Good day, and thank you for standing by. Welcome to the Dril-Quip Third Quarter 2022 Fireside Chat [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Erin Fazio, Finance Director for Dril-Quip. Please go ahead.

Thank you, Liz and good morning. Welcome to Dril-Quip's third quarter 2022 fireside chat. Our news release and financial statements issued yesterday can be found on our Web site. As a reminder, during the course of this conference call, we will provide forward looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and Web site for a discussion of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release. With that, I'll turn the call over to David Smith of Pickering Energy Partners.

Thank you, Erin, and good morning. My name is Dave Smith. I'm the lead oilfield services analyst at Pickering Energy Partners. I want to say thank you for this opportunity to host Dril-Quip's third quarter fireside chat. And Jeff, I look forward to our discussion after your prepared remarks. I'll turn it over to you.

Yes. Thanks, David. Look forward to the discussion today. To be direct, the results of the quarter did not meet our expectations. There were a few transitory items in the quarter that we believe are nonrecurring headwinds to the results. That having been said, the incoming order trend was $75 million and at the high end of our expected range of $60 million to $80 million. We were also pleased with the quality of those incoming bookings in the quarter with the expected margin on those bookings the highest so far this year as a result of favorable mix and improving pricing. We expect this to obviously benefit future coming quarters. The income bookings number was muted by a cancellation in the quarter that's quite frankly uncommon at Dril-Quip. I think in the five years I've been here, this is only the third time that I've seen a cancellation of this size, so quite uncommon. We would expect Q4 bookings to exceed Q3 bookings. But due to the large number of outstanding tree tenders and customer timing, this number could range quite high. As we look forward to 2023, leading indicators such as tender volume and average quote value have recovered really to pre-pandemic levels. We are well positioned to capitalize on what is clearly a constructive offshore market and believe that the order trend will continue to accelerate into next year. We look forward to discussing growth in several key markets that we're really excited about, that includes Saudi Arabia, Brazil and Latin America among others. So with that, David, I'll turn it back over to you.

Great. Thank you, Jeff. I guess if we could start maybe with the broader market outlook, it feels like the macro backdrop for energy has so many moving pieces in play some really positive like the drive for energy security and there's looming recession concerns. So I'm curious about what you're hearing from customers on how they're viewing the current economic environment?

Yes. Thanks. Clearly two things as you point out, two things that are on everyone's mind. But look, it's been really great to get back on the road internationally over the last several months. So I've visited almost all of our key markets over the last three or four months. I think what I hear most from customers is really two fold. First, they're very optimistic about a combination, as you pointed out, of energy security. And candidly, there's been systematic underinvestment over the last several years. They believe that will provide a really strong foundation for increasing activity in almost all areas of the world for the next few years. Quite frankly, I understand your point on recession, but quite frankly, things are pretty tight today. And a simple reversal of COVID zero in China would only serve to tighten those markets. So I think it's pretty constructive there. That's the first thing. That having been said, the second thing is customers are really looking at the exact words they used when I was visiting in Brazil, they're looking for resilient investments. And what does that mean? It really means continue to maintain capital discipline, but also factoring in significantly lower oil prices into their economics. I think most of them are shooting for kind of a $35 to $45 oil price. I think there's just a lot of scar tissue from the last downturn and people are still being relatively conservative.

Yes, that makes a lot of sense. Curious, have you noticed any changes in customer behavior over the past couple of quarters? I mean it's one thing about what they're saying, but just regarding their actual behavior.

If anything, I think they're becoming more confident in their optimism. I think the other change that we're seeing as a business as well is just really a shift we have a lot of conversation around standardization. And as a result of that, what we're really seeing is a shift to more call off orders, use Petrobras as a good example. If you go back in time in 2011, '12, '13, '14, Petrobras would have placed these huge tenders, and we have a huge bookings number right away for wellheads. Now it's more of what they're doing this year, which is how I'm going to do a small tender, it's going to be an MSA, and then I'm going to call it off over the course of a year. So I think a little bit more short term horizon on some of the MSAs people are signing up for, and more call off as opposed to just a big PO right at the beginning of the year. So I think it protects them a little bit more on those downside situations. So not unlike the comment that I made around the $35 to $40 that kind of protects their economics. I think they're also trying to protect themselves from an inventory standpoint as well.

