Good morning. Welcome to Dril-Quip's first quarter 2023 fireside chat. At this time, all participants are on a listen-only mode. There'll be no question and answer opportunity at the end of this call. As a reminder, this call is being recorded. At this time, I'd like to turn the conference over to Erin Fazio, Finance Director for Dril-Quip. Please go ahead. Thank you, Matthew. Welcome to Dril-Quip's first quarter 2023 fireside chat. An updated investor presentation has been posted under the Investors tab on the company's website, along with the earnings release. This call is being recorded and a replay will be made available on the company's website following the call. Before we begin, I would like to remind you that Dril-Quip's comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause Dril-Quip's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the first quarter 2023 financial and operational results announcement we released yesterday for a full disclosure on forward-looking statements and reconciliations of non-GAAP measures. Speaking on the call today from Dril-Quip, we have Jeff Bird, President and Chief Executive Officer, and Kyle McClure, Vice President and Chief Financial Officer, and David Smith from Pickering Energy Partners. I would now like to turn the call over to David Smith. Thank you, Erin. Good morning. My name is Dave Smith. I'm the lead oilfield service analyst at Pickering Energy Partners. I wanna say thank you for this opportunity to host Dril-Quip's first quarter fireside chat. Jeff and Kyle, I look forward to our discussion after Jeff's prepared remarks. With that, I'll turn it over to Jeff. Thank you, David, and thank you for joining us today. Just as a quick reminder for those in Houston, we're experiencing pretty bad weather today, so if you hear rain or thunder in the background, it is not sound effects, it is actually rain and thunder in the background. With that, we'll go ahead and proceed. As you may have seen in our earnings release, we've changed our reporting segments from geography to subsea products, subsea services, and well construction. This decision was to change our reportable segments as a part of our streamlined organization that we believe will give us, our stakeholders, better visibility to our business and more closely aligned with our internal operating structure. As for first quarter results, we delivered strong year-over-year revenue results that were up 9%, with revenue in our well construction segment growing 38% year-over-year, and subsea services growing 10% year-over-year, reflecting the growing demand in key markets such as Brazil, the Middle East, Latin America, and some reemerging markets, such as West Africa. Bookings for the quarter reflected the typical Q1 seasonality, and we continue to expect bookings growth throughout the remainder of 2023. It should be noted that our targets do include a number of subsea trees where FID will play a crucial role in order timing throughout the year. We've also continued to make progress on our footprint optimization plan to improve efficiency and reduce excess capacity. During the first quarter, we closed the sale of our aftermarket facility here in Houston. In addition, we continue to remain on track for the sale of a third Houston property later this year. Once completed, the disposal of these three properties will have contributed over $40 million in cash flow, allowing us to invest in other areas of the business. Free cash flow did come in below our expectations. This was primarily driven by working capital timing related to accounts receivable. We expect working capital to normalize over the next two quarters, and specifically day sales outstanding is expected to return to levels closer to Q4 2022 by the third quarter, which we believe will generate approximately $40 million in cash. Finally, I wanted to reiterate that capital allocation continues to be a critical area of focus for Dril-Quip as we support our organic and inorganic growth opportunities. We remain disciplined in our approach with a keen focus on driving attractive long-term returns on capital deployment. Our strong, clean balance sheet allows us the flexibility to consider multiple investment paths. These opportunities include organic initiatives and the evaluation of potential inorganic opportunities that align with our vision for the future. With that, I'll turn the call back over to David. Thank you, Jeff. I guess starting out, I'm curious, when it comes to the current, you know, global economic environment, what are you hearing from customers? Are you seeing any project deferrals or other signs of hesitation, you know, related to recent oil price volatility? Thanks, Dave. That's a good question. You really have to segment our different customer types to get a good read on that. Let me just walk through this. First of all, what I believe is the most responsive to oil price volatility is the Lower Forty-Eight, and we essentially have no Lower Forty-Eight exposure. You know, a change in oil price is not going to dramatically affect, in a short term, our revenue or our bookings as it relates to that. If I think about our 3 other customer segments, I've got the large IOCs I'll talk about, the NOCs I'll talk about, and then kind of the small mid-size customers that I'll talk about. If I think about the IOCs, look, they've got very