Good day, and thank you for standing by. Welcome to the Dril-Quip Third Quarter 2022 Fireside Chat. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Erin Fazio, Finance Director for Dril-Quip. Please go ahead. Thank you, Liz, and good morning. Welcome to Dril-Quip's 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'll 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 David Smith. I'm the lead oilfield services analyst at Pickering Energy Partners. I wanted to say thank you for this opportunity to host Dril-Quip's Third Quarter Fireside Chat. Jeff, I look forward to our discussion. After your prepared remarks, I'll turn it over to you. Yeah. Thanks, David. Look forward to the discussion today. Look, to be direct, the results of the quarter did not meet our expectations. There were a few transitory items in the quarter that we believe are non-recurring 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-$80 million. We were also pleased by 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 improving pricing. We expect this to obviously benefit future coming quarters. The incoming bookings number was muted by a cancellation in the quarter that's quite frankly uncommon at Dril-Quip. 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 tree tenders and customer timing, this number could range quite high. As we look forward to 2023, leading indicators such as 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 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. With that, David, I'll turn it back over to you. 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 play. You know, some really positive, like the drive for energy security, then you know, there's looming recession concerns. I'm curious about what you're hearing from customers on how they're viewing the current economic environment. Yeah. Yeah. Thanks. Clearly two things, as you point out, two things that are on everyone's mind. 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. You know, I think what I hear most from customers is really twofold. First, they're very optimistic about a combination, as you point out, of energy security. And candidly, there's been systematic underinvestment over the last several years. They believe that'll provide a really strong foundation for increasing activity in almost all areas of the world for the next few years. You know, quite frankly, I understand your point on recession, but quite frankly, you know, things are pretty tight today. A simple reversal of COVID-Zero in China would only serve to tighten those markets. I think it's pretty constructive there. That's the first thing. That having been said, the second thing is customers are really looking, and the exact words they used when I was visiting in Brazil, they're looking for resilient investments. What does that mean? It really means continuing to maintain capital discipline, but also factoring in significantly lower oil prices into their economics. I think most of them are shooting for kind of a $35-$45 oil price. I think there's just a lot of scar tissue from the last downturn, and people are still being relatively conservative. Yeah, that makes a lot of sense. Curious if you have noticed any changes in customer behavior over the past couple quarters? I mean, you know, it's one thing about what they're saying, but just, you know, regarding their actual behavior. Yeah. You know, if anything, I think they're becoming more confident in their optimism. You know, I think the other change that we're seeing as a business as well is just really a shift in, you know, we have a lot of conversation around standardization. As a result of that, what we're really seeing is a shift to more call-off orders. Use Petrobras as a good example. You know, if you go back in time in 2011, 2012, 2013, 2014, Petrobras would have placed these huge tenders, and we'd have a huge bookings number right away for well heads. Now it's more of what they're doing this year, which is, "Hey, I'm gonna do a small tender. It's gonna be an MSA, and then I'm gonna call it off, you know, over the course of a year." I think a little bit more short-term horizon on some of the MSAs people are signing up for, and more call-offs as opposed to just a big PO right at the beginning of the year. I think it protects them a little bit more on those downside situations. Not unlike the comment that I made around the $35-$40 that kind of protects their economics, I think they're also trying to protect themselves from an inventory standpoint as well. Just on the Petrobras, the Petrobras awards, wondering if you had maybe any update on where you were kind of, you know, progressing through that first order and maybe your outlook on when, you know, they might come back and tender again? We got the MSA earlier in the year. It 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 is sitting in backlog. Call it 40 something sitting in backlog. The other 40 something will be called off sometime between Q4 and Q1 this year. It's a little spicy there maybe on whether it's this year or next year getting called off. We expect two more tenders to come out. The next tender could come out as