Welcome to the Dril-Quip Q4 and Full Year 2021 Earnings Call. My name is Daryl and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Director, Investor Relations and Corporate Planning, Blake Holcomb. Blake, you may begin.

Thank you and welcome to Dril-Quip’s full year 2021 conference call. An updated investor presentation has been posted under the Investors tab on the company’s website along with the earnings release and will be referenced during today’s call. 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 2021 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 would like to now turn the call over to Jeff Bird.

Thanks, Blake. First, I’d like to say that I am both humbled and excited to take over as CEO following Blake’s 11 years as CEO. I’d like to personally thank Blake for his many years of service to Dril-Quip. His contributions have been enormous and he will be missed. I am pleased to introduce Kyle McClure as our new CFO effective January 1. Kyle brings a wealth of both private and public company CFO experience, and has worked in a variety of industries, and is already just starting to bring his fresh perspective to the business. Welcome aboard, Kyle. You will hear more from him later in the presentation. I’d also like to congratulate our employees around the world. We closed 2021 with the best safety record in the last 20 years for Dril-Quip. This is a direct result of the hard work and dedication of all of our employees, but specifically those that are on our manufacturing facilities and on rigs around the world. Thank you for your efforts. With that, we will turn to Page 3 to review some of the highlights for 2021. We’ve consistently communicated a three-pronged growth strategy. And I am pleased to announce we have made significant progress on all three pillars. Beginning with peer-to-peer collaboration, we believe our industry and our company are stronger when we work closely with our friends in the industry. These collaboration agreements deliver superior value to our customers and ultimately to our shareholders over time. In 2020, we signed our first collaboration agreement with Proserv. We saw this start to bear fruit in 2021 as tree wins increase and expect that to accelerate into 2022 as we expect to more than double our tree awards from 2021. I am excited about the two additional collaboration agreements signed in…

Thank you, Jeff and good day to everyone on the call. It’s great to be with the company and look forward to partnering with the management team and broader organization going forward. I will begin on Page 6, which highlights the financial results for Q4 and full year 2021. Q4 revenue came in at $78 million, which was down $5 million sequentially, driven mostly by lower product volumes in the Western Hemisphere and downhole tools activity after a record Q3 for that business. Full year 2021 revenue was $323 million, which was down $42 million year-over-year. The year-over-year decline is mostly tied to lower product revenues, driven by the impacts of the pandemic on overall oil and gas demand that led to lower orders in 2020 and the majority of 2021. Gross margins also saw some contraction during 2021, about roughly 100 basis points. However, much of this decline can be attributed to the cancellation of the forge lease agreement with AFGlobal, partially offset by our downhole tools contribution. Adjusted EBITDA for Q4 was roughly $1 million in the quarter, which was down roughly $3 million Q-on-Q due to lower revenue and unfavorable mix. The full year decline in adjusted EBITDA from $32 million to $15 million can be largely attributed to the decline in the subsea product revenues, partially offset by downhole tools revenue growth, lower research and development spend, and contribution from productivity improvements. Cost actions and productivity improvements in both 2020 and 2021 helped mitigate some of this impact to the decline in revenues, leading to 39% incremental margins. Turning to Page 7, Q4 bookings came in at $80 million, which was significantly above our expectations of $40 million to $60 million, which is where we have been running in the past six quarters. The fourth quarter…

Thanks, Kyle. It’s great to have you on board. Turning to the macro environment on Page 12, there are two key indicators that one should watch when thinking about our growth, specifically in our subsea products. Those are tree awards and deepwater wells. The first clearly impacts our order levels and is tied to our SPS franchise. We are expecting that to grow at an 8% CAGR through 2026 with a nice pop in 2022. As always, the direct correlation can be challenging due to specific customer drilling patterns. However, as I stated earlier in the presentation, we would expect our tree awards to more than double year-on-year to 17 to 19 trees in 2022. The second metric we look at is wells drilled. This is a direct indicator of number of wellheads and connectors used each year. Due to customer inventory and lead time, orders can often lag actual wells drilled. However, we do expect a 5% CAGR through 2026. As I discussed earlier in the presentation, we are already starting to see wellhead awards pick up with the largest and most recent award being the recent Petrobras contract for up to 87 exploration and development wellheads through 2025. I would restate that Dril-Quip will begin to participate in a larger share of development wellheads than we might historically have via our collaboration agreements with OneSubsea. Slide 13 shows our 2022 strategic focus areas. First, we will continue to build on the great work we’ve already done with our strategic growth pillars. We’ve laid a strong foundation, but there is more to be done. While these pillars will help us continue to grow top line revenue in our core business, we must also go further in our strategic focus in order to best position ourselves for the years ahead.…

[Operator Instructions] And our first question comes from Taylor Zurcher. Go ahead, Taylor.

