Ladies and gentlemen, thank you for standing by. Welcome to Dril-Quip’s Conference Call. [Operator Instructions] An updated investor deck was posted under the investors tab on the company’s website yesterday along with the earnings release and will be referenced during today’s call. This conference 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 fourth quarter 2018 financial and operational results announcement we released yesterday for disclosure on forward-looking statements and reconciliations of non-GAAP measures. I would now like to turn the conference over to Blake DeBerry, Dril-Quip’s President, and Chief Executive Officer.

Thank you. On behalf of the management team, I would like to welcome all of you to today’s conference call. We decided that having a call at this time made sense to be able to discuss with all of you at one time a number of positive changes that are underway at Dril-Quip. We don’t intend on doing quarterly calls going forward. But we’ll host them annually like we’re doing today. I will begin with a high-level review of our 2018 results and highlight some of our key accomplishments as well as discuss the efforts we began last year with our detailed review of our worldwide operations to minimize cost across our entire business. I will then turn the call over to Jeff Bird, our Chief Financial Officer to review the financial results and give general guidance for 2019. I will then provide some closing comments regarding our 2019 outlook and then open the call to questions. I’m particularly proud of how our employees and management team successfully operated in an ever-changing and difficult environment in 2018. We remained focused on providing the highest level of service and support to our customers and at the same time, generated positive free cash flow. In the fourth quarter of 2018, we grew free cash flow to $6.5 million, which marked the 24th consecutive quarter that we have generated free cash flow despite the industry downturn that we have faced over the last several years. We have been focused on the importance of generating free cash flow and staying debt free long before Wall Street and the industry realized their critical importance in operating in a cyclical industry like oil services. The fourth quarter also saw better than expected revenue of $97.3 million, well above the high end of our guidance range. In…

Thank you, Blake. Good morning, everyone. Our financial results for the fourth quarter showed some significant improvements. Revenue for the fourth quarter increased by $4 million quarter-over-quarter to $97.3 million. This exceeded the high end of our guidance range of $80 million to $90 million, primarily due to increased product sales in Asia Pacific. For full year 2018, our revenues were $384.6 million and while we had a decrease in activity versus 2017, of about 15%, we are encouraged by the growth we saw in the fourth quarter and we’re cautiously optimistic that it will carry into 2019. On a segment basis, our Western Hemisphere revenue for the fourth quarter of 2018 decreased from the prior quarter by $1 million or 2%, primarily driven by low activity levels in Brazil, offset by increased project activity in North America, driven primarily by higher Subsea Wellhead controls and pipe activity. Our Eastern Hemisphere revenue increased by $1.1 million, or 4% in the fourth quarter compared to the prior quarter due to increased Subsea Wellhead and pipe activity in Ghana and Norway. Asia Pacific revenue increased sequentially by $4 million or 47% due to increased Subsea Wellhead and connector sales in Malaysia, Indonesia and Qatar offset by lower aftermarket activity. Looking ahead to 2019, we are currently forecasting all quarters in 2019 to have steady revenue in the range of $90 million to $100 million, which is subject to change if we have any major project wins or start to see an uptick in activity. Cost of sales for the fourth quarter was $68.7 million, an increase of $3 million compared to the prior quarter and in line with the increase in revenue. For the full year of 2018, cost of sales was $271.5 million, a reduction of $33.9 million or 11% compared…

Thanks, Jeff. As we look to 2019 and beyond, we will continue to focus on our bottoms-up strategic plan with a vision towards the long-term. We have reevaluated our overall business and product lines and believe that we are realigning and reorganizing our entire company not only to sustain us throughout the forecast recovery but allow us to operate more efficiently in any macro environment. We will no longer manufacture everything in every location but instead, we’ll find the lowest cost solution to ensure our customers get quality products while maximizing our own margins. We’re reducing our G&A and rightsizing our physical footprints around the world. We have hired a new Vice President of Supply Chain to help us capture long-term sustainable improvements. We are evaluating all strategic opportunities for our forge operations to maximize returns. We will continue to focus on R&D and leverage our technological, innovative products. We remain keenly focused on implementing our cost savings initiatives and maximizing margins. We have an experienced organization, first-class service and a strong clean balance sheet poised to capitalize on an improving market. We will continue to focus on generating free cash flow and delivering profitable growth, which should meaningfully add value to our shareholders. With that, I will turn the call over to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of James West with Evercore ISI.