early as fourth quarter, but might bleed into first quarter next year. We expect another tender at the end of next year. If you know, during my visits there, the expectation is they're gonna have 350 wells drilled over the next five years. It is definitely a strong market for us. Look, on those tenders, they typically give a do the tender. It typically is a 1A, 1B type thing. They always split those tenders, and we generally get our fair share of them. We're pretty optimistic there. That's great. I guess we have seen some really good momentum, you know, just big picture with the offshore rig count, you know, floaters and jackups. I'm curious on what you're seeing geographically, you know, maybe where activity is ramping fastest and maybe specifically where you see, you know, your opportunities looking more favorable. Yeah. Look, we're really investing and excited about three key markets, and these are really the three that I visited over the last three to six months. We're investing in Brazil, we're investing in Saudi Arabia, and we're investing in Latin America. Let me just go into. The story's 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 the region there, and we're looking at expanding our tool line as well as investing in stocking programs for more rapid response in that market. I was in Saudi a couple of months ago and spent a considerable amount of time with the team and at Aramco. 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, that's gonna be choppy. We're not gonna see that every quarter that way, but we believe that we'll continue to penetrate that market. Second, the expected growth in Saudi is gonna stretch the supply chain there over the coming years. 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. The last thing in Saudi is just a shout-out to the team. We ran the largest liner hanger in the world at 18 5/8 by 24, so nice job there. If I turn to Brazil, where I was a couple weeks ago, we personally went there. We wanted to see a ramp-up, and the ramp-up is just unbelievable right now in Brazil, and that's in terms of both manufacturing and services in region. This is the 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 TIW or the downhole tool business. So, you know, 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. Already mentioned the 350 wellheads over the next five years. Great MSA. You know, we are excited, though, about 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 they're doing there. It's kind of funny. I went to one of the customer meetings there, and the customer actually on the PowerPoint slide showed that running our liner hanger will give them a 10% improvement in production. It makes your life easy when the customer is actually showing the value of your liner hanger actually on their presentation. Look, we're ramping up stocking programs there. You saw some a little higher CapEx in the quarter. Those were running tools to help address that market as well. The last market is really Latin America. That for us, Latin America is Mexico, Colombia, Ecuador, Guyana. Just a few things about that. 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. Last, we received our first downhole tool order in Suriname recently, and we believe that's gonna be a growing market. It's always been a strong market on the subsea wellhead side, but we 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 of investment in all those, and that investment is really threefold. It's roof line where we need it's stocking programs where we need it, and it's running tools where we need it. Wow. That was very full there. Yeah, I wouldn't have been surprised if you told me 20% of your Q3 orders were subsea trees. I would not have guessed 20% was Saudi. I mean. Yeah. Is this a big liner hanger order? Are there other products- It was actually on the subsea product side, believe it or not. That Saudi market's always been strong for downhole tools. But in Saudi, they tend to place these large orders, so you get a nice, big, chunky product order on downhole tools, and then you spend the next year installing all that product, right? The service revenue then will peak for downhole tools and you'll get that one order in a quarter type thing. It was actually subsea products, believe it or not. We actually, to your question on trees, we actually booked zero trees in the quarter. This is a bookings number that's not lumpy from that standpoint. Wow. I guess stepping back and just turning to the competitive landscape, we'd love to hear if you're seeing any changes to the dynamics there. Maybe, you know, 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 this cycle. And that tends to lean towards EPCI awards that are bundled type things as it relates to the tree side of the business. You know, clearly that doesn't affect the wellhead side of the house. We always see large customers that order wellheads outside the bundle. BP does that, Chevron does that, Petrovietnam does that. 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-size customers. They're kind of second to come into the market. They're much more influenced by recent inflation. They're much more influenced by, you know, an upturn in 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. 