And just on the Petrobras, the Petrobras at works. Wondering if you had maybe any update on where you were kind of progressing through that first order and maybe your outlook on when it might come back and tender again?

So we got the MSA earlier in the year. It was 87 subsea wellhead systems. 11 of those were exploratory. 76 of those were development. About half of that has already been called off and is sitting in backlog. So call it 40-something sitting in backlog. And then the other 40-something will be called off sometime between Q4 and Q1 this year. So it's a little spicy there maybe on whether it's this year or next year or getting called off. And then we expect two more tenders to come out. The next tender could come out as early as fourth quarter, but might lead into first quarter next year, and then we expect another tender at the end of next year. And if you -- during my visits there, the expectation is they're going to have 350 wells drilled over the next five years. So it's definitely a strong market for us. And look, on those tenders, they typically give -- do the tender, it typically is a 1A, 1B type thing. They always split those tenders, and we generally get our fair share of them. So we're pretty optimistic there.

That's great. I guess, we have seen some really good momentum, just big picture with the offshore rig count, floaters and jackups. I'm curious on what you're seeing geographically maybe where activity is ramping fastest, and maybe specifically, where you see your opportunities looking more favorable?

So we're really investing and excited about three key markets, and these are really the three that I've visited over the last three to six months. We're investing in Brazil. We're investing in Saudi Arabia, and we're investing in Latin America. Let me just go -- and the story is a little different on all three of those. So just let me speak about all three of them. I mean, if I turn to Saudi, look, we're adding boots on the ground in region there, and we're looking at expanding our roof line as well as investing in stocking programs for more rapid response in that market. I was in Saudi a couple of months ago and spent a considerable amount of time with the team and at Aramco. First, the team there has done an outstanding job of improving service quality and in terms of moving forward qualifications. As you know, qualifications are always challenging there, but we're starting to see results. For example, 20% of our orders this quarter were related to Saudi. Now that's going to be choppy. We're not going to see that every quarter that way, but we believe that will continue to penetrate that market. Second, the expected growth in Saudi is going to stretch the supply chain there over the coming years. And we're working with Aramco to make certain that we're making the right investments on the ground to supply them in Kingdom. I think this will position us well to take advantage of the upturn. And then the last thing in Saudi is just a shout out to the team. We ran the largest liner hanger in the world at 18-5/8 by 24. So nice job there. If I turn to Brazil where I was a couple of weeks ago, I…

I wouldn't have been surprised if you told me 20% of your Q3 orders were subsea trees. I would not have guessed 20% with Saudi. I mean is this a big liner hanger order, or are there other…

It was actually on the subsea product side. It was actually on the subsea product side, believe it or not. So that Saudi market has always been strong for downhole tools. But in Saudi, they tend to place these large orders, so you get a nice big chunky product order on downhole tools and then you spend the next year installing all that product right. So the service revenue then will peak for downhole tools, and you'll get that one order and a quarter type of thing, but it was actually subsea products, believe it or not. We actually -- to your question on trees, we actually booked zero trees in the quarter. So this is a bookings number that's not lumpy from that standpoint.

Well, I guess stepping back and just turning to the competitive landscape. We'd love to hear if you're seeing any changes to the dynamics there, maybe any potential changes given some expected consolidation?

Yes. I've spoken about it before, but I guess just to reiterate how we see the competitive dynamic. I mean, the one dynamic we see is the larger operators with the strongest balance sheet, so quickest to be able to invest in this cycle. And that tends to lead towards EPCI awards that are bundled type things as it relates to the tree side of the business. Clearly, that doesn't affect the wellhead side of the house. We always see large customers that order wellheads outside the bundle. BP does that. Chevron does that. Petrobras does that. But on those large tree orders that you've seen from some other people, those are the large operators coming in. Our customers tend to be the small to midsized customers. They're kind of second to come into the market. They're much more influenced by recent inflation. They're much more influenced by an upturn in interest rates. Their balance sheets tend not to be quite as strong as the majors. And they're just starting to come back into the market. So to give you a perspective, one of the things that we looked at this quarter is just how many open tenders we have right now with those small and medium sized players. We've got about $150 million to $200 million in open tenders that haven't been awarded yet with those small, medium sized player. So some of those will book in the fourth quarter and some of those will slide into next year. But you can appreciate when you've got that much in open tenders, it gets tough to kind of call from a tree standpoint where it's going to land.

