Q4, we had a 2021, 5% gross margin 23 in Q1, we would expect going forward. The the orders mix is much improved versus what we saw coming out of Q4, which had a really heavy lean towards pipe and fabrication. We saw that play out in Q1, we would think for the rest of the year. If we look at the orders mix goes.

Into Q2, and beyond Youre going to see a much better mix of Sps Wellheads et cetera, and so we would continue to see gross margins.

It up into the mid to high <unk> in the back half of the year.

Got it.

So if it was all entirely on the mix side looking at the cost of sales.

It sounds as if.

You were able to.

Control and manage.

The challenges.

You you've been confronting there at least in <unk> in general.

Both over <unk> and through to the present, how each draw quick managing.

Inflationary pressures and just the supply chain and logistics challenges that are affecting the whole industrial world. Yes, So as Jeff mentioned sort of a hand to hand combat to some degree on inflation, we do have msas, where we can we can ratchet up based upon certain indexes, it's what I call a fluid situation.

We are sort of day to day thinking about this whether it's price increases across the board based upon lift in certain certain of our business units or if it's just we're dealing with a customer by customer situation. In addition to supply chain issues. We are certainly looking at additional productivity that we've announced in the prior earnings call back in February so it.

It is sort of a very fluid situation inflation continues to be.

Depending on the business, we're looking at whether its downhole tools for the subsea business from sort of two different.

Interfaces happening there downhole tools, a little bit more real time in terms of what they can do sub state a little bit longer term contracts, but the MSA. There should should continue to help us but it is a real time situation that we are we are doing our best to just kind of manage in Q1, I think we did a really good job of that.

As the year goes on we're probably going to continue to see inflationary pressures and will continue to pulp prices, we can and will continue to pull costs as we need to.

Got it so.

Two leavers there do you expect to be able to continue to use.

On the bright side for expenses SG&A did come in 12% lower than consensus.

Engineering and product development expense was right in line.

How much of this year's target for productivity and efficiency savings did you harvest and <unk> and sequentially. How do you expect the remainder to be achieved over the rest of 2022, yeah. So we talked about the $15 million back in February we got about $3 million of that in the quarter, we expect to pick up another five of that in Q2 on an annualized basis.

Remaining piece of that is going to be largely supply chain savings and operational.

Efficiency improvements and productivity. So I think as we see the year play out I would probably target around maybe five to 7 million that will pick up this year it'll be split <unk> between cost of goods and G&A G&A will continue to be a focus for the organization I think we're sort of laser focused on that especially as as revenues continue to come back and want to make sure we get as much of that fall through of the incremental.

Revenue as you know we saw when things came down how quickly decremental margins went with it as revenues come back we expect the incremental margins probably to overshoot, what our expectations are here internally, but as we continue to pull those two levers whether it's cost or price. We're keenly focused on both right now.

Got it.

Turning to bookings.

Zero in on product orders inbound.

Inbound orders for products totaled $63 million, which was within.

That new hire stepped up guidance range of $60 million to $80 million.

Closer to the floor.

You've just reaffirmed annual bookings guidance for growth of 20% this year and clearly continue to think that forecast.

Has potential variance, it's skewed to the upside.

So did you just experienced.

Some standard slippage of <unk> in which the timing of certain orders or a large awards simply slid out a few months and what does your intact full year 2022 bookings guidance imply.

For our new expected quarterly product orders range.

Both both for <unk> and then what we should see sequentially over the second half.

Yes so.

Still very optimistic about the 20% year on year and believe that's well within in hand, I think if we looked at it Tom on the way into the pandemic, we had more Mrs to the downside I think as we exit the pandemic what we're starting to see now is more opportunities to the upside. So if you look at specific.

<unk> Q1 to $63 million number there.

As I've said before it doesn't take much to move the needle on that.

A tree order of three trees is is $15 million and suddenly moves that to the upside and thats worn order as an example, so.

Think we will see some lumpiness quarter to quarter, depending on how those orders play out, but we would expect to see continued increases Q1 Q2 and throughout the balance of the year, what we're really seeing right now in the market is two things one a lot of the conversations that we didn't think we're going to happen until Q3, and Q4 are being pulled into.

The first half of the year, so we're optimistic about that.

Furthermore, there are some items that candidly, where cat two items lower probability items. This year that we just didn't expect to have real meaningful conversations are see orders for those this year and this year and those those drop in orders are starting to materialize now in Q2. So we're very optimistic about the 20% and believe there is more likely.

