Q4 2023 Dril-Quip Inc Earnings Call

Participants

Erin Fazio; Director of Corporate Development, IR & FP&A; Dril-Quip, Inc.

Jeff Bird; President, CEO & Director; Dril-Quip, Inc.

Kyle McClure; VP & CFO; Dril-Quip, Inc.

Eddie Kim; Analyst; Barclays Bank PLC

Presentation

Operator

Good morning and welcome to Dril-Quip Fourth Quarter and Full Year 2023 earnings call. (Operator Instructions) As a reminder, this call is being recorded. At this time, I would like to turn the call over to Erin Fazio, Corporate Finance Director for Dril-Quip. Please go ahead.

Erin Fazio

Thank you, and good morning. We appreciate you joining us on today's call. An updated investor presentation have been posted under the Investors tab on the company's website, along with the earnings press 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 comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause to cause actual results to differ materially from anticipated results or expectations expressed in these forward-looking statements.
Please refer to the Q4 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 Drill-Quip, Jeff Bird, President and Chief Executive Officer; and Kyle McClure, Vice President and Chief Financial Officer. I would now like to turn the call over to Jeff Bird.

Jeff Bird

Thank you, Erin, and thank you all for joining us today. Dril-quip delivered strong fourth quarter results, marking a pivotal year with double-digit growth in both annual revenue and adjusted EBITDA, showcasing significant progress towards our longer-term financial, operational and strategic objectives.
Total revenue grew 17% year-over-year and our fourth quarter organic revenue was the highest quarter achieved since pre-pandemic. Net bookings in the quarter were $123 million, an increase of $76 million sequentially and above our expectations for the quarter.
There were several notable orders in the quarter. The largest was for subsea production systems for trees for approximately $40 million. Orders for trees, as we've mentioned, tend to be very large discrete events that can shift materially from period to period depending on the customer schedules. This project includes three trees plus various accessories which will be delivered over the next two years in Australia. And we also saw incremental call-offs from Petrobras in the quarter and some large deferred orders.
Total bookings for Subsea Products in the period were $97 million. There were also multiple significant contract wins that were not reflected in our bookings. We were awarded a three year $20 million deepwater subsea wellhead MSA. By Sienna, we won a multi-well multi-year contract to supply subsea wellhead systems in Mexico. We were awarded a second project on the north slope of Alaska for 20 liner hanger systems through 2025.
Additionally, we're off to a strong start to 2024 as we were directly awarded the contract for all of BP's subsea wellheads for another five years and the Tullo subsea wellhead MSA has been extended for three more years throughout 2023.
We consistently communicated that bookings may not be the most accurate metric to evaluate the current state of Dril-Quip, particularly following the recent acquisition of grade, nor the majority of our revenue is short lead time delivery and operate on a book-and-ship model this quarter will be the final disclosure of well construction and subsea service bookings in our results.
Moving forward, we will continue to report subsea product bookings and add regular disclosures regarding master service agreements to reflect the evolving procurement strategies of the energy industry. We will review the new metrics in our first quarter 2024 earnings conference call, reflecting on the accomplishments of 2023.
Our strategic efforts to reorganize the business into product lines, optimize our footprint, invest in wellhead manufacturing capabilities and grow inorganically have been systematically executed, thanks to the hard work and commitment of our employees. In the fourth quarter, we successfully completed the sale of our Houston administration building, marking the end of this phase of the footprint optimization initiative.
The cash proceeds from this endeavor, approximately $23 million for the year funded the investment in subsea wellhead manufacturing equipment announced in late 2022. Simultaneously, this effort has contributed to a significant reduction in operating expenses for our Houston camp.
Our investment in upgrading our subsea wellhead manufacturing equipment remains on schedule and is expected to go live in the second quarter of 2024. As previously stated, this move is expected to significantly reduce lead times and lower cost for our subsea wellhead product line.
In 2023, we took a significant stride in our strategic venture to broaden our well construction portfolio through the completion of our acquisition of great north. This acquisition has swiftly proven to be financially accretive and our progress on recognizing the announced synergies of bringing their wellhead through our international footprint and leveraging their best cost supply chain has seen early wins almost immediately. We received inbound customer calls asking for cross-selling contacts, and we've already had orders placed in regions such as the Middle East and Latin America.
On the supply chain side, we've notably completed multiple supplier qualifications for our liner hanger product line and the first purchase orders were placed in December. While it will take several months for all their inventory to work its way through the system we are excited about these early wins towards tangible margin improved.
The macroeconomic outlook for 2024 and beyond continues to be constructive for all our segments. Offshore project FIDs are projected to increase substantially from 2023 levels for the next two years according to Rystad.
Beyond that, the disciplined operators who have enabled in their procurement methods in recent history, have made the breakevens for those projects even more flexible, ensuring the continuity and strength of this upcycle for many more years. While this fall, we saw some projects pushed out due to rig capacity constraints, we are confident that we will begin to see contract awards accelerate in 2024 and beyond. As a result in the Canadian onshore market, we anticipate growth to come from three areas.
First, increasing production from operators driving increased rental revenues from our multi-well frac connector as they support the increased offtake capacity from the new Trans Mountain pipeline coming online. Second, increasing market share, particularly in the Grand Prairie region of Canada.
We are currently increasing our facility size to support anticipated growth and committed projects. And finally, we expect early green shoot international growth, leveraging Dril-Quip footprint in key areas such as the Middle East, Latin America and the US.
We continue to strategically invest in key growth markets globally in particular in Saudi Arabia, we have established and in-Kingdom operating team are investing in a new facility, preparing technologies for qualification and building out manufacturing capability in Latin America, specifically Mexico we are investing in a larger facility to accommodate accelerating demand for our liner hanger and onshore wellhead offering in West Africa, we are putting operating structures in place to support new contract awards in Ghana, Namibia and the Ivory Coast.
Before turning the call over to Kyle for some color on our 2023 financial results and 2024 outlook, I'd like to thank our exceptionally talented and committed team here at Dril-Quip. The success we achieved in the fourth quarter and throughout 2023 is a direct result of your hard work Kyle?

