Q3 2022 Dril-Quip Inc Earnings Call

October 28, 2022

[music].

Yeah.

Good day, and thank you for standing by welcome.

Welcome to the real quick third quarter 2022 Fireside chat.

At this time all participants are in a listen only mode.

Be advised today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Erin Fazio Finance director for drunk with please go ahead.

Thank you Liz and good morning, welcome to <unk> third quarter 2022, Fireside chat our news release and financial statements issued yesterday can be found on our website. As a reminder, 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 review, our SEC filings and website for a discussion of the factors that could cause actual results to differ materially as you know 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 Smith of Pickering Energy partners.

Okay. Thank you Erin and good morning.

My name is Dave Smith.

Oilfield services.

Pickering Energy partners I wanted to say thank you for this opportunity.

So group's third quarter Fireside chat.

I look forward to our discussion.

Your prepared remarks, I will turn it over to you.

Yes, Thanks, David look forward to the discussion today will be a direct the results of the quarter did not meet our expectations. There were a few transitory items in the quarter that we believe are nonrecurring headwinds to the results that having been said the incoming order trend was $75 million and at the high end of our expected range of $60 million to $80 million.

We were also pleased with the quality of those incoming bookings in the quarter with the expected margin on those bookings the highest so far this year as a result of favorable mix and an.

And improving pricing.

We expect this to obviously benefit future future coming quarters with the income we booked the bookings number was muted by a cancellation in the quarter. That's quite frankly uncommon that drove up I think in the five years I've been here. This is only the third time that I've seen a cancellation of this size so quite uncommon.

We would expect Q4 bookings to exceed Q3 bookings, but due to the large number of outstanding <unk> tenders and customer timing this number could range quite high.

As we look forward to 2023, leading indicators such as a tender volume and average quote value have recovered really to pre pandemic levels.

We are well positioned to capitalize on what is clearly a constructive offshore market and believe that the order trend we will continue to accelerate into next year.

Look forward to discussing growth in several key markets that we're really excited about that includes Saudi Arabia, Brazil, and Latin America, among others, so with that David ill turn it back over to you.

Okay.

Great. Thank you Jeff.

I guess, if we could start maybe.

With the broader market outlook.

It feels like the macro backdrop for energy has so many moving pieces in place.

Really positive like the drive for energy security.

Let me recession concerns.

I'm curious about what youre hearing from customers on how they're viewing the current economic environment.

Yes, yes. Thanks.

Clearly two things that you pointed out two things that are on everyone's mind, but look it's been really great to get back on the road internationally over the last.

Several months I visited almost all of our key markets over the last three or four months.

I think what I hear most from customers is really twofold first they are very optimistic about a combination as you point out of energy security and candidly theres been systematic underinvestment over the last several years. They believe that would provide a really a strong foundation for increasing activity in almost all areas of the world for the next few years.

Quite frankly, I understand your point on recession, but quite frankly.

Things are pretty tight today, and a simple reversal of Covid zero in China would only serve to tighten those markets. So I think it's pretty constructive there. That's the first thing that having been said the second thing is customers are really looking at the exact words. They used when I was visiting in Brazil, Theyre looking for a resilient investments and what does it.

I mean, it really means continuing to maintain capital discipline, but also factory and significantly lower oil prices into their economics I think most of them are shooting for kind of a 35 to $45 oil price I think there's just a lot of scar tissue from the last downturn and people are still being relatively conservative.

<unk>.

Okay.

Yes that makes a lot of sense.

I'm curious have you noticed any changes in customer behavior over the past couple of quarters.

That's one thing about what Theyre, saying.

Regarding their actual behavior.

Yes.

If anything I think they are becoming more confident in their optimism I think the other change that we're seeing is as the business as well is just really a shift and we have a lot of conversation around standardization and as a result of that what we're really seeing is a shift to more call off orders use Petrobras is a good example.

If you go back in time in 2011, 12, 13, 14, Petrobras would've placed these huge tenders and we have a huge bookings number right away for Wellheads now it's more of what they are doing this year, which is having to do a small tender it's going to be an MSA and then I'm going to call it off.

Over the course of a year, so I think a little bit more short term horizon on some of the Msas people are signing up for it.

And more call off as opposed to just a bit.

At the beginning of the year, so I think it protects them a little bit more on those downside situations. So not unlike the comment that I made around the $35 to $40 kind of protects their economics I think they are also trying to protect themselves from an inventory standpoint as well.

Okay.

And just.

On the Petrobras.

This is a special asset work wondering.

I'm wondering if you have maybe any update on where you work progressing through that first order.

And maybe your outlook on that Mike.

