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Edited Transcript of DRQ earnings conference call or presentation 7-May-20 3:15pm GMT

Q1 2020 Dril-Quip Inc Earnings Call

HOUSTON May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Dril-Quip Inc earnings conference call or presentation Thursday, May 7, 2020 at 3:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blake T. DeBerry

Dril-Quip, Inc. - President, CEO & Director

* Jeffrey J. Bird

Dril-Quip, Inc. - Senior VP of Production Operations & CFO

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Conference Call Participants

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* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

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Presentation

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Operator [1]

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Hello, and welcome to the Evercore ISI 2020 Webinar with Dril-Quip. Speaking today from Evercore ISI will be energy analyst, James West.

I'd like to remind everyone that the material in this webinar is based upon information considered to be reliable for neither Evercore ISI nor its affiliates guaranteed completeness or accuracy. Assumptions, opinion and recommendations contained herein are subject to change without notice. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or solicitation for the purchase or sale of any security, and we will not be disclosing any nonpublic information.

Our speakers will be taking questions via the questions window on your webinar control panel. Just send your questions in at any time during the presentation. And now I'll turn the microphone over to James West.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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Thanks, Emily. Good morning, everyone, and welcome to our exclusive fireside chat with the executive team for Dril-Quip. The company reported its first quarter results last night, and we're, of course, excited to have the team with us today. Dril-Quip also released a supplemental slide deck, which we're not going to go through today, but I suggest everyone to take a look at.

Joining me is President and CEO Blake DeBerry; and Senior Vice President of Production Operations and CFO, Jeff Bird.

Blake joined Dril-Quip in 1988 and has held a number of management and engineering positions with the company in both domestic and international locations. This includes serving as Senior Vice President, Sales and Engineering and as Vice President for Dril-Quip's Asia Pacific region. He was named CEO in October of 2011.

Jeff joined Dril-Quip as Vice President and CFO in 2017. He was promoted to Senior Vice President of Production Operations and CFO in 2019 -- sorry, joined in '17. Prior to Dril-Quip, Jeff was the CFO of Frank's International from 2014 to 2017; CFO of Ascend Performance Materials in 2010 to 2014; and prior to Ascend, Jeff served in a variety of accounting and finance roles in the industrial manufacturing sector including as a Division CFO at Danaher.

Since Blake and Jeff teamed up, Dril-Quip has undergone a significant organizational shift with footprint reductions, the introduction of lean manufacturing practices, the integration of supply chain and major cost reductions. And as outlined in April, additional measures were released last night to react to the impact of the COVID-19 crisis and the oil price collapse.

One thing I know Blake and Jeff are really excited about today is sitting on $343 million in cash and no debt as we go into this downturn. So welcome, gentlemen, and thanks for joining me today.

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [3]

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Thank you, James. Glad to be here.

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Questions and Answers

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [1]

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So I don't want to spend too much time looking backwards here. But since you guys typically don't host an earnings call with the 1Q release, maybe we'll start here for just a minute.

So you posted first quarter results last night that did highlight to myself and I think others, the way that COVID-19 impacts have had a negative impact on all areas of global operations and probably will have a much bigger impact in the second quarter. Could you highlight some of the challenges brought on by the pandemic and how you're addressing those?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [2]

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Yes, sure. First off, our top priority has been the safety of our employees around the world as the pandemic has spread. And I have to say that I'm incredibly proud of our employees and their resilience during these rapid changes.

Our IT group, kind of mid-March, went from managing 700 people in our facilities, their IT services, to getting them working from home. And that went off without a hitch, so they -- kudos to them. But I'm most proud of, quite frankly, of what we consider our essential employees, and those are people that have to come into the plants and work. They've done an incredible job in both the manufacturing organization and our aftermarket organization and our offshore service technicians. They've still been traveling around the world. So they've done a great job.

But it was disruptive, that's for sure. If you just look at our facilities, it all started around the Lunar New Year period when some of our machinists went back to China for -- their native country and then couldn't get back. That disrupted our Singapore facilities. We had about a 1-month disruption there. And about the time that finished, the U.S. and the U.K. both start going on work at home and lockdowns. We put in our business continuity plans. And by that, what we mean is we separated into 2 or 3 shifts, depending on the number of people. We didn't have any overlap of personnel. We had staggered lunch and tea breaks. We also vested all of our employees in their PTO, so their vacation or annual leave. And we told them if they had special circumstances that they couldn't come in and work or they just felt it was too risky, that they could use that time and take that time.

