Q2 2022 Dril-Quip Inc Earnings Call

Good day, ladies and gentlemen, and thank you for standing by welcome to the real quick second quarter 2022, Fireside chat at this time all participants are in a listen only mode. At this time I would like to turn the call over to MS. Erin Fazio director corporate development Investor.

<unk> and F. PMA ma'am please begin.

Thank you Howard Good morning, welcome to <unk> second quarter, 2022, Fireside chat our news release and financial statements issued yesterday can be found on our website.

<unk> during the course of this conference call. We will provide forward looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please.

Please review, our SEC filings and website for a discussion of the factors that could cause actual results to differ materially.

Reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release with that I'll turn the call over to David Anderson.

Oh, great. Thanks, Erin and good morning, My name is Dave Anderson I head up by Energy services research at Barclays I want to thank Jeff for the opportunity to host this quarters earnings Fireside chat.

Hey, we should call us up a little bit different to say the middle of the hot summer, maybe should we fired side Pat I'm not sure.

Jessica will provide a brief recap of the second quarter, after which I'm gonna have a series of topics and questions to discuss the remainder of the hour, we're not going to be taking any questions but.

On the phone.

Okay.

Thanks.

Okay.

Hey, Thanks, Dave Thanks for hosting the Fireside chat I appreciate it and Youre, absolutely right, probably something more appropriate than fireside chat as we sit here in Houston, Texas in the middle of an awfully awfully Hot summer.

First I would like to thank the employees for a strong quarter and hard work that went into delivering the results really appreciate it myself the management team and our customers appreciate the quality and safe manner in which we conduct our business in the second quarter and this is probably one of our best quarters since the beginning of the pandemic.

We're pleased with that also.

From a revenue and adjusted EBITDA standpoint, while we beat both our expectations and consensus it was really broad based growth.

A number of our products.

I'll just go through each of those if I think about subsea services. We're most encouraged by subsea services. It was up little over 20% sequentially, we really like the growth.

This is specifically.

Specifically as a result of the fact that that's often a leading indicator of our customers and activity levels coming back to work. So if you think about that our customers have a customer property that they are bringing back to work they have rigs that they're bringing back online. So we start to see recertification and rework happening. So that's often an early indicator.

And probably our shortest turnaround and shortest cycle business of our three the next is downhole tools also a short cycle business, we've talked a lot about downhole tools over the last few quarters and the growth that we expect to see there we had a nice sequential increase Q on Q, there as well that's really broad based.

Latin America was strong both in Mexico, and Ecuador, Middle East was strong specifically, Saudi and we're starting to see our deepwater business emerge there is a real growth opportunity there and last but certainly not least on the subsea products side, a solid 7% Q on Q increase and we liked the increase there.

Largely on the fact that we started to see orders pick up.

Back half of last year, the orders were up about 10% to 15% over the first half that that trend really maintained the first half of this year and we're seeing that start to translate now into revenue. So overall, a solid quarter. We're pleased with it and once again like to thank our employees with that I'll turn it back over to you Dave for a robust conversation.

Great. Thanks, Jeff.

So one of the things we've been seeing this quarter its been its growing expectation of an offshore inflection.

But I think it's also pretty clear doesn't need everybody at the same time.

So we.

We're seeing a lot of tenders out there for both deepwater and Jack up rigs.

Let's just start with what Youre hearing from your customers kind of what Youre hearing from that current economic environment.

Obviously people are talking about a recession.

Im wondering if theyre talking about that at all or if your customers are instead looking the other way and really think about this energy.

Global energy crisis, we're facing and how they see kind of playing into that yes.

So I think first and foremost we're seeing our customers maintaining capital discipline in that and Thats really across the board regardless of size of customer regardless of whether it's an IOC or NFC theres just a lot of capital discipline in the market right now I do think that there are some folks that have gone back some of our customers.

I have gone back and are really reevaluating and sharpening their pencils on projects looking at what do we do believe the demand will actually be.

We're in a high inflationary environment what are the project economics look like so we see a lot of projects that are pushing into the back half of the year and they are pushing the back half of the year as they just reevaluate what the economics look like and what we're hearing from our customers. It's very easy to look at today's environment and say, it's $100 oil at $90 oil.

Everybody is getting back to work, but they are looking at much much lower breakeven when they are doing that analysis. So we're hearing numbers anywhere from $35 to $40 is what theyre thinking about so that they can be resilient, when if and when things turn back the other direction again.

It's a very much an environment, where cautious optimism is what I would say.

Okay.

So if I look at your orders this quarter you did around $50 million.

Just kind of ran some really quick Silvia.

Math here, but if I just look at the last 10 quarters, you've averaged right around $15 million a quarter.

So how do we think about that and how that could potentially change.

Based on what Youre seeing out there and obviously I'm sort of thinking about 'twenty three kind of how these how these numbers could trend. So what's sort of your I guess with 12 to 18 months.

On how the orders could trend.

So if I will talk about this year and then I'll talk just more general environment for next year I mean, this year, we still expect orders to be up year on year around 20%.

Obviously, you can do the math and figure out that Thats, a little backend loaded right now it doesn't surprise us that its backend loaded we would've originally thought that at the beginning of the year I think we might have gotten a little optimistic early in the year when oil prices were good in the inflationary environment wasn't there as we saw inflation start to creep in.

