Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Dril-Quip 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 Relations and FP&A. Ma'am, please begin. Thank you, Howard. Good morning. Welcome to Dril-Quip's second 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 Dave Anderson. Great. Thanks, Erin. Good morning. My name is Dave Anderson. I head up energy services research at Barclays. I'd like to thank Jeff for the opportunity to host this quarter's earnings fireside chat, though maybe we should call it something a little bit different considering the middle of the hot summer. Maybe it should be fireside pit. I'm not sure. Jeff 's gonna provide a brief recap of the second quarter, after which I'm gonna have a series of topics and questions to discuss for the remainder of the hour. We're not gonna be taking any questions, but you can follow up on the phone. Jeff will provide review for the second quarter. Thanks. Hey, thanks, Dave. Thanks for hosting the fireside chat. Appreciate it, and you're absolutely right, probably something more appropriate than fireside chat as we sit here in Houston, Texas in the middle of an awfully hot summer. First, I'd 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. 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, we beat both our expectations and consensus. It was really broad-based growth among a number of our products. You know, I'll just go through each of those. If I think about subsea services, we're most encouraged by subsea services. It was up a little over 20% sequentially. We really like the growth in subsea services, specifically as a result of the fact that that's often a leading indicator of our customers' activity levels coming back to work. If you think about that, our customers have a customer property that they're bringing back to work. They have rigs that they're bringing back online. We start to see recertification and rework happening. 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 deep water business emerge there as a real growth opportunity there. Last but certainly not least on the subsea product side, a solid 7% Q-on-Q increase. We like the increase there. That's largely on the fact that we started to see orders pick up back half of last year. The orders were up about 10%-15% over the first half. That trend really maintained the first half of this year, and we're seeing that start to translate now into revenue. 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, you know, one of the things we've been seeing this quarter has been this growing expectation of an offshore inflection. But I think it's also pretty clear it doesn't hit everybody at the same time. So we're seeing a lot of tenders out there for both deep water and jackup rigs. So maybe let's just start with what you're hearing from your customers, kinda what you're hearing from that current economic environment. You know, obviously people are talking about a recession. I'm wondering if they're talking about that at all, or if your customers are instead looking the other way and really think about this energy, you know, global energy crisis we're facing and how they see kinda playing into that. I think first and foremost, we're seeing our customers maintain capital discipline, and that's really across the board, regardless of size of customer, regardless of whether it's an IOC or NOC. There's just a lot of capital discipline in the market right now. I do think that there's some folks that have gone back or some of our customers that have gone back and are really reevaluating and sharpening their pencils on projects, looking at, you know, what do we believe the demand will actually be. We're in a high inflationary environment. What do the project economics look like? We see a lot of projects that are pushing to the back half of the year, and they're pushing the back half of the year as they just reevaluate what the economics look like. What we're hearing from our customers, it's very easy to look at today's environment and say, "Hey, it's $100 oil or $90 oil." You know, everybody's getting back to work, but they're looking at much, much lower breakevens when they're doing that analysis. You know, we're hearing numbers anywhere from $35-$40 is what they're thinking about so that they can be resilient when, you know, if and when things turn back the other direction again. I think it's very much an environment where cautious optimism is what I'd say. If I look at your orders this quarter, you did around $50 million. I was just kind of running some really quick, silly math here. If I just look at the last 10 quarters, you've averaged right around $50 million a quarter. How do you think about that and how that could potentially change based on what you're seeing out there? Obviously I'm sort of thinking about 2023 and kind of how these numbers could trend. What's sort of your, I guess, your 12- to 18-month view on how the orders could trend? We'll 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-over-year around 20%. Obviously, you could do the math and figure out that that's a little back-end loaded, right now. Doesn't surprise us that it's back-end loaded. We would have 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 and the inflationary environment wasn't there. As we saw inflation start to creep in, some of those products were just a little slower to come online. We would expect, you know, we talked earlier about, you know, 16-19 tree bookings this year. We expect about 11 of those in the back half of the year now. We've 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, is we're seeing far more MSAs now, and we're not seeing those purchase orders that automatically convert to bookings. Think about, let's use Petrobras as an example. You know, they placed an MSA for 11 exploratory wellheads, and I want to say 76 development wellheads for a total of 87 wellheads. Those don't automatically go into bookings until they're called off. If you go back, you know, five, six, seven years ago, they would've just placed a purchase order for it. We are seeing a lot of good activity. It's just translated into MSA as opposed to bookings. If I think about 2023, look, it's a constructive environment. Oil prices we expect will remain high. You