And so all those things had an impact on our production hours. We got up and running in there. And then shortly after that, the Brazilian government shut us down and we were closed for about a week. And we worked with Petrobras, Petrobras petitioned the government. We got back up and running in Brazil. And then the borders closed between Malaysia and Singapore, and we have a significant number of Malaysian employees. And so we're scrambling to -- what are we going to do there. And then Singapore hit the circuit breaker because their COVID cases came up, and we had to petition the government for Singapore to stay open. And we were successful there. So that operation continued. And then Singapore continued to get increased cases, and they put tighter restrictions on. They actually came in and said, hey, you have 102 direct labor employees here working. Your new number is now 80, right? And so there's just been -- it's been an incredibly fluid changing environment for our facilities, but we've been managing through that.

But all that impacted in our Q1 results. We also had some supply chain disruptions as simply getting materials, but the logistics actually became the more difficult thing, moving materials from place to place. Sea freight became challenging, airfreight became almost impossible.

So all of those things impacted us. And then our results were also impacted on the AR side. As we moved to work from home and our customers moved to work from home, we had about $10 million in receivables that we expected to get, and that had a negative impact on our cash flow.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [3]

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Sure. Fair enough. And you also, Blake or Jeff, you took a $40 million in restructuring and impairment charges during the first quarter. Could you talk about what the major buckets are related to these charges and impairments?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [4]

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Jeff, do you want to take that question?

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [5]

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Yes, sure. So really 3 large buckets, if you will. As a result -- we talked about this in the press release. As a result of some strategic repositioning on some of our product lines, we're taking an inventory and fixed asset charge of about $24 million. And that's really starting to think differently about our footprint. Severance-related would be about $8 million. And goodwill, and that's the goodwill from TIW, is another $8 million. So all of that relates to our view of the current outlook in the market and really our need to respond appropriately in the market that we're in today.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

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Okay. That makes sense. So what's -- what are the main drivers here of your downturn playbook? Clearly, there's some facility consolidation, disciplined spending, rightsizing the organization. But could you dig deeper into what you're doing with respect to some of those actions?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [7]

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Yes. I'll be a little sensitive, as you can appreciate, James, in my response here because we want to make sure that we're notifying our employees in locations in an appropriate manner. And obviously, that's going to roll out over the next month or 2. So bear with me here if I'm a little vague maybe about locations.

But when we went 1.0 transformation, if you will, we kind of had -- we left that with a playbook that said, hey, if things go down, here's the levers that we know we'll need to pull. So candidly, we had those playbooks in the drawer. But at the time, we thought things were bouncing back. And so we didn't think we need to execute those.

So a lot of these were already in queue. And just an example, on the product side, we were looking at just a number of product offerings we have. So if you think about our subsea wellheads, today, we have 15 different subsea wellheads. We imagine we can get that down to 4 or 5 subsea wellheads. So you can imagine the cost, the inventory and the footprint shrinkage that you can do just from something like that and how that can help take cost out of the business by having a more common manufacturing process.

So that's just one example of one of the things that we're pulling out of the playbook now and starting to execute on.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [8]

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Okay. All right. Fair enough. Despite the crash we've had, really, probably a good way to describe it, in oil prices, bookings for the quarter held up pretty well. About $60 million. And the backlog is still kind of near recent highs.

I guess, how would you characterize first customer orders and then customer conversations in this current period of uncertainty?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [9]

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So right now, currently, what's in our backlog, we're not seeing any cancellations of our backlog. And that's consistent with what we saw kind of in the '15, '16 time frame. But we do see some push out of deliveries.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [10]

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Okay.

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [11]

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And that's what a lot of the conversation was, I think. Some of our -- some of the larger operators are still in the planning mode of what does their new program look like. So I'm not sure we've seen everything from them yet. The independents work a little faster.

But to be honest, James, I've also been on executive-level calls on projects that we have ongoing to ensure that Dril-Quip is a critical supplier to the success of the project continues to stay focused and deliver. So it's a mixed bag, quite honestly, it goes both ways.

On the pricing side, our customers really are aware that they asked for concessions in '15, and then they asked again in '16, and we complied as best we could in those time periods. But throughout the cycle, we haven't raised prices at all. And Dril-Quip has worked hard to restructure our company and get our cost out, which is what you saw us do in the back half of '18 and all through '19 with the last transformation. So that we were able to operate profitably at those pricing levels.