They're not upside to that number.

Got it.

You just mentioned how much of a swing factor.

Subsea tree orders can be from one quarter to the next.

I know that you are anticipating a big year for subsea trees.

17% to 19.

Orders foreseen.

And the indicated timing of those awards was what underpins your original expectation for how product orders would fall by quarter, which was that.

2022 is expected to have a bar bell shaped with a bigger <unk> and then <unk>.

How many trees did you book in <unk> and what's the latest visibility on how the remaining water should be distributed.

Yes.

I believe there are about three trees booked in <unk>.

And the balances that we see.

<unk> level of that in really Q2, and Q3 right now and that's really on.

On the back of two things really to be honest one is.

Our concerns from a supply chain standpoint from a number of these customers.

And also just the underlying economics that you have as well, but I believe the number was three trees in Q1.

And then similar question when it comes to the.

The latest multiyear Petrobras awards, you've inked.

Was the <unk> order contribution and then what level of call off orders.

Should those awards yield this year.

Yes. So we had so total of 87 development and exploration Wellheads under that MSA about 30% of those.

Have already been placed in terms of purchase orders and were in the bookings.

In Q1, that's well ahead of the schedule that we would have expected to see and candidly, we now expect that.

Sometime first half of 'twenty, three there'll be another tender where we.

Where we'll see another renewal if you will or a flip over if you will of that MSA, so pretty optimistic that's a significant improvement.

So what we would have expected those 30, well Ed will really deliver.

Starting September this year and probably through the first three quarters of next year.

And.

Just broadly Jeff you just touch on this.

To a degree but its worth.

Revisiting and delving into a bit more but.

What sources are fueling your confidence that there is this positive bias to your 2022 bookings guidance is it.

A combination of customer conversations what youre seeing in certain geographic regions.

You've already.

Touched on.

Both the acceleration youre seeing for certain projects and the.

The rising probability of.

Materialization for others, just whats what all is behind your conviction that any surprises are likely to be to the upside.

Yes, so just a couple of things there is a little bit of everything that you said we first.

Self and business leaders have been having a number of what I'd characterize as very fruitful customer customer discussions and almost every one of those discussions that we have with customers is all about pulling things in and doing things earlier than we had originally expected and some of that's price.

<unk>, but but some of that is also hey, we're worried about supply chains. We wanted to get the early lead items out there and get that done so that that's one a.

Although a little bit more anecdotal probably the other thing is we have a very robust process, where every two weeks we have what we call War board meeting with each of our regional leaders with each of our product leaders, where we go through literally order by order with an update on what was the last conversation the customer said it was going to be Q4, now it's Q2.

So those conversations are literally every two weeks the customer conversations with myself and the business leaders are really once every quarter or so so as an example, I did a European trip.

Trip in Q1 got a lot of positive feedback from that in Q2 will be doing in Asia tour.

And expect to get some positive comment there. The one area that is kind of weak right now that we see at least is Asia Pac Europe seems strong Brazil is very strong Gulf of Mexico is picking up Latam is picking up it's really Asia Pac so I'll be interested to see the feedback we get when we were on that two are out there.

Right I know you just went through Europe and that was a very encouraging trip it sounds like.

Moving onto the pillars of your growth strategy, you've made impressive headway with the collaboration approach.

You first introduced the concept a few years ago.

I'll have the collaboration with Proserv and one subsea respectively performed so far and what portion of 2020 bookings are you counting on them to deliver.

Yes, So let me divide it between.

<unk> and one subsea if I think about proserv.

Those are obviously the controls that go on the trees that we sell will book as you said 17 to 19 trees. This year about half of the trees that we will book will have proserv controls on them.

So that's a very strong statement I think about that collaboration agreement in some cases, we're bringing proserv to the table below in some cases pro service, bringing us to the table as well. So we really view that as a mutually beneficial relationships with about half of those trees.

You think about the one subsea collaboration agreement that really gives us exposure to EPC and development wells. The challenge is that drill quips portion of the overall EPC contract.

It's pretty small when you look at the total scope there. So we'll probably won't target anything specific around that one subsea collaboration agreement right now or we will talk about it right now, we'll probably talk about those things as they happen because to be perfectly honest. It's all about one subsea winning where a small portion of that overall PCI. The other thing.