Kyle McClure

Thank you, Jeff, and good morning, everyone. As Jeff highlighted, the company delivered strong fourth quarter and full year results, demonstrating continued progress on our business initiatives and reflecting the initial stages of a multiyear upcycle in the international and offshore market.
Looking at our results, fourth quarter revenue was $126.3 million, an increase of 31% year over year and 8% sequentially, driven by activity increases in subsea services in Brazil, Europe and Australia, and the impact of a full quarter of great dollar for the full year 2023 revenue was $424.1 million, an increase of 17% year over year. Great North contributed $35.2 million for the year.
Looking at the segment results, Subsea Products and Subsea Service revenue increased 2% and 7% compared to the previous year, respectively. While we encountered challenges related to rig availability and FPSO delivery timing earlier in 2023, the fourth quarter showed increased activity, resulting in a $76 million increase in bookings quarter over quarter included in that, as Jeff mentioned, is approximately $40 million related to the subsea tree order that we will be recognizing in revenue over the next two years.
Well, construction segment revenue grew 70% year over year, reflecting the addition of great north and activity increases in Latin America and Saudi Arabia. Embedded within the well construction segment is the legacy TRW business, which is exiting 2023 with a $100 million annual run rate ahead of schedule.
Gross margins were 27.4% during the fourth quarter and 27.3% For the full year full year gross margins improved 73 basis points, largely due to our ongoing initiatives across the organization to drive operational efficiency, partly offset by some supply chain headwinds and international startup costs in our legacy well construction product line, selling, general and administrative expenses increased 8% compared to the full year 2022, which was driven by the addition of Greg North expenses and severance engineering expense was $12.6 million for the full year 2023 increased approximately $1 million compared to 2022 year over year increase is attributed to increased testing and qualifications related to specific international customer requirements, primarily in Brazil and the Middle East.
The rigorous testing that our teams have been able to perform this year have directly correlated to new contract wins, particularly around our sealing technology for Petrobras. Profitability improved during the quarter with adjusted EBITDA coming in at $16.5 million, an increase of $4.2 million sequentially and $6.3 million from one year ago. For the full year, adjusted EBITDA was $46.5 million, an increase of 56% year over year increase in adjusted EBITDA year over year to be attributed to leverage on incremental revenues and the acquisition of great North third quarter of 2023.
Free cash flow was $14.5 million for the fourth quarter of 2023, an improvement of $37.3 million year over year, cash provided by operations was $7.7 million and free cash flow was negative $24.9 million for the full year 2023, cash provided by operations increased $44.5 million compared to the full year of 2022. The increase was driven by improvements in our profitability and cash conversion cycle and the receipt of a US tax refund. Capex in the fourth quarter of 2023 was $11.6 million and $32.6 million for the full year of 2023, the majority of which were related to investments in manufacturing equipment and rental tools down were already secured.
Our balance sheet continues to be incredibly strong with ending cash and cash equivalents of $217 million at year end, allowing us flexibility to continue and invest in accretive organic and inorganic opportunities across the spectrum while continuing to manage our longer cash conversion cycle of our Subsea Products.
Before concluding today's conference call, I'll review our high-level 2024 financial outlook. We expect revenue to increase 15% to 20% over 2022, Q1 revenues expected to be in the range of $105 million to $100 million. We expect revenue to ramp up throughout the year as the strong Q4 subsea product bookings start to roll through and our well construction deepwater liner hanger business continues to gain traction in Brazil and beyond adjusted EBITDA for the full year of $65 million to $75 million, subsea product bookings of $200 million to 225 million, representing growth of 5% over 2023. Subsea Product bookings of $217 million.
As a reminder, we will be discontinuing the inclusion of well construction bookings next year and only including orders for our Subsea Products segment. For additional context as we ship disclosures, Q4 bookings will be the Subsea Products segment only [97 million] tree awards were approximately [43 million] in 2023, which occurred all in the fourth quarter, we anticipate approximately [35 million] awards for 2024 CapEx is expected to return to normalized levels of 3% to 5% of revenue in 2024, which will include the final expense related to our investment in our Houston manufacturing equipment of approximately $7 million. Free cash flow is expected to be positive in 2024 Q1 is seasonally challenged and expected to be a net use of cash.
With that said, we'd now like to open the line for any questions operator?