Which also leads that there are sort of full year bookings guidance of 15% to 20%. We could see bookings bracketed at 75 to upwards of 100 in Q4.

You mentioned on the smaller customers that maybe more responsive to inflation, right? So inflation is a widely discussed topic. Curious where you're seeing inflationary pressures? And if you could give us any color on what levers Dril-Quip can pull to mitigate this impact?

Yes. I mean I think the areas that we saw inflation is obviously a lot around the commodity forging things like that, that we purchased. Obviously, we saw a fair amount of inflation on other services as well. I do think that it started to moderate compared to earlier in the year. As far as levers, look, downhole tools is our shortest cycle business. They did a nice job of passing that along to their customers over the last 12, 18 months. As I mentioned earlier, one of the things we looked at this quarter was on that $75 million of incoming bookings, how did those margins compare to prior quarters. And this was our strongest gross margin quarter from a booking standpoint this year. Now some of that is clearly mix, right? We had a nice favorable mix, but a fair chunk of that is also being able to pass along inflation and being able to pass along price as well.

We rolled out a new pricing scheme in the quarter, what our guys would refer to as inflation plus. So you'll see that pick up in the gross margin line going forward.

I guess moving over to Kyle, this is probably for you. I'm curious how you're viewing the current interest rate environment, and how you see it impacting Dril-Quip? And maybe specifically, if it presents any opportunity given your pursuing balance sheet pretty significant?

Yes, it's certainly better to be in a net cash position versus the net debt position, especially with floating rate debt in this environment. If you see the face of our financials this quarter, we split cash and cash equivalents and short term investments out. We started to put some some cash to work out beyond 90 days to take advantage of some of the higher rate environments. With the Fed continuing to raise rates at 75 basis points of the clip, the ECB, a number of central banks out there raising rates, we're certainly taking advantage of that, but just chasing yield to some extent. So we're chasing some yield out beyond 90 days, less than six months, of course, since we’re pushing our investment policy out there to try to maximize what we can at this point.

And well, just switching over to foreign currency. I mean, US dollars had another really strong quarter I think against other global currencies. Can you talk about the impact that's had on your revenue and earnings this quarter? Maybe how you see that impact for the rest of the year?

We've had $2 million in the quarter for FX , we think about $4 million year-to-date, about 15% to 25% of our revenues in a given quarter, depending on the mix are coming out of pounds, Norwegian krone, Brazilian reals, and the pound really got hit hard in Q3, which impacted us in the quarter. The pound I think it was down about 15% against the dollar. So that continues to -- as we go out beyond this sort of the whims of the market, if you will, to some extent, if you’re believer sort of mean reversion of currencies, I think we'll sort of have some good times and some bad times as it relates to that. But we're actively taking a look at it but it certainly got dinged in the quarter on the FX front.

I do want to circle back really to that nice step up in gross product orders. If we can circle back to with your Q4 target, did you say kind of $75 million to $100 million?

If you look at our full year guidance of 15% to 20% bookings, that would imply 75 on the lower end and 100 on the higher end if we book the number of trees we think that are out there.

So I guess two related questions. One, could you give us maybe some more color about what's in that outlook for Q4 orders, and maybe the confidence you have on that increase? And then the second one, just maybe any additional color on that cancellation in the third quarter and kind of your confidence on that remaining -- a rare event?

So if we look at the fourth quarter inside that $75 million, I talked about having $150 million to $200 million of kind of open tree tenders right now. We're including, I think, five or six trees in the fourth quarter right now. Obviously, that number could go substantially higher, right? So we've got five or six trees kind of in that $75 million number right now, but we expect that there could be upside depending on how many of those -- the $150 million to $200 million tender gets awarded in the quarter. If I think about the cancellation, look, those are pretty rare. For us, it was $12 million, just to give perspective, though. I think for the entire project, that cancellation was $660 million in cancellations kind of across the industry. And candidly, it was a project that as they got into it, the economics just didn't work. I think it was actually a dry hole. So that's why those are pretty rare. We generally don't see those type of things happen.