I would say is is that we talked pretty openly on the legacy side, we talked pretty openly about proserv in one subsea theres a number of other what I would characterize as quiet collaboration agreements that are happening at the same time, specifically around the wellheads.

And we believe those will start to materialize last three quarters of this year as wobble, we're careful about putting a target out there just because of the relationship with one subsea and how dependent we are on their way to be honest.

Got it.

Newest collaboration that drove quip has entered with Aker solutions.

It was actually for them for the new energy side, specifically <unk>.

Yes.

Carbon capture utilization storage.

Through that collaboration you will be participating in the macro led consortium thats been selected as one of two Coe final was asked to provide a feed package for the northern endurance partnerships East coast cluster in UK North Sea.

Between that opportunity and my understanding of some other prospects you have traction with it seems as if 2022 could be a breakthrough year for drove quips emerging role in <unk>.

<unk>.

What's the estimated offshore Ccs Tam for <unk> quip and how.

How much of that do you aim or aspire to eventually capture.

Yes. So if we think about first let me talk a little bit about the agreement and then I'll give you a size of market size and kind of what we think about obviously very pleased with the acre solutions collaboration agreement.

And to be honest.

The minute, we announced that it was somewhat surprising we've got two or three other large inbound calls.

Asking about that collaboration agreement and asking us to.

Participate in a joint bid with Occar solutions. The other thing that was somewhat surprised that we had some other <unk> companies that called US and said Hey, we really believe we can work with you as well.

In a collaboration agreement around that same segment. So we're very very very pleased with that if you think about the size of the market.

And it's all about a slow ramp up to this number but by 2030, it's easy to see where you'd have 200 <unk>.

Annually 200 Cc U S wells.

And then ramping from there.

If you look at what acre share and if you just assume the dockers subsea tree share is similar in <unk> you'd be round of 15% to 20% share.

Could be higher than that could be lower than that could be a little higher to be honest, just because you think about their European influence and and where he sees the U S is likely to take off first but just think about it is 15% of those 200 by 2030, we started to feed the feed started two weeks ago, we've ring fenced the resources around that.

I joke, a little bit our director of energy transition has now gone from a team of one to a growing team as we jointly work on that fee with offer solution.

We probably won't see.

Orders from that time until 2023, because the feed is going to take some time. This year that will happen later this year and I don't think the award will happen until next year, So you'll likely see this in terms of bookings.

'twenty three and real revenue starting in probably late 'twenty three 'twenty four time frame.

Okay.

So we'll stay tuned for that but that was it.

Very helpful overview, and I can't believe I actually used capture that pad pun was not intended.

Future share win.

You've previously spoken to focal areas for additional collaborations liner hangers.

<unk>.

Just maybe revisit those and provide an update on where youre at in pursuing them and perhaps a distinction between.

<unk>.

Potential big being additional collaborations and then.

What you just clarify for us which is these quieter.

Emerging collaborations around the wellhead just should we think of those as two different categories or perhaps just an overall update on how collaboration should evolve from here.

Yes.

Let me go through the three segments and I'll kind of explain the quiet collaboration agreement versus more of a what I would characterize as a headline collaboration agreements. So if you start with our downhole tool business, we do a lot of work.

A lot of work with all the major service providers around the world. So that would include your normal cast of characters.

<unk> and Halliburton Weatherford.

Weatherford in a baker and depending on the region of the World. We just have a better kit.

And better availability than they might have internally. So theres a number of cases, where in all of with all of those major service providers, we're providing liner hangers today, it's not a headline collaboration agreement, it's more country by country region by region, we're working with them.

And candidly those are very successful and we see those growing right now so that's really that that downhole tool business.

Where we're starting to I would say approach, how we think about it in subsea wellheads and buy approach I mean.

On the one subsea side, where literally sit down and jointly have a review of all the open tenders and how we're approaching it we're starting to get down that path as well with liner hanger, so and we're expecting that growth and liner hangers to come this year as a result of that.

If I think about other areas for collaboration outside of that the.

The most likely right now is really around our connector.

And if you think about that there are some major pipe providers that don't have a connector and obviously, we buy and pass through the pipes. So there is really some opportunities there and we're constantly looking at those opportunities it likely wouldn't be a global collaboration agreement it would likely be a regional specific depending on the pipe supplier collaboration agreement but.

We're constantly looking at that as it relates to the <unk> I don't think Youll see a collaboration agreement specifically on DXP until we likely get that installation and unfortunately, we had expected to have an installation.