Some of those products, which is a little slower to come online. So we would expect we talked earlier about.

16% to 19 three bookings this year, we expect about 11 of those in the back half of the year now.

Got that reflected in kind of our 20% up year on year. The other trend that we're seeing and this is across the board as we're seeing far more msas now and we're not seeing those purchase or is it automatically convert to bookings. So think about let's use Petrobras as an example, they placed an MSA for 11 exploratory well heads and I want to say.

76 development wells for a total of 87.

None automatically go into booking until bookings until they're called off so if you go back.

567 years ago. They would have just place a purchase order for it. So we are seeing a lot of good activity. It's just translated into msas as opposed to bookings. If I think about 2023 look it's a constructive environment oil prices. We expect will remain high we believe that the subsea services growth that we saw in the second quarter is indicative.

Are customers coming back to work and we would expect the strong bookings number again next year and likely up from 22 to 23 again.

So I was curious if you had just mentioned before on you talked about some of the short cycle business running through and.

Subsea services that doesn't run through backlog Im assuming is that goes right through revenue, but maybe just kind of talk about your overall mix in terms of some of the short cycle versus longer cycle opportunities and how that compares to maybe a few years ago, which I would have thought probably most of your business would have been more in kind of a longer cycle category.

Yes so.

Just to clarify Youre right to say most of the services don't go through backlog there are situations, where the contracted a certain way where they might go through backlog.

Petrobras will be an example of that but outside of Petrobras you're right. Most of that services just goes straight to straight to revenue. So that's obviously short cycle customer could buy a wellhead they could purchase a tree. They can purchase connector and it may be months or even years before we actually service that and see the service come through on that so.

Those are longer cycles, so think about a wellhead at anywhere from 26% to 52 weeks, depending on the specs of the wellhead, where it's going in the world think about a tree is anywhere from 12 to 18 months, probably on the higher side right now given supply chain constraints.

And think about downhole tools is really very we've got stocking programs were downhole tools. So that's very much a customer shows up asked for the equipment and immediately goes to work the lead times on that.

Almost a pick it up at the longest maybe 12 weeks or something like that from a deepwater standpoint. So when we say we're seeing the short cycle businesses pick up that's really downhole tools that we didn't even own back in 2016, and its really that services that as customers come back to work they start to work through their inventory.

So I guess, if I just think about comment on your wellheads and trees and that for the most part.

Are your orders coming for more short cycle work meeting step out in field extensions, along those lines versus some of kind of.

Maybe kind of new fields.

That kind of generally speaking, but is that how youre bookings also look yes, its more its more brownfield and greenfield yes.

Yes.

That's probably one so we see <unk> ordered a whole bunch of <unk>.

About the subsea tree bookings and Youre basically what you're saying that 12 to 18 months in front.

So basically the wellheads in the rest of your business should therefore be more of a 'twenty. Three event is it takes a little bit more of a shorter cycle.

Cycle environment, I guess is the way to put it yes, yes.

That's exactly right. If you are comparing wellheads, which is kind of our core product line, if you compare wellheads and trees yet it would come on later in the cycle. The other thing I think you often see with Wellheads is you might see customers holding a little more inventory you don't have a lot of trees in inventory, whereas you might hold some wellheads inventory, so often as the cycle starts to rebound.

They'll work through some of that inventory first.

Before they start reordering.

So speaking of inventory and sort of the cost of inflation.

We're navigating through right now any concerns that you have in terms of realized margins.

In terms of that or is it the stuff ordered so I guess kind of almost just in time to an extent that you can really capture any of those.

Any of those inflationary issues.

You have to this is Kyle you kind of have to split it into two pieces. The downhole tools business as Jeff mentioned little bit shorter cycle, they're out on the forefront getting price. In addition, we're seeing cost inflation happening there margins have been relatively stable over the last call. It three or four quarters. They were out sort of late last year, raising prices sort of across the board from service and product.

On the subsea products side of the house, a little bit longer as Jeff mentioned in the cycle.

We're pulling units bidding on one of your purchasing inventory when that goes into the cost.

The folks in that business are out there right now identifying where theyre seeing inflation happening on a part by part basis and try to get that pricing along to the customer as well, even though that may not come back out of inventory until much later, so we're being very aggressive on the pricing side of the house Youre, saying that I think in the margin side, specifically on downhole tools, you've seen them stabilize margin and in fact growing there are other product margin.

Okay, that's good to hear.

Maybe we can just kind of take a bigger picture if I look globally kind of all the different markets, where you've been active over the last few decades.

Where are you seeing activity.

Kind of at the margin starting to increase a little bit more than others I know kind of everywhere is starting to percolate, but.

What's kind of happening on the leading edge there Whats got me. Most excited is as you think about the next six to 12.

Yes, I think I think if you step back and look at it I mean, obviously, Brazil is very very very strong right now I talked about the 87 wellhead orders.

<unk> that we got earlier in the year, that's calling off much faster than we would have anticipated in fact, we expect them to probably go out for tender again later.

Early next year sometime so that's much earlier than we would have expected if.

If I turn from there to the Middle East Saudi remains strong I was there.

Four or five weeks ago, and our downhole tool business is humming along and expect growth in the back half of the year and in Saudi both as it relates to that.