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-sized players. We've got about $150 million-$200 million in open tenders that haven't been awarded yet with those small, medium-sized players. Some of those will book in the fourth quarter, and some of those will slide into next year. You can appreciate when you've got that much in open tenders, it gets tough to kind of call on from a tree standpoint, where it's gonna land in the fourth quarter. Which also leads to there are sort of full year bookings guidance of 15%-20%. We could see bookings bracketed at 75 to upwards of 100 in Q4. Yeah. Okay. You mentioned on the smaller customers that are maybe more responsive to inflation, right? Inflation's a widely discussed topic. I'm curious where you're seeing inflationary pressures, and if you could give us any color on what levers, you know, Dril-Quip can pull to mitigate this impact. Yeah, I mean, you know, I think the areas that we saw inflation is obviously a lot around the commodity forging, things like that we purchased. Obviously, we saw a fair amount of inflation on other services as 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, 18 months. As I mentioned earlier, you know, one of the things we looked at this quarter was on that $75 million of incoming bookings, how did those margins compare to prior quarters? This was our strongest gross margin quarter from a booking standpoint this year. Now, some of that is clearly mixed, 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 along prices as well. Yeah. We rolled out a new pricing scheme in the quarter, what our guys would refer to as an inflation plus. You'll see that pick up in the gross margin line going forward. That's great. Moving over to. Yep. I guess I'm gonna go over to Kyle, this is probably for you. I'm curious how you're viewing the current interest rate environment and how you see it impacting Dril-Quip. Maybe specifically, you know, if it presents any opportunity, you know, given your pristine balance sheet and, you know, pretty significant liquidity. Yeah. It's certainly better to be in a net cash position vs a net debt position, especially with floating rate debt in this environment. If you see the face of our financials this quarter, we split cash and cash equivalents and short-term investments out. We started to put some cash to work out beyond 90 days to take advantage of some of the higher rate environments. With the Fed continuing to raise rates at 75 basis points at a clip, the ECB, a number of central banks out there raising rates, we're certainly taking advantage of that, by just chasing yield to some extent. 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. Great. Yep. Well, just switching over to foreign currency. I mean, U.S. dollars had another really strong quarter, right, against other global currencies. Can you talk about the impact that's had on your revenue and earnings this quarter? Maybe how you see that impact for the rest of the year. Yeah. We've cited $2 million in the quarter for FX. We think about $4 million year to date. You know, about 15%-25% of our revenue is any given quarter, depending on the mix, are coming out of, you know, pounds, Norwegian kroner, 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. You know, that continues to, you know, as we go out beyond this, it's sort of the whims of the market, if you will, to some extent. If you're a believer of 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. We're actively taking a look at it, but it certainly got dinged in the quarter on the FX front. Yep. I do want to circle back really to that, you know, nice step up in gross product orders. If we could circle back to that. Did Did you say kind of $75-$100 million? Yeah. If you look at our full year, our full year guidance of 15%-20% bookings, that would imply $75 on the lower end and $100 on the higher end if we book the number of trees we think that are out there. Yeah. I guess, you know, two related questions. One, could you give us maybe some more color about what's in that outlook for Q4 orders and maybe, you know, the confidence you have on that increase? The second one, you know, just maybe any additional color on that cancellation that hit in the third quarter and kind of your confidence on, you know, that remaining a rare event. If we look at the fourth quarter inside that $75 million, you know, I talked about having $150 million-$200 million of kind of open tree tenders right now. We're including, I think 5 or 6 trees in the fourth quarter right now. Obviously, that number could go substantially higher, right? We've got 5 or 6 trees kind of in that $75 million number right now. We expect that there could be upside depending on how many of those, that $150 million-$200 million tender gets awarded in the quarter. If I think about the cancellation, look, 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. Candidly, it was a project that 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 see those type of things happen. Just absent that, obviously, we would've had gross bookings in