Mike.

I'll come back and tender.

Yes, yes so.

We got the MSA earlier in the year was 87% subsea wellhead systems 11 of those were exploratory 76 of those were development about half of that has already been called off and it's sitting in backlog. So call. It 40, something sitting in backlog and then the other 40 something will be called off.

Sometime between Q4 and Q1.

This year, so it's a little it's a little spicy there may be an on whether its this year or next year getting called off and then we expect two more tenders to come out.

Next tender could come out as early as fourth quarter, but might bleed into first quarter next year and then we expect another tender at the end of next year and.

During my visits there the expectation is they're going to have 350 wells drilled.

Over the next five years, so it's definitely a strong market for us and look on those tenders. They typically give do the tender. It typically is a one a one b type thing they always split those tenders and we generally get our fair share of them So world where we are.

Pretty optimistic there.

That's great.

Yes.

We have seen some really good momentum just big picture with the offshore rig count floaters and Jackups.

I'm curious.

What youre seeing geographically, alright, maybe where activity is ramping faster.

And maybe specifically where you see.

Youre opportunities looking more favorable.

Yes, so we're really investing and excited about three key markets and these are really the three that I that I visited over the last three months to six months, we're investing in Brazil.

That thing in Saudi Arabia, and we're investing in Latin America, Let me just go in and the story is a little different on all three of those so just let me speak about all three of them I mean, if I turn to Saudi look we're adding boots on the ground in region, there and we're looking at expanding our roofline as well as investing in stocking programs for more rapid response in that market.

A couple of months ago, and spent a considerable amount of time with the team and at a Ram co first the team there has done an outstanding.

Job of improving service quality and in terms of moving forward qualifications. As you know qualifications are always challenging there, but we're starting to see results. For example, 20% of our orders this quarter were related to Saudi now thats going to be choppy, we are not going to see that every quarter that way, but we believe that we will continue to penetrate.

That market.

Second the expected growth in Saudi is going to stretch the supply chain there over the coming years.

And we're working with Aramco to make certain that we're making the right investments on the ground to supply them in Kingdom I think this will position us well to take advantage of the upturn and then the last thing in Saudi just a shout out to the team. We ran the largest liner hanger in the world at 18, and five eights by 'twenty four so nice job there if I turn to Brazil, where I was.

A weeks ago.

We personally went there we wanted to see the ramp up and the ramp up is just unbelievable right now in Brazil, and that's in terms of both manufacturing and services in the region.

This is same facility, we've always had there so it's not a new facility. It's just ramping that up we've always served the wellhead market out of that facility I think the one nuance. This time is we really didn't own ti W or the downhole tool business, so that wasn't in our portfolio.

Last time, but we'll be using that for downhole tools.

We had some great visits with customers there.

I already mentioned the 350 wellheads over the next one.

For the next five years great MSA.

We are.

<unk> got the downhole tool business I already talked about subsea wellheads, there, but on the downhole tool business just turning to that.

I'm really excited about what theyre doing there, it's kind of funny I went to one of the customer meetings, there and the customer actually on the Powerpoint slide show that.

Running our liner hanger will give them a 10% improvement in production. It makes your life easy when the when the customer is actually showing the value of your liner hanger action on their presentation. So look we're ramping up stocking programs. There you saw some little higher capex in the quarter those were running tools to help.

Address that market as well and then the last market is really Latin America that for US Latin America is Mexico, Colombia, Ecuador, Guyana.

Just a few things about that looked at the downhole tool business in Mexico has grown fivefold over the last several years, so really a strong market Guyana early days, but we recently ran our first liner hanger system, there and would expect follow on orders in the coming quarters and then we'll ask we've received our first downhole tool.

Order in Suriname recently, and we believe that's going to be a growing market has always been a strong market on the subsea wellhead side, but we've got our first run there on downhole tools. So those are really kind of the three key markets that we're looking at we're making different levels and divestment and all of those and that investment is really threefold, it's roofline, where we need it.

Yeah.

It's stocking programs, where we need it and its running tools, where we need it.

That's great color.

It wouldn't have been surprised if you told me 20% of your Q3 orders for subsea trees, I would not have guessed, 20% with Saudi.

That's a big liner hanger quarter.

Are there other.

He was actually on the subsea products side. It was actually on the subsea products I believe it or not so that Saudi market has always been strong for downhole tools.

But in Saudi they tend to place. These large orders that you get a nice big chunky product order, our downhole tools and then you spend the next year instead.

Installing all of that product right. So the service revenue dental will peak for downhole tools and you'll get that that one order in a quarter type thing, but it was actually subsea products believe it or not we actually to your question on trees, we actually booked zero trees in the quarter. So.