So Blake, Jeff, the – first of all, congratulations on a great quarter. And then, I guess, my main question here is the transformation program, which is – seems to be a very big change for Dril-Quip as an organization. What is the origin of the transformation program? You laid out, kind of, the metrics around it and maybe we can revisit those, but I would love to hear, kind of, the thinking behind this and how this got started and how you see this progressing? Because outside of the thematic, that is, kind of, the bottom of the offshore market and coming back this seems to be the biggest thematic at least for Dril-Quip over the next year or so.

All right. Thanks, James. Yes, so we announced previously that in the second quarter of 2018, we did a bottoms up strategic review. And we brought in an outside party to take an independent look and just verify our strategy and that we’re on the right track. The outcome of that strategy was pretty much in alignment with what we were doing. But one of the big outputs was that the recovery in the offshore sector was just going to be more extended and much longer not a steep of recovery as we were anticipating. And with that, it makes you look at your capacity to put things in perspective from a capacity outlook given in today’s offshore environment. If we had 100% of the market share in Subsea Wellheads and connectors of the wells that are being drilled in 2019, for example, we could supply all of that out of our Houston facility by itself. So that drove us to look structurally at how’s the company set up. And the methodology we took really was – first was do no harm to our customers. So how our customers interact with us, had to stay the same. How they interface with the company doesn’t change but how we operate and supply those products, that’s what’s available for change. And the big change was we’re going to move to make supply chain a bigger part of our procurement methodology. And then also concentrate our manufacturing of certain products in different regional centers. So we created a center of excellent structure at our different manufacturing facilities. We elected not to close any facility simply because in every place that we had major manufacturing facilities is where activity was for our customers. So we left in each location those things that are customer facing, the sales, the inside sales and the things that our customers want to see. The assembly of our products, the aftermarket and then some things that logistically are challenge to move. So fabrication – fabricated joint manufacturing, for example, the logistics with moving those don’t make it practical to do in one centralized location. And then we looked at how big does the footprint need to be in each location. We set up the number of machines in each facility was going to be at some level of flex capacity. So it’s not at what our current capacity is, but the manning level, the personnel and headcount that manufacture it is at the current work to support our current revenue expectations. So that’s the real driver. That’s the path we’re on. It was an immense project, that really started in the September timeframe. We looked at thousands and thousands of cost savings initiatives by hundreds of Dril-Quip’s employees. And I’m very pleased with how it turned out and looking forward to getting this transformation completed over 2019.

Okay, great. Well, congratulations on that. That sounds like a very, very strong process and something unique to Dril-Quip. One of the, I guess, my follow-up on – a little unrelated but in terms of how you guys think about running the business, you obviously saw our work row this week about shareholder alignment and returns on capital employed. Dril-Quip has always been a company that’s gone after margin, not market shares, so I’m pretty sure you are already aligned precisely with what the way we think about the business but how do you guys if you could elaborate somewhat on how you think about driving returns in your business and your willingness to go after value rather than market share.

Sure. As I stated in the call earlier, we’ve been free cash flow for 24 consecutive quarters, that’s been a metric that’s been important to us from the very, very beginning. And so we do not chase market share. We do have incredible pricing discipline. And quite frankly, I did listen to your webinar. And I did pass that on to my board. How – I’ll leave it to the board how they want to take the information contained in there. But the focus for me really is on the Dril-Quip business and how we make returns to shareholders. And quite frankly, we are focused on improving our operating margins, reducing our cost and returning cash to our shareholders through the stock buyback program that was just initiated yesterday.

Thanks Blake.

All right thank you.

Your next question comes from Thomas Curran with B. Riley FBR.

Congratulations on your inaugural earnings call. Annually it’s a good start. I only wish Jerry Brooks were on the call to finally hear me shut up on the topic after years of nagging him about it.

He might be listening. I don’t know.