And just absent that, obviously, we would have had gross bookings in the mid-70s. So we view Q4 at the low end of the range. It's not really a step-up in our minds, it's sort of sequential flatness if we end up at 75%.

That makes perfect sense. And just stepping back to the tenders outstanding with the small operators for the $150 million to $200 million of open tenders. If five or six of those trees hit in the fourth quarter, I imagine you've got -- it probably sets up for a healthy order outlook in '23. And I recognize it's a little early to ask you this, but I'm going to anyways on how you're thinking about what '23 orders might look like. Not looking for official guidance, but just given some good tailwinds here.

Yes, sure. I'll give you color. Look, we tend to reserve our guidance until our customers complete their budget cycles. They're just now doing that. However, as we look forward, we've got some nice leading indicators, right? The tender volume -- the tendering volume in the average quote value have really recovered to pre-pandemic levels, which we -- as we went in and looked at that, we were actually even a little surprised by that as we compared it to where we were before. Those haven't turned into orders yet. But I think the quote activity ultimately will start to lead to orders. We're well positioned to capitalize on that, clearly a constructive offshore market. And look, we believe that, that will continue to accelerate into next year. It's going to be led by the regions I talked about. It's going to be led by Brazil. I already talked about two more tenders there that are going to happen. It's going to be led by the Middle East, specifically Saudi will continue to see nice work there and Latin America for us as well. We're doing a lot of things now to put things in place to be able to really capitalize on that. So we're making adjustments to footprint. We've got the manufacturing investment. We've talked previously about that will start to come in over the course of '23, but we believe that will really position us well. We do an annual earnings call, as you may remember, we do that in February. So our plan is to give kind of full year guidance on that. Our strategic initiatives, further improve profitability programs that we're already putting in place. We'll talk more broadly about that in that annual call.

Without giving guidance into '23, I think we would view it as constructive/positive -- all signs point to a constructive '23.

Understood, and I'll definitely look forward to hearing that, that outlook, don't worry. Sticking on third quarter, I noticed the drop in combined service and leasing margins. And those margins have been running really strong. Could you give us some color of what you saw this quarter? What sort of that decrease in margins? And maybe a follow-up there would be, how you see those margins -- for service and leasing kind of specifically, how do you see those progressing from here?

So in the quarter, as you look at Q1 to Q2 to Q3, you'll see a step up into Q2 and a step down in Q3. Really, it was three distinct projects kind of came to in when we had our rental tools on rigs, if you will. And those work scopes did come to an end in the quarter, so we saw those tick down. I think we would see service margins, if you will, looking at probably Q1 and Q3 probably being more indicative of what that margin profile should look like.

That makes sense. And I was hoping we could talk a little bit about the supply chain issues that drove the lower downhole tool product sales in Q3, especially any color around those issues and maybe how you see those evolving?

Yes, it's not systemic. It's really just a couple of orders that got hung up due to supply chain issues, some raw materials coming in and getting the orders out on time. So we view it as very transitory. Those orders go out in Q4 and it's not something that we would view kind of going on from here.

It's a couple for $1 million each, basically. So they just happen to be pretty material orders, right?

Got it. So this sound like that's something that would necessarily impact the timing of your ambition to grow that business to the $100 million annual run rate target?

Yes.

Is that still kind of inhibition for, I think, kind of hitting that target by year end '23?

Yes. I think what we would hope is kind of exiting '23, maybe a run rate exiting '23 going into '24, that we'd be thinking about $100 million. So you'd be looking kind of in late '23, early '24 for kind of a $25 million per quarter run rate business. Making the investments now, I talk about Saudi and roofline. If you just think about that market, kind of what our fair share of market share is there is probably half of what it should be, to be honest. And if we make that investment, get the boots on the ground, get our activist core in the right spot, we would see ourselves probably doubling our market share in Saudi over the next couple of years.

I mean they had a record quarter in Q2. Obviously, Jeff mentioned the $2 million in orders that slid out in Q3. So they're starting to get close to that $20 million range and hopefully, will be run rating $25 million coming out of next year.

And you'll really see that and say you'll see the pickup in Saudi and Brazil.