long-term plans. The most they're gonna do is move something to the right a little bit or move something to the left a little bit. We just don't see that right now. In fact, as we're talking to those large IOCs, if anything, what we're seeing is them accelerating plans. Where we might have thought they would have a reorder point in 2024 sometime, we're now seeing that reorder point could be as early as late 2023, as an example. We don't really see that in IOCs, but once again, they're looking at oil prices out the next 5, 10 years, not the next 5 or 10 months, so to speak. If I think about NOCs, think about well construction, and on that well construction side, we've got a fairly significant amount of exposure to NOC. Think Brazil, think Middle East, think Mexico, think Ecuador. They're drilling for a whole number of reasons that don't include the current oil price, and we're just not seeing any slowdown there. In fact, you know, we've talked about Brazil being a great market for us. We've talked about Mexico remaining strong. We've talked about Saudi remaining strong. We just don't see any changes there either. That really affects well construction for us and to some degree, wellheads as well as it relates to Brazil. Nothing there. The area where we do see some customers probably more susceptible to short-term price changes is really those small, medium-sized customers, and that's really related to our tree franchise. Think SPS that's part of our subsea product segment. We've got about 10 trees this year that we've got targeted as potential bookings. You know, higher inflation, rig rates, oil prices, will all affect those customers. It won't necessarily cancel a project, but it might cause FID to be deferred. That's really the only space right now where we're seeing really a responsiveness to short-term, oil price volatility. No, that makes perfect sense. I would imagine even rig availability at this point could cause some projects for the mid-sized independents to get deferred. Yeah, no, that. Yeah, that's exactly right. That's what affects our bookings quarter to quarter, and I talk a lot about lumpiness quarter to quarter. It's really around those 3, those 10 trees that we talk about. You know, with each tree being kind of $3 million-$5 million, it doesn't take a lot to move that tree to the right and affect, you know, our overall bookings number. Yep, absolutely. Jeff, you've mentioned over the past few quarters, you know, there are a few key markets where you're seeing strong growth. Is there a specific market where you're seeing, you know, the most growth? Does that answer change if we talk, you know, near term versus long term? The 2 markets that we're most excited about right now are Latin America and specifically Brazil. As you'll be aware, we signed an MSA about 18 months ago for 87 wellhead systems. We would have thought that was gonna last them 3 years plus. They've already come out with another tender that'll be awarded later this year. That just gives you a sense of how quickly that Brazil market is accelerating. We've got 21 X-Pak De on an MSA as well. They'll start really getting installed this year. We're really excited about that Brazil market. If I move to Mexico's been a really strong market for us as well, specifically around well construction. That market's or that business there has grown fivefold over the last, call it 3 years plus. Latin America, largely, we're excited about. The other area we're excited about is really around Middle East and specifically Saudi. We've seen a lot of growth in our well construction business in Saudi. Even looking out broader Middle East, we're seeing growth there as well. Kind of a nascent area where we're really starting to see pickup right now is Africa. It's not the usual suspects in Africa. It's really Namibia we're seeing a lot of exploratory right now, a lot of orders dropping in there. Really, when you look at those finds, that's got the opportunity to be a major field in kind of the next three, five, seven years. We're really excited about that as well. Yeah, absolutely. Circling back to the Middle East, you know, certainly a big driver of growth in the offshore market, but, you know, entirely on the shallow water side. Could you provide a little more insight, you know, into your views of that market over the next couple of years and, you know, how Dril-Quip is participating? you know, first, look, that's been a very strong... If you go back to the TIW acquisition that we made in late 2016, it was a strong market for TIW. It's continued to be a strong market for what is now our well construction business. It continues to grow. We have exposure based on current qualifications to probably 30%-40% of that market, from a well construction standpoint. We're actually working on qualifications that would expand that exposure to that market. Well construction is very well-positioned to capitalize in that market. We're making investment there. We're looking at facilities right now. In fact, probably in the next 30 days, I'll be going over to review a facility that we're likely to invest in. We're gonna put local manufacturing on the ground there. We've already got local service techs. We've already got local test and assembly. This will move a lot of our supply chain in Kingdom as well. That's on the well construction side. If I turn to