Yes, on the beach somewhere. Good for him. Probably in Galveston. So starting with CRD, Red Emperor. Do you know whether there is currently any form of decisive dialogue taking place? And if so, is it between Hanoi and Beijing? Or between Repsol and Petrovietnam, perhaps a multiparty negotiation? Where should we focus for the most meaningful news flow on progress toward a resolution?

Yes, I’m not aware of how the dialogue is progressing on that project. We do have a valid layer of award, it expires the end of March this year. So we’ll just have to see how that progresses going forward and whether Repsol wants to engage with us or let that expire. I think one of the important takeaways really is that in our revenue projections that we’re having for 2019, we’re not including any revenue from CRD. So that shouldn’t affect the outcome for the business, should that project not go forward.

Okay. And then on the new product front for the DXe Connector and then the latest BigBore design. When was each commercially launched? And what revenue run rate has each achieved at this point?

So we launched BigBore-IIe and DXe about 18 months ago. We’ve had some success in penetrating the market, so we’ve got one. We’ve licensed the DXe profile to three companies so they can machine that profile. One of our major customers has adopted the DXe profile as well as the BigBore-IIe for all of their HPHT development work. So that’s a positive sign. We have one operator in the U.S. here that is going to convert their existing inventory to BigBore-IIe. And really from an impact perspective, we’re anticipating about 15% of our bookings in 2019 will come from new products.

Okay. That color is helpful. And last one for me on bookings. Just what was the percentage of orders in 4Q that you would categorize as non-project?

They were all non-project. We didn’t have any project bookings in the fourth quarter.

So it was a 100%?

100%.

Okay great thanks for taking my questions.

All right thanks Thomas.

Your next question comes from the line of Marc Bianchi with Cowen.

Just following up, gentlemen, to the last comment about the project bookings or non-project booking orders? Do you see this as a sustainable run rate? Or do you see the run rate any differently than what it would have been in the prior few quarters?

Marc, we’re certainly optimistic about that booking run rate in the fourth quarter. We are currently optimistic of what our first quarter bookings run rate looks like. I’m not ready to call anything on this call here today. But we are still optimistic about what Q1 looks like. I would say you’re probably better if I was going to guide, say, guide at the top end of that booking range that we’ve normally been running throughout the year.

But that $50 million to $70 million is what I think we have consistently talked about, so high end of that range.

Right. And the driver for that really is just a gradual increase in offshore activity? Or is it really – is there some kind of restocking that’s taking place that could have risk of falling off?

No. I think it’s just a gradual increase in the offshore activity. One of the things that we’re seeing if you followed us in the post-drilling moratorium in 2011, 2012, 2013, we saw a very similar event, where our customers slowed down their activity because the drilling moratorium in this downturn is because of the commodity price. They didn’t cancel any of the Wellhead orders. And so what we’re seeing is a de-stocking of the Wellheads as our customers go back to work. But they’re placing orders for the two drilling products the fabricated joints and the service. We see our service activity as higher as a percentage of our revenue. And then you also see some gross margin effect, so some reduction in gross margin because fabricated joints just have a lower margin product because they consist of – a large portion of it’s just pipe that we procure markup in resale. So it is lower margin. But for me, this is encouraging. This means customer property is being consumed. And we’re just getting closer to the point of restocking by our customers.

Right, right, okay, thanks for that Blake. Just one more on the – so you’ve given the revenue guidance which is seems like you’re sort of clicking along at the run rate that you delivered in the fourth quarter, should we think about the profitability at that run rate of revenue being similar to what you delivered in the fourth quarter? And then adding on any incremental cost savings on top of that?

Jeff, you want to take that?

Yes, I think, that’s the right way to think about it if you use fourth quarter as a proxy with our guidance of $90 million to $100 million and the EBITDA – the adjusted EBITDA there you would add on the additional cost savings that we outlined on Slide 16 to that number.

Okay. Great, thanks so much. I’ll turn it back.

Your next question comes from the line of David Smith with Heikkinen Advisors.