This is <unk>.

This is a bookings number that's not lumpy from that standpoint.

Wow.

Hi.

I guess stepping back and just turning to the competitive landscape.

Would love to hear if you're seeing any changes to better dynamics, there maybe any potential changes given some expected consolidation.

Yeah.

I've spoken about it before but I guess just to reiterate how we see the competitive dynamic I mean.

The one dynamic we see is the larger operators with the strongest balance sheets are quickest to be able to invest in.

In this cycle and that tends to lead towards lean towards.

<unk> awards that are that are bundled type.

Type things as it relates to the tree side of the business.

Clearly that doesn't that doesn't affect the wellhead side of the house, we always be large customers that order wellheads outside the bundle BP does that Chevron does that Petrobras does that but.

But on those large tree orders that you've seen from some other people those are the large operators coming in our customers tend to be the small to mid sized customers. They are kind of second to come into the market. They are much more influenced by recent inflation, they're much more influenced by <unk>.

Turn and interest rates their balance sheets tend not to be quite as strong as the majors.

And they're just starting to come back into the market. So to give you a perspective one of the things that we looked at this quarter is just how many open tenders, we have right now with those small and medium size players and we've got about $150 million to $200 million in open tenders that haven't been awarded yet with those small.

Medium sized.

Player. So some of those are book in the fourth quarter.

And some of those will slide into next year, but you can appreciate when you've got that much in open tenders it gets tough to kind of call.

From a tree standpoint, where it's going to land and which also means that there are sort of full year bookings guidance of 15% to 20%, we can see bookings bracket it at $75 to upwards of 100 in Q4.

Okay.

And on the smaller customers that are maybe more responsive to inflation alright. So.

It plays into that.

A widely discussed topic I am curious what you are seeing inflationary pressures and if you could give us any color on what levers you have real quick.

Paul.

Perfect.

Yes, I mean, I think the areas that we saw inflation is obviously a lot around the commodity forgings things like that that we purchase obviously, we saw a fair amount of inflation on other services well I do think that it started to moderate compared to earlier in the year as far as levers look downhole tools is our shortest cycle.

Business. They did a nice job of passing that along to their customers over the last 12 to 18 months as I mentioned earlier one of the things we looked at this quarter was on that $75 million of incoming bookings.

How do those margins compare to prior quarters and this was our strongest gross margin quarter from a booking standpoint.

This year now some of that is clearly mix right. We had a nice favorable mix, but a fair chunk of that is also being able to pass along inflation and being able to pass on prices, we rolled out a new pricing scheme in the quarter, what our guys would refer to as an inflation plus so youll see that pick up in the gross margin line going forward.

That's great.

Yes.

Moving over to Europe .

I guess my.

Probably for you.

I'm curious how you're viewing the current interest rate environment, and how you see it backing and maybe specifically yes.

Any opportunity given your pristine balance sheet.

That's pretty significant.

Yes.

Certainly better to be in a net cash position.

The net debt position, especially with floating rate debt in this environment do.

Do you see the face of our financials. This quarter, we split cash and cash equivalents and short term investments out we are starting to put some some.

Cash to work out beyond 90 days to take advantage of some of the higher rate environment.

With the fed continuing to raise rates at 75 basis points on the clip the ECB number of central banks out there raising rates, we're certainly taking advantage of that but just chasing yield to some extent. So we're chasing some yield out beyond 90 days less than six months of course and sort of pushing our investment policy out there to try to maximize what we can at this point.

Okay.

Yes.

Okay.

Yes.

Switching over to <unk>.

Currently I mean U S dollars at another really strong quarter, Alright, I guess other global currencies can you talk about the impact that's had.

On your revenue and earnings this quarter, maybe I can see that impact.

Rest of the year.

Yes, we've had tweak cited 2 million in the quarter for FX.

Think about $4 million year to date about 15% to 25% of our revenues in any given quarter, depending on the mix or coming out of.

Pounds, Norwegian kroner and Brazilian Reais.

The pound really got hit hard in Q3, which impacted us in the quarter. The pound I think was down about 15% against the dollar. So that continues as we go out beyond sort of the whims of the market. If you will to some extent if you're a believer in sort of mean reversion of currencies I think we'll sort of have some good times and some bad times as it relates to that but that we're actually taking a look at it but it certainly is.

Being in the quarter on the FX front.

Okay.

Yes.

I want to circle back.

Nice step up in gross product orders.

If we could circle back to you.

Your your Q4 target.

$75 million to $100 million.

Yes, if you look at our full year <unk>.