the mid-70s. We view Q4, the low end of the range. It's not really a step up in our minds. It's sort of a sequential flatness if we end up at 75. Sure. That makes perfect sense. You know, just stepping back to the tenders outstanding with the small operators for, was it $150 million-$200 million of open tenders? Yeah. You know, if five or six of those trees hit in the fourth quarter, I imagine you've got it probably sets up for a healthy order outlook in 2023. I recognize it's a little early to ask you this, but I'm going to anyways on how you're thinking about, you know, what 2023 orders might look like. Not looking for official guidance, but just, you know, given some good tailwind here. Yeah, sure. I’ll give you color. Look, you know, we tend to reserve our guidance until our customers complete their budget cycle. They’re just now doing that. However, as we look forward, you know, we’ve got some nice leading indicators, right? The tender volume, the, you know, the tendering volume and the average quote value have really recovered to pre-pandemic levels, which, you know, 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 to orders. We’re well positioned to capitalize on that. Clearly, a constructive offshore market. Look, we believe that that will continue to accelerate into next year. It's gonna be led by the regions I talked about. It's gonna be led by Brazil. Already talked about two more tenders there that are gonna happen. It's gonna be led by the Middle East specifically. Saudi will continue to see nice work there, and Latin America for us as well. Yeah. We're doing a lot of things now to put things in place to be able to really capitalize on that, you know. We're making adjustments to footprint. We've got the manufacturing investment we've talked previously about. That'll start to come in over the course of 2023. We believe that'll really position us well. We do an annual earnings call, as you may remember. We do that in February. 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. We'll talk more broadly about that in that annual call. Yeah. Without giving guidance into 2023, I think we would view it as constructive. Yeah ... and slash positive. All signs point to a, you know, constructive 2023. Understood. I'll definitely look forward to hearing that outlook this February. Sticking on third quarter. Kyle, I noticed the drop in combined service and leasing margins. Those margins have been running really strong. Could you give us some color for what you saw this quarter? What drove that decrease in margins? Maybe follow up there would be how you see those margins for service and leasing, Kyle, specifically, how you see those progressing from here. In the quarters, we look at Q1 to Q2 to Q3, you'll see a step up into Q2 and a step down in Q3. Really, it was three distinct projects kinda came to an end where we had our rental tools on rigs, if you will. Those work scopes did come to an end in the quarter, so we saw those tick down. I think we would see service margins, if you will, looking at probably Q1 and Q3 being more indicative of what that margin profile should look like. That makes sense. I was hoping we could talk a little bit about the supply chain issues that drove the lower downhole tool product sales in Q3. You know, especially, you know, any color around those issues and maybe how you see those resolving. Yeah. It's not systemic. It's really just a couple orders that got hung up due to supply chain issues, some raw materials coming in and getting the orders out on time. We view it as, you know, very transitory. Those orders will go out in Q4, and it's not something that we would view kind of going on from here. It's a couple orders for $1 million each, basically. So that's- They just happen to be pretty material orders, right? Got it. It doesn't sound like that's something that would necessarily impact the timing of your ambition to grow that business to, Yeah the $100 million annual run rate target. Yeah. Yeah. Is, is- Yeah. Is that still, you know, kind of an ambition for, I think kind of hitting that target by, is that year-end 2023? I think what we would hope is, you know, kind of exiting 2023, maybe a run rate exiting 2023, going into 2024, that we'd be thinking about, you know, 100 million. You'd be looking kind of in late 2023, early 2024 for kind of a $25 million per quarter run rate business. Making the investments now, I talk about Saudi and roofline. You know, if you just think about that market, you know, kind of what our fair share of market share is there, is probably half of what it should be, to be honest. If we make that investment, get the boots on the ground, get our IKTVA score in the right spot, we would see ourselves probably doubling our market share in Saudi over the next couple years. Yeah. I mean, they had a record quarter in Q2. Obviously, Jeff mentioned the $2 million in orders that slid out in Q3. They're starting to get close to that $20 million range, and hopefully we'll be run rating 25 coming out of next year. You'll really see that in, say, you'll see the pickup in Saudi and Brazil. Got it. Appreciate that. Yep. Free cash flow, you