So they understand, I think. And our message to them is that, unfortunately, there's just not a lot of room to bring prices down further. There's been no increase in prices since the last downturn. So our focus to them is really, hey, we've spent a lot of time, energy, money on these new products and those new products are designed to save you money. And that's where we'd like to have the conversation on how you can become more cost effective.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [12]

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Okay. Okay. So do you think, Blake or Jeff, that -- I guess how should we think about nonproject inbounds in the near term? And we were doing kind of $50 million, $60 million a quarter. Does that take a dip here? Or could that be kind of consistent?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [13]

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So it's challenging, James, because there's just so much uncertainty in -- across the entire sector, not just in the OFS space, but on the E&P side as well.

The best I can do to guide is, say, if you look back to kind of the 2015 to '17 period, we kind of clipped along at about that $50 million a quarter bookings rate. And that's about as good as we can get. And I don't think we're going to know what the answer it is until we get a real sense of what the demand looks like coming out of this COVID-19 issue.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [14]

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Sure. Sure. How much of the inbound had you been seeing over the last several quarters was from new products that you've introduced in the market in the last several years?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [15]

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Yes. So we had -- through '19, our inbound bookings, percentage of bookings that was new products was about 13%. We were targeting 14%. So we hit 13%, so pretty much on target. But if you combined new products and/or new customers, about 30% of our bookings fell into that bucket, and some of them were a double overlap.

But still, we were making really good traction in that space. But a lot of that inbound was targeted to the SPS side of the business, which we have a relatively small market share. We were seeing a lot of traction there, but that traction was primarily with independents. And independents seem to be the first to shut down. So I think we're going to see a slower uptake in that new products, particularly on the SPS side until this market starts to recover.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [16]

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Okay. Okay. Well, and maybe turning to the downturn and the current macro situation. In the supplemental earnings deck, it shows a pretty dramatic drop in subsea equipment market demand since February. What kind of macro framework was designed for these -- to show the significant estimate declines in '21 through '23? What -- I mean, what kind of oil price or outlook is that -- is backing that up?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [17]

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Yes. I think -- well, first off, and not being critical of the people that make those prognostications. But we all know it's difficult to predict the future. And -- but this is our best guess at what the future holds.

And to be honest, the big macro thing is really just the supply-demand. And we were already operating at a slight oversupply, I think, producing about 103 million barrels a day and consuming about 100 million. But when the demand destruction happened, we went down 20%, 30%, maybe 35% on the demand side. So all of a sudden, the way I like to think about it is every 3 days, enough oil has gone in storage to service the world for a full day at its prior pre-COVID capacity. So once the demand comes back up, there's this massive amount of oil in storage that has to get consumed before we're going to see pricing improvement and increased activity. And I think that's what's driving those charts.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [18]

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Right. Okay. And so is this -- the way you're thinking about and streamlining the organization, are you basing that on kind of those charts and that prognostication?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [19]

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Yes. Just simply put, yes, is the answer. But as good companies do, we have a plan for the worst and a plan for the better. We've gone through and modeled, okay, if it gets worse, what are the levers that we can pull so that we don't have to start to do the plan in the middle of a crisis. We simply say, okay, let's pull out the new playbook.

And on the other side, if we get an uptick, we're not destroying any manufacturing capacity that we can't put back in place. So I think if things get better, we'll be in a position that we can respond to the market and supply the products and services that it needs.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [20]

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Okay. How much cash do you need? And you're in the enviable position of having a lot of cash, so this is good. But how much cash do you need to run the business in this kind of lowered environment?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [21]

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Well, yes, I do like having the cash on the balance sheet, and I'll let Jeff take that one for you.

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [22]

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Yes. I think in the current environment, we probably need $50 million to $75 million of cash to really run the business with current revenue expectations.

And just to be clear, the way that we think about it going into this year, is we started the year with around $415 million in cash. We've talked about cash neutrality in the year. And to us, what that simply means is, look, we've got a stock buyback program in place and we would make sure that we're properly balancing our free cash flow and that stock buyback program so that we would target ending the year with $415 million in cash, just as we began the year with $415 million of cash.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [23]

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Okay. Okay. Great. And then how are you prioritizing your CapEx at this point? Are we going down to kind of pure maintenance levels?