Full year guidance of 15% to 20% bookings that would imply 75 on the lower end of the 100 on the higher end, if we bumped the number of trades, we think that are out there.

Yes.

Two related questions.

Yes.

Could you give us maybe some more color about what's in that outlook for Q4 orders and maybe yes.

Confidence you have in that increase.

And then the second one.

Yes.

Maybe.

Any additional color on that that cancellation that third quarter and kind of your confidence on.

That remaining a rare event.

So if we if we look at the fourth quarter inside that $75 million I talked about having $150 million to $200 million of kind of open tree tenders right now, we're including I think five or six trees in the.

In the fourth quarter right now, obviously that number could go substantially higher right. So we've got five or six trees kind of in that $75 million number right now, but we expect that there could be upside depending on how many of that $150 million and $200 million tender gets.

It gets awarded in the quarter.

If I think about the cancellation with those are pretty rare.

For us it was $12 million just to give perspective, though I think for the entire project that cancellation was $660 million in cancellations kind of across the industry and candidly. It was a project that then as they got into it. The economics just didn't work I think it was actually a dry hole.

So that's why those are pretty rare, we generally don't generally don't see those type of things happen and just absent that obviously, we would add gross bookings in the mid 70. So we view Q4, the low end of the range that is not really a step up in our minds, it's sort of it's sort of a.

Sequential flatness, if we end up at 75%.

Sure.

Yes.

And just circling back to the.

The tenders outstanding with the small operators for.

100.

$200 million of our competitors.

Yes.

Five or six of those trends in the fourth quarter.

So we've got.

Okay.

It sets up for a healthy order outlook in 'twenty three.

I recognize it's a little early to ask if that's what I'm going to do it anyways.

John .

And how are.

Youre thinking about that.

23 orders might look like not looking for official guidance, but just given some good tailwind here.

Yes, sure I'll give you a color look we tend to reserve our guidance until our customers complete their budget cycle Theyre, just now doing that.

However, as we look forward, we've got some nice leading indicators right.

Tender volume.

The tendering volume in the average quote value have really recovered to pre pandemic levels, which we as we went in and looked at that we were actually even a little surprised by that as we compared it to where we were before those haven't turned into orders yet, but I think the quote activity ultimately will start to lead orders were well positioned.

To capitalize on that clearly a constructive offshore market.

And look we believe that that will continue to accelerate into next year, it's going to be led by the regions I talked about it's going to be led by Brazil already talked about two more tenders. There that are going to happen, it's going to be led by the middle East specifically, Saudi will continue to see nice.

Work there in Latin America for us as well.

We're doing a lot of things now to put things in place to be able to really capitalize on that so we're making adjustments to footprint we have.

The manufacturing investment we've talked previously about that will start to come in over the course of 'twenty three but we believe that all really position us well, we do an annual earnings call as you may remember.

We do that in February so our plan is to give kind of full year guidance on that our strategic initiatives further improved profitability programs that we're already putting in place will talk more broadly about that and Danielle without giving guidance in the 'twenty three I think we would view it as constructive.

<unk> positive all signs point to.

Our construct of 'twenty three.

Understood.

I look forward to hearing.

That outlook.

Yes.

February .

Okay.

Third quarter.

I noticed the drop in.

And combined service and leasing margin.

And those margins have been.

Really strong could you give us some color what you saw this quarter.

Sort of that decrease in margin and maybe.

A follow up there would be how you see those margins.

For service and leasing cost specifically, how you see those progressing.

Yes, so in the quarter as we look at Q1 to Q2 to Q3, you will see a step up into Q2 and a step down in Q3 really it was three distinct projects kind of came to and when we had our rental tools on rigs if you will.

And those work scopes did come to an end in the quarter. So we saw those ticked down I think we would see service margins. If you will looking at probably Q1, and Q3, probably being more indicative of what that margin profile should look like.

That makes sense.

Yeah.

And then I was hoping we could talk a little bit about the supply chain issues that drove the lower downhole tool.

Product sales in Q3.

Especially any color around those issues, maybe how you see those resolving.

Yes, it's not systemic that's really just a couple of orders that got hung up due to supply chain issues, some raw materials coming in and getting the orders out on time. So we view it as very transitory those orders go out in Q4, and it's not something that we would view kind of going on from here. It's a couple of hours per $1 million each basically so.

They just happen to be pretty pretty material orders right got it so.

It doesn't sound like that's something that would necessarily impact the timing of your ambitions.

To grow that business too.

The $100 million annual run rate.

On the right target.

Yes.

No.

Is that is that still.

Kind of an ambition for hitting.