know, negative for the quarter again. Kyle, were there any surprises vs what you were expecting or how you were thinking about, or any changes to how you're thinking about free cash flow, you know, going forward? Yeah. I mean, the quarter. Year to date, we're about $20 million behind where we had anticipated in our internal projections that presented that 3%-5% free cash flow margin. It really split into two things. One is working capital is higher by about $15 million, specifically due to sort of what I'd call investment in inventory, strategically ahead of, you know, what's gonna 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 for the foreseeable future. Then two is around the investment in machinery that Jeff mentioned, the $22 million investment in new machinery here in Houston. About $4 million of that went out in the quarter. Didn't have that in the original plan, but that is gonna continue to kind of pay out here. Q4, we expect a little less than $1 million to go out with those machines in the quarter. For full year, we expect to kind of be break even on free cash. Largely in Q4, we expect a big tax receivable to come due. That's gonna help drive that. We do expect to be free cash break even on the year at this point in time. Really just the working capital is what's drove it at this point in time, specifically around making what I'd call strategic investments in raw materials. Yeah. You're not alone there, for sure. Wrapping that up, how do you see Q4 playing out as you work toward the top line growth and incremental margins targets? Yeah. We would expect Q4 to kind of be up mid-single digits top line coming out of Q3. We've met with the team here the last, you know, few days or so just to kind of get a pin in this and feel like that mid-single digits growth is very achievable. Incremental margins probably in that 30%-40% range, coming out of Q3. You know, 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. I think, you know, that's how we see the next quarter shaking up here. Okay. I know seasonality affects a lot of OFS companies with offshore exposure. Does Dril-Quip experience any level of seasonality, or is it just too small to call out? It really is from a booking standpoint, we probably highlight Q4 as 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 end up sort of seeing that spike in Q4 for most years. Okay. Yeah, operationally. Operationally, I wouldn't see any seasonality there. You may have an odd order come in from time to time, but the way we recognize revenue on a POC basis tends, and that's about half of our revenue now, if you will, tends to smooth out a lot of that, the booking spikes, if you will. Sure. I was thinking on the services side maybe, but you know, No, I wouldn't cite any seasonality on the service front. Yeah. I'll move on from that. Yeah, did wanna maybe step over toward the topic of M&A. Correct me if I'm wrong, but it definitely feels like Dril-Quip, you know, y'all have indicated an increased interest maybe in organic growth. I'm curious if you could talk about how you're thinking about those opportunities, maybe, you know, where you see the sweet spots for Dril-Quip in terms of size, but also market exposure. You know, any indications about what direction that could take. Yeah. It can take many forms at this point in time. I mean, think about from a scale standpoint, we need to get more scale of an organization. We're looking at, you know, anything from very large deals that would transform the company to sort of smaller bolt-on deals that may exist in energy, specifically in OFS, that may exist outside of energy, but may have an energy sub to it. As we talked about last time, really needs to have Dril-Quip DNA in it, which is sort of highly specialized, highly engineered products, is what we're gonna be looking at specifically. We are looking at the aperture is what I'd refer to as sort of wide open at this point in time. We've spent the quarter really building capability inside the organization, really spending a lot of time. This is the priority for the company right now. We need to get bigger. We need to get bigger through acquisition, but we're gonna be very disciplined on this front too. This is not gonna be something just to go out to do a deal for deal's sake. We're gonna be very disciplined on this front, but I think we're looking from very, very sizable deals that transform to smaller technology plays. We are, you know, from a capital allocation standpoint, this is number two for us going forward, as we've said, previously. Beyond internal CapEx, great investments for us, number two is gonna be M&A for us. I think the important thing to add is, you know, however we exit from a transaction. Our investors should assume that we're gonna maintain the same balance sheet discipline that we've always had, right? No one should expect us to exit a transaction with a bunch of debt, right? We're gonna exit a transaction. Under the point. You know, still with a strong balance sheet. I think that's one. You know, I think the other interesting thing is that it seems like the conversations over the last quarter around M&A have been much richer