Got it. Appreciate that. So free cash flow negative for the quarter. Again, Kyle, were there any surprises versus what you were expecting or how you were thinking about, or anything just how you're thinking about free cash flow going forward?

I mean the quarter -- so year-to-date, we're about $20 million behind where we had anticipated in our internal projections that presented that 3% to 5% free cash flow margin, and really split into two things. One is working capital is higher by about $15 million, specifically due to sort of what I’d call investment in inventory, strategically ahead of what's going to happen, who knows in Europe this winter, stocking plans and so forth have been replenished to kind of make sure we've got raw materials for the foreseeable future. And then two is around the investment in machinery that Jeff mentioned the $22 million investment in new machinery here in Houston. About $4 million of that went out in the quarter. And so we didn't have that in the original plan but that is going to continue to kind of pay out here. In Q4, we expect a little less than 1 million to go out with those machines in the quarter. But for full year, we expect to kind of be breakeven on free cash, largely in Q4, we expect the big tax receivable to come due that's going to help drive that but we do expect to be free cash breakeven on the year at this point in time. And really just the working capital which drove at this point in time, specifically around making what I call strategic investments in raw materials.

You're not alone there, for sure. So wrapping that up, how do you see Q4 playing out as you work towards the top line growth and incremental margin targets?

We would expect Q4 to kind of be up mid-single digits top line coming out of Q3. We met with the team here in the last few days or so, just to kind of get a pin in this and feel like that mid single digit growth is very achievable. Incremental margin is probably in that 30%, 40% range coming out of Q3. So I think for full year, we put out 10% top line growth. I think we're still sticking to that based upon what we see in Q4. So I think that's how we see the next quarter shaking up here.

And I know seasonality affects a lot of OFS companies with offshore exposure. Does Dril-Quip experienced any level of seasonality or is it too small to call out?

It really is from a booking standpoint, we'd probably highlight Q4 is typically the highest level of bookings we see. Generally, customers are sort of exhausting the remaining pieces of their CapEx plans, if you will, and we end up sort of seeing that spike in Q4 for most years.

Okay, but operationally, not…

Operationally, I wouldn't see any seasonality there. You may have an odd order coming from time to time. But the way we recognize revenue on a POC basis, and that's about half of our revenue now, if you will, tends to smooth out a lot of =the booking spikes, if you will.

I was thinking on the services side maybe…

I wouldn't cite any seasonality on the Jeff's front.

I'll move on from that. I did want to maybe step over towards the topic of M&A. And correct me if I'm wrong, but it definitely feels like Dril-Quip, you all have indicated an increased interest maybe in inorganic growth. And I'm curious if you could talk about how you're thinking about those opportunities, maybe where you see the sweet spot for Dril-Quip in terms of size, but also market exposure? Any indications about what direction that could take?

It can take many forms at this point in time. I mean you think about from a scale standpoint, we need to get more scale as an organization. So we're looking at anything from very large deals that would transform the company to sort of smaller bolt-on deals that may exist in energy, specifically in OFS that may exist outside of energy, but they have an energy sub to it. And as we talked about last time, really needs to have Dril-Quip DNA in it, which is sort of highly specialized, highly engineered products is what we're going to be looking at specifically. But we are looking -- at the aperture is what I refer to as sort of wide open at this point in time. We expect the quarter really building capability inside the organization. Really spending a lot of time. This is a priority for the company right now. We need to get bigger. We need to get bigger through acquisition but we're going to be very disciplined on this front. So this is not going to be something just go out to do a deal for deal's sake. We're going to be very disciplined on this front. But I think we're looking from a very, very sizable deals transform to smaller technology plays. We are -- from a capital allocation standpoint, this is number two for us going forward, as we've said previously. Beyond internal CapEx, great investment source. Number 2 is going to be M&A for us.

I think the important thing to add is however we exit from a transaction our investors should assume that we're going to maintain the same balance sheet discipline that we've always had, right? So no one should expect us to exit a transaction with a bunch of debt, right? We're going to exit a transaction still with a strong balance sheet. I think that's one. I think the other interesting thing is it seems like the conversations over the last quarter around M&A have been much richer and deeper than they might have been earlier in the year. And those aren't public companies. There's a number of private or privately held companies where I think the conversations have been more meaningful over the last quarter.