Even on some of our connector and service equipment business, we've had some deferred revenue there as well so we think that's doing well.

Norway remains strong.

Economic scheme, there, it's actually encouraging drilling so that's good as well Asia Pac is probably the slowest to come back although that having been said if we think about our subsea services. We did start to see an increase in recertification and rework as rigs start to come back online. There. So that's kind of the overall I think if you think about Ghana.

They are really looking at I'll be curious to see how the new legislation is working through right now plays out I think and gone they're really looking for what I would say is regulatory certainty.

Thinking back to work and Thats, what I, most often hear from our customers. There is they want that regulatory certainties. So they know the environment, they're going to be operating in over the next five to 10 years and perhaps that will come out of the legislation working itself out right now.

Let's not hold our breath.

Could you kind of circle back to Brazil.

Talk about the MSA you mentioned.

This is a big business for you.

If we think about last cycle can you talk a little bit about how different it is in sort of the contract structure you touched on it before but I'd love to dig into this a little bit more about the MSA is today versus really kind of what the business was before and as it relates to those 87 wellheads.

Those are not in fact, just help me understand how those kind of flow through backlog and.

As you work through.

A little different than before I think it would be helpful.

Break that down for us yes.

Yes, thanks, Dave it's really it's really a lot different than before I think if you go back to the.

The last big upswing. They place purchase orders May play is very very very large purchase orders and then we delivered against those purchase orders. So the minute that they place those purchase orders those purchase orders went into backlog and the environment. We're in today.

Typically have an MSA for up to a certain amount of wellheads optimism minimum in there as well, but it's a kind of a min Max contract that youre thinking about and that includes both the equipment and.

The service and then they call off against that.

Contract. So what we'll do from a recognition standpoint is when we sign a contract like that will.

We will recognize the minimum to the extent, there's a minimum but anything above that minimum we don't recognize until the cough actually happens. So when you see an announcement from us about 87, Wellheads with Petrobras that doesn't immediately go into backlog the minimum would go into backlog, but the balance of it would would only go into backlog and thats called off.

Okay that helps clarify that.

It does so then.

So essentially all 87, those wellheads will.

Have gone through backlog.

Essentially by early next year is that how I should read that.

But another MSA.

Yes, I think about 30% of them are already through our already through backlog. The remaining 70% will probably happen over the next 12 to 18 months. They may not get all the way through it before they do their tender right. So I would expect that when they are 80% of the way through or 70% of the way through that contract. That's when they probably want to go out back.

The tender again right so it won't be just.

Won't be a digital event quite that easily right there'll be some cutover.

So when we think of middle East and Saudi drove group, it's not typically the first thing that comes to mind.

Could you sort of talk about that opportunity in that market. We know that I'm. Assuming this is for the offshore and all the jackups that are being tendered out there could you talk a little bit about that market as you see that opportunity and kind of.

Like I said I don't remember this being a part of your story franchise, but at the same time of course Jackup fleet.

A big part of Saudi took fairly recently could you talk about the evolution of that market and kind of where you guys. So deliberately yes.

And the reason you wouldn't have thought of it as a drill quip market is because that really we really got a fairly large presence with that when we bought <unk>. So that's really that downhole tools market and <unk> has always had a very strong presence.

In that Saudi market. So we're we're one of the key one of the key liner hanger players in that market.

A ram co. There we do so we will sell from time to time, some sub mud line.

We will sell surface connectors, we will sell diverge from time to time.

A smaller market by far.

Liner hanger businesses, our largest business in Saudi.

But we are looking at opportunities and as you mentioned a significant ramp up there and as we had conversations with Aramco. They are really looking to add more vendors in that.

And that market, just because of the ramp up and I think they are concerned about supply chain.

So what is that so are you on.

The Wellheads youre not qualified I'm assuming.

Aramco is that something youre trying to.

Get accomplished how does that work.

Historically, it's not been very easy to get qualified but.

Things are very different in Saudi today. These days, so I'm, assuming maybe there is a little bit more flexibility there, yes, youre right to say, it's not easy to qualified so were qualified on <unk>.

I think we're through some qualification on sub mud line and on the surface wellhead side were not qualified yet.

Okay, it's primarily.

Primarily for US a liner hanger market, we are working on application of Wellheads surface wellhead.

As well we are working on that but we're not qualified yet.

What market you did mentioned West Africa.

Is that.

And it's always been sort of fits and starts and assuming Nigeria, and Angola, and all those markets that take a little bit longer to get going are you seeing any kind of signs green shoots or anything like that happening in that market. Yes. It's very early it's very early days, but we are seeing activity, where we hadn't seen activity in a while there but.

Not not really anything that would be material in the next six to 12 months.

Okay.

And then maybe could you just discuss the competitive dynamic.

Youre seeing out there today.

Particularly wellheads is sort of a two horse race for a while just wondering if.

Competitor behavior has changed at all maybe kind of what kind of compared to no.

Such an early part of the recovery here, but don't know if there's anything to be gleaned from this recovery versus the prior recovery.

But just in terms of the competitive outlook out there would be helpful. Yes.

Yes, so if I think about it in that regard you are right to say, it's kind of a two horse race I mean don't forget from a competitive standpoint, we've got a.