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [24]

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Yes, we have guided a higher number, obviously, in a different market that seems like a long, long time ago now. But we're now at maintenance CapEx. The maintenance CapEx should be between $10 million and $15 million. Some of the footprint rationalization that we're about to undertake will be minimal CapEx, might cost $1 million $2 million, but that should easily fit within that $10 million to $15 million guidance.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [25]

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Right. Okay. Okay. And then what about R&D spending, given -- I mean you guys are a technology leader. So I suspect it does not -- we're not going to 0 here, but what are you prioritizing for R&D?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [26]

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Yes, James, so our focus on the R&D had been really in the SPS space. We have the HPHT facility in Singapore that we added in -- or started in 2016 and we used that facility as well as our Houston facility for the past few years.

And the reality is, if you look at subsea tree awards, we were clipping along kind of at the 300 to 350 trees a year pace. I think now we're somewhere in the 100 to 130. That market has certainly gotten smaller. So there's not a lot of urgency to build that product line out right now.

So -- and we did just receive an award from OTC for our new subsea tree, we call it VXTe. And I do believe this product is significantly differentiated. And there may be some opportunities to just kind of monetize the technology a bit. So that's something that we are looking at.

So currently, our R&D efforts are really focused on what can we do on short-term win, what are the things we can rapidly commercialize and generate some revenue in the next 12 to 18 months and make sure that the return on that investment is our significant priority.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [27]

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Okay. And I wanted to dig in, if we can, Blake, on some of the new products that you and I have talked about over the last couple of years. And of course, all these are -- have won the Spotlight Award -- Technology Spotlight Awards at OTC. The Big Bore Wellhead, The Wellhead Connector, the Double Expansion Liner Hanger and then the vertical tree, the XTe that you mentioned in your comments just a second ago, how has the introduction of those been into the market?

Could you maybe parse between the products and what is the customer acceptance? And are you actually winning new customers? I think you highlighted to me maybe what it feels like years ago, but I think it was like 3 months ago that they were getting some good acceptance with some customers you really hadn't done a lot of work for in a while.

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [28]

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Right. Yes. So first off, there's a common theme among all those products. When we started this process, I challenged our R&D engineers, say, look, I want you to design equipment that structurally changes how our customers drill wells offshore, that gives them permanent cost savings. So this was significantly focused on not giving supply chain and making things smaller, cheaper, lighter, but on structurally changing, eliminating trips, minimizing days offshore.

Because our view is that eventually -- although it seems a long ways away now, but eventually, prices are going to recover, rig rates are going to go up and that spread cost is going to go up. And if we can save time, that is significantly more valuable. So every one of these products is focused on time savings. Some more than significant than others.

I can tell you the VXTe, the vertical tree system that we just won the Spotlight Award on, we took that to a major operator. We showed them the concept. Their subject matter expert pulled out a piece of paper, start scribbling down, and he said, you just saved me $3 million to $4 million per completion. That's meaningful savings.

And so you're right. We were seeing uptick on these new products, BigBore-IIe. We had several independents. Some were converting their existing inventory to BigBore-IIe. The DXe wellhead connector is going to be significant in the 20,000 development space. So that's been selected as the profile and connector of choice. The XPak Liner is -- I've got customers asking for that. So it is significantly eliminates risk when running those big bore liner hangers through the wellheads.

And so all these things have an interest. And to be honest, right now, I think we're in a position where the major operators may be more willing to look at these new systems because they're more risk-averse than an independent. But now we're in an environment where we desperately need to pull cost out. And I'm hopeful that we can get some messaging or I can get some messaging up at the executive level and we push this down, and we get some more traction on getting some of these products introduced into major operators.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [29]

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Okay. Are you seeing the difference in behavior between -- and you alluded to a little bit of the independents earlier, but the large IOCs, the NOCs and the independents as we kind of get into the downturn here?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [30]

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We are. It was stark, almost the difference between them. Within a week, we had independents saying, these were my go-forward plans, I'm not doing that anymore. And I think if you break the CapEx reductions down by those 3 categories, you would see that play out.

Independents very quickly shut down for, I will say, for the most part. I will say we do have a couple of customers that say, hey, it's cheap to drill now. I'm going to drill now, that are independent. So it's not a one size fits all.

The IOCs are more, I think, are just more pragmatic about how they view it and make their plans. It just takes them a little longer. And so we are seeing delays in awards and push out of programs from those customers.

