Innovex International, Inc. Q3 FY2023 earnings call

• Third quarter revenue was up 31% sequentially and 33% year-over-year. - Service segment delivered lower revenue than expected in Q3 due to rig availability and FPSO delivery timing, but expected to rebound in Q4. - Awarded Petrobras tender valued at up to $28 million, with first call-offs expected soon. - Backlog was approximately $200 million at quarter end. - Second quarter gross margin was 27%, adjusted EBITDA was $12.4 million. - Completed acquisition of Great North, which is financially accretive. - Footprint optimization initiative expected to yield $25 million in cash proceeds with sale of third Houston building. - Made key wins in Africa, Brazil, Canada and New Zealand markets. - Invested in manufacturing equipment with first machine delivered in Q3.

Subsea Products revenue increased 15% compared to the prior year and 25% sequentially, driven by the delivery of certain customer milestones in the quarter in Europe. Subsea Services revenue increased 6% year-over-year and was up 3% sequentially, with increased activity in Brazil offsetting some weather and customer schedule delays in other regions. The Well Construction segment grew 117% year-over-year and 76% sequentially, reflecting the addition of Great North and activity increases in Latin America, Saudi Arabia, Brazil and West Africa. Approximately 80% of the current business is call-off or book and ship against MSAs.

• Fourth quarter revenue expected to be in the range of $115 million to $125 million. - Fourth quarter bookings expected to be in the range of $75 million to $100 million, including 6 subsea trees. - Fourth quarter adjusted EBITDA margins expected to be 14% to 16%. - Expected positive free cash flow in fourth quarter. - Full year 2023 anticipated to have a slight net use of free cash flow.

• Rig availability in tight rig market and FPSO delivery timing impacting customer service and bookings timing. - Near-term product mix challenges as customers refine drilling schedules.

Q: Just wanted to touch on the light orders this quarter. You mentioned rig availability and FPSO delivery timing. But the first one makes sense. I mean, if the customer can't get the rig, there's no drilling that's going to take place. But could you expand upon the FPSO comment? I would have thought drilling and production would be a bit independent of each other. And just curious if, I guess, which regions this apply to, this FPSO delivery timing that you experienced?

A: Yes. So just a little bit about order trend in general. So the rig availability is specifically around Middle East, where we're seeing some challenges there and also around some of our smaller customers that might be fighting for rig availability. We see that specifically on tree orders and things like that. The FPSO would be more related to Brazil, where we're seeing some delays there in call-offs as a result of that. But if I step back and just look at the broader order trend, with the addition of Great North, right now, Eddie, about 80% of our business is book and bill and/or call-off against MSA. So you think about that Well Construction business, and the Well Construction business is almost all book and bill, all call-off from MSA. Services is obviously book and bill, maybe a little bit of call-off from MSA, and that really leaves Subsea Products as our one business now that really is a backlog or an order of business. And even inside of that, the wellhead that we have now are largely call-off as well. So you think about the mention of Petrobras and the recent award that we got on Petrobras, up to $28 million. Of that $28 million, only about $4 million or $5 million of the $28 million actually goes into bookings and goes into backlog. Traditionally, that would have been all $28 million would have gone on the bookings or would have gone into backlog. So just a very different model now than we might have seen before from an order standpoint. Obviously, Kyle talked a little bit earlier about the $75 million to $100 million in the fourth quarter as it relates to order trends. Those are largely 6 trees. Trees can be anywhere from $3 million to $5 million, depends on the size and scope of the tree and the size and scope of the project. But those are large orders. And then at the small end of well construction, you could have something as small as a $100,000 call-off. So just a pretty diverse set of products now for us than you might have remembered 5, 10 years ago even.

Q: And just on that fourth quarter bookings guidance of $75 million to $100 million, that is a big step-up from third quarter levels. What gives you the confidence kind of in that bookings range? And separately, any kind of preliminary thoughts on bookings for 2024? I would think that as rigs become more available and the FPSOs get delivered, your book would increase year-over-year. Just any preliminary thoughts on '24 bookings?

A: Yes, yes. So that ramp in Q4, we've got good visibility to the ramp. It will largely be dependent on FID timing for a number of customers. That's what the 6 trees are based on. As you know, Eddie, our SPS customers tend to be the smaller customers that are probably more reliant on rig availability and fighting for rig, probably a little tougher in a higher interest rate, high rig rate environment. So whether it's Q4 or Q1, we have confidence in the inbound orders. It will just be a timing question in Q4 really around the 6 trees, and that will kind of dictate where we end up in that range in the quarter. If I look out to next year, we see a pretty constructive market next year, pretty optimistic. Just getting early gauges right now from a number of our customers there and their budgeting cycles right now, but all early indications are another strong year next year. Kyle McClure: Also, if you go back and look, I don't know, 5 to 10 years, we looked at this as well. The Q3 to Q4 step-up is always there for us. It's almost ends up doubling what we've got coming out of Q3. So we would expect a pretty decent order flow for Q4. If you go back, we have a seasonality to it effectively is what we typically see, if we went back, at least -- 7 or 8 years back, and that's always been the case.