and deeper than they might have been earlier in the year. Those aren't public companies. There's a number of private or privately held companies where I think the conversations have been more meaningful over the last quarter. Yeah. I think there's enough sort of support and energy right now where you're gonna see a lot of these transactions probably come to the threshold here over the next six to 12 months or so. Looking forward to seeing some of those. I did wanna circle back to some bigger picture discussion. You know, just looking at the floating rig count, it's been picking up nicely. Yeah. If I look at Petrodata's working floater count, you know, Q1 was maybe a slow start, up 2% year-over-year. Starts ramping in the second quarter. You know, that was up 8% from 2Q 2021. This last quarter, Q3, is about 13% higher year-over-year. You know, it also looks like we're getting some uptick in exploration activity. Where I'm going with this is kind of twofold. You know, first, I remember historically, customer inventory levels could cause, you know, some dislocation between, you know, the pace of your orders and, you know, activity levels. I wanted to ask what you're seeing with regards to customer inventory levels. You know, if the gross product orders step up this quarter, you know, it includes some level of restocking, or if it's just kind of, you know, this is kind of the momentum we should expect, right? With the floating rig count growing. Yeah. Customer inventory is always tricky, right? Because, you know, every customer has or our larger customers, I should say, have some level of inventory, but they like to maintain some level of inventory for their own cost. You know, if I look at where we are right now, I'd say this is more momentum to your specific question. If you just divide between the different product lines, downhole tools is a book-and-bill business, right? That's just gonna call off right away. Subsea wellheads is moving to more of a book-and-bill business. You know, I talked about Petrobras. That 87 wellhead systems that they awarded, they awarded as an MSA, not a booking, but they've called it off over the course of the year, right? We see more and more customers moving to that kind of model, an MSA model where they call off so 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, you're gonna see more and more customers converting to those type of programs. I wouldn't call this quarter a restocking as much as that I would say, "Hey, it's just a normal run rate type business." Trees is probably the choppiest piece of all that as we talked about earlier. It sounds like going forward it might be trees and large Saudi orders, which I'm still wrapping my head around. The second part of that question, or the second place I was going with the, you know, mentioning the exploration pickup, you know, I wanted to revisit an old assumption I had, which was that the Dril-Quip had a very strong share of exploration wellheads, you know, with maybe a lighter share on the development side, where the big tree manufacturers, you know, manufacturers with push bundling, right? I was looking for, you know, A, is that kind of how it was, and then, you know, B, that kind of segues into, you know, if we could see maybe any narrowing of that share between exploration and development, you know, with the collaborations, you know, that have been part of your growth story for the past couple years. Yeah. Just to address that, I mean, it's interesting, you know, there are certain customer buying habits that are just ingrained, right? You know, and you're right to say that our share was larger on exploration than it was on development. That having been said, there's a lot of customers that just buy the subsea wellhead outside of a bundle. Even if they bundle everything else, they don't bundle the wellhead necessarily, and that's Petrobras, BP, Chevron, you know, 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 collaboration agreements actually. One of those is with OneSubsea, that's specifically around wellheads. We have a number of systems that are bid right now jointly with OneSubsea that we would not have previously been involved in because of the EPCI nature. That's starting to develop. Clearly our success there is really tied to OneSubsea winning the ultimate tender. The wellhead is just a small portion of that overall tender. It's really dependent on that. That having been said, we did see the first subsea wellhead tree combination with OneSubsea. That was actually BP. I mentioned BP is one of the clients that buys directly from us. They would've pulled wellheads out of their stocking program, but used it with a OneSubsea tree. The second collaboration agreement we really have is with Aker Solutions. As you're aware, that's specifically related to our shallow water tree and our subsea wellheads around CCUS. We continue to work with Aker on the BP Northern Endurance Project FEED. We now expect that. I think that FID slid out a little bit. We now expect that to be early 2024. The one thing I obviously have to comment about when we talk about these collaboration agreements is, you know, there's the recent Aker, OneSubsea, Subsea 7 joint venture. We get a number of questions around that. Look, we work closely with OneSubsea on jointly tendering. We also work closely with Aker on jointly tendering. So to the extent that both of those companies are stronger together in a JV, that only serves to benefit Dril-Quip. So right now it's really business as usual there. That's great. Do you think there may be further areas or product lines to explore in terms of future collaboration? Yeah. You know, we're always looking at that and obviously cautious about talking about anything specific there. 