know, we believe that the subsea services growth that we saw in the second quarter is indicative of customers coming back to work. You know, we would expect a strong bookings number again next year and likely up from 2022 to 2023 again. I was curious, you had just mentioned before on, you talked about some of the short cycle business, running through. I don't do subsea services, that doesn't run through backlog, I'm assuming? Does that go right through revenue? Maybe just kind of talk about your overall mix in terms of some of those short cycle versus longer cycle opportunities and how that compares to maybe a few years ago, which I would've thought probably most of your business would've been more in kind of a longer cycle category. Yeah. Just to clarify, you're right to say most of the services don't go through backlog. There are situations where it's contracted a certain way where they might go through backlog. Petrobras would be an example of that, but outside of Petrobras, you're right, most of that services just goes, you know, straight to revenue. That's obviously short cycle. A customer could buy a wellhead, they could purchase a tree, they could purchase a connector, and it may be months or even years before we actually service that and see the service come through on that. Those are longer cycles. Think about a wellhead as anywhere from 26-52 weeks, depending on the specs of the wellhead, where it's going in the world. Think about a tree as anywhere from 12-18 months, probably on the higher side right now, given supply chain constraints. Think about downhole tools as really very, we've got stocking programs for downhole tools, so that's very much a customer shows up, asks for the equipment, and immediately goes to work. The lead times on that are, you know, almost a pick it up and at the longest, maybe 12 weeks or something like that from a deep water standpoint. 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. It's really that services that as customers come back to work, they start to work through their inventory. I guess if I just think about some of your wellheads and your trees and that, for the most part, are your orders coming from more short cycle work, meaning step outs and field extensions along those lines, versus some kind of, you know, maybe kind of new fields? I guess we're seeing that kind of generally speaking, but is that how your bookings also look? Yeah, it's more brownfield than greenfield. Yeah. Yeah. I guess that's probably one. We see FTI ordered a whole bunch of, you know, they're talking about their subsea tree bookings and you're basically what you're saying that 12-18 months in front. Basically, the wellheads and the rest of your business should therefore be more of a 2023 event. It just takes a little bit, you know, you're more of a shorter cycle in a longer cycle environment, I guess, is the way to put it. Yeah, that's exactly right. If you're comparing wellheads, which is, you know, kind of our core product line, if you compare wellheads to trees, yeah, 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 typically hold a lot of trees in inventory, whereas you might hold some wellheads in inventory. Often as the cycle starts to rebound, they'll work through some of that inventory first, before they start reordering. speaking of inventory and sort of the cost and inflation that we're navigating through right now, any concerns you have in terms of your 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 inflationary issues? This is Kyle. You kind of have to split it into two pieces. The downhole tools business, as Jeff mentioned, a little bit shorter cycle. They're out on the forefront getting price. In addition, we either are seeing cost inflation happening. Their margins have been relatively stable over the last, call it, three, four quarters. They were out sort of late last year, raising prices sort of across the board for service and product. On the subsea product side of the house, a little bit longer, as Jeff mentioned in the cycle. So we're planning, you know, spending on when you're purchasing inventory, when that goes into the cost. The folks in that business are out there right now identifying where they're seeing inflation happening on a part-by-part basis and trying to get that pricing along to the customer as well, even though that may not come back out of inventory until much later. We're being very aggressive on the pricing side of the house. You're seeing that, I think, in the margin side, specifically on downhole tools. You're seeing them stabilize margin and in fact growing their product margin. Okay, that's good to hear. Maybe we can just try to take a bigger picture to try to 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 at least percolate, but what's kind of happening on the leading edge there? What's got you most excited as you think about the next 6-12? Yeah, I think if you step back and look at it, I mean, obviously, Brazil is very strong right now. You know, I talked about the 87 wellhead orders, the MSA that we got earlier in the year. That's calling off much faster than we would have anticipated. In fact, you know, we expect them to probably go out for tender again later, early next year sometime. That's much earlier than we would've expected. If I turn from there to the Middle East, Saudi remains strong. I was there four or five weeks ago, and you know, our downhole tool business is humming along and expect growth in the back half of the year in Saudi, both as it relates to that and even on some of our connector and service equipment business. We've had some diverter revenue there as well. So we think that's doing well. Look, Norway remains strong. There's a economic scheme there that's actually encouraging drilling, so that's good as well. Asia-Pac's 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. You know, I think if you think about GOM, you know, they're really looking, and I'll be curious to see how the new legislation that's working through right now plays out. I think in GOM, they're really looking for what I would say is regulatory certainty. Mm. to get back to work. That's what I most often hear from our customers there, is they want that regulatory certainty so they know the environment