In Q1 of this year that was a dry hole, so we're kind of back to.

Back to square one on that first installation realistically now we're probably looking at the middle of next year.

At the earliest for that first installation. So we still continue to have conversations with some of the majors that are very excited about it still continue to have conversations with other <unk> providers that are very excited about it but really step one in getting those people to move in a more meaningful way is really about that first installation. So I suspect on our collaboration.

Agreement there you wouldn't see one until probably late 'twenty three after our first installation.

Alright, so that.

The next milestone we will look forward progress towards a potential collaboration will be getting the first <unk>.

That's exactly right yes.

Turning to.

Another pillar of.

Your strategic growth plan.

Downhole tools.

I know that's.

One of your highest margin.

Product lines.

And.

It seems therefore.

Given where gross margin came in on a consolidated basis in <unk>.

Downhole tools might have had.

A bit of a late start to the year in <unk> relative to <unk>.

Your expectations for the full year do you still see.

Double digit growth for downhole tools this year.

And what should be the drivers of that growth rate.

Yes, we're still very optimistic about double digit growth for downhole tools this year.

The drivers are really three categories.

<unk> continues to be a nice.

A nice growth driver for us new product as you are aware, we want an OTC award and I think a couple of years ago continue to see growth there we.

We expect to start to get back some of the share that we had lost in the middle East. If you think about the original <unk>. They had a very strong presence in the middle East lost that.

Over time, we are starting to see that return right now so there'll be some share gain in the middle East and then really just Latin America in general inclusive of Mexico Latin America in general.

Is just a very very very strong market right now so thats not so much a share as a rising tide. So think about it is <unk> starting to share penetration there think about it as Saudi share gains there and then think about it is Latin America inclusive of Mexico really a rising tide, if you will and just a very strong market.

It did have a tough Q1, Tom but they do expect to grow pretty nicely into Q2 and maintain that growth throughout the rest of the year. So that'll be a helpful margin tailwind for us heading heading forward.

Got it.

You just touched on.

The <unk>.

Talked about.

Timing expectations for that first <unk> installation.

How about just an update on <unk>.

Further installations in.

Adoption of your your new technology suite.

Where some of the other offerings at at this point.

Yes look so.

While we <unk> a disappointment right now from an installation standpoint, the track record for the E series <unk>.

Continues to build I just talked about the expect D. As you mentioned.

We just installed our being more 2020 K system in the Gulf of Mexico that will actually be featured next week at OTC and then if you think about being more <unk> in general.

We would expect as we get to the end of the year, it's probably have 60% to 70% of our orders are wellhead orders around that specific product. So youll recall, we went from 15 wellhead systems for wellhead systems will now even inside those four wellhead systems that we've got big bore TUI is the is the dominant system that we're seeing.

Right now so still very optimistic about that as a standard system and thats really been.

Until <unk> started to get the installs now that's really been a very very nice surprise for us from a new product standpoint.

Yes.

Okay.

Shifting gears now to the.

The company's ongoing transformation.

He has had underway.

You know you do continue to implement.

Changes to the organizational structure.

<unk>.

How are you progressing at this point.

At the high level.

The changes you're making in terms of leadership teams.

Yep.

Yeah. So if I think about it in teams that I mentioned.

Three.

The three current business leaders.

So in terms of subsea products, we've now got very specific business unit managers.

Around wellheads around our Sps franchise and surface equipment slash connectors. Those gentlemen are all doing a great job of.

Starting to build out their teams and we've really now communicated too.

Every individual in the organization what team, they're on and as we start to divide and think about those teams were finding real opportunity. There, we're breaking barriers, where handoffs might've creative problems either in terms of cost inside the system or in terms of just customer responsiveness and ability to improve our on time delivery right and how those are.

Teams sitting in separate areas on the campus. So the communications improving over the course of the next three to six months Youre going to see those teams start to colocate on the campus and I'm optimistic that as those teams co locate.

We're just going to see even more benefits in the back half of the year both in terms of.

Improved on time delivery improved customer responsiveness, and really just margin improvement as we start to attack costs in a meaningful way.

Yes.

And.

In <unk>.

Last quarter in the fourth quarter.

You did.

Take a $53 million charge.

Related to restructuring.

In sort.

Sort of.

Big.

Initial step towards the product line rationalization.

You'll you'll be executing could you expound on where youre at with that have you already identified some of the product lines.