Our collaboration agreement with one subsea will work with them on Wellheads, we're actively tendering there obviously, we're wanting someone subsidy to win.

Is that business in order for us to tag along with them, but that but thats a situation thats probably different than the last up cycle.

We also did what I'd call quiet collaboration agreements, where we will bid from time to time.

With <unk> as well.

And those are really our two partners. So if you think about PCI.

Bid, we typically on PCI would go in with either one subsea Iraq or to the extent that.

That makes sense and then there are still plenty of large customers Petrobras included that tender their wellheads completely separately.

From trees in the rest of the bundle.

We're very competitive there.

So if I just kind of slide over to.

Talking about the kind of financially be capital allocation.

Part of it I guess, it's probably more specialty bread a bit more for Kyle I was wondering maybe if you could talk about how you see second quarter playing out.

Top line growth and kind of incremental margin targets could you help us kind of narrow down kind of where youre, hoping to land the plane by year end.

The setup is for next year and kind of where our starting point will be for 'twenty. Three yes, I think about the back half I think about Q3, and Q4, probably being somewhat similar to what we had in Q2 more or less I think Jeff talked about the tree orders that'll be pretty important.

Important for us to get those and start booking revenue and margin as it relates to those those particular preorders are so lumpy that theyre very critical in the bookings process, but I would expect Q3 Q4 to kind of be more or less because the numbers are sort of where they are in terms of size of $1 billion here or there can make a big difference to hitting on the bottom line side of the house, but I expect Q3 Q4 to be more or less.

With Q2, as we turn to page 23, a little bit too early for us to probably touch on that at this point in time as we are starting to rollout budgets here in the next couple of months and getting Capex plans from our customers and so forth. So I'll be a little bit hesitant to jump into 'twenty three at this point.

Okay, and then in terms of the free cash flow expectations that you you talked to some pretty good confidence about building up that cash from a second half one of the things that's come up quite a bit.

<unk> been working capital build.

When people kind of building that up so maybe talk about those two things together and kind of how free cash flow. It looks in the second half. So we'd expect a pretty strong second half in terms of free cash we had negative 25, I think year to date. If you will we would expect probably to come back on that front and have a pretty positive second half and.

A bit of a drag in Q2 as we've been growing nicely Q on Q, we have seen a sequential.

A decline in <unk>.

We would expect that working capital pick up as revenues flattened out in Q3 Q4 to come back in a couple of one off items here or there in Q4, we expect to kind of drive our free cash into that we talked about 3% to 5% yield for the year, we're still sticking to all five.

A piece of the guidance, we stocked back out in February with bookings up 20% revenue up 1%.

Incremental margins, 40% to 60 free cash in 3% to 5% yield.

Then capex about 15 to 17 numbers I think we're sticking to all of those as we hit the back half of the year as we think about 'twenty three I think it's just a little too early to talk about that.

Okay. It sounds good sounds good.

Some of the recent commentary you've been talking about kind of M&A, you've done a few things over the last couple of years.

Help me understand what makes most sense for your business.

You have a little bit different business than most.

On the Wellheads and trees, and <unk> been pretty offshore driven capital equipment and consumable type of business. So is that the direction you're continuing to go I would imagine there's a lot of opportunities in that in that market. So does that the direction. We go or you think in other places to take them.

Yes, I think I think David is a little bit of thinking about the drill quip DNA and the expertise we have right. So you think about that as high pressure high temperature I think about that is highly engineered manufacturing capability is something that can build on our footprint.

It doesn't necessarily need to be to the right or left off the wellhead for three it could be energy or energy adjacent.

Markets that we'd be looking at we've actually spent a fair I mean, obviously, we're focused on the organic side, but over the last quarter. We've actually engaged third party, we've gone through that in a fair amount of detail now we've got it narrowed down to kind of a final two three areas that we're thinking about and we'll be working on that really over the next.

Call it more nine to 12 months.

You should expect the balance of this year, we're going to do an awful lot of work on as we've talked about making sure we get our roofline right, making sure we get our manufacturing investment right standing up the new organization, but I think as we exit this year, you'll start to hear more around M&A and I'll, let Carl talk a little bit about capital structure, where we're going to put a pin in this strategy M&A strategy, you're probably hearing.

The next couple of months as Jeff mentioned, we've got to get with our our board here in the next couple of weeks and talking through what we're thinking about there and then how we want to communicate that.

And if we do to the to the market here, but I think Jeff touched on it it's going to be stepping out and drove up the DNA it could be energy it could be energy adjacent we've.

We've got guiding principles, we're gathering together, they're going to help take us through the process here, but we do think the inorganic side of the house is going to have to be a pretty big pillar of our growth going forward, we're well positioned in our organic space here as Jeff touched on earlier, we're pretty we've got enough work streams going on internally from a reorganization property sales footprint rationalization and we touched on the manufacturing of <unk>.

But in the release this morning.

Those three items those three work streams are plenty for us probably for the next six months. So we're going to be standing up that inorganic capability inside the organization and where we point that.

The ship if you will is still a little bit TBD, but it's going to have a very much a connection to the drop of DNA and highly engineered highly specified and taking what we do well and being able to step that out and bring value to Jeff mentioned, the energy and energy adjacent spaces. So.