the subsea product side of the house, we participated more opportunistically in that market. Largely that's because of qualifications, and we are working now on qualifications for a number of subsea products in that market as well. We're taking that into account when we look at our manufacturing and supply chain in Kingdom. As you probably are aware, those qualifications are sometimes arduous. We're probably 12-18 months away from formal qualification in Kingdom on the subsea product side. You should expect more to come on subsea products. Well construction, nice growth probably over the next 12-18 months. subsea products starting to kick in probably 12 months out. We've already had a strong start to this quarter. We've already got a nice drop in booking on the well construction side, in addition to signing an MSA in region as well already in the second quarter. You don't see that press in our Q1 results, but when we release Q2, you're gonna see a nice MSA from our well construction business and a nice drop in order there from Saudi as well. Looking forward to that. You know, I guess just circling back to, you know, the offshore bigger picture, pace of offshore rig contracting, you know, has certainly improved over the past year. Having watched this market for a long time, I can't tell you how refreshing it is, you know, to be back firmly in an offshore OFS upcycle. I'm curious on your perspective, you know, is there anything about the upswing we're seeing in the offshore market that you think is different from prior upcycles? Maybe, you know, assuming oil prices were to hold steady, how would you be thinking about the next, you know, few years? Yeah. So a couple things. I mean, I think it's unquestionable that over the last 5 to 7 years, there's been under-investment offshore, right. I think those inside the industry, kind of always knew that investment had to come back. I don't think anybody that's inside the industry, candidly, at any OFS company or at any operator is surprised that's coming back. I think the two things that are different this time is that it's probably coming back in a more thoughtful, capital-disciplined way, as opposed to, you know, these sudden spurts and stops that we have because of overinvestment and under-investment. I think it's a nice slow march up as opposed to the tops and bottoms that we've experienced in the past. I think the other thing that really plays a role is you can't underestimate the role of energy security. If you think about some of the world events that we've seen really over the last 12 to 18 months, I think people have woken up to the fact that energy security matters, and we can be very reliant on a few players in the market, and it doesn't take much to move the needle from an energy security standpoint. I think a combination of probably more disciplined approach to investment and energy security is really probably different this time than what you would have seen in the past. The days of drill, baby, drill are probably over based on the capital discipline that we're seeing today. Yeah, that makes perfect sense. I don't know if this is a Jeff question or a Kyle question, but I was hoping if you could share a little more color around the reasoning behind changing the reporting structure, you know, to subsea products, subsea services, and well construction. Yeah. I'll kick it off, and then I'll let Kyle jump in. Look, as I came into role a little over a year ago, I mean, one of my observations was that as a business, we were geographically focused, but as an organization, we were really siloed, and we didn't have the right strategies for each of our products. Each of our products has a very different strategic approach, whether that be well construction or even if you look within subsea products or subsea services, there's elements in there that have very different strategies. What we wanted to do is we wanted to align more from a strategic standpoint around these segments and products, even underneath these segments, so that the organizations inside those products could be more clear about what they were doing and where they were marching. That means that, you know, the days in the past where, you know, there'd be a gap between sales and sales admin, and sales admin and engineering, and engineering and manufacturing, and so on, we're breaking down those silos from a responsibility standpoint so that people have more clear accountability. If you're inside one of those organizations now, you know what your strategy is, you know what you're marching to, and when you look to your right and your left, those are people that are marching to that same strategy. The revenue was obviously very clear inside the organization. It really became a lot of costs that was kind of shared amongst the organization that we've clearly defined now. People have obviously P&Ls. Jeff being a former CFO, very returns-focused individual as well. Now we can start looking at things like return on invested capital for each of the new segments and really driving that behavior, setting targets. I think, you know, we announced probably a while ago internally this reorganization. We just sort of went live with it back in January. Now we're sort of operating with it here in January through March for the first time in Q1, and obviously, reporting that way externally. We'll give the