they're gonna be operating in over the next 5, 10 years. Perhaps that'll come out of the legislation working itself out right now. Let's not hold our breath. Could you kind of circle back to Brazil and talk about the MSA you mentioned? This is a big business for you, I guess, 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 in this a little bit more about- Yeah. MSAs today versus really kind of what the business was before. As it relates to those 87 wellheads, those are not in backlog. Just help me understand how those kind of flow through backlog and as you work through. It's just, it's a little different than before. I think it'd be helpful just to break that down for us, please. Yeah. Thanks, Dave. It's really a lot different than before. I think if you go back to, you know, the last big upswing, they placed purchase orders, and they placed very large purchase orders. Then we delivered against those purchase orders. The minute that they placed those purchase orders, those purchase orders went into backlog. Mm-hmm. In the environment we're in today, they typically have an MSA for up to a certain amount of wellheads. Often, there's a minimum in there as well, but it's a kind of a min-max contract that you're thinking about, and that includes both the equipment and the service, and then they call off against that contract. What we'll do from a recognition standpoint is when we sign a contract like that, we'll recognize the minimum to the extent there's a minimum, but anything above that minimum, we don't recognize until the call off actually happens. 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 only go into backlog as it's called off. I see. Does that help clarify that? It does. Essentially all 87 of those wellheads will have gone through backlog essentially by early next year. Is that how I should read your commentary? That I think. about another MSA on the horizon? Yeah. I think about 30% of them are already through backlog. Okay. The remaining 70% will probably happen over the next 12-18 months. They may not get all the way through it before they do their tender, right? I would expect that, you know, when they're 80% of the way through or 70% of the way through that contract, that's when they probably wanna go back out to tender again, right? It won't be a digital event quite that easily, right? There'll be some cutover. When we think of Middle East and Saudi, Dril-Quip is not typically the first name that comes to mind. In fact, 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, you know. Like I said, I don't remember this being a part of your story in prior times, but at the same time, of course, jackups was never a really big part of Saudi until fairly recently. Could you talk about the evolution of that market and kind of where you guys fit in there, please? Yeah. Well, the reason you wouldn't have thought of it as a Dril-Quip market is because we really got a fairly large presence with that when we bought TIW. That's really that downhole tools market. TIW has always had a very strong presence in that Saudi market. We're, you know, one of the key liner hanger players in that market, serving Saudi Aramco there. We will sell from time to time sub-mudline. We will sell surface connectors. We will sell diverters from time to time. It's a smaller market. By far, the liner hanger business is our largest business in Saudi. We are looking at opportunities and, you know, as you mentioned, a significant ramp up there. As we had conversations with Aramco, you know, they're really looking to add more vendors in that, in that market just because of the ramp up, and I think they're concerned about supply chain. What is that? Are you qualified, what, on the wellhead side, you're not qualified, I'm assuming on for Aramco. Is that something you're trying to get accomplished. How does that work? It's historically not been very easy to get qualified, but. Ah. Things are very different in Saudi today these days. I'm assuming maybe there's a little bit more flexibility there. Yeah. You're right to say it's not easy to get qualified. We're qualified on diverters. I think we're through some qualification on sub-mudline, and on the surface wellhead side, we're not qualified yet. Okay. It's primarily for us, a liner hanger market. We're working- Okay. On qualification of wellhead. We're surface wellhead, as well. We are working on that, but we're not qualified yet. Okay. One market you didn't mention is West Africa. Is that, and it's always been sort of fits and starts. I'm assuming Nigeria and Angola and all those markets will 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? Yeah, it's very early. It's very early days, but we are seeing activity where we hadn't seen activity in a while there. Not really anything that would be material in the next 6-12 months. Okay. Maybe could we just discuss the competitive dynamics that you're seeing out there today. Particularly wellhead is sort of a two-horse race for a while. Just wondering if competitor behavior has changed at all. Maybe kind of what's it compared to. I know we're such an early part of the recovery here, but I don't know if there's anything to be gleaned from this recovery versus the prior recovery. Just in terms of the competitive outlook out there would be helpful. Yeah. If I think about it in that regard, you're right to say, you know, it's kind of a two-horse race. I mean, don't forget, from a competitive standpoint, we've got a collaboration agreement with OneSubsea, where we'll work with them on wellheads. You know, we're actively tendering there. Obviously, you know, we're relying on OneSubsea to win that business in order for us to tag along with them, but that's a situation that's probably different than the last upcycle. We also bid, you know, what I'd call quiet collaboration agreements, where we'll bid from time to time with Aker as well. Those are really our two partners. If you think about an EPCI bid, we typically, on EPCI, would go in with either OneSubsea or Aker to the extent that that makes sense. Then look, there are still plenty of large customers, Petrobras included, that tender their wellheads completely separately from trees and the rest of the bundle. Mm-hmm. Obviously, we're very competitive