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 OneSubsea or the Aker one, it is really around downhole tools. The interesting about downhole tools is they actually supply to Schlumberger, Baker Hughes, Halliburton. About 1/3 of the downhole tool business actually goes through those three companies. Most of that's in Latin America, but we do see that starting to extend to other regions of the world as well. I'm gonna switch over to an energy transition question. Before I do, I wanna say congratulations on getting an A on your ESG rating from MSCI this quarter. Thought that was impressive. Yeah. You know, we've actually spent a lot of time the last 18 months on doing a lot of work around that. To be honest, it's 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 facility that we installed solar panels, I think, on practically every building on the Singapore campus. So that's a good example. Then we will publish our first sustainability report probably in the next 12 months or so. You know, you recently published a deck on your energy transition efforts, you know, especially CCUS. Wanted to talk through maybe how you're thinking about that opportunity, you know, midterm, longer term, and if there's any change in your outlook with the passage of the Inflation Reduction Act. Yeah. Look, we still think that's gonna be a strong business for us. Right now it's really about laying the groundwork. That's not just us. I think that's, you know, a lot of people in the industry are right now just laying the groundwork for, you know, probably orders that start in 2024 and 2025. You know, I talked about the BP Northern Endurance Partnership project FEED. There's a few other small FEEDs that we're working on as well outside of the collaboration agreement with Aker Solutions. We see most of those likely coming to fruition in a calendar 2024, 2025 timeframe. It's really right in our wheelhouse if you think about it. I mean, the shallow water tree that 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 product side for a long time. We're just converting that over to for use in CCUS. Same thing on the wellhead side as well. Yeah. Definitely that would be in your wheelhouse. Are there any other areas of energy transition, you know, that you're interested in or, you know, that might also be in your wheelhouse? Yeah. Look, I think what we're doing is really looking at our core capabilities, high pressure, high temperature, metal to metal seal, and we're looking across a variety of of energy transition opportunities. It's probably too early to talk about those, but that's something that we're constantly monitoring in the business. Got it. I guess switching over to, you know, the organizational changes you're targeting, you know, to the organization structure. I think, you know, pushing efficiencies and, you know, reducing the cost structure. Wanted to ask if you could give us any update on the progress and plan there, you know, for adjusting the operational structure. Maybe remind us of the magnitude of, you know, the cost savings you look for the next couple of years. Yeah. There's a number of things in flight, and then I'll let Kyle talk about real estate and kind of the cost-saving side. 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 burgeoning group, if you will. We're now dividing into those teams. The organizations are completely aligned in those teams. We're already starting to see some of the benefits of that as we divide into those teams. We're making better investment decisions. We're making better decisions around customer orders. We're making improvements in on-time delivery. We're starting to see the real operational benefits of 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. They're starting to work towards those right now, but it's early days. The second thing that we've done is just optimizing footprint. We made the $22,500,000 manufacturing investment. I think first machine now arrives May next year, with material portion of that starting really in earnest in late 2023. We're starting to clear out area, on our campus here. You know, if you came to the campus here by the end of the year, we'll have a fenced off area where the equipment's gonna go in and the signage and all those type of things. We're starting to get excited about that as well. 