You'll be exiting and.

Will you be giving us updates on.

How that should run its course.

So as far as product line exit we went through a grow harvest kiln.

Plan with every single product line, we're executing on that right now the $53 million charge that you saw in the fourth quarter was a result of that the example, I would give on an update on that is as I said earlier, we had 15 wellhead systems. They went to four wellhead systems. Obviously when you eliminate 11 wellhead systems there is a lot.

Inventory and assets that go along with eliminating that.

And Thats just an example of what we've done youre not going to CSA, Hey, we're exiting.

One of the product lines, we've got today, either in terms of Wellheads Sps surface products downhole tools, we're very confident and we like those products when we like our position. There. This was more around pruning within those respective product lines as opposed to hey, we're going to do a wholesale exit of one of those product lines.

Do you foresee wholesale exits as.

A potential or already planned next step.

No.

No. We think we think we prune these product lines to the to the right level and that and it's just more focused.

I keep coming back to that 15% to four it just much more focused candidly it helps our customers a great deal, especially in the supply chain world that we live in today, we can be much more thoughtful around stocking programs and things like that and that allows us to.

Bypass, perhaps some of the supply chain and logistics issues that we've seen before so it's really more of that type of consolidation. Then it is really exiting one of those product lines.

Understood.

Aspect.

The transformation underway.

Is the right sizing of your footprint.

<unk>.

How much of the.

Eventual expected $40 million to $60 million in targeted property divestiture proceeds do you expect to achieve in 2022.

Yes, So we've got the project in flight right now to attack the 40 to $60 $40 60 is probably over a longer much longer period of time, if you will.

I would think probably by year end or somewhere in the nine month horizon, we should be in a position to at least announced perhaps are either closing or.

Somewhere around there our first piece of that of that property reduction.

Reduction, but in terms of how much we think we're going to pull in this year, it's a little bit tough to tell right now with what's going on the market different pieces of property have different values and so forth. So.

I would hate to put a number out there at this point and I think what you will see though you will see that we will have for sale signs if you will and probably around 85% to 90 acres of the Houston campus within the next 30 to 60 days.

Not already by the way some of it is already there but.

More to come there, but predicting the cash and when thats going to happen is a bit tough right now.

Okay.

In general should we think about these restructuring and right sizing improvements.

<unk>.

Separate from your targeted.

Productivity and efficiency savings.

Goal for 2000 $20 million to $15 million yeah. Its.

Yes, so that's one more extreme we've got which is the $15 million of productivity. The property is completely different work stream.

The $15 million to $20 million, we would talk about in terms of longer term savings.

As a part of the property reductions getting our footprint smaller overhead go sit down significantly things like property taxes and fixed costs, we anticipate somewhere in the neighborhood of $5 million savings with that beyond that we're going to take the cash likely from the proceeds of the sale.

Getting campus, a little bit smaller, we're going to put that towards our manufacturing.

Making a nice investment in manufacturing around sort of $20 million ish right now we'll have roughly a two year payback for us. So we think of that 15 to 20, it's both a combination of fixed cost. We think we'll see a reduction of about $5 million and addition of productivity that we will see what the manufacturing investments somewhere in that $15 million to $20 million range, we will pick up annually.

But that probably won't kick in and probably until late 'twenty three beginning of 'twenty four.

But those are longer longer term productivity goals force associated with the campus reduction and then subsequent investments in manufacturing.

And.

When it comes out of transformation, we've talked a lot thus far about.

Where you are pruning shrinking looking too.

Monetize but there is also a.

Growth enhancement side to it right where the.

The new organization.

Should have benefits in terms of.

Where you'll be.

Concentrating and hopefully.

More effectively pursuing.

Growth opportunities.

Specifically for the.

The new energy transition team.

In addition to the Ccs.

<unk> you.

It will be.

Pushing through the the Occar collaboration are there other areas of transition you are interested in exploring.

Yes, there are and we're actively actively engaging and evaluating those markets right now it's really about matching up our core competencies. So if you think about high pressure high temperature metals <unk> things like that it's really about evaluating those core competencies and seeing where those match in a number of <unk>.

Energy transition areas, we've got some of those identified right now but to be honest, it's a little too early to start to have those conversations right now because we're still in the very early stages of evaluating our ability to win in those markets. There is a lot of white space in the markets. We're looking at is just making sure that we've got the right match and the.

Right.

Formula If you will for success.