there. If I just kind of slide over to kind of looking, talking about the kind of financial, maybe capital allocation part of it, I guess it's probably more of a question, a bit more for Kyle. I was wondering maybe if you could talk about how you see, you know, the second quarter playing out. You're talking about top line growth and kind of incremental margin targets. Could you help us kind of narrow down kind of where you're hoping to land the plane by year end and what the setup is? Yeah. for next year and kind of where our starting point will be for 2023? Yeah. As 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 for us to get those and start booking revenue and margin as it relates to those particular tree orders. They're so lumpy that they're very critical in the bookings process. I would expect Q3, Q4 to kind of be more or less because the numbers are sort of, you know, where they are in terms of size. You know, $1 million here or there can make a big difference to hitting on the bottom line side of the house. I expect Q3, Q4 to be more or less in line with Q2. As we turn the page to 2023, a little bit too early for us to probably touch on that at this point in time, as we're starting to roll up budgets here in the next couple of months and getting, you know, CapEx plans from our customers and so forth. I'd be a little bit hesitant to jump into 2023 at this point. Okay. Then in terms of the free cash flow expectations, you talked some pretty good confidence about building up that cash from the second half. One of the things that's come up quite a bit during earnings has been working capital builds, and people kind of building that up. Maybe talk about those two things together and kind of how free cash flow looks in the second half. 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. AR has been a bit of a drag in Q2 as we've been growing nicely Q on Q. We've seen a sequential decline in AR. We'd expect that working capital to pick up as revenues flatten 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%-5% yield for the year. We're still sticking to all five pieces of guidance we stuck back out in February with bookings up 20%, revenue up 10%. Mm-hmm. Incremental margins 40%-60%, free cash at 3%-5% yield, and then CapEx at that 15-17 numbers. I think we're sticking to all those, as we hit the back half of the year. As we think about 2023, I think it's just a little too early to talk about that. Okay. 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 know, you have a little bit different business than most and, you know, on the well heads and the trees and, you know, you've been pretty offshore driven capital equipment, consumable type of business. Is that the direction you continue to go? I would imagine there's a lot of opportunities in that market. Is that the direction we go or are you thinking other places to take this business? Yeah, I think, Dave, it's a little bit of thinking about the Dril-Quip DNA and the expertise we have, right? You think about that as high pressure, high temperature. Think about that as highly engineered manufacturing capability, something we can build on our footprint. You know, it doesn't necessarily need to be to the right or left of a wellhead or a tree. It could be energy or energy adjacent. Markets that we'd be looking at, I mean, obviously, we're focused on the organic side, but over the last quarter, we've actually engaged a 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 to three areas that we're thinking about, and we'll be working on that really over the next, I'd call it more nine to 12 months. You know, you should expect the balance of this year, we're gonna 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. I think as we exit this year, you'll start to hear more around M&A. I'll let Kyle talk a little bit. Yeah, I mean. You know, about capital structure. We're gonna put a pin in this strategy, M&A strategy, probably here in the next couple months. As Jeff mentioned, we've got to get with our board here in the next couple weeks and talk them through what we're thinking about there and then how we wanna communicate that and when and if we do to the market here. I think Jeff touched on it. It's gonna be stepping out from Dril-Quip's DNA. It could be energy, it could be energy adjacent. We've got guiding principles we're gathering together that are gonna help take us through this process here. We do think the inorganic side of the house is gonna 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've got enough work streams going on internally from a reorganization, property sales, footprint rationalization. We touched on the manufacturing investment in the release this morning. Those three items, those three work streams are plenty for us probably for the next six months. We're gonna be standing up that inorganic capability inside the organization. Where we point that ship, if you will, is still a little bit TBD, but it's gonna have very much a connection to the Dril-Quip DNA and highly engineered, highly specified. Taking what we do well and being able to step that out and bring value to, you know, as Jeff mentioned, the energy and energy adjacent spaces. 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 it's a critical path for our growth going forward beyond just what we see in the organic market. As long as I've known Dril-Quip, and to be honest, I think I've covered Dril-Quip for almost 20 years, there's never been any debt on this balance sheet. All of the things that you're talking about, my first thought is, does this change that strategy? Are you willing to take on debt to finance some of these potential new areas of growth? Yeah. We view our balance sheet as a very critical asset. Obviously, we would not anticipate taking on debt in any one of these scenarios here. We wanna continue to maintain a very healthy cash balance. From an M&A standpoint, we'll probably be very programmatic about it, thinking through a string of pearls over time that help develop that capability inside the company. It probably wouldn't be a big bang type of deal. We need our organic business, quite honestly, to generate a little bit more free cash right now than it is. I don't think debt would be something we would entertain