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's other areas of the world where we're looking at making investments candidly in new line. It doesn't just go all one way, you know. On the Houston Campus, we knew we had excess. Saudi Arabia, we're gonna make an investment. Other areas of the world, we're going to make investments as well. It's not simply a downsizing, it's more of a reallocation of resources around the world. Those are kind of the three things, Kyle, you can talk about. Yeah. I was gonna say 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 we're actively marketing. We've got lots of interest in it. We're working towards PSAs on both here, probably in the next 30-60 days. I would 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 wanna get to 35% gross margins as an organization, but that will likely take us some time in 2024 to be run-rating that. We need the new manufacturing equipment here. We need the P&Ls for the product lines. We need to get the targets sorted out, if you will. This year has been a year of a lot of sort of change. We expect 2023 as we get these P&Ls set up for the businesses, targets established, people understand what numbers they own, what costs they own, if you will, we'll start to grind towards efficiencies there. Really expect that gross margin target of 35% to likely be achieved at some point in 2024 exit, is what we would expect. Can I ask what kind of revenue growth might be contemplated on that path to 35%? We have said for our internal planning purposes no revenue growth get to 35% based upon flat. Yeah, I think it kind of goes back to the comment that I made earlier around customers wanting to be resilient. We know there's gonna be revenue growth over the next two years. I think that's unquestionable. What we wanna 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 and, yeah, sustainable. Yeah. The intention is to kind of stretch the envelope on the teams, if you will, and we know we'll get some reflation of activity and price. But we're doing that modeling and it goes under the assumption of, hey, there's no revenue growth here. Knowing that there will be. Right. I know you mentioned setting specific gross margin targets for each of the segments. I don't suppose you're willing to, you know, discuss that part any further. Very, very unlikely we're gonna discuss it here today. We appreciate the attempt, though. You gave me this platform, I gotta try. I think we'll 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 dimensions, not to get too into the nerd weeds here, but there's a lot going on that we've got to suss out internally before we wanna talk about that externally. I think on a consolidated basis, 35% is the target. We've got some materials out on our site that sort of step people through this, you know, the actions to get there. 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. If the market happens to snap back sooner and we get some revenue and price reflation, we probably get there sooner. The intention is to kind of take the, you know, once we get footprint and roofline where we need it 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, you know, taking action accordingly. Yeah. I do wanna say congratulations on the sale of the Forbes facility. You know, it sounds like you've got some pretty good visibility on, you know, the timing and proceeds for those next two- Yeah sales that are targeted. I not to be greedy, but, you know, could that scope of, you know, property sales be expanded in the future? I know you've got, you know, some growth initiatives in other areas. I didn't know if there was, you know, any trimming that might be left or if, you know, this is really kind of, you know, the conclusion of it. I think as we look out and we make the new manufacturing investment, it's unquestionable we're gonna need a smaller footprint. So, you know, if you go out to kind of call it 2024 when everything's been installed there, I think that's the next time we'll really do a reassessment of, you know, what's our roofline look like and, you know, do we need to tweak that again? Although I think our General Counsel that's managing most of this, a shout-out to James Webster for all the hard work that he's doing around this. I think he's happy that we've got two properties right now and maybe we take a little bit of pause for a couple years, 'cause it's unbelievable how much work divesting of these takes, especially on an integrated campus. I think you should look out to 2024 for the next time we'd have a conversation around that. Okay. Well, I'll make a calendar reminder. Those were all my questions today, unless, Jeff, unless you wanna field one about your World Series prediction. I'm going to the game tonight and I like the Astros in six, I think. Kyle's wearing his Astros shirt as we sit here right now. I've got my jersey on. I would go with the Astros in six as well. Excellent. Look, I know Q3 was a little bumpy. You know, I thought the step up in gross product orders was a solid sign. You know, clearly a lot of positive opportunities ahead for Dril-Quip, and I'm looking forward to watching them play out. Jeff and Kyle, thank you both for you know giving me the chance to host the fireside chat this quarter. Okay. Hey, thanks. Thanks, David. Thank you, David. All right. This concludes today's conference call. Thank you for participating. You may now disconnect.