Yes, I think there's enough sort of support and energy right now where you're going to see a lot of these -- a lot of transactions probably come to the threshold here over the next six to 12 months or so.

Looking forward to seeing some of those. I did want to circle back to some bigger picture discussion. Just looking at the floating rig count, it's been picking up nicely. If I look at Petrodata’s work in floater count, Q1 was is low start up 2% year-over-year, starts ramping in the second quarter that was up 8% moving from 2Q '21. And then this last quarter, Q3 is up 13% higher year-over-year. So also it looks like we're getting some uptick in exploration activity. And where I'm going with this is kind of twofold. So first, I remember historically, customer inventory levels could cause some dislocation between the pace of your orders and activity levels. So I wanted to ask what you're seeing with regards to customer inventory levels. If the gross product orders step up this quarter it includes some level of restocking, or is this just kind of -- this is kind of the momentum we should expect, with the floating rig count growing?

Yes. Customer inventory is ice tricky, right? Because every customer -- or our larger customers, I should say, have some level of inventory, but they like to maintain some level of inventory for their own cost. If I look at where we are right now, I'd say this is more momentum to your specific question. So if you just divide between the different product lines, downhole tools of the book-and-bill business, right? So that's just going to call off right away. Subsea wellheads is moving to more of a book-to-bill business. I talked about Petrobras, that 87 wellhead systems that they awarded, they awarded MSA not a booking, but they've called it off over the course of the year, right? And we see more and more customers moving to that kind of model, an MSA model where they call off. So the old days of having a bunch of inventory at customers is slowly going away. It's not completely gone away yet. But I think over time, you're going to see more and more customers converting to those type of programs. So I wouldn't call this quarter a restocking as much as I would say, hey, it's just the normal run rate type business.

Trees is probably the choppiest piece of all that as we talked about earlier.

It sounds like going forward might be trees some large Saudi orders, which I'm still wrapping my head around. The second part of that question -- second place I was going with the mentioning the exploration pickup. I wanted to revisit an old assumption I had, which was that the Dril-Quip had a very strong share of exploration wellhead with maybe a lighter share on the development side whereas the big three manufacturers would push [bundling], right? So looking forward a, is that kind of how it was? And then b, that kind of segues into if we could see maybe any narrowing of that share between exploration and development with the collaborations that have been part of your growth story for the past couple of years?

So look, just to address that. I mean, it's interesting. There are certain customer buying habits that are just ingrained, right? And you're right to say that our share was larger on exploration than it was in development. That having been said, there's a lot of customers that just buy the subsea wellhead outside of a bundle. Even if they bundle everything else, they don't bundle the wellhead enough, and that's Petrobras, BP, Chevron, a list of customers. But there are some customers that bundle. And so as a result, we've signed a collaboration agreement -- a couple of collaboration agreements actually. One of those is with OneSubsea, that's specifically around wellheads. We have a number of systems that are bid right now jointly with OneSubsea that we would not have previously been involved in because of the EPCI nature. So that's starting to develop. Clearly, our success there is really tied to OneSubsea winning the ultimate tender and the wellhead is just a small portion of that overall tender. So it's really dependent on that. That having been said, we did see the first subsea wellhead tree combination with OneSubsea. That was actually BP. I mentioned BP is one of the ones that buys directly from us, they would have pulled well as out of their stocking program, but use it with the OneSubsea tree. The second collaboration agreement we really have is with Aker Solutions. And as you're aware, that's specifically related to our shallow water tree and our subsea wellheads around CCUS. We continue to work with Aker on the BP Northern Endurance Project feed. And we now expect that -- I think that FID slid out a little bit. We now expect that to be early 2024. The one thing I obviously have to comment about when we talk about these collaboration agreements is there's the recent Aker OneSubsea subsea seven joint venture. We get a number of questions around that. Look, we work closely with OneSubsea on jointly tendering. We will also work closely with Aker on jointly tendering. So to the extent that both of those companies are stronger together in a JV, that only serves to benefit Dril-Quip. So right now, it's really business as usual there.

That's great. Do you think there will be further areas or product lines to explore in terms of future collaborations?