at this juncture. I think our balance sheet, we wanna continue to hold a pretty healthy cash balance on there. Give us, you know, options around, you know, making sure, you know, we've done $21 million today 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. I think as it relates to debt, that's probably something that we would not entertain, at least at this juncture. All right. I tried. On the subsea tree side, I'm interested in something, you know, as we're talking about M&A, kind of moving to other areas. It would seem that subsea trees might be an interesting area right now. I mean, one of your big competitors is essentially throwing in the towel. They've said that essentially they can't make the business work. I mean, I know you talked about OneSubsea, but geez, I can't remember the last time they really talked about this market. Seems like it's a pretty big opportunity on the tree side. Is that an area where you see sort of some competitive dynamics shifting and maybe a little bit of an opportunity on that? I mean, trees have sort of always been sort of, I guess, how should we say, opportunistic. It feels like over the years. Does this go from more opportunistic to more of a steadier part of the business going forward? Yeah. We're really looking at that. Think about trees from two aspects. One is shallow water. You know, we've got a decent share in shallow water trees. We'll continue to do that. We've got a new tree that we're bringing online called SBTe that leverages some of our technology. We think we get first win on SBTe sometime early next year. That same tree is the tree that we'll use then in carbon capture. Think of that as ultimately becoming our CCUS tree. We look at it that way. Obviously, we sell deep water trees, and you're right to say. Mm-hmm You know, that's more optimistic, or opportunistic. Those tend to be smaller to mid-size players versus the large projects. When the project gets to a certain size, that's when we'll team up with the likes of Aker or the likes of OneSubsea on our EPCI on the deep water. But on the shallow water, we've got a tree offering that we believe is competitive. We're developing a new tree there, and that tree will ultimately become our carbon capture tree as well. That makes sense. I'm gonna shift here a little bit to move on to some of the growth pillars that are potential over the next several years. I think it's the three in particular. One would be some of the collaboration approaches you're taking. Two would be the downhole business. And three, well, would be the e-Series product line, which you're building out. Maybe just start with the collaboration side here. Can you talk about maybe the Aker collaboration is a great place to start, that you announced this 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? Then, I guess separately, what other areas are you contemplating? Are there other collaborations like this out there? Would it be in energy transition bucket? Yeah. Specifically as it relates to Aker, you know, I mean, we've had ongoing conversations with Aker for a period of time. I think as they looked at, you know, both the shallow water tree that we've got and the wellhead they've got, they thought that was a good match with the offering that they were gonna bring to the market from an overall CCUS standpoint. We signed that agreement, as you're 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 were gonna play in CCUS." It's really presented some nice opportunities for both ourselves and Aker, and for us separately from that. In fact, next week, next Friday, we'll deliver a very small FEED, but we'll deliver our first CCUS FEED next week. We wouldn't expect to see on the large projects that we're talking about with our Aker, the Northern Endurance project. We've ramped up there. We're probably spending $2-$3 million annualized now. We've hired folks. We're jointly located and working closely with Aker on that. We wouldn't expect that FID though on that project until sometime next year. First order really wouldn't hit until late next year. We are working with a number of other companies. We haven't gone public with those, so we're 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. Hopefully more to come on those. When would you expect some of those first Christmas trees or wellheads to be installed on CCUS? I'm just trying to understand the timeline. Obviously, we've been talking about all these different projects. Just trying to put something on the ground here. When should we expect sort of the first one on the seabed? Or I guess however they're designed, I guess I don't know the full design here. I'm assuming on the seabed, but maybe they are on the surface wellheads. I'm not entirely sure what that looks like. Right. It depends on the project. Okay. It depends on the project. We wouldn't expect first order till, you know, I think conservatively expect first orders late 2023, and probably first revenue on that sometime in 2024. First install probably sometime in 2024. Okay. From there, hopefully we start seeing more of this and, you know, perhaps we'll even get a full carbon market. I'm sure that's kind of. Yeah. kind of what you're planning on. Yeah. What other kind of markets are you targeting here? Is this the only kind of area that you see potential for collaboration? Are there other areas that you see potential here? I mean, obviously CCUS is. Mm-hmm. This is by far, you know, the most immediate. I think as we look at something like hydrogen, as an example, there's a number of areas where we could play from a high pressure, high temperature standpoint, but that's much more nascent than the CCUS market. I'd almost characterize CCUS as product development because it's an extension of things we already do, as opposed to a hydrogen, as an example, which is much more R&D and in its infancy right now. Any other areas, like geothermal? Will there be an opportunity for geothermal? Yeah. I'm just kind of thinking about where this could be translatable. Yeah. You know, we looked at geothermal. You know what I'd say is we accidentally sell into geothermal through connectors, and pipe, but the geothermal market's a very, very commoditized market, and we find it pretty challenging. I, you know, we'll