Hey, Jeff and Kyle, thanks for taking my question and good morning. First one, just sort of a high level, one on the market outlook, one of your largest subsea peers this morning was basically making the point that the tone of customer conversations has reached an intensity point that they haven’t seen in a number of years. And as I just look at Q4 orders for you guys and the Q1 outlook as well as the 2022 outlook, I mean, clearly, there is momentum building. So just curious if you could kind of characterize for us the tone and tenor of some of the discussions you’re having with customers today? And if you think 2022 might be an inflection point or a leaping point for more healthy growth to come as we get into 2023 and beyond?

Yes. Thanks for the question. I’d echo the comments that you heard there that we are seeing a lot of customer conversations now that candidly, we haven’t seen from – candidly, before the pandemic. This is obviously the highest order quarter that we’ve had probably in six or seven quarters. We’re seeing strong Latin America conversations right now. Norway is extremely strong right now. Gulf of Mexico is extremely strong, so much so that probably rate constraints are the problem in Gulf of Mexico, and even starting to see early conversations in West Africa as well around some of the smaller independents, and things like that there. That’s mainly the subsea business. On the downhole tool side, it’s really a story of Latin America and the Middle East there. So we see Ecuador strong. We see Mexico strong. We see Saudi strong as well. We talked a little bit, I think, two quarters ago, probably around the 21 systems that were awarded in Brazil around our XPak DE. So a lot of great conversations right now. I think as we went into the pandemic, we probably aired to be – to miss the number. I think on the way out, it will probably be just the opposite of that. So we’re pretty optimistic about 2022.

Alright. Good to hear, Jeff. And just a follow-up on sort of the refocus strategy moving forward, I mean there is a lot of different buckets to parse through, but maybe I’ll just ask on the capital allocation bucket. On the – in the prepared remarks today, you talked about $200 million to $250 million of excess cash on the balance sheet. And you also talked about inorganic growth as being a key driver for Dril-Quip in the coming year. So I guess my question is, when it comes to capital allocation, how might the strategy notably differ, if at all, from the strategy Dril-Quip’s maintained over the past 2 or 3 years? I mean share repurchases have been part of the story. Inorganic growth has been part of the story. So just curious how you think about the capital allocation strategy potentially changing moving forward?

Yes. I’ll let Kyle answer that question. He’s spent a lot of time on that in the first couple of months he’s been here, so...

Yes. I think we look at inorganic as sort of a newer arrow in our quiver, if you will. I think internal investments will continue to be sort of priority one. Those are the best returns on our capital, if you will. We know kind of what we are – rental tools other things like that tend to be a pretty good use of our funds. Share buyback will continue to be part of the capital allocation policy going forward as well. That doesn’t change. You saw what we did in ‘21. I think our premise there is we generated $28 million of free cash. We bought back about that amount of shares. We make – as we look out in the future, obviously, free cash is going to be a little bit challenging into ‘22. We use the opportunity in the marketplace, seeing where we were trading in Q4 to kind of be opportunistic there. I think we’d probably still be opportunistic as well as look at free cash trends and kind of how we’re going to deploy that out into the marketplace. But inorganic is a little bit a newer one there. As Jeff laid out, we’re kind of early innings, if you will, on putting our framework together kind of where we want to take that. But we do look at – we do have excess cash on the balance sheet. We do need to grow inorganically, but we are sort of early days on putting that thesis together on how that’s going to play out.

Alright, makes sense. Thanks for the answers.

Yes, thanks.

[Operator Instructions] And it doesn’t look like we have any questions. I’ll pass it back to the speakers for closing comments.

Okay. I’d like to thank everyone for their participation today on the call. I’m excited about the future of Dril-Quip, and the action plans and strategies that we’ve put in place to make us a better organization for all our stakeholders. And I look forward to providing updates on our progress in the coming quarters. Thanks, everyone.

And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.