It's a long winded answer basically saying, it's still TBD at this point in time, but we're spending a lot of effort on it because we know what the critical path for our growth going forward beyond just what we see in the organic market.

So as long as I've known drill quip.

So I think I've covered yoga for almost 20 years.

There's never been any debt on the balance sheet. So all of the things that you were talking about my first thought is does this change that strategy are you willing to take on debt to finance some of them.

Potential new areas of growth.

We view our balance sheet is a very critical asset obviously, we would not anticipate taking on debt and any one of these scenarios here.

We want to continue to maintain a very healthy cash balance from an M&A standpoint will probably be very programmatic about it.

Thinking through a string of pearls over time that helped develop but that capability inside the company it probably wouldn't be a big Bang type of deal.

And we need our organic business quite honestly to generate a little bit more free cash right now than it is.

But I don't think that would be something we would entertain.

At this juncture I think our balance sheet, we want to continue to hold a pretty healthy cash balance on there give us.

Options around making sure we've got we've done $21 million a day on share buyback right. That's been a good thematic for us this year as we're pushing free cash back to our shareholders in that methodology, but I think as it relates to that that's probably something that that we would not entertain at least at this juncture.

Alright, I tried I tried.

Yes.

Yes.

The subsea tree side I am interested in something as we're talking about M&A and kind of move to other areas. It would seem that subsea trees, there might be an interesting area right now I mean, one of your big competitors essentially throwing throwing in the towel.

Essentially they can't make the business work.

I mean, I know you talked about one subsea, which is I can't remember not familiar we talked about this market seems like it's a pretty big opportunity on the <unk> side is that an area, where you see sort of some competitive dynamics shifting in maybe a little bit of an opportunity on that trees have sort of always been sort of.

I guess I would say opportunistic it feels like over the years. So just does that go for more opportunistic to more of a steadier part of the business going forward.

Yes, we're really looking at that.

Do you think about <unk> from two aspects one one in shallow water.

We've got a decent.

Sure on the shallow water trees will continue to do that we've got a new tree that we're bringing online called the SPT that leverages.

Leveraging some of our technology, we think we'd get first win on SPT sometime early next year that same tree is a tree that we will use then in carbon capture so think of that as ultimately becoming our <unk> III. So we look at it that way, obviously sell deepwater trees and youre right to say that we're optimistic that as opportunistic.

Those tend to be smaller to mid sized players.

Versus the large projects when the project gets to a certain size. That's when we'll team up with the likes of Aqua or the likes of one subsea on IEP PCI on the deepwater, but on the shallow water. We've got a tree offering that we believe is competitive or developing a new tree, there and thats rial tones. These come our carbon capture three as well.

That makes sense that makes sense.

I'm going to shift here, a little bit to move on to some of the growth pillars.

That our potential over the next several years I guess, there's three in particular, we'll review some of the collaboration approaches you're taking.

Two of the downhole business.

Three would be the E series product line, which Youre building out so maybe just start with the collaboration side here can you can you talk about.

Maybe the awkward collaboration is a great place to start.

You Werent analysis earlier this year.

It's a great way to increase your exposure to energy transition.

Could you maybe talk about that collaboration how it came about the opportunities you see there and then I guess separately what other areas you're contemplating other other collaborations like this out there and would it be an energy transition bucket.

Yeah, so specifically as it relates to <unk> I mean, we've had ongoing conversations blocker for a period of time I think as they looked at both the shallow water tree that we've gotten the wellhead than they thought.

That was a good match with the offering that they were going to bring to the market from an overall.

<unk> standpoint, when we signed that agreement as Youre aware earlier this year almost immediately upon signing that agreement we had a number of customers approach us afterwards, saying Hey, we didn't realize you guys are going to play in <unk>. So it's really presented some nice opportunities for both ourselves and offer.

And for US separately from that in fact next week next Friday, we will deliver very small fee, but will deliver our first <unk> next week, we wouldn't expect to see on the large projects that we're talking about with our offer of the northern endurance project. We've ramped up there, we're probably spending $2 million to $3 million annualized now with <unk>.

<unk> folks were jointly located in working closely with Occar on that we wouldn't expect that E. Though on that project until sometime next year.

And first order really wouldn't hit until late late next year, we are working with a number of other companies.

We haven't gone public with those are a little cautious about throwing the names out there Dave but there are two or three other companies that on the energy transition side, we will go to market with.

And hopefully more to come more to come on us.

So when would you expect some of those first.

Christmas trees, and wellheads to be installed on <unk>. So I'm just trying to.

Understand the timeline, obviously, you could talk about what's different projects just trying to put up something on the ground here when should we expect sort of the first one.

On the seabed or I guess, however, their design I guess I'm not point I don't know the full design here I'm, assuming maybe maybe maybe they are on the surface wellheads I'm not entirely sure.

It depends on the projects it depends on the project.

We wouldn't expect first order until I think conservatively expect first orders late 'twenty, three and probably first revenue on that sometime in 'twenty four so first install probably sometime in 'twenty four.

Okay, and then from there hopefully we start seeing more of that and perhaps what you can get to.

A full carbon market I am sure Thats kind of what you're planning on.

What are the kind of markets are you targeting here is it just is this the only kind of area that you see.

For collaboration or are there other areas that you see potential here.