participate there, but it's gonna be much more opportunistic, versus something that, you know, we'll aggressively pursue and build out a whole product line around. I think our investment will be pretty small there. Okay. Then shifting over to the downhole tools, you had talked about some pretty good growth this quarter in there. Maybe just talk about. I think it's a little bit on the shorter cycle here on these tools because you're saying kind of it happens, you know, you kinda come out there right as these things are happening. Could you talk about how that business is developing? downhole tools is something that Dril-Quip has always been involved in pretty heavily. Is there something different about this cycle that you see going forward that gives us a better opportunity? Is there something that's changed about the business that you think, maybe downhole tools will have a little bit more growth than you've seen in the past? Yeah. You know, if you go back in time, and this is, you know, obviously predates me, but if you go back to 2016 and before, you know, clearly Dril-Quip had a downhole tool business. You know, as I understand it was pretty immaterial to the overall business. Obviously, the acquisition of TIW really was the beginning of what would be a more substantial downhole tool business. I think the thing that's materially different now than, you know, what might have been in the past is we now have very specific stocking programs around the world. You know, if you go and talk to our business, they've got a stocking program in Saudi. When I was out there, you can actually see where they're stocking. We've got a stocking program in Ecuador. We've got a stocking program in Mexico. You know, in key markets, we've got stocking programs where 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's a challenging logistics market today, right? I think with that inventory on the ground around the world, there's real opportunity there. The other thing is, you know, you pointed out some of the issues in Saudi around qualification. We worked very hard to get a number of sizes and a lot of our kit qualified in Saudi. From a liner hanger standpoint, we're well positioned right now in 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. You know, the company. 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 needed 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're basically kind of building out that capacity in advance of potential activity? Is that what you mean by that? Yeah. You've gotta have inventory on the ground, right? Yeah. think about it as a Kanban, where you've gotta have inventory on the ground, and then as that customer pulls the inventory, you know, the signal goes back to our manufacturing and our supply chain to restock those for. You've gotta have certain sizes and certain kit on the ground in a Kanban that your customers can pull on immediately. If you don't have that kit, they're gonna figure out a different solution. I was just about to say, if you're not ready, you don't get the work. That's exact. The next thing I'm thinking about is, do you see an opportunity 'cause your competitors in that business have not done that? I mean, is that what you're seeing out there? There is a little bit of that. What shouldn't be lost, by the way, is we supply a number of our competitors with liner hangers. Schlumberger will buy liner hangers from us. Halliburton will buy liner hangers from us. It really depends on the market. Yeah, I think Two things matter in that business, service quality, making sure you're servicing the customer in the right way. Mm-hmm Having that inventory on the ground. 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. Just speaking of Schlumberger, they had a big pickup in Gulf of Mexico activity and kind of more and more work offshore. I'm assuming that downhole tools sort of goes hand in hand with just activity levels offshore. It does. Well, keep in mind, by the way, our downhole tool business is not nearly the deepwater business that you'd expect from wellheads and trees, right? There's a healthy amount of what I call international land, not Lower forty-eight, within that downhole tool business. Huh, international land. Boy, I wouldn't have thought that. Okay. That's interesting. Are there any kind of particular markets that you think you're ideally suited for or you have positioning, as you just said, sort of stocking? I guess you just kind of rattled off a number of the countries, but are those sort of the countries that you see the biggest opportunity, presumably? Yeah, really if you think about it as Ecuador, Mexico, Saudi, Brazil with Petrobras is starting to emerge. Mm-hmm Behind an MSA for the XPAK-De with them. I think it's 27 systems is what's on that MSA. Think about it as those are the core markets. We certainly supply other markets, but when we supply those markets, that's where you'll typically see us operate. You know, we'll sell the equipment to, you know, someone that you might view as a competitor, and then they'll install it for us. Okay. In 2021, you had 35% growth on this business. I don't. Correct me if I'm wrong. Have you put out a number for your expectations this year? Just curious, should we, I'm presuming you should be expecting double-digit growth on this business for next few years. I mean, we would expect double-digit growth on the business for sure this year, and obviously coming out of 2020, they had a nice year in 2021, and this is an area where they've seen some really tremendous growth, as Jeff mentioned, the markets they're operating in. Saudi's been a key market for us the last few years. We would expect a nice growth in this business. It's a really good service and product business, too. It's got nice margins across the board. As I mentioned earlier, they've done a really good job of fighting off the inflation beast here the last 6-9 months or so. Mm-hmm If you go back pre-acquisition day, that was a $130 million business. Okay. We've talked about that, as you know, over the next couple of years, getting back to 130. Might not get back to 130, 'cause those are the glory days. Yeah If you will, of the industry, but you could easily see that getting back to $100 million. Next year, $100 million? Over the