Hi, good morning. Thank you. And also want to say thank you for us in the conference call. First question fits with, the Q4 revenue of about 15% ahead of the midpoint of prior guidance. I wanted to ask if that relates primarily to the strength of Q4 orders? I know you called out Asia-Pac product sales. But I wanted to check if that included your strength of orders received in the quarter that were also booked as revenue?

This is Jeff. There’s a little bit of book and bill in the quarter, but largely the revenue that we realized in any given quarter, the bookings were from prior quarters. So you’re going to see a lot of the Q4 bookings turning to revenue.

Appreciate it. And the follow-up question, it looks like about $30 million or about 12% of Q3 inventory was written off in Q4. Just wanted to make sure, I got that correct. And as though curious if you can give us any color around the write-off? If it’s a particular product line? And if there’s any potential to recoup some value from that inventory in the future?

Yes, so – this is Jeff, again. The number is right on the $30 million and that percent I believe is right as well. What we did was we just went back holistically and looked at our inventory in light of our new outlook on the market and adjusted accordingly. And we believe we’ve marked it down to what would be a reasonable resale value. So there probably wouldn’t be incremental EBITDA on that as much as there would be free cash flow from it.

Great, thank you very much.

':

Good morning, Blake. Good morning, Jeff. Just from stepping back and thinking about the potential for incremental FIDs going forward around the globe. Just given that these are longer-term projects. If you look to cross the next call it 24 months to take a longer-term view, which regions are geomarkets over that time period are you most excited about? And where might we potentially see some positive surprises and some softer spots globally just from a geomarket or regional perspective over the next call it two-ish years?

Sure. So if you look at Page 10 of our investor deck we put out, you can see we, kind of, put a heat map of the globe there. But predominantly, what looks attractive to us and what we’re seeing is first to kick off really is in the North Sea and the well cap is going to be up in the North Sea particularly at this year and it looks to follow on. And that’s a lot of Brownfield type work – tieback work, and we’re chasing projects there. Also, the Gulf of Mexico is going to look good over the next couple of years and down into Mexico as well we’re seeing a lot of operators pick up in Mexico. And then in the Asia Pacific region, it’s really we are going to see some activity in the Middle East, where we’re making some inroads with Aramco with our downhole tool products as well as with some of our older mudline equipment actually in the Middle East for Aramco. But also up in China, we see some projects up in there that look attractive. I think further out, we’re going to see Australia pickup but that’s a little bit down the road as the LNG activity picks up. They’ve got so many LNG plants over there. They have to keep feeding those plants. There’s going to be infield work there that we think we can benefit from a couple of years from now.

Great, that’s super helpful color. I appreciate it. And then next question is just, as you think about cost cuts 2020-plus and you guys have done an impressive job so far executing on the cost cut side. You certainly saw it in Q4 numbers. But 2020-plus you had a commentary on Slide 15 around integrated supply chain, procurement realignment and adding savings above and beyond the $40 million to $50 million. Is that seems to suggest maybe some shift away from vertically integrating and sourcing things like forgings from third parties? Am I reading too much into that? Or how would you characterize the 2020-plus cost initiatives?

I think that’s – you’re pretty much on track. I will say if I want to spend a little bit of time on the forging facility in our – looking at our strategic alternatives there. Yes, we’re looking at all options on that forge facility from an outright sale to a JV to leasing it to mothballing, right? Which that’s the last option. Obviously, the better outcomes for us is to sell it and use that as a supplier, so we’re just making forgings and passing it through the fence. But when you are looking at the broader supply chain, the reason that’s kind of coming in in the 2020 timeframe is although we can initiate those supply chain activities this year. We’ve got to get the inventory terms of the products before those lower cost show up in our cost of sales. That’s why we believe it’s really more of a 2020 play on getting those costs down.

Just building on the forge for a second on Slide 16 where we talk about our cost-saving initiatives. We mentioned in the commentary that the annual savings from that ultimate disposition of forge would be around $6 million to $8 million annually. We really don’t have anything in our 2019 cost initiatives or cost savings initiatives as a result of forge. I mean, in the last piece in the supply chain, I think, by the end of the year we’ll probably have $150 million of our cost base out from an RFP standpoint. So working through that right now. But as Blake says, the turns on added are just a little bit slower and we won’t read those really till 2020.