Yes, I mean, obviously <unk> is by far.

The most immediate I think as we look at something like hydrogen example, there is a number of areas, where we can play from a high pressure high temperature standpoint, but thats much more nascent than the <unk> market. So I would almost characterize <unk>.

As product development because it is an extension of the things we already do as opposed to a heightened as an example, which is much more R&D in.

Its infancy right now.

Any other areas like geothermal is there'll be an opportunity for geothermal FERC unrelated I'm, just kind of thinking about where this could be translatable, yes, we looked at geothermal.

What I'd say is we accidentally cell in the geothermal through connectors.

And pipe, but the geothermal market are very very commoditized market and we find it pretty challenging so we will participate there, but it's going to be much more opportunistic versus something that we will aggressively pursue and build out a whole product line around I think our investment would be pretty small there.

Okay.

Shifting over to the downhole tools, you had talked about some pretty good growth this quarter and there maybe just talk about I think it would go a little bit on the shorter cycle, you're on these tools because youre seeing kind of it happens you get an order.

You get.

You kind of come at the right right. As these things are happening could you talk about how that business is developing and downhole tools is something that drove it has always been involved in pretty heavily so is there something different about this cycle that you see going forward.

Better opportunities or something has changed about the business that you think maybe downhole tools will have a little bit more growth than <unk> seen in the past.

Yes. So if you go back in time and this obviously creates even if you go back to 2016 and before.

Clearly drove we've had a downhole tool business, but as I understand that it was pretty immaterial to the overall to the overall business. Obviously the acquisition of the IW really was the beginning of what would be a more substantial downhole tool business I think the thing thats materially different now.

Then what might've been in the past is we now have very specific stocking programs around the world. So if you. If you go and talk to our business they've got a stocking program in Saudi So when I was out there you can actually see where they are stocking we've got a stocking program in Ecuador, We've got a stocking program in Mexico.

In key markets, we've got stocking programs where were in the past. We just tried to respond with quick turn manufacturing and candidly, that's not very effective and especially not very effective in what is a challenging logistics market today right. So I think with that inventory on the ground around the world, there's real opportunity there or the other.

Thing as you pointed out some of the issues in salary around qualification, we worked very hard to get a number of sizes and a lot of our kit qualified in Saudi so from liner hanger standpoint, we're well positioned right now.

Saudi we're working through a lot of the inventory in Saudi we would expect a fair amount of restocking back half of this year in Saudi and going into next year. So.

The company is just I think we understand the short cycle nature of it and perhaps when we bought that company in 2017, we didn't fully appreciate how quick the turnaround really needs to be on those liner hangers.

When you say stocking programs are you, saying essentially you have the capacity of the downhole tool to meet those markets and you basically kind of building out that capacity in advance of potential activity is that what you mean by that yes, you've got to have inventory on the ground right. So think about it is.

I go back to my industrial data think about it as a kanban.

Where you've got to have inventory on the ground and then is that customer pull the inventory the signal goes back to our manufacturing and our supply chain to restock doesn't work you got to have certain sizes and certain kit on the ground in a kanban that you can then put that your customers can pull on immediately if you don't have that kit, they're going to figure out a different solution.

Or just about to say if you don't have it.

Youre not ready.

Work at all.

Yes.

So the next thing I am thinking about is what have you.

Do you see an opportunity because your competitors in that business have not done that.

Is that what youre seeing out there.

There is a little bit of that what shouldn't be lost by the way we supply a number of our competitors with liner hangers. So schlumberger will by liner hangers from from us.

Alberta will by liner hangers from us it really depends on the market. So, yes, I think being.

Two things matter on that business service quality.

Making sure you're servicing the customer in the right way.

And having that inventory on the ground and we've dramatically improved our service quality and that gives us a lot more at bats, with customers and we've got the inventory on the ground.

So <unk> had a big.

Speaking of Schlumberger, they had a big pickup in Gulf of Mexico.

Activity in kind of a more and more work offshore I'm, assuming that downhole tools sort of goes hand in hand, with just activity levels offshore.

Well keep in mind by the way are our downhole tool business is not nearly the deepwater business that you would expect from Wellheads injuries rates. There is a fair there's a healthy amount of what I'd call international and not lower 48, but there's a healthy amount of international land.

Within that downhole tool business.

International land, but I wouldn't have thought that okay.

Interesting.

Are there any kind of particular markets that you think youre ideally suited or you have positioning as you just said sort of stocking I guess, you kind of rattled off a number of the countries.

Are those sort of the countries that you see the biggest opportunity, presumably really think about it is ecuador.

Mexico Saudi.

Brazil with Petrobras is starting to emerge.

For the X Pac day with them I think it's 27 systems is what's on that MSA. So so think about it as those in the core markets, we certainly supply other markets, but when we supply those markets, that's where you'll typically see us operate we'll sell the equipment to someone that you might view as a competitor and then they'll install it for us.

Okay.

2021 you had 35% growth in this business.

Correct me if I'm wrong.

Put out a number for your expectations. This year just curious should we are presuming you should be expecting double digit growth in this business for next year.

Yes, we would expect double digit growth on the business.

For sure this year, and obviously coming out of 'twenty. They had a nice year in 'twenty. One and this is this is an area where they have seen some really tremendous growth Jeff mentioned the markets they're operating in.