next couple years. Maybe exit rate for now. Yeah, maybe exit rate. I suspect my downhole tool leaders on the phone right now sweating. Well, the longer I keep talking, the more guidance I'm gonna get out of you. It makes you guys move a little bit faster as well. All right, let's move on to the third part of that leg of growth here, the e-Series technology expansion and some of these big bores equipment. Can you talk about what exactly this product line is and where it fits in the market? Is this sort of a. Do you see a niche out there that you're kind of filling in the gap? Or how are you thinking about sort of the longer prospects of this business? Yeah. The e-Series is just a number of products that we brought to market really over the last 4 or 5 years. You know, it's really all about reducing costs for our customers. How are you thinking about sort of the longer prospects of this business? Yeah. The e-Series is just a number of products that we brought to market really over the last four or five years. You know, it's really all about reducing costs for our customers, reducing carbon footprint for our customers. They can certainly use the entire suite of products, or they can use them individually. You know, right now, we more often than not see them used individually. You know, think about that as, you know, if you think about that from a wellhead standpoint, you know, we've got e-Series wellheads, and increasingly we see all of our customers gravitating towards those e-Series wellheads. You know, I think we've already quoted numbers. You know, we'd probably exit this year with probably 70% of the orders in wellheads all being e-Series, which you know is helpful for us in a number of ways, inventory included, by the way. The DXe connector is a high fatigue connector. We've seen traction on that in Norway. We've seen traction on that in Gulf of Mexico. It's early days, but we're pretty happy about the adoption there. I talked about the XPAK -De, and I talked about Petrobras, and I talked about the MSA there. We're pretty happy with that. We have one actually headed to Guyana 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. You know, I talked a little bit about SBTe, which is the shallow water tree. That will just be one more extension of that e-Series of products. Jeff, what's the pitch to the customer on this e-Series? Why would they wanna say a DXe wellhead, you know, connector or rely on e-Series? What is it? I think you said it's more efficient, but what's sort of the selling point that you're offering? Yeah, it's really three things. One is just time. You know, depending on the product that we're talking about, it's fewer trips, so fewer trips means less cost. You know, it's also carbon footprint reduction as well. Depending, you know, if you get less trips and you start doing that math on fewer trips, on less equipment, then that makes a difference for them as well. Increasingly, we're seeing our customers start to build into their tendering process questions around carbon footprint and what we can do to help them reduce their carbon footprint. This series of products just helps them reduce that carbon footprint as well. Okay. Okay, that makes sense. It's difficult to see where that goes in the calculation in the math, but I think you can expect it to get more and more competitive over the next couple of years. Last section here, just wanna talk about some of the operational footprint of your organization. Probably my favorite subject, frankly. I know, Jeff, we've talked about this quite a bit in terms of the changes you've made there operationally. You know, the business itself, Dril-Quip was sort of set up, I don't know, the way I always view it was sort of just kinda built on the fly to a certain extent. You've come in there last few years and really kinda changed that around. Could you just kinda bring us up to date in terms of where you are, in terms of adjusting your operational structure? Maybe some of the changes you made, are they done? What are you working on today, in terms of, you know, and where are you in your sort of path to, I guess, optimal efficiency, if there is such a thing? Yeah. Yeah. Well, let's start with the changes that we announced earlier in the year when I became CEO. We're getting much more product focused now. In the past, we used to be very functional. You know what, my observation is you made those handoffs from, you know, salesperson to sales admin to engineering to manufacturing. Something got lost in between every step there and time. It added time, candidly. It added a lot of time. As you know, time is money, time is expense, time is inventory. We're in the process of really reorganizing into those product groups. We've got leaders for those product groups. We're in the process of co-locating people. You've been on our campus, Dave, so you know how large the campus is and how spread out people can be. We're in the process of co-locating into the different product groups. We believe that'll make those, you know, improve communication, obviously, between those functions and make us more efficient. As we relocate on the campus, we've got 218 acres on campus today. You know, we've identified at least 100 of that candidly we can divest those. I think we said in our release already, we expect one of those is under contract right now. Our forge facility is under contract right now. We'd expect that to close this year. Two of the other properties, we'd expect to at least be under contract this year, if not close this year as well. We've talked about, you know, really the benefit of that. I mean, we're probably unique in that we actually own a lot of our property. When we actually reduce roof line, not only are we reducing the expense that goes with having that roof line, but we're also able to get cash proceeds from it. You know, we've narrowed that a little bit. It was a $40 million-$60 million range. Given higher interest rates and the market we're in, it's tightened up a little bit. It's more $40 million-$50 million right now, but we're pretty confident about that $40 million-$50 million of incoming cash. We're gonna 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'd tack on there when Jeff talks about the product line organization is getting, you know, income statements by product line and understanding true profitability across the portfolio here. We're in the process of doing that, and that's kinda helping understand, as Jeff mentioned, as we're going through, you know, footprint rationalization, product line rationalization, just who's doing well and who's not, and where we need to focus our energy. Where we need to make investment. Yeah. Jeff, you brought up the forging. It's been sort of a something I've been talking about. Gosh, I go back to my Mike Walker days. I never fully grasped the integrated model on the forging side. Sounds like you finally have a way to a seller there. 