And then NOCs, it's a mixed bag. It depends if you're an exporter or you're a net importer. One of the things that I saw in the financial crisis of 2008, 2009, when I was working in Asia Pacific, C&O OC just kept drilling because they're not selling on the open market, it's for internal consumption. And so we've actually seen some increase in NOC activity. But some that are on the export side that they're winding down activity. So it's a mixed bag.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [31]

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Okay. And maybe we could just hop around the world of some of your key markets here and start with Brazil. You have a great relationship with Petrobras. You talked earlier about how they -- your facility guys shut down, and they were able to get it -- get back up and going. We haven't yet seen a lot of contract or tender cancellations in Brazil. How are you feeling about that market as we go through this year?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [32]

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Well, you're right. We do have a good relationship with Petrobras, and we actually have a pretty strong position in that market. As you're probably well aware, the historic wellhead providers down there is Dril-Quip and then the VECO portion of Baker Hughes. And we always tended to split that business about 60-40, with Dril-Quip getting the 40%.

But what we understand now, currently, Petrobras is running around 18 rigs and Dril-Quip wellheads are on 12 of them. So the consumption of Dril-Quip wellheads is going at a quicker pace. And so that's -- we find that as a positive sign. We've heard a little bit Petrobras announcing they're going to cut back some of their exploration program. But they also are involved in 17 production sharing agreements with some significant majors, and those tend to -- those seem to be continuing.

We did win an award with -- from an IOC in Brazil, and we are executing that work now. We won that last year. So even though Petrobras is announcing some delays in their program, I think we're expecting to see some replenishment cycle for wellheads in Brazil kick off in the second half of this year.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [33]

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Okay. That's great. What about Europe and the Gulf of Mexico? I know that you had some unfavorable mix in these markets last quarter. Is that temporary? And does that improve going forward, at least the mix, maybe the volumes are lower, but the mix gets better?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [34]

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Yes. So again, we haven't experienced any significant cancellations in the drilling programs around the world. But the Gulf of Mexico was probably the most impacted. The independents, as I said before, reacted quickly. So it's a little more muted in the Gulf.

But there are some bright spots in activity, what I'm going to say in the west. So Mexico is still going to be active. There's wells that are committed there. Exxon in Guyana is still hot, of course. And we're working to try and secure wellhead and tube head awards there. And then, of course, as I mentioned, in Brazil.

The mix issue really is as anybody that's followed us before knows we make a product that we call a fabricated joint. So we manufacture the connectors that go on the end of a piece of pipe and we buy the pipe. And so the pipe is a relatively low-margin pass-through and the profit is in the connectors and the fabrication work. And so the consolidated margin of that is a drag when it happens. I always view that as a positive indicator because it means if we're selling pipe and connectors in excess of wellheads, it means that wellheads are being consumed from inventory, and we're getting closer to a reorder cycle. So that's -- it's kind of a good news, bad news. But it is transitory. I don't expect that to change, to be honest, over the second quarter and probably not the third. We'll just see how it plays out.

In Europe, that's probably the place that we're seeing the largest number of delays. But again, not cancellations, just pushing out. A lot of that's in West Africa. Surprisingly, one of the bright spots in Europe is Norway. We've seen a few wells announced up there by ConocoPhillips, an exploration program, and so we're looking for that. So I think once we can kind of get through the COVID delays and that gets behind us, I think we're going to see some activity in Norway pick up.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [35]

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Okay. Good. And then perhaps maybe we'll just finish up on Asia and what you guys are experiencing there. I mean, you talked a little bit about the COVID disruptions. But as that clears, how does that market look to you?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [36]

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Yes. So Asia actually is a bright spot for us. CNOOC is actually speeding up. We have 4 tenders in-house for CNOOC. So that's a positive sign. I think I mentioned them before, is kind of an NOC that's continuing on. Myanmar has -- still has some activity with both Woodside and PTTEP. That work seems to be holding up well. And then for us, Asia Pacific also includes the Middle East.

There's been some COVID delays there, but I think there's some opportunities that we're seeing out of the Middle East. We got a big tender for tubulars for Kuwait Oil Company. And then we got some surface wellheads and mudline equipment that's really kind of a Saudi and UAE thing. And then, of course, our liner hangers from TIW have pretty good presence in that area as well.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [37]

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Okay. So maybe another financial question for you guys. You've historically -- when you've had these share repurchase programs, you've acted pretty quickly. But I was a bit a little bit surprised to see you buy $25 million worth of stock in the quarter. Now you've got a rock-solid balance sheet. So it doesn't -- it's -- I'm not worried about it. But can you walk through your thinking around the timing of the buyback? Why you went ahead and acted now and didn't conserve that cash?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [38]

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Yes.