market a little bit of a deeper look into the organization, as the newly branded Well Construction organization, Subsea Services, and Subsea Products. We'll have a fourth one for the corporate segment, which is sort of the cost of running a public company, if you will. Really about driving accountability, driving returns inside the organization. We've got a number of investments we've got ongoing right now that are gonna help boost that longer term. It's really about sort of accountability, making sure people understand who's got what cost, and ultimately being a returns-focused organization. That's, that's a lot of good color. Sticking on one of those segments, the Well Construction Business. I think formerly referred to as Downhole Tools, it has had, you know, some pretty solid growth. Could you give us some color behind your confidence that this growth continues? You know, do you still expect to reach the $100 million annualized revenue run rate by the end of 2023? Yeah. You know, if you look, nice strong start, by the way, to the year, with a little over $20 million in revenue for that well construction business. You know, if you, We see strong growth there in Saudi. If I think about the two areas of growth, we expect continued growth in Saudi this year from that business. We're excited about that. You know, as I mentioned already, in Q2, we've already seen some nice wins around that. We're excited about that. The real area of growth beyond the normal markets, which is Saudi, Mexico, Ecuador, really comes in the deepwater. If you go back to when we made the original acquisition back in 2016, and obviously this has developed slower than we would've expected, is we believed there was an opportunity to go deepwater with the X-Pak De. We've now taken that offshore. We've got it qualified at a number of key customers. That business was essentially zero, call it 6 to 12 months ago. We believe that business could grow to $20 million over the next really 12 to 18 months. We're starting to see real acceleration now in that product line specifically. It really adds real value to our customers. I mean, with each time you run the X-Pak De, and these are customer numbers, not our numbers, you save $1 million each time you run it. The savings are substantial enough that it's almost an immediate, "Why wouldn't I do this?" That's really the acceleration we're starting to see now in that deepwater business. If I think about that growth as I exit this year, it's gonna be Mexico's gonna be a key contributor. Saudi will continue to be a big contributor and growing. The last segment is really around deepwater, and that's the growth that we're just starting to see now, and we're just starting to see the tip of the iceberg on that. That's great to hear. I have to admit, I hadn't factored in deepwater growth for the downhole tools business. I mean the well construction business. By the way, my goal today is not to call it downhole tools, David. Yep. Yep. Segment formally known as. I knew that was gonna be a challenge throughout the call for me. would like to circle back to the MSAs, maybe get some color on how Dril-Quip's MSA list has evolved, you know, how we should think about MSAs as it pertains to your revenue outlook this year, and maybe a little bit bigger picture, what, you know, more orders coming through MSAs might mean, if anything, for, you know, reducing the historical cycle time between orders and backlog conversion? Yeah, sure. You know, if you think about our product lines and subsea services, I'm gonna take off the table because there's not really any backlog per se or it's de minimis for subsea services, right? If you think about MSAs, our MSAs really come in through subsea products and to a very lesser degree through well construction as well. If you go back in the past, if I go back to kind of the heyday, call it 2011 to 2014, people would've placed these huge purchase orders, the operators, and they would've been on the hook for those huge purchase orders. If things turned down, they were on the hook for it whether things turned down or not. I think if you think about capital discipline, I think part of that capital discipline is I'm gonna contract differently with my OFS suppliers, and instead of placing these huge purchase orders on products that have lead times of 12 to 26 weeks, I'm gonna set up an MSA, and I'm gonna call off against that MSA and have a minimum quantity. That's what we're seeing today. I mean, we saw that in Brazil. We see that with a lot of the large IOCs as well. That's kind of an evolution. I think it's actually healthier for the industry as a whole, and I think it's healthier because candidly, you don't end up with a lot of excess equipment in the chain if things turn one direction or the other, right? If you think about our subsea wellhead today, the lead time is 26 weeks in that. We're gonna reduce that to 13 weeks. Why would you place a 3-year purchase order for something that has a 13-week lead time? If you think about downhole tools, 12 weeks maximum lead time, 12 weeks. Why would you place a 3-year purchase order for something that has a 12-week lead time? Just doesn't make a lot of sense. At least as it relates to subsea wellheads and as it relates to well construction, those are more MSA. On the tree side, you might get those large purchase orders because the lead