We'll probably be talking more about those in the coming quarters, but just not ready evaluating to them how to work, but not ready to talk about yet.

Got it.

<unk>.

Maybe.

You've reaffirmed.

All of the.

Prior guidance you've provided for 2022.

But returning to.

Sure.

How <unk> came in in <unk>.

The resulting effect on.

Expectations for <unk> and the sequential progression over the remainder of the year.

Could we just.

Clarify both.

Margin expectation for Q2 and then.

Top line as well.

For revenue still expecting to achieve.

10% year over year topline growth, but just.

Where should we see <unk> now come in both in terms of the.

The margin inflection expectations and then its contribution to that.

Full year, 10% growth yes.

So we would see revenues in Q2, probably a minimum growth of about 10%.

Our expectation is revenue is going to start with a nine in Q2 and beyond which will put us back in the nineties.

First time since really the middle part of 2020.

The teams I think very optimistic about the remainder of the year and I think we would see margins continue to tick up to call. It.

Somewhere between 25, and 30% depending on the mix that comes through next quarter.

So I think we're pretty optimistic that we'll at least the 10% growth in Q2.

And then gross margins would continue to tick up call. It 450 basis points Q on Q is what the expectation is and as I said earlier, we'll continue to keep.

Pretty close eye on SG&A, and we want to see that margin flow through we think as we've talked about earlier on the way up just like we saw on the way down we're probably going to overshoot somebody incrementals just because of the cost that's been taken out. In addition to just now we're getting to a certain revenue threshold or level that we are picking up on the on the fixed cost base here and so for every dollar we kind of bring on incremental revenue standpoint.

I think we're going to see some pretty nice flow through.

Okay.

And longer term once you have.

Complete it.

These.

Reorganization and right sizing modifications, where do you think.

Products gross margin.

Should normalize.

I think overall gross margins will talk to that and then come back to product, but overall gross margins probably somewhere in the mid thirties.

Take a look at the productivity, we're targeting and getting revenues.

Much further north in here, we would think that the gross margins on products or on the overall would be somewhere in the mid to high <unk> is kind of what we would take a look at it from a historical standpoint. In addition to sort of the math, we've done done internally on the product side of the house you can look across both downhole tools.

Addition to subsea.

Subsea products again, I think youre, probably going to see that probably in the low to mid thirties with service, bringing us up to that kind of mid to high <unk>.

You had warned pile that free cash flow would.

It would be negative for <unk>.

And it came in at a negative $13 million.

And yet.

As part of the.

Reiterate it.

Guidance.

We remain confident in the ability to achieve a positive.

Free cash flow margin for 2022, 3% to 5%.

What what does give you the conviction that over the next three quarters, you'll be able to reverse that and ultimately.

End up in that.

Positive range for free cash flow for the year.

I think just underlying improvement in the business is obviously helpful.

The lack of onetime payments that we typically have in Q1 will dissipate into Q2.

So I think as we think about Q2 getting us back to what I'd say is free cash breakeven in the quarter and then as Q3 and Q4 happened I think we expect to see a nice tailwind of around various.

So working capital. In addition, we have perhaps some.

Tax refunds from time to time flowing through and so forth that will that will probably help bridge that gap, but I think we're pretty confident that that 10 to 15 number.

Is achievable if we do the math on the sort of 3% to 5% free cash.

You talk about Q1, it actually came in much much better than our internal forecast. So I think we're pleased we're off to a good start dsos down nicely Q4 to Q1 by about 17 days or so.

We're going to try to hang on to that as we move throughout the year. As you know the business is growing here, we are going to be consuming cash in the working capital functions inventory.

We are going to obviously continue to we've made great improvements in 2021 as it relates to the DSO.

And inventory, we're going to continue to hang onto those and try to improve those further.

And homing in on on working capital.

What's the likely.

Evolution of it quarter by quarter.

What should we expect in terms of draw versus contribution to cash flow in <unk>, and then over <unk> and <unk>.

I'd say Q2, we'll call it working capital breakeven.

And then beyond that we should see some pickup in Q in the back half of the year.

Probably sizing that somewhere in the $10 million range from working capital.

Q2, probably breakeven on the working capital lines, and then picking up.

About 10 million in the back half of the year.

Okay.

And when it comes to your priorities for capital allocation in descending order of importance they have been.

Number one.

Capex that has been and will remain a top priority, where you've just reaffirmed in an annual budget of $15 million to $17 million.