Saudi has been a key market for us the last last few years. So we would expect a nice growth in this business and it's and it's a really good service same product business to its got nice margins across the board as I mentioned earlier, they've done a really good job of.

Fighting off the inflation based here in the last six to nine months or so if you go if you go back pre acquisition, Dave that was $130 million business.

We've talked about that as you know over the next couple of years getting back to May not get back to 130, because those were the glory days. If you will of the industry, but you could easily see that getting back to a $100 million.

Next year $100 million over the next couple of years, maybe exit rate for now, yes, maybe maybe exit rate.

Suspect my downhole tool leaders on the phone right now flooding.

Well the lager I keep talking to more guidance when we get out of here. So.

Talk a little bit faster now.

All right, let's move on to the third part of that that leg of growth here at the East theory technology expansion at <unk>.

Big boards.

Can you talk can you talk about what exactly this product line is.

Where it fits in the market is this sort of a.

Do you see a niche out there.

<unk>.

Youre kind of filling and filling in the gap or.

How are you thinking about sort of the longer the prospects.

Yes, so the <unk>.

The series is just a number of products that we brought to market really over the last four or five years, it's really all about reducing cost for our customers.

How are you thinking about sort of the <unk>.

The prospects.

Yes. So the E series is just a number of products that we brought to market really over the last four or five years, it's really all about reducing cost for our customers reducing carbon footprint for our customers. They can certainly use the entire suite of products or they can use them individually. So right now we more often than not see them used individually.

So.

Think about that is if you think about that from a wellhead standpoint.

We've got U series, Wellheads and increasingly we see all of our customers grabbing gravitating towards those E series E series Wellheads.

I think we've already quoted numbers.

Exit this year with probably 70% of the orders and Wellheads all being E series, which is helpful for us in a number of ways in inventory included by the way. The <unk> connector is a high fatigue connector, we've seen traction on that in Norway leasing traction on that and Gulf of Mexico. It's early days, but we're pretty happy about the adoption there.

I talked about the X Pac GE and I talked about Petrobras and I talked about the MSA there.

We're pretty happy with that we have won actually headed to garner right now as a matter of fact, so that's a very early days, but we're starting to see an uptick on that as well and then I talked a little bit about <unk>, which is the shallow water treat it will just be one more extension of that E series of products.

So Jeff what's the pitch to the customer.

With E series.

Why would they want to.

DXP wellhead.

Connector or <unk>.

Or rely on E series, what is the I think you said, it's more efficient, but what's sort of the selling point that youre offering yes, it's really it's really three things.

One one is just time, depending on the product that we're talking about it's fewer trips fewer trips means less cost.

It's also a carbon footprint reduction as well so depending if you get less trips and you start doing that math on fewer trips.

Less equipment.

Equipment, then then that makes a difference for them as well and increasingly we're seeing our customers start to build into their tendering process.

<unk> is around carbon footprint and what we can do to help them reduce their carbon footprint and this series of products just helps them reduce their carbon footprint as well.

Okay. Okay that makes sense, it's difficult to see where that goes in the calculation and the math, but I think you can expect it to get more and more competitive over the next couple of years.

So last session here.

I just wanted to talk about some of the operational footprint. Some of your organization, probably my favorite subject frankly, I know Chuck.

Quite a bit in terms of.

The changes you've made there operationally.

The business itself drove quick sort of setup.

The way I always do to sort of just kind of built on the fly to a certain extent you've come in there last few years of really kind of changed that around could you just kind of bring us up to date in terms of where you are in terms of.

Adjusting your operational structure, maybe some of the changes you've made or are they done what are you working on today.

In terms of.

Are you sort of pass through.

Optimal efficiency, if there is such a thing.

Yes, yes.

Well, let's start with the changes that we announced earlier in the year when I became CEO , we were getting much more product focus now in the past we used to be very very functional and what my observation was that you made those handoffs from salesperson the sale of them in the engineering to manufacturing something got lost in between every step there.

<unk>.

And at a time candidly it add a lot of time and as you know time is money.

Time is expense time as inventory and so we're in the process of.

Really reorganizing into those product groups, we've got leaders for those product groups were in the process of co locating people <unk> been on our campus data. So you know how large the campuses and how spread out people can be.

We're in the process of co locating into the different product groups, we believe that will make those.

Improved communication, obviously between those functions and make us more efficient as we relocate on the campus. We've got 219 acres on campus today.

We've identified at least 100.

Of that that that candidly, we can divest of so I think we said in our release already we expect one of those is under contract right now are forged facilities under contract right now we'd expect that to close this year and two of the other properties.

We would expect to at least be under contract this year.

Not close this year as well and we've talked about really the benefit of that I mean, we are probably unique in that we actually own a lot of our property. So we actually reduced roofline not only are we reducing the expense that goes with having that roofline, but we're also able to get the cash proceeds from it. So we've narrowed that a little bit it was a $40 to $60 million range given <unk>.

Interest rates in the market. We're in has tightened up a little bit it's more 40% to $50 million right now, but we're pretty confident about that $40 million to $50 million of incoming cash we're going to take some of that cash and invest it in manufacturing clearly not all of it but we would expect to take about $20 million of that cash and reinvest it in our manufacturing.