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 integrated model? I know it did just happen, but shifting from, say, what it was, you know, 10 years ago, essentially a fully integrated model to what it is today. Can you just talk about the differences between then and how you're sourcing those forgings? 'Cause of course, the next thing I'm gonna think about is, man, where are you getting forgings today? 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 you're thinking about that. Yeah. To be honest, Dave, we moved that supply chain for forgings outside of our on-site forge probably about 18 months ago, if not 24 months ago. We've got forging sources in North America. We've got forging sources in Italy. You know, obviously, we're always looking at the cost of those forgings. We're always looking at the lead time of those forgings. But we do have forging suppliers really candidly around the world, but Italy, North America being the two largest of those. The forge that we've got on campus today, when we make that sale, it will not operate as a forge. There's another strategic buyer that's interested in the property. They're buying it, and it won't operate as a forge. It's not operating as a forge today, as a matter of fact. Oh, that's interesting. Yeah. The interesting thing about that, and I've probably quoted these numbers before, is, 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 brought potential forge buyers in to look at that facility, their 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. You know, and look, these guys are professional forge suppliers, right? Yeah. Presumably even at GBP 35 million, now you could contend, you know, it's worth, yes, as a lot of companies are experiencing now, it's worth the continuity of supply to have that. When you get down to GBP 7 million, it's awfully hard to make that work. I think we quoted a few years ago when we shut down the forge, I think we quoted $8 million-$10 million annualized savings if I remember that correctly. I mean, something like that might have made in 2012, 2013, 2014. Yeah. Pretty hard to see how that makes sense going forward. Yeah, that makes a lot of sense. Yeah. It's not fair, it's not fair to the people that made those decisions in 2012, 2013, and 2014 to say it was a bad decision then because it was a very tight supply chain then, right? You're right. Now, now and going forward, it just doesn't make sense. Great. Taking all this into account and the efficiencies that you're thinking about and you're targeting, how are you thinking about sort of where growth margins can normalize, end of the day? When everything's sort of done, settled down and I don't know, let's fast-forward 12-18 months when whatever normalized means, and I know that's not such an easy concept, but what's sort of your target here? What kind of operational margin expansion do you think you can squeeze out of this business kind of- Yeah. Structurally? Yeah. As we sit here today, kind of in the mid-20s, we would expect, call it, I'm gonna say 18-24 months down the road, once these investments are made, roof line is shrunk, manufacturing investments made, we would expect to kind of be in the mid-30s is what our expectation is, and that's the math we're kind of working off of over time 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 streams that we've got going on internally, we would expect that gross margin line to kind of be in the mid-30s%. Okay, that's good. That's a good target. So kinda last question here, kinda on a related note. What are some of your ambitions on kind of decarbonization targets? Maybe just kind of expand some of your recent efforts on the ESG side, Jeff. You know, we don't think about, you know, service companies don't necessarily have the highest Scope 1 and Scope 2 targets, and Scope 3 is another question altogether. But just talk about maybe kind of some of the things that you're doing along those lines on your own footprint and other ESG efforts that you're trying to, that you're working on. Yeah. Look, we've gone out and identified our Scope 1 and Scope 2 greenhouse gas emissions. We've got a fairly good handle even on Scope 3 as well. We've got specific targets around that Scope 1 and 2 reduction. You know, 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'd see that they're putting solar panels on top of a number of our buildings in Singapore. Obviously, you know, this footprint optimization is probably one of the larger opportunities. If you think about it, almost cutting, you know, the size of our roof line in half here in Houston and consolidating all of our efforts into the other half is a significant reduction. We've done a lot of work to both understand and to set very clear targets around Scope 1 and Scope 2. That makes a lot of sense. Well, that's all the questions I had, gentlemen. Jeff, Kyle, thank you very much for the opportunity for hosting this. I think we kinda touched on all of the subjects. Yeah. There's obviously a lot happening over the next in just about every market. I think as people are just trying to get their handle on kind of how things are playing out, different markets obviously happen at different times. Clearly there's a lot of things percolating just below the surface on the Dril-Quip story. Thank you very much for our gentlemen for giving me the opportunity today. Yes. Thanks a lot, Dave, and I think we'll see you in a little over a month in New York. That's right. Looking forward to that. Okay. Thanks, Dave. Thanks, Dave. Okay, guys. Thank you. Thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.