Question and Answer Session

Operator

(Operator Instructions) Eddie Kim, Barclays.

Eddie Kim

Hey, good morning. On your really strong bookings in the fourth quarter here, and I'm sorry if I missed it, but could you provide the subsea product bookings for full year 2022 and 2023. Just wanted to how that compares to the '24 guide of $200 million to $225 million?

Jeff Bird

Yeah the Hey, good morning.
Good morning, Eddie. This is Jeff. The number in 2022 and 2023 was about flat at, call it $215 million, $217 million, somewhere in that range in both 2022 and 2023. So the 2024 number, if you think about that as a midpoint would be flat with the high end being $225 million. And I think the one notable thing about that is what's not included in those bookings numbers, which are the MSAs that and we're pretty consistently now signing.
So if you think about the BPMSA. dimension, that five-year extension goes for about 20 to 25 well heads a year that don't go into our bookings number until they're called off and the value of that would be, call it, $15million to $20 million annually when they start reordering well, as right now, they're really working through customer property.
We expect them to start reordering late this year, early next year.
And so that is the nuance. We just think this is probably a better way to be more clear with those fall in the stock that this is directly tied to subsea.
The bookings are now.

Eddie Kim

Yes, yes.
Got it.
Great.
And then just a quick follow-up. The 24 wells that you just announced for the Woodside trying on development offshore Mexico.
Is that going to be included as part of a subsea bookings in the first quarter or was that booked in the fourth quarter?

Jeff Bird

That was at MSA in the fourth quarter and will be called off over the next year or two probably. So that's sometimes the we signed.
We signed an MSA right.
It's a nice it's a nice award. But in the past, that would have just hit the big splashy number in the fourth quarter.
And now that's just not the way that the things are contracted.

Eddie Kim

Right, right okay

Jeff Bird

At least for our products.

Eddie Kim

Yes.
And then just my follow-up is on the margin guide for this year. And yes, in the slide deck last quarter, you said you're targeting kind of 15% to 18% EBITDA margins for 2024. What the midpoint of your guidance implies around 14% for this year. So just wondering if you could help us understand the delta there are some cost saving can be lower than anticipated this year, or is this a reflection of kind of recent bookings coming in a maybe lower pricing than you anticipated? Just any color there would be great.

Kyle McClure

Yes.
I would tell you that the difference between those two now is probably just timing on productivity initiatives inside the company. Right now, things are fine, moved out a quarter or so on some productivity concepts that we are moving forward on.

Eddie Kim

Okay more than timing related.
Okay.
Understood. That's all I had. Thank you for the color, and I'll turn it back.

Kyle McClure

Thank you Eddie.

Operator

As we have no further questions, in queue at this time.
This will conclude today's conference call. Thank you for participating, and you may now disconnect.