Isn't that target by year end 'twenty three.

Yes, I think I think what we would hope is kind of exiting 'twenty three maybe a run rate exiting 'twenty three going into 'twenty for that we'd be thinking about $100 million. So you'd be looking kind of in late 'twenty three early 'twenty four for kind of a $25 million.

Per quarter run rate business.

Making the investments now I talk about Saudi and roofline.

If you just think about that market.

Kind of what our fair share of market share is there is probably half of what it should be.

To be honest and if we make that investment and get the boots on the ground.

Our activist score in the right spot, we would see ourselves probably doubling our market share in Saudi over the next couple of years I mean, they had a record quarter in Q2, obviously, Jeff mentioned the $2 million in orders that slipped out in Q3. So they are starting to get close to that $20 million range and hopefully will be run rating 25 coming out of next year and you'll really.

That and say you will see the pickup in Saudi and Brazil.

Got it I appreciate that.

So.

Free cash flow.

Negative for the quarter again.

Were there any surprises versus what you were expecting or how you were thinking about.

Or any changes to how you're thinking about free cash flow going forward.

Yes, I mean, the court so year to date were about 20 million behind where we had anticipated in our internal projections that presented that 3% to 5% of free cash flow margin and really split into two things. One is working capital is higher by about $15 million, specifically due to sort of what I'd call it investment in inventory.

<unk> ahead of what's going to happen who knows in Europe . This winter.

Stocking plans and so forth have been replenished to kind of make sure. We've got raw materials now for the foreseeable future and then two is around the investment in machinery that Jeff mentioned, the $22 million investment in new machinery here in Houston about $4 million that went out in the quarter.

And so didn't have that in the original plan, but that is going to continue to kind of pay up here Q4, we expect a little less than 1 million go out with those machines in the quarter, but for full year, we expect to kind of be breakeven on free cash largely in Q4, we expect a big tax receivable to come do that's going to help drive that but we do expect to be free cash breakeven on the year at this point in time and really just the.

Working capital is whats relevant at this point in time, specifically around making what I would call strategic investments in raw materials.

Yes sure.

You're not alone there for sure.

Sure.

So.

Okay.

And wrapping that up.

C Q.

Q4, playing out as we work towards that.

The top line growth and incremental margins targets, yes, we would expect Q4 to kind of be up mid single digits top line coming out of Q3.

Met with team here in the last few days or so just to kind of get a pin in this and feel like that mid single digit growth is very achievable.

Incremental margins, probably in that 30% to 40% range coming out of Q3 so.

I think for full year, we put out 10% top line growth I think we're still sticking to that based upon what we see in Q4 so.

So I think that's what that's how we see the next quarter shaken up here okay.

And that seasonality affects a lot of companies with offshore exposure.

Okay.

Just real quick experience any level of seasonality.

Too small to call out.

It really is from a booking standpoint, we would probably highlight in Q4 is typically the highest level of bookings. We see generally customers are sort of exhausting. The remaining pieces of their capex plans. If you will and we ended up sort of seeing that spike in Q4 for most years.

Okay.

Operationally.

Operationally I wouldn't I wouldn't see any seasonality there you might have an order come in from time to time, but the way we recognize revenue on a POC basis, that's about half of our revenue now if you will tends to smooth out a lot of that book.

Bookings spikes, if you will I think on the services side maybe.

But what.

I wouldn't cite any seasonality on the <unk> front.

Move on from that.

Okay.

Maybe step over towards the topic of M&A and correct me, if I'm wrong, but it definitely feels like dropbox.

Yeah, I'll have indicated an increase in interest maybe in.

And organic growth.

Curious if you could talk about how youre thinking about those opportunities and maybe where you see the sweet spot.

In terms of size, but also market exposure.

Any indications about what direction that could take.

Yes. It can take many forms at this point in time I think about from a scale standpoint, we need to get more scale of an organization. So we're looking at.

Anything from very large deal that would transform the company to sort of smaller bolt on deals that may exist in energy, specifically I know that that may exist outside of energy that they have an energy sub to it and as we talked about last time really needs to have drilled with DNA in it which is sort of highly specialized highly engineered products is what we're going to be looking at specifically, but we are looking.

At the aperture is what I would refer to as sort of wide open at this point in time, we spent the quarter really building capability inside the organization.

Really spending a lot of time. This is a priority for the company right now we need to get bigger we need to get bigger through acquisition, but we are going to be very disciplined on this front. So this is not going to be something just to go out to do a deal for deal sake. We're.

We're going to be very disciplined on this front, but I think we're looking from a very very sizable deal transformed to smaller technology plays we are.