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [39]

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Yes. Sorry about that, Blake.

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [40]

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Yes. So as I talked about earlier, we've got a philosophy of cash neutrality in the year. We started the year with that actually thinking about it that way. Candidly, it's a surprise the way we started the quarter and the way that we ended the quarter were a little different from a macro environment.

So that's kind of the underlying premise. We thought it was a good buy at the beginning of the year. I think we ended up a little over $30 a share, perhaps on the total buyback. Having said that, I think that as we progress now through the next 2 quarters, we'll be pretty cautious in watching the market and seeing how the full-year free cash flow unfolds. Obviously, we're still relatively confident that we'll end the year at that $415 million number or around that number. But if things start to play out a little bit better than certainly, I think we'd rethink what we do the balance of the year on the cash -- or the stock buyback.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [41]

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Okay. Makes sense. So with the pristine balance sheet, you're one of the few companies that I think could execute on M&A rather swiftly. Others are going to have to really be considerate about it and deal with some restructurings and things that are going to happen in other parts of the service industry. So what's your kind of guiding principle, what are your guiding principles on M&A? Are there certain technologies you may focus on? And then how do you think about kind of the new technologies that are coming to the oilfield or merging in the oilfield like AI and machine learning?

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [42]

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Yes. So first, let me say, I think transactions in this environment are pretty challenging. It's pretty challenging to put your head around what valuation looks like. So I'm relatively skeptical something would happen in the short term.

But if we think about it in terms of guiding principles, I think Blake and I, our attitude is, we're not going to risk the balance sheet. We talk a lot about the rock-solid balance sheet. We're not going to risk that. So first and foremost, I think any transaction that we execute would have to be free cash flow neutral in pretty quick fashion. We would never make an acquisition where we bleed cash for 12 to 18 months or anything like that.

I think second, it's got to provide some significant scale to be relevant in the current market. I don't think that we would want to go out as an example and make an acquisition where somebody has a 3% share and hope to grow an already crowded market. We'd want to look at an acquisition that already had a 15% to 20% market share as an example in their target market before we'd even think about an acquisition in that regard.

And then obviously, we're just coming through our strategic plan, and we know exactly what those are. So easy to have a clear strategic rationale on value creation and customer behavior. We just spent a lot of time -- it's actually an interesting time to do this. We spent a lot of time on voice a customer and just making sure that we understand what customers are really looking for. So any acquisition that we do would also be based on that.

And then the last piece is what I kind of started with is, it's got to be transactual and executable in the current market. But I'd venture to say, while we certainly have a strong enough balance sheet to make acquisitions and to be opportunistic, I just don't see it in the next 6 to 9 months to be candid with you.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [43]

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Okay. And anything on the kind of new technology side that fits into that kind of target list that you guys are putting together?

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [44]

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Yes. We're always looking at those small tuck-in acquisitions. But I think as Blake mentioned earlier, right now, we're very focused on near-term revenue and near-term profitability. So as we winnow down that list of technology opportunities, I think if it's a technology that we feel like we could quickly tuck-in and quickly capitalize on, we'd certainly be open to that. But it's not something where I think we'd make an acquisition or do a tuck-in and expect a 5- to 10-year realization from a top line. It would be really short term,

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [45]

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Understood. Understood. Well, gentlemen, that's all I had for today. I told you, we'd keep it to under 45. It looks like I've actually, for once, been successful in doing that. I appreciate you guys joining. Any parting thoughts, Blake or Jeff, before I let you guys go?

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [46]

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Yes. I'd just say that it never feels good to be in a downturn. But if I'm going to be in a downturn, I want to do it with the balance sheet we have, with no debt and cash in place. But we are keenly focused on execution and focused on free cash flow to preserve our strength. And really, finally, we have a history of returning value to shareholders, and we're going to continue to do that in the future.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [47]

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Okay. Great. Well, Blake, Jeff, thanks for joining me today. Hang in there as this downturn kind of unfolds. You obviously have the rock-solid balance sheet to get you through. We look forward to kind of watching to see how this plays out. But I think you're -- you can come out of this even stronger than you went in. So congrats on keeping that fortress balance sheet, and we'll talk again here soon.

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Blake T. DeBerry, Dril-Quip, Inc. - President, CEO & Director [48]

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Thanks, James.

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Jeffrey J. Bird, Dril-Quip, Inc. - Senior VP of Production Operations & CFO [49]

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Thank you, James.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [50]

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Okay. Thanks, everybody.