Two would be M&A.

Which use.

Were you described being open to both energy and energy adjacent transactions and then three would be share repurchases.

Let's start with two.

Could you elucidate on.

What you mean by energy adjacent and we'd all we might see you consider in terms of M&A on that front.

Yes, sure. So I think when you look at the the Oss the landscape. That's there today and you look at it in a very traditional sense, whether its public companies or large private companies that we're all familiar with that large.

Most of 100% of Opex exposure.

Some cases challenge balance sheets challenged markets challenged situations I think what we're really looking for.

If you think about an ideal acquisition for us if you open that aperture and say hey, I want something that has energy exposure in that.

So it could be our core Oss business, you will that's great, but it would be ideally, we're finding something that has that Oss exposure, but also has non all opex exposure as well that gives us just better.

A little bit more.

Diversity, if you will around products, but still plays to our mechanical engineering and manufacturing and footprint strengths that we've got around the world. So we're in process of starting to evaluate what those end markets would look like we're being very thoughtful about that.

Really kind of look out we understand ofm's very well, what we want to make sure as we're just as thoughtful about the non Oss side of the business as well so that's likely going to develop over the next two or three quarters a more thoughtful.

<unk> around one of our guiding principles are there and how we're thinking about it.

Got it.

And on the energy side.

Could we see you potentially.

Execute a transaction.

With a focus on new energy opportunities are there any technologies or.

<unk> products.

You already have identified that ideally you would add as part of.

Your pursuit of <unk> for example.

I think <unk> is the obvious we've got.

Hey.

Kind of a robust.

That development plan on what we think we need to do around Ccs to make sure Thats a fulsome offering for US there may be cases, as we look at that product Road map, where we say hey, you know what a lot smarter to go out and buy this as opposed to try to develop it internally and be very thoughtful.

Round, how we approach that so that's the most likely acquisition and it would probably be a little more technology related as opposed to <unk>.

Large business or something like that the challenge candidly that I see as you look out at new energy right now is.

Infinite multiples in some case, so I think thats, probably a challenged market for US right now as we expand outside of Ccs, We may find some opportunities, but right now.

About new energy its more likely to be something from a product standpoint on the Ccs side.

Got it.

And then.

Jumping now to the top priority.

Capex.

The reiterated budget of $15 million to $17 million.

How could you just refresh us on how that 15% to $17 million you breakdown.

Yes hang on one second here.

Largely going to be in the rental tool space associated with the <unk>.

Previously announced.

Work in Brazil, we've got quite a bit to build out there.

Let's see.

Yes, it's largely rental tools, followed by way of a small piece of it we're going to be taking on this year. In addition to the normal maintenance capex, but it's going to be heavily weighted towards rental tools. This year.

That's probably because that's primarily a combination of downhole tools and I think some big <unk> tools as well. So if you think about where we are growing those are really growth capex projects. If you will force them and it was the other thing to keep in mind by the way about that 15% to $17 million is it does not include or.

And play a manufacturing investment to $20 million manufacturing investment that <unk> spoke about it does not contemplate that now obviously given the lead times of those products and things like that it's.

Impossible that all 20 million would.

It would happen this year, but you could have an initial down payment or something like that this year for that.

Okay.

And once that.

$20 million spend does get.

Underway.

Sort of timeframe should we assume it'll happen over.

Yes, so I can talk about delivery of equipment, we haven't negotiated obviously terms and things like that.

We're looking at a number of machines first delivery I think on that first machine is 48 weeks once we place the order Theres been no order placed yet and then you would see every couple of months one more machine coming in total of seven machines I believe total coming in so think about that is once we go 48 weeks first delivery of machine and then <unk>.

Two months after that so most of the spend on that would likely happen and we bleed into 'twenty, three and maybe even into 24, depending on the timing of the approval of that $20 million as we get that approved internally then we will update our guidance on cash flow and Capex accordingly.

Okay, we'll stay tuned for more on that and then.

Yeah.

Concluding the discussion of capital allocation priorities.

The third priority the buyback.

<unk>.

You spent $5 8 million on the repurchase of.

Just under 274000 shares.

If my math is correct that would leave you with $102 million remaining under the existing authorization.

Good.

Could you tell us just should we expect that.

There should just be continual refreshment of the authorization is that remains your.

Your third proud.

Priority for capital allocation and go to for.

Excess cash flow here or there.