From a capital allocation standpoint. This is number two for us going forward as we've said previously beyond.

Beyond internal Capex, great investments for US number two is going to be M&A for us.

I think the important thing to add is.

However, we exit from a transaction our investors should assume that we're going to maintain the same balance sheet discipline.

Alright that right so.

No one should expect us to exit a transaction with a bunch of debt right, we're going to exit a transaction in the morning.

<unk>.

Still with a strong balance sheet I think thats one.

I think the other interesting thing is that it seems like the conversations over the last quarter around M&A.

M&A had been much richer and deeper than they might have been earlier in the year and those arent public companies. Those theres a number of private are privately held companies, where I think the conversations have been more meaningful over the last quarter. I think there is enough sort of support and energy right now where youre going to see a lot of these a lot of transactions probably come to the threshold here over the next six to 12 months or so.

Looking forward Samsung.

I think.

If I circle back.

So bigger picture discussion.

Looking at the floating rig count has been picking up nicely.

If I look at Petrochina is working floater count Q1 was that.

We just started up 2% year over year starts ramping in the second quarter that was up 8%.

<unk> 21, and then this last quarter Q3 is about 13% higher higher year over year. So.

So it looks like we're getting some uptick in exploration activity and where I'm going with this is kind of twofold.

First I remember historically customer inventory levels could cause.

Some dislocation between.

The pace of your orders.

Activity levels. So I wanted to ask what youre seeing with regards to customer inventory levels.

The gross product orders step up this quarter includes some level of restocking.

Just kind of this.

Kind of the momentum we should expect great with the floating rig count growth.

Yes customer inventory is always tricky right because.

Every customer <unk>.

Larger customers I should say have have some level of inventory, but they like to maintain some level of inventory for their own costs.

I look at where we are right now.

I'd say this is more momentum to your specific question. So if you just divide between the different product lines downhole tools of the book book and Bill business right. So that's just going to call off right away subsea Wellheads is moving to more of a book and Bill business I talked about Petrobras that 87.

Well has systems that they awarded they awarded us MSA not a booking what I've called it off over the course of the year right and we see more and more customers moving to that kind of model and MSA model, where they call off so that that the old days of having a bunch of inventory at customers is slowly going away, it's not completely gone away, yet, but I think over time.

Youre going to see more and more customers converting to those type of programs. So I wouldn't call. This quarter, a restocking as much that I would say hey, it's just the normal run rate run rate type business trees is probably the choppiness piece of all of that as we've talked about right.

It sounds like going forward about retreats large Saudi orders.

I'm still wrapping my head around.

The second part of that question.

The second question I was going with that mentioned the exploration pickup.

I wanted to revisit all of assumption I had which was the real quick kind of a very strong share of exploration of Wellheads.

Maybe a lighter share on the development side, whereas the victory manufacturers.

Baxter's push bundling alright.

So.

Looking for yes.

Is that kind of how it was.

And then b.

Kind of second wave then too.

We could see maybe any narrowing.

That share between exploration and development.

The collaborations.

Part of your growth story for the past couple of years.

Yes, yes, yes.

So look just to address that I mean, it's interesting there are certain customer buying habits that are just ingrained right.

And Youre right to say that our share was larger on exploration and it wasn't development that having been said there is a lot of customers that just by the subsea wellhead outside of a bundle even if they bundle everything else. They don't bundle the wellhead necessarily in that stack of rocks BP Chevron.

A list of customers, but there are some customers that bundle and look so as a result.

We've signed a collaboration agreement a couple of collaboration agreements actually.

One of those is with one subsea that specifically around wellheads.

We have a number of systems that are bid right now jointly with one subsea.

That would not we would not have previously been involved them because of the PCI nature. So that's starting to develop.

Clearly our success there is it really tied to one subsea.

Winning the ultimate.

Ultimate tender in the wellhead is it just a small portion of that overall tenders. So it.

It's really dependent on that that having been said we did see the first.

Subsea wellhead tree combination with one subsea that was actually BP I mentioned <unk> is one of the points that buy directly from us they would've pulled wellheads out of their stocking program, but usually with a one subsea tree. The second collaboration agreement, we really have is with.

As with all of our solutions and as Youre aware, thats, specifically related to our shallow water tree and our subsea wellheads around around <unk>.

We continue to work with Occar.

On the BP Northern endurance project feed and we now expect that I think that slid.

Slid out a little bit we now expect that to be.

Early 2024, the one thing I, obviously have the comment about when we talk.

About these collaboration agreements is there is the recent offer one sub say one subsea subsea seven joint venture we get a number of questions around that we work closely with one subsea on jointly tendering. We will also work closely with Occar on jointly tendering.

