Good day, and thank you for standing by. Welcome to the Dril-Quip Q4 Full Year 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I'd now like to hand the conference call over to your speaker today, Erin Fazio, Director of Corporate Finance. Please go ahead.

Thank you, and good morning. Welcome to Dril-Quip's full year 2022 conference call. An updated investor presentation has been posted under the Investors tab on the company's website along with the earnings release. This call is being recorded, and a replay will be made available on the company's website following the call. Before we begin, I would like to remind you that Dril-Quip's comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause Dril-Quip's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the fourth quarter 2022 financial and operational results announcement we released yesterday for a full disclosure on forward-looking statements and reconciliations of non-GAAP measures. Speaking on the call today from Dril-Quip, we have Jeff Bird, President and Chief Executive Officer; and Kyle McClure, Vice President and Chief Financial Officer. I will now turn the call over to Jeff Bird.

Thank you, Erin, and thank you all for joining us today. Dril-Quip delivered an incredibly strong fourth quarter, capping an important year where we met or exceeded most of our targets and made significant progress along our longer-term financial, operational and strategic objectives. Total revenue grew double digits year-over-year, and our fourth quarter revenue was the highest quarter achieved since pre-pandemic. This was partly driven by several factors such as aggressive investments from Brazil, offshore investments across multiple markets from large E&P customers and price increases to offset inflationary pressures. Fourth quarter gross margin grew by over 15%, and our overall profitability improved with adjusted EBITDA reaching almost 11% in Q4 and improving 350 basis points year-over-year. Our improved margin profile, combined with our ongoing initiatives across the organization to drive operational efficiency, such as our investment in improved wellhead manufacturing and footprint optimization will continue to support our performance moving forward. Cash flow fell short of our breakeven target for the year. However, our cash position remains strong and allows us to strategically invest in a growing market. Kyle will provide some additional detail on this matter shortly. Bookings in the quarter were particularly strong at $94 million with no notable cancellations. This is the highest quarterly mark since Q4 2019, reflecting the ongoing up cycle in the offshore market, but also incrementally higher and in line with our typical Q4 seasonality. As strong as bookings were to end the year, it's worth noting that bookings do not include the entirety of any master service agreements or MSAs signed during the year. As customers call off from an MSA, we will then include those units in the bookings. For example, we signed a new MSA with a customer for our West Africa project in the fourth quarter for 30…

Thank you, Jeff, and good morning, everyone. As Jeff mentioned, the company delivered strong fourth quarter and full year results as we continue to make progress along our initiatives for the business, and we believe we are well-positioned to execute on opportunities in this constructive market. Looking at our results. Fourth quarter revenue was $96.8 million and increased 24% year-over-year, driven primarily by higher product and service revenues across all regions, reflecting the ongoing up cycle in the offshore market. For the full year 2022, revenue was $362.1 million and was up 12% year-over-year. The year-over-year increase was primarily driven by higher product revenues across all regions, partially offset by lower service revenues in Asia Pacific. Gross margins during the fourth quarter were 31.2%, up 979 basis points year-over-year. This improvement in gross margin is largely due to leverage on higher revenues, product mix, gains in pricing and our ongoing initiatives across the organization to drive operational efficiency. SG&A expenses decreased by 18% to $94.2 million in 2022 from $115 million in 2021 due to lower legal expenses in connection with FMC lawsuit. Excluding those legal charges in 2021, SG&A was roughly flat year-on-year. Additionally, engineering expenses also decreased by 23% to $11.7 million from $15.1 million in 2021 as a result of the completion of certain strategic projects. So overall, we are continuing to manage the overall SGA&E cost base despite expected back-to-back years of double-digit revenue growth. Our overall profitability also improved during the quarter with adjusted EBITDA coming in at $10.4 million, an increase of $9.8 million from one year ago. For the full year, adjusted EBITDA was approximately $30 million, an increase of 98% year-over-year. The improvement in adjusted EBITDA was driven by improved macro trends, strong performances in all of our businesses with subsea product…