So I think it's the authorizations I think at $118 million at this point in time with the re upping of $100 million at the end of last year I think we've chatted internally about this I think there's a lot of uncertainty in the marketplace right now with the geopolitical Stu I think Jeff touched on earlier, we're going to continue to look at it and depending on how cash flow.

<unk> are trending and so forth.

We will continue to support the stock.

It'll just be if you look historically as the company has done this it's been what I call, perhaps opportunistic at times.

We did sell in Q4 and the beginning parts of Q1, but we'll continue to keep this as part of our capital allocation policy.

There is a lot of uncertainty in the marketplace right now so I think where we are we're taking a pause here for the time being.

Got it thanks for that correction.

I guess I had an additional $10 million or so.

There is a 118.

1 million remaining under the current authorization got it yes.

<unk>.

And then.

Is.

The approach there is expected to remain opportunistic it sounds like you are.

You don't plan on putting any kind of <unk>.

Programming in place for.

Algorithmic buying yes, so just to clarify when we say opportunistic I mean, we do put we do put formulas in grids and things like that in place when we take that approach I think.

Things that we're monitoring very closely right now it's tough to understand the market right now when you've got the challenge in Ukraine The challenge in Russia.

The shutdowns that we see kind of spreading through China is just making sure that we understand the underlying environment. When we're making that decision and obviously that's a challenge right now we're certainly not afraid as we've shown in the past to pull that trigger and when we do pull that trigger it'll be in the form of a thoughtful grid that will rollout.

Typically do in those cases, we rollout of grid and rollout of dollar mountain and roll through it that way.

But to <unk> point, we tend to match, we tend to match free cash flow and buy back just as a philosophical a philosophical point.

Sure makes sense.

Yeah.

And then.

Returning to the subsea tree order expectations for this year.

I know.

The high degree of reliable visibility.

Pad.

Partly stems from specific projects, such as BHP Kenzie north.

Harper energies catcher field.

Could you perhaps split.

How those 17 to 19 million trees should fall between.

Major projects that are either greenfield or moving into a new phase of development versus.

Incremental trees on established installed.

Production House.

Yes.

Im going to say about 75% of them are probably build ons from existing projects. So it would be a true 5678.

Or in the case of catcher 220, somethings, where in the Twenty's there.

There is a small portion that are that our new one off trees. Those aren't large greenfield project, we tend not to participate in those large greenfield projects, we tend to participate well with.

I would characterize as the independents and larger independence as opposed to the major IOC is the nice thing about by the way. The fact that those are largely.

Knock on trees from from previous.

Orders is that what you find is that serial number one tree.

As always challenging from an operational standpoint, you are learning a lot when you get to treat 345 or in the case of catcher trees 20, something you can be a lot more efficient from an operating standpoint so.

We're pretty pleased about that actually as we progress through the year.

Got it yes, it's consistent with sort of how we've seen the overall subsea tree market up cycle progress in terms of where the majority of the demand is originating from.

Why don't I wrap it with my questions here turn it back over to.

You Jacqueline tile and.

Allow us these last few minutes too.

Here are some concluding remarks.

Yes, sure. So if we look if we look at.

Q2.

Optimistic about orders as <unk> stated earlier, we would expect our revenue number to start with the nine we believe that's going to have some strong incrementals with it as we as we start that March back up we believe once we hit that number will only see a rising number from there for the balance of the year very awkward.

Barry.

Pleased with where the order trend is and believe that 20% strong from an order standpoint year on year very focused on our growth pillars, we've talked a lot in this call about collaboration.

And we're very pleased with those and see a lot of success for those in some cases, it's laying the foundation now and orders next year in the case of <unk> and in some cases in the case of what we see with downhole tools and Wellheads. It will likely mean real orders. This year, we're focused on our cost base and focused on executing with our customers.

We've talked about.

<unk> that footprint and getting the organization aligned we're well on our way to doing that.

I'm pleased that I think in the back half of the year.

That will start to see even further upside from that but not quite ready to talk about that overall middle of the fairway quarter understand it might've been a wide fairway, but a middle of the fairway quarter, but opportunistic about.

Q2 and beyond.

Great.

Sure.

I think we will conclude there.

Thank you to Jeff and Kyle for joining me for the first quarter Fireside chat and to all of you.

For listening in.

Yes.

Thanks, Tom Thanks, Scott.

This concludes today's conference call. Thank you for participating you may now disconnect.

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