So to the extent that both of those companies are stronger together in a JV that only serves to benefit drove up so right now it's really business as usual there.

That's great.

Do you think there would be further areas or product lines to explore in terms of future collaborations.

Yes.

We're always we're always looking at that and obviously cautious about talking about anything specific there, but you know the area that I think goes unnoticed many times because it wasn't a widely publicized collaboration and it may not be nearly as formal as the one subsea or the orca one.

It's really around downhole tools and interesting about downhole tool as they actually supply to Schlumberger Baker Hughes Halliburton about a third of the downhole tool business actually goes through those three companies.

And most of that is in Latin America, but but we do see that starting to extend to other regions of the world as well.

I'm going to switch over to.

Energy transition question.

But before I do I want to say congratulations on getting.

On your ESG rating from MFS.

This quarter.

That was impressive.

Yes.

We've actually spent a lot of time in the last 18 months I'm doing a lot of work around that to be honest a lot of things. We were doing anyway. We're just doing a better job of telling people what we're doing but we have made some pretty substantial improvements around carbon reduction programs and things like that in fact, I just got the video yesterday of our Singapore.

<unk> that we installed solar panels I think on practically every building on the on the Singapore campus. So that's a good example, and then we will publish our first sustainability report probably in the next 12 months or so.

And yes.

We recently published.

On your energy transition efforts, especially CCU U S.

Talk to you and maybe how youre thinking about that opportunity.

Mid term longer term.

And if theres any change in your outlook with that.

The passage of the inflation reduction Act.

Yes.

We still think that's going to be a strong business for us.

But right now it's really about laying the groundwork and that's not just us I think thats a lot of people in the industry are right now just laying the groundwork for probably orders that start in 'twenty $4 25, So you and I talked about the BP Northern endurance product features a few other small feeds that we're working on as well outside of the collaborations.

<unk> agree with Occar.

You see them.

Most of those likely coming to fruition in a kind of call. It 24.

25 timeframe, it's really right in our wheelhouse, if you think about it I mean, the shallow water treated we've got we're making some tweaks to make it more fit for purpose, but it's a nice offering that we have on the subsea products side for for a long time, and we're just converting that over to <unk>.

Or use in Ccs same.

Same thing on the wellhead side as well.

Yes, that's why I say that would be in your wheelhouse.

Are there any other areas of energy transition.

Yes.

You're interested in are right.

I might also begin your wheelhouse.

Yes look I think what we're doing is really looking at our core capabilities.

High pressure high temperature metal to metal steel and we're looking across the variety of <unk>.

Energy transition opportunities, it's probably too early to talk about those but thats something that that were.

And we're constantly monitoring and our business.

I guess switching over to.

Okay.

The organizational.

The changes we are targeting to the organization structure.

I think yes.

Efficiencies.

And the cost structure I wanted to ask.

If you could give us any any update on that.

<unk>.

Plant there.

Yes for adjusting the operational structure and maybe you can remind us of the.

Magnitude of cost savings, you're looking for the next couple of years.

Yes.

So theres a number of things in flight and then I'll, let Carl talk about real estate and kind of the cost savings side, but the things the things that are in flight right. Now in February we started standing up a new organizational structure around subsea products subsea services and downhole tools energy transition being kind of the the.

Burgeoning group if you will.

Now dividing into those teams the organizations are completely aligned with them in those teams were already starting to see some of the benefits of that as we divide into those teams were making better investment decisions, we're making better decisions around customers, we're making improvements in on time delivery. So we're starting to see the real operational.

<unk> benefits.

Those things today I think the formal financials will probably be stood up early next year and then I think those benefits will only accelerate we're setting specific gross margin targets for each of those businesses are starting to work towards those right now, but its early days. The second thing that we've that we've done is just optimizing footprint and we may.

The $22 $5 million manufacturing investment I think first machine now arrives may next year with material portion of that starting really in earnest in late 'twenty three we're starting to clear out area on our campus here. So if you came to the campus here by the end of the year, we will have a fence off area, where the equipment is going to go down in the <unk>.

And all of those type of things. So we're starting to get excited about that as well and then the last piece is really around.

Footprint rationalization, we've got three facilities here that were listed we sold one of them in the quarter. As you saw there is other areas of the world where we're looking at.

Making investments candidly and refine so it doesn't just go all one way on.

On the Houston campus, we knew we had excess.

Saudi Arabia, we're going to make an investment in other areas, where we're going to make investments as well so it's not simply a <unk>.