Thanks, Kyle. While much has been accomplished, we know we still can do more to position our company for long-term success, advancing market share and overall profitability. We are well-positioned to participate in strong market fundamentals and an upswing in the offshore market. The underinvestment over recent years across the industry has made for tightness today with long lead times for new and replacement equipment and thus a constructive environment for continued investment given the commodity price outlook. We are keeping a pulse on customer behaviors and confidence, and we expect order trends and spending to accelerate in 2023. As I touched on earlier, we're seeing significant signs of progress in key markets in Saudi Arabia, Brazil and Latin America. As we enter 2023, capital allocation will be a critical area of focus for Dril-Quip as we support our organic and inorganic growth opportunities. We remain disciplined in our approach with a keen focus on driving attractive long-term returns on capital deployment. Our strong clean balance sheet allows us the flexibility to consider multiple investment paths. These opportunities include organic initiatives and include the evaluation of potential inorganic opportunities that align with our vision for the future. The M&A pipeline is rather strong, and as you would expect, we're consistently evaluating the M&A landscape with a wide aperture of opportunities. Any M&A opportunity, large or small will adhere to our disciplined approach to capital allocation and any target will need to fit strategic and financial criteria that will ultimately provide accretion to our shareholders. In conclusion, 2022 was a pivotal year for Dril-Quip with significant progress being made along our long-term objectives. Furthermore, as you may have seen, we published our first corporate sustainability report in 2022. At Dril-Quip, we believe technology innovation is key to improving our energy efficiency and providing people around the world with universal access to reliable, affordable, clean energy. I want to thank our extremely talented and committed team here at Dril-Quip for their efforts in pursuit of our vision for the company, their commitment to safety and ongoing dedication to all our valued stakeholders. With that, we'd like to open the line for any questions. Operator?

[Operator Instructions] Our first question comes from the line of Eddie Kim of Barclays.

Could you just update us on your wellhead MSA with Petrobras? It just seems like the activity level and urgency from them has almost reached a fever pitch in just the last 3 months here, at least on the offshore rig side. But as it relates to Dril-Quip, I know you got the MSA early last year for 87 wellheads. Have nearly all of those been called off at this point? And any update on the additional tenders you've been expecting from them?

Yes. The 87 wellheads, I think about 50% of that has been called off to date, we would expect the balance of that to be called off in '23, maybe early '24. There is a new tender that's already out there for the next tranche of wellhead systems. We would expect at least 1 tender in 2023, probably about a year earlier than we would have expected. So to your point, things are definitely picking up a little quicker there than we would have expected. The team is doing a great job there of starting to ramp up from a manufacturing standpoint, from a service tech standpoint as well, and we're pretty excited about that. I also should comment on the downhole tools business as we commented in the script, we do have 21 of our XPak De systems that are also under MSA. To date, only one or two of those have been called off, we would expect that to start to accelerate in '23 and into early '24 as well.

And then just separately, shifting to your EBITDA guide, a pretty impressive guide on EBITDA incremental margins of 40% to 60% this year. Approximately how much of that EBITDA increase would you estimate is from kind of cost out and footprint rationalization versus higher pricing? I have to imagine you're seeing higher pricing right now, but do you sort of have to get through lower price backlog this year before really seeing that benefit in 2024?

Yes. I'll let Kyle walk through the details. But I think if I could divide our business between the subsea products and the downhole tool side, downhole tools does get pricing much quicker than the subsea side. The subsea side is definitely a backlog business. So when you look at our $240 million in backlog as an example, the vast majority of that is subsea products. And you're right to say that's a lot slower to come through, but that downhole tool business turns about every 6 to 12 weeks. So the pricing is really quick there, but I'll let Kyle walk through those details.

Yes. I think on the productivity, if you will, or operational efficiency, we've got about 5 to 10 on a run rate basis once we've got our property rationalization completed. Obviously, Jeff talked about the sale of the forge facility last year. We expect to close and the other 2 facilities before the end of Q2. That, on an annualized basis, is about $5 million to $10 million. We'll get some of that this year, but I think the majority of sort of the year-on-year EBITDA increase is going to be through better mix and just volumes and then sort of legacy pricing coming back from, as Jeff mentioned, downhole tools. And then we've got obviously some stuff that's in backlog that's got -- that we take into account pricing as it relates to inflation. So we'll see all those -- the benefit of those kind of flow through coming out of backlog. And then, as Jeff mentioned, the book and ship nature of downhole tools.

[Operator Instructions] Since there are no further questions, we'd like to thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.