times are significantly longer. The way I think about it is if you've got an 18-month-plus lead time, you're likely to have large purchase orders. If you've got a sub one year lead time, you're likely to have MSAs. A lot of our products tend to be sub one year lead times. Yeah. That makes perfect sense actually. Stepping back, was hoping, you know, if you could provide us an update on the ongoing operational excellence initiatives and kind of specifically, you know, the footprint rationalization and then the manufacturing investments. You know, where is each stream relative to, you know, needed additional, you know, the required additional investment? You know, where are we on the timeline? Can you quantify, you know, the related investments? Yeah. Maybe are there any charges, relative to, you know, relative to these? Yeah. Let me just back up and talk operational excellence as a whole. I mean, the big initiatives that you've mentioned are very important, but I think what's more important is we're starting to ingrain operational excellence in the DNA of the company. What that means is when I go to a manufacturing facility, they've got real Gemba walks with real boards, and they're solving problems every day with our operational excellence tools. When I go to a service center, they've got boards, they're reviewing KPIs every day, and they're solving real-time problems with operational excellence tools. That's happened in each of our facilities and each of our service centers around the world. That probably is the most important part of operational excellence because we're not waiting till the end of a week, the end of a month, the end of a quarter to solve a problem. We're solving the problem real time and breaking down barriers. That having been said, you're right, we do have a couple of large things in stream right now. One of those is the footprint. I mentioned that in the opening remarks. We had 218 acres in Houston. By the end of the year, we'll be down to 130 acres, and then we will have completed most of the work that we need to do in Houston, and we'll hit pause on that as it relates to footprint rationalization. We are making investments. You know, we talked about a $25 million investment in subsea wellhead manufacturing. That, first piece of equipment actually arrives this month. That'll largely be done kind of early to mid next year, and we'll start to get the real benefit of that early to mid next year, that $25 million investment. Just to put that investment in perspective, that goes from needing 117 machines today that aren't operating efficiently down to, I think, it's 12 machines operating efficiently. You get a lot more footprint, opportunity out of that. Then it really takes that lead time from, call it, 26 weeks today down to 13 weeks. It's really a game changer for us internally. From a lead time standpoint, it's a game changer for our customers as well. That will drive gross margin expansion. I think in our deck we talk about getting to a 35% gross margin expansion. That will drive gross margin expansion to 35%. We really believe that we've got the right things in tow around subsea wellhead. We start to look at areas of the world where we need to make investment. I talked a little bit earlier about Saudi and the fact that, you know, we're gonna look at investment in Saudi. We're gonna look at expanding our facility in Mexico as well as that business grows. We're gonna look at what are the right investments we need to make in South Africa or West Africa as well. We're looking at those investments. I don't see a charge specifically for any of those because, candidly, those are greenfield investments. Yeah, just to clarify, it's, 35% gross margin on products... Right. Yeah. Specifically, as Jeff mentioned there. We do have some smaller restructuring, if you will, throughout the last, call it, 5 quarters or so related to property moves on campus. Some of those are relating to the, to the wellhead, manufacturing investment. The last piece, you know, and this moves kind of beyond operational excellence to commercial excellence, is, you know, we feel like we're very close to having the operational side running smoothly so that we can service our customers in the best way possible. Now it moves to commercial excellence and, you know, how do we make sure that front-facing side of the house is as good as the operational side of the house. More to come on that, but what we're really starting to turn our efforts now towards that. Great. I just wanna make sure I heard correctly. you know, regarding the equipment investment, did you say it goes from kind of needing 117 machines down to 12? Yep. Want to make sure I wrote that down right. Yeah, it's. Some of those probably, David, would have always been excess machines. Okay. Some of it is just machines that aren't operating in the most efficient way, or we've got too much downtime between those machines. Sticking on that topic of investment, could you provide an update on your inorganic growth opportunity set, that you've touched on in the past? You know, maybe is the company willing to take on some debt to help, you know, get a deal done? I know you've got a great, you know, cash balance, but kind of thinking about the potential sizing. Yes. I'll kick it off, and then I'll let Kyle talk a little bit on the financial side. You know, if I