Okay. Great, thanks.

[Operator Instructions] Your next question comes from the line of Martin Malloy with Johnson Rice.

Good morning, and thank you for having this call. I wanted to ask about the services segment. It looks like it’s growing in terms of absolute dollars from 2017 to 2018. Could you maybe talk about some of the key drivers there? And whether you think that growth will continue into 2019?

Sure. So excuse me – as I discussed before the growth in our services revenue is consistent with what we’ve historically seen when we have a period of high customer property that’s held in inventory particularly the Subsea Wellhead business as our customers go back to work. They don’t buy anymore Subsea Wellheads, but they buy the two year products that go with those. So our mix of products shifts more towards the fabricated joints. But then our service revenues increase as a result of that activity level. And so you’ll see a shift of the service revenues being a higher percentage of the total revenues for period of time. Once that de-stocking is complete and the reordering of wellhead products come in then the margins or gross margins are going to normalize. And then that service as a percentage of the total revenue will come down.

Okay, thank you. And then regarding M&A, you’ve mentioned in your slides some potential for technology tuck-in acquisitions. Are you focused on the offshore or onshore for those acquisitions? Can you maybe speak about what you’re looking for?

Sure, sure. Look, as part of that strategic review that we did in the second quarter of 2018, one of the things we looked at is acquisitions and what was the right thing for us to do. And it was clear that perfectly to stay in its swim lane, which is where we’ve been all along. The reality is we’re good at technically differentiated products and when we go onshore, it’s more of a commodity supply chain play. And that’s really not what we’re good at. So we’re going to stay at what we’re good at. So the acquisitions that we’re talking about really are those pieces of technology that can help us advance our R&D efforts quicker. So it’s going to be smaller tuck-ins that tie closely with what we’re trying to accomplish with our R&D program.

Great, thank you.

Your next question comes from the line of David Smith with Heikkinen Advisors.

Thanks for, let me back in. I think you mentioned one customer converting their wellheads orders and inventory to BigBore-IIe. And I wanted to make sure is it fair to assume that shows up in the services segment?

No, that will show up in the products segment. So there is a cost of conversion. So – if somebody wants to convert it, it just shows up as a product.

And was also curious, maybe how you see the opportunity for additional conversions of customer orders and your inventory in backlog?

I don’t know that we’ll see any in backlog. I think it’s really dependent on the individual customers and their preference in the offshore arena. And where they are drilling the wells. One of the things that we’re seeing is our customer base has moved away from the more challenging deepwater, very deep wells in the current environment and they’re doing more shallower drilled wells, Brownfield tieback, the easy to complete stuff. So the BigBore-IIe while providing some advantages, that advantages is not as big as when they move back into the deepwater arena. So I think a lot of our customers are having to consume my inventory that I have right now. And when things – when I get back into these more complicated wells, I’ll switch over to the new product then.

Appreciate the caller, thank you.

And your last remaining question comes from Simon Wong with Gabelli & Company.

Good morning, gentlemen. A couple of questions. What cash cost for restructuring in 2019?

Jeff, you want to take that?

Yes. No, there shouldn’t be any more cash cost for restructuring in 2019 – while there will be cash I should say in 2019, but we took the full charge for that at the end of 2018 so outlined in our opening comments was the cash charge of I believe around $8 million, $9 million.

Okay, that was taken in 2018.

Yes, the charge was taken in 2018, the cash would go out in 2019.

Okay. And then my follow-up. Can you talk about how you think about your new share repurchase authorization? You’re buying stock in the $50 last year, now the stock is down, are you planning to be aggressive? Or will the repurchase authorization be more gradual and even through the year?

Yes, so we – the board approved that stock repurchasing. We believe that our stock is a good value today. We believe that will execute on the cost initiatives that are outlined. So we’ll be looking at the market over the next nine months to look at the fair value of our stock.

Okay. Great, thank you.

All right. That concludes Dril-Quip’s inaugural conference call. I want to thank everybody for listening in. And we appreciate you following along. Thank you.

This concludes today’s conference call. You may now disconnect.