We're always looking at that and obviously cautious about talking about anything specific there. But the area that I think goes unnoticed many times because it wasn't a widely publicized collaboration, and it may not be nearly as formal as the OneSubsea or the Aker one, is really around downhole tools. And interesting about downhole tools is they actually supply to Schlumberger, Baker Hughes, Halliburton. About a third of the downhole tool business actually goes through those three companies. And most of that's in Latin America but we do see that starting to extend to other regions of the world as well.

I'm going to switch over to an energy transition question. But before I do, I want to say congratulations on getting an A on your ESG rating from MSCI this quarter, that was impressive.

We've actually spent a lot of time in the last 18 months. I'm doing a lot of work around that. To be honest, it's a lot of things we were doing anyway. We're just doing a better job of telling people what we're doing, but we have made some pretty substantial improvements around carbon reduction programs and things like that. In fact, I just got the video yesterday of our Singapore facility that we installed solar panels, I think, on practically every building on the Singapore campus. So that's a good example. And then we will publish our first sustainability report probably in the next 12 months or so.

And you recently published a deck on your energy transition efforts, especially CCUS. I wanted to talk through maybe how you're thinking about that opportunity, midterm, longer term? And if there's any change in your outlook with the passage of the Inflation Reduction Act?

Look, we still think that's going to be a strong business for us. But right now, it's really about laying the groundwork and that's not just us. I think that's a lot of people in the industry are right now just laying the groundwork for probably orders that start in '24 and '25. So I talked about the BP Northern Endurance project feed. There's a few other small feeds that we're working on as well outside of the collaboration agreement with Aker. But we [Technical Difficulty] most of those likely coming to fruition in call it a '24, '25 time frame. It's really right in our wheelhouse, if you think about it. I mean the shallow water tree that we've got, we're making some tweaks to make it more fit for purpose, but it's a nice offering that we have on the Subsea product side for a long time, and we're just converting that over to -- for use in CCUS. Same thing on the wellhead side as well.

Yes, that's when I say that would be in your wheelhouse. Are there any other areas of energy transition that you're interested in or that might also be in your wheelhouse?

Look, I think what we're doing is really looking at our core capabilities, high pressure, high temperature and metal to metal steel. And we're looking across a variety of energy transition opportunities. It's probably too early to talk about those. But that's something that we're constantly monitoring in the business.

I guess switching over to the organizational -- the changes you're targeting to the organization structure. I think pushing efficiencies and reducing the cost structure. I wanted to ask if you could give us any update on the progress and plan there for adjusting the operational structure? And maybe remind us of the magnitude of the cost savings you look for the next couple of years?

So there's a number of things in flight, and then I'll let Kyle talk about real estate and kind of the cost savings side. But the things that are in flight right now in February, we started standing up a new organizational structure around subsea products, subsea services and downhole tools. Energy transition being kind of the burgeoning group, if you will. We're now dividing into those teams. The organizations are completely aligned within those teams. We're already starting to see some of the benefits of that as we divide into those teams. We're making better investment decisions. We're making better decisions around customer orders. We're making improvements in on-time delivery. So we're starting to see the real operational benefits of those things today. I think the formal financials will probably be stood up early next year. And then I think those benefits will only accelerate. We're setting specific gross margin targets for each of those businesses. They're starting to work towards those right now, but it's early days. The second thing that we've done is just optimizing footprint. And we’ve made $22.5 million manufacturing investment. I think first machine now arrives May next year with a material portion of that starting really in earnest in late '23. We're starting to clear out area on our campus here. So if you came to the campus here by the end of the year, we'll have a fence off area where the equipment is going to go in and signage and all those type of things. So we're starting to get excited about that as well. And then the last piece is really around footprint rationalization. We've got three facilities here that were listed. We sold one of them in the quarter as you saw. There's other areas that we were looking at making investments candidly in roofline. So it doesn't just go all one way. On the Houston campus, we knew we had excess. Saudi Arabia, we're going to make an investment. In other areas of the world, we're going to make investments as well. So it's not simply a downsizing, it's more of a reallocation of resources around the world. So those are kind of the three things, Kyle, you can talk about…