think about the new reporting segments we've got, it actually has really helped us align around what's the right inorganic strategy for each of those, right? As you can imagine, having a name well construction is a lot more inclusive than having a name downhole tool. You know, as we start looking at inorganic opportunities, there's plenty of inorganic opportunities around well construction. There's plenty of inorganic opportunities around subsea services. There's plenty of inorganic opportunities around subsea products. Each of those we're looking closely at as we move along there. We are looking at things that are adjacency, but right now we're more focused on those three segments. Yeah. I think if you look at the last couple quarters, 2 or 3 quarters, it feels like we're seeing a lot more deal traffic come through. We've had a lot of folks who've had a good 2022, expecting an even better 2023. I think the difference, I would say versus any other point in the last 9 years or so, is that the sellers are much more realistic about valuations. You're starting to see the bid-ask spread coming together a little bit more, which is nice to see. I think as it relates to debt, I think we're still a little bit adverse to that from a capital structure standpoint. If it's purely an OFE asset due to the cyclicality, as well, the debt markets really aren't what they used to be, if you will, the last 10-15 years. We're working through that as well. you know, I think we'll for the time being, we'll continue to target here and a debt-free balance sheet, unless, as Jeff kind of called out, we find more of a unicorn deal with maybe it's a little bit more, you know, different exposures in markets with an OFS stub. Absent that, I think we'd still say we're gonna target a debt-free balance sheet. No, I appreciate that color. Looking at the quarter, you know, free cash flow missed our expectation, missed consensus. I get the working capital build. You addressed it early on. Can you talk about some of the specific steps that are being taken to help improve free cash flow and maybe not just, you know, getting DSOs down in the third quarter, but is there anything, you know, structural beyond that? There's plenty of initiatives underway at any given time in the organization. Right now, we've kicked off a number of order to cash initiatives here probably in the last couple months, various initiatives that we're looking into to get down billing times, collection times and so forth. You know, Q1 is always a tough free cash flow quarter for the company with the payment of our annual bonus. We've got our annual property tax payment in the quarter. Timing this quarter on AR was just a little bit more than we anticipated, as we mentioned, we'll probably catch up in Q2 and Q3. You know, we'll see a more normalized DSO exiting Q3. I mean, the caveat being that we are expecting growth to accelerate in the back half of the year. Assuming that bookings growth consistent with our full year guide for Q3, Q4 might require some more working capital. Embedded in the next 2 quarters should be roughly that $40 million reduction AR we've cited in the press release, all else equal, if you will, around working capital. We continued obviously to have pretty good financial flexibility supporting our growth plans, outlined in our full year guidance, which we reiterated in the press release. Yep. I do appreciate the, the full year guidance. If, if I step back, you know, looking at last year, 2Q 2022 was a really strong quarter for Dril-Quip on revenue and EBITDA. For kind of my last question, I'll just be direct and ask, you know, how do you see 2Q 2023 playing out? You know, could we expect year-over-year growth? I think we look at Q2 in general where the bookings came out of Q1. We would expect Q2 to look largely similar to the Q1 we just finished with regard to revenue and EBITDA, so maybe slightly behind last year's Q2. There'll be some puts and takes obviously with the segments, of course, but would expect a flattish to Q1 of this year. From a bookings viewpoint, we expect to be in the $55 million-$75 million range. Again, as Jeff mentioned, some of those projects do hit FID. We could see ourselves at the top end of that range based upon some of those digital tree orders. Free cash flow should be improved versus Q1 as we catch up on timing of AR, as I just mentioned. probably slightly down from last Q2, but flattish to what we see this Q2 looking like or this Q1 look. Great. I appreciate it. You know, you've given us a lot of information. I am thinking I should have, written down some more questions, but that's all I got. You know, I've got, a lot of notes here to digest. Jeff and Kyle, it was a pleasure to host the call with y'all, and I will turn it back to you. Great. Thanks, thanks for hosting today, David. It looks like we actually got through this without losing power here in Houston. Look, we're pretty confident as we go into the balance of the year. You know, we're happy with the revenue. We're happy with the EBITDA from Q1. You know, we continue to be optimistic around bookings the balance of the year. We'll see the cash flow bounce back kind of Q2, Q3. More to come, but pretty excited about the balance of the year. Thanks, David. Look forward to next time. All right. Thanks, David. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.