<unk>, it's more of a reallocation of resources around the world. So those are kind of the three things you can talk yes. As you can see on the real estate. We obviously closed on a deal here in prior quarter. We would expect the remaining two pieces of property we've talked about.

To be under a purchase and sale agreement.

More or less around year end is what I'm guessing whether or not we get the cash in Q4 or Q1, we don't have a sense of that right now but were actively marketing we've got lots of interest in it we are working towards PSA is on both here.

Probably in the next 30 to 60 days.

Expect to have more news on that obviously in February , but that's moving along nicely Jeff mentioned gross margin targets for the business. We've put out there externally we want to get to 35% gross margin as an organization.

But that will likely take us some time in 2004 to be run rating that we need the new manufacturing equipment here, we need the P&L for the product lines, we need to get the targets sorted up if you will so this year has been a year, where a lot of sort of change we expect 'twenty three as we get these P&L set up for the businesses targets establish people understand what numbers they own and what cost stay.

One if you will we will start to grind towards efficiencies, there, but really expect that gross margin target of 35% to likely be achieved at some point in 2020 for exit is what we would what we would expect.

And can I ask what kind of revenue growth might be contemplated on that path to 35%. We have said for our internal planning purposes. We have said no revenue growth, 35% based upon flat.

I think I think I think it kind of goes back to the comment that I made earlier around customers wanting to be resilient and we know there's going to be revenue growth over the next two years I think thats unquestionable, what we want to make sure is in the environment. We're in now which is kind of the low point.

The environment, we're in now that we can be very profitable.

Yeah sustainable yes, the intention is to kind of stretch the envelope on the teams. If you will and we know we will get some reflation.

Activity in price.

But we're doing that modeling and go get some assumption of Hey, there's no revenue growth here.

Knowing that there will still be.

Right.

I know you mentioned certain specific gross margin targets for.

Great.

With that I'll ask first year.

Sure.

Yes.

And any further.

Very unlikely we're going to discuss it here today, we appreciate it and I appreciate we appreciate the attempt.

Given this platform I got it right.

We'll be happy I think we will be happy to talk about that at some point in the future. We're doing a lot of sort of financial reporting redesign standing up of some new data dimension is not to get too into the nerd weeds here, but there's a lot going on that we've got a set that internally before we want to talk about that externally, but I think on a consolidated basis, 35% of the target we have.

Got some materials out on our site that sort of step people through this the actions to get there, but it is it is a protracted process that it's going to be like I said, it's probably a two year journey for us to get back there the market happens to snap back sooner and we get some revenue and price reflation, we'd probably get there sooner, but the intention is to kind of take the once we.

Footprint and roofline, where we needed to be we get P&L stood up et cetera, et cetera that those folks are now understanding kind of what they own and then taking actions accordingly.

Yes.

I do want to say congratulations.

On the sale of the facility.

And it sounds like you've got some pretty good visibility on.

Yes.

The timing of proceeds for the next two sales that are targeted.

That would be great, but that's.

That scope.

Property sales speed.

We expect that in the future I know you've got some growth initiatives and other areas I didn't know if there was any trimming that might be less.

Yes.

Is really kind of get the conclusion of it.

Yes, I think.

I think as we as we look out and we make the new manufacturing investment.

Unquestionable, we're going to need a smaller footprint.

So if you go out to kind of call. It 2024, when everything has been.

Been installed there I think thats. The next time, we will really do a reassessment of whats a refined look like and do we need to do we need to tweak that again, although I think our general counsel that's manage most of this a shot out to James Webster for all the hard work that that he is doing around this.

I think he's happy that we've got two properties right now maybe we take a little bit of pause for a couple of years, because it's unbelievable how much work.

Divesting of these especially on an integrated campus how much work divesting of these tanks, but I think you should look out to 2024 for the next time, we would have a conversation around that okay.

Reconciling the reminder.

No.

Yes.

Those are all my questions today and the less.

Jeff unless you wanted to build one about your real serious production.

I am going to the game Tonight, and I like the Astra's <unk> six I think Carl is wearing his astro sure as we sit here right now I've got my Jersey on I would go with the Astro and <unk> as well excellent.

Excellent.

I know Q3 was a little bumpy I thought the step up in gross product orders with.

Solid sign.

Clearly a lot of positive opportunities for growth.

Looking forward to Washington to play out.

<unk>.

Thank you for giving me the.

The chance to host Fireside chat this quarter.

Hey, Thanks, Thanks, David Thank you David.

Alright.

Okay.

This concludes today's conference call.

Thank you for participating you may now disconnect.

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

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Q3 2022 Dril-Quip Inc Earnings Call

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