Yes, actually on the real estate, we've obviously closed on a deal here in the prior quarter. We would at the remaining two pieces of the property we've talked about to be under a purchase and sale agreement, more or less around year end is what I'm guessing. Whether or not we get the cash in Q4 or Q1, we don't have a sense of that right now. But we're actively marketing. We've got lots of interest in it. We're working towards PSAs on both here, probably in the next 30 to 60 days. We expect to have more news on that, obviously, in February, but that's moving along nicely. Jeff mentioned gross margin targets for the business. We've put out there externally. We want to get to 35% gross margin as an organization. But that will likely take us some time in '24 to be run rating that. We need the new manufacturing equipment here. We need the P&Ls for the product lines. We need to get the targets sorted up, if you will. So this year has been a year of a lot of sort of change. We expect '23 as we get these P&L set up for the businesses, targets established, people understand what numbers they own, what cost they own, if you will. We'll start to grind towards efficiencies there. But really expect that gross margin target of 35% to likely be achieved at some point in 2024 exit is what we would expect.

And can you ask what kind of revenue growth might be contemplated on that path to 35%?

We have said -- for our internal planning purposes, we have said no revenue growth, get to 35% based upon flat.

I think it kind of goes back to the comment that I made earlier around customers wanting to be resilient. We know there's going to be revenue growth over the next two years. I think that's unquestionable. What we want to make sure is in the environment we're in now, which is kind of the low point, the environment we're in now that we can be very profitable and sustainable.

Yes, the intention is to kind of stretch the envelope on the teams, if you will. And we know we'll get some reflation of activity and price. But we're doing that modeling and go get some of the assumption of, hey, there's no revenue growth here, knowing that there will be.

I know you mentioned set in specific gross margin targets for each of the segments. I don't suppose you want to discuss that any further.

Very unlikely, we're going to discuss it here today…

We appreciate the attempt though…

You give me this platform, I got to try.

I think we'll be happy to talk about that at some point in the future. We're doing a lot of sort of financial reporting redesign, standing up of some new data dimensions, not to get too into the nerd weeds here, but there's a lot going on that we've got to assess that internally before we want to talk about that external. But I think on a consolidated basis, 35% is the target. We've got some materials out on our site that sort of step people through the actions to get there. But it is a protracted process that it's going to be, I guess, that it's probably a two year journey for us to get back there. The market happens to snap back sooner we get some revenue and price reflation, we probably get there sooner. But the intention is to kind of take the -- once we get footprint and roofline where we need it to be, we get P&L stood up, et cetera, et cetera, that those folks are now understanding kind of what they own and then taking action accordingly.

I do want to say congratulations on the sale of the Forge facility. And it sounds like you've got some pretty good visibility on the timing of proceeds for those next two sales that are targeted. Not to be greedy, but could that scope of property sales be expanded in the future? I know you've got some growth initiatives in other areas. I didn't know if there was any trimming that might be left or if this is really kind of the conclusion of it.

Yes. I think as we look out and we make the new manufacturing investment, it's unquestionable we're going to need a smaller footprint. So if you go out to kind of, call it, 2024 when everything has been been installed there, I think that's the next time we'll really do a reassessment of what's our refine look like and do we need to tweak that again. Although, I think our General Counsel that’s management of this, a shout out to James Webster for all the hard work that he's doing around this. I think he's happy that we've got two properties right now and maybe we take a little bit of pause for a couple of years because it's unbelievable how much work divesting of these, especially on an integrated campus, how much work divesting of these takes. But I think you should look out to 2024 for the next time we'd have a conversation around that.

Okay. I'll make a calender reminder. Those were all my questions today and Jeff, unless you want to fill one about your world series prediction?

I'm going to the game tonight, and I like the Astros in 6, I think. Kyle is wearing his Astros shirt as we sit here right now…

I've got my jersey on. I would go with the Astros and 6 as well.

I know Q3 was a little bumpy. I thought the step up in gross product orders was a solid sign. Clearly, a lot of positive opportunities ahead for Dril-Quip, and I'm looking forward to watching them play out. So Jeff and Kyle, thank you both for giving me the chance to go with the fireside chat this quarter.

Okay. Thanks, David.

Thank you, David.

This concludes today's conference call. Thank you for participating. You may now disconnect.