The other thing I would tack on there when Jeff talked about the product line organization is getting income statements byproduct line understanding through profitability across the portfolio here and so we're in the process of doing that and that's kind of helping understand as Jeff mentioned as we're going through footprint rationalization roofline rationalization, just who is doing well and who's not and where we need to focus our energy.

Yes.

We need to make investments.

So Jeff you brought up the forging sort of I've been talking about gosh, you can go back to my Mike Mike Walker, Dave I never fully grasp the integrated model on the forging side. It sounds like you finally have a way to.

A seller there. So how does this work going forward will you still be getting your forgings from whoever the new buyer there or do you get it from somewhere else can you talk about how this sort of changes your business going from sort of the fully.

It just happened, but but shifting from say what it was 10 years ago.

Essentially a fully integrated model to what it is today can you just talk about the differences between them and how you're sourcing those forgings that because of course, the nexium will think about it.

I'm sure that's probably not so easy I know a lot of that comes from Europe or at least for a lot of people, but I'd love to understand how youre thinking about that yes.

To be honest, Dave we move that supply chain for <unk> outside of our onsite forge probably about 18 months ago. It's not 24 months ago. We've got forging sources in North America, We've got forwarding sources in Italy, obviously, we're always looking at the cost of those forward and we're always looking at the lead time.

<unk>, but we do have forging suppliers really candidly around around the world, but Italy, North America being the two largest of those so the <unk> that we've got on campus today, when we make that sale. It will not operate as affords us another strategic buyer thats interested in the property they are buying it and it won't operate as affords.

For us today and as a matter of fact.

Yes, the interesting thing about that and probably quoted these numbers before as you know in our peak we were operating we probably had 35 million pounds a year going through there.

At the low point, we had 7 million pounds going through there as we bought Patel.

Potential forge buyers in to look at that facility. There estimate estimate is that they had to have 50 million pounds, a year going through there to make that work from an economic standpoint for them. So.

These guys professional forged suppliers right. So yes.

Similarly, even at 35 million pounds that you could contend it's worth.

A lot of companies are experiencing now it's worth a continuity of supply to have that but when you get down to 7 million pounds. It's awfully hard to make that work and I think we quoted.

A few years ago, when we shut down the 400, I think we quoted $8 million to $10 million annualized savings if I, if I remember that correctly.

Something like that might have made sense in 12, 13, 14, but pretty hard to see how that makes sense going forward.

Yes, it's not fair, it's not fair to the people that made those decisions in 12, 13, and 14 to say it was a bad decision then because it was a very tight supply chain and rate, but youre right now now and going forward. It just doesn't make sense.

Great. So taking all this into account and the efficiencies that youre thinking about and you're targeting.

How are you thinking about sort of where gross margins can normalize end of the day when everything is sort of done settled out lateral let's fast forward 12 months 18 months whatever normalized.

So thats about quickly because of that but.

What's sort of your target here, what kind of what kind of operational margin expansion do you think you can squeeze out of this business.

Yes, so structurally yes, as we sit here today kind of in the mid mid <unk>, we would expect call it.

18 to 24 months down the road. Once these investments are made roofline has shrunk manufacturing investments made we would expect to kind of be in the mid <unk> is what our expectation is and thats. The math, we're kind of working off of overtime to kind of get us in that ballpark here between the reorganization, Jeff mentioned the property footprint rationalization manufacturing investments. In addition to other work stream.

That we've got going on internally, we would expect that gross margin line to kind of be in the mid <unk>.

Okay. That's good that's good targeted so.

Last question here.

On a related.

What are some of your ambitions.

Carbonization targets.

Maybe just kind of expressed some of your recent efforts on the ESG side Jeff.

We don't think about service companies don't necessarily have the highest.

Scope, one and scope two targets on its scope III. Another question altogether, but just talk about maybe kind of some of the things that youre doing along those lines on your own footprint.

Other ESG efforts that youre trying to.

That you're working on.

Yes, so we've gone out and identified our scope one and scope two greenhouse gas emissions, we've got a fairly good handle on scope three as well and we've got specific targets around that scope, one and two reduction.

We've implemented some renewable strategy here in Houston as it relates to.

Electricity and gas.

We have a solar install if you went out to our Singapore facility right now you would see that theyre, putting solar panels on top of a number of our buildings.

Singapore, obviously.

This footprint optimization is probably one of the larger opportunities if you think about almost cutting.

Size of our roofline in half here in Houston, and consolidating all of our efforts into the other half is significant reduction so we've done a lot of work.

To both understand and set very clear targets around scope, one and scope two.

That makes a lot of sense well, that's all the questions I had gentlemen, Jeff Kyle. Thank you very much the opportunity for hosting this.

I think we kind of touched on all of the subjects is obviously a lot happening over the next.

Just about every market I think as people are just trying to get a handle on kind of how things are playing out different markets. Obviously happen at different time. So clearly there's a lot of things percolating just below the surface on.

On the drug of choice. So thank you very much gentlemen.

Given the opportunities today.

Thanks, a lot Dave and I think we will see you in a little over a month in New York, That's right looking forward to that okay. Thanks, Dave. Thanks, Okay. Thank you.

Yes.

Thank you for participating in today's conference. This conference. This concludes the program you may now disconnect everyone have a wonderful day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Tom.

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