Innovex International, Inc.

Good morning, and welcome to InnoVEX's third quarter 2024 earnings call. At this time, all participants are on a listen-only mode, and there will be a question and answer opportunity at the end of this call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Erin Fazio, Investor Relations. Mom, please go ahead.

Thank you, and good morning. We appreciate you joining us on today's call. An updated investor presentation has been posted under the Investors tab on the company's website, along with the earnings press release. This call is being recorded, and a refill will be made available on the company's website following the call. Before we begin, I would like to remind you that InnoVax's comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause InnoVax's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. please refer to the third quarter 2024 financial and operational results announcement we released yesterday for discussion of forward-looking statements and reconciliation of non-debt measures. Speaking on the call today from InnoVEX, we have Adam Anderson, Chief Executive Officer, and Kendall Reed, Chief Financial Officer. I would now like to turn the call over to Adam Anderson.

Thanks, Erin. Welcome to our inaugural earnings call as InnoVEX International. On September 6, InnoVEX Downhole Solutions closed on the merger with DrillQuip. and the combined company is now trading on the New York Stock Exchange under the ticker INVX. On today's call, we will introduce you to the new Innovex, discuss the current quarter performance, and provide an outlook on our plans going forward. Before we dive into these details, however, we want to spend some time introducing you to the Innovex platform and our approach. Our vision is to create a unique energy platform, a leader in well-centric products and technologies, with a focus on driving exceptional value and service to our customers, and exceptional absolute returns for our shareholders. Since InnoVEX's inception in 2016, we have generated strong financial returns, not just relative to traditional energy service companies, but returns superior to the S&P 500. To achieve these returns, we have curated a portfolio of what we call small-ticket, big-impact, single-use products, employing a capital-light business model. We create differentiation and customer loyalty through our unique no barriers culture. Let me take each one of these in turn. Our portfolio has been curated to focus primarily on consumable or single use products. Most of our revenues come from products that are consumed in the process of drilling, completing, and producing oil and gas. We're focused on small ticket, big impact products that are highly engineered to our customers' requirements and are critical to efficient operations However, they represent a small proportion of the overall well cost. For these mission-critical products, reliability and service quality are the primary driver of purchase intent, not pricing. Our business is capitalized by design. Given the consumable nature of our product portfolio and a focus on a lean operating model, InnoVEX requires a negligible amount of CapEx, 3% of revenue or less, to sustain and grow our business. Consequently, under normal business conditions, we convert 50% to 60% of our EBITDA into free cash flow. High free cash flow drives our reinvestment flywheel, allowing us to fund organic and inorganic investment opportunities that target returns on invested capital in excess of 20%. To drive innovation and organic growth, our no-barriers culture is paramount. No barriers means eliminating all barriers within InnoVEX as well as between InnoVEX and our customers. We minimize the layers between management and the people in the field doing the actual work to ensure our team can respond more adeptly to our customers' needs. No barriers is not just a catchphrase. It is how we do business. We design organizations to be lean, flat, and unbureaucratic. It's important to me that we both, one, keep our overhead costs low, and two, maintain a highly responsive organization where bottoms-up decision-making is centered around taking care of our customers. We empower our employees to focus on our customer needs and rapidly respond with radical transparency. We listen to our customers, admit our mistakes, and use those mistakes to deepen our relationship and trust with clients. We have consistently and organically grown our market share through innovation and excellent service. A recent example of this was in the Delaware Basin. when a major operator in the basin was experiencing a challenge with the capabilities of the liner-hanger system they were using as they transitioned to longer and more challenging laterals. We were able to solve this technical challenge nearly six months earlier than the incumbent supplier, and as a result, significantly grew our market share in this strategic product. One of the best examples of our culture-driving market share growth is in the U.S. land cementing tool market, where we have grown our market share from 5% in 2018 to 30% today. Similarly, in Saudi Arabia, we have established ourselves as an innovator for a variety of down-hole consumable products. From a standing start a decade ago, we have over 30 products qualified and did roughly $60 million of revenue in the last 12 months. I am excited to see how the new InnoVEX can leverage our combined strengths to drive additional market share capture, and we have already seen some early success on this front that I'll describe in a minute. We consider our financial results to be the true measure of our success. Since inception, we have grown revenues per share at a 22% CAGR, a rate far better than our peers and four times faster than the S&P 500. We look at our revenue per share because we do acquire and divest of businesses over time. We're not looking to get bigger, but rather more valuable. Our margins have been consistently high over time, including during COVID, a testament to our resiliency and ability to adapt quickly. Finally, while InnoVEX has generated exceptional per share growth, produced consistently high margins, and required low capital intensity, we have also generated excellent return on capital, averaging 17% over the last six years, 300 basis points better than the S&P 500, and far superior to almost any other company in our space. We consider ourselves to be a high quality industrial platform. What do we mean by platform? In addition to our organic growth, we can successfully fold in disciplined acquisitions by leveraging our no barrier culture, our global distribution network, our customer relationships, and a capital life business model. When we look at inorganic growth, we look for very specific criteria. It must fit our small ticket, big impact value proposition and have an opportunity for the combined entity to be better together to ultimately generate exceptional gross margins, consistent EBITDA margins, and high free cash flow. We drive organic growth of acquired companies for customer-focused innovation and access to a broader distribution network. We are not aggregating EBITDA. We will get bigger over time, but only as we get better. In a time when our industry is generally struggling for investor relevancy, we believe that the best way to be relevant is to be highly profitable. As we execute this inorganic strategy, maintaining a strong, conservative balance sheet and keeping leverage less than one times EBITDA is a priority. InnoVEX has a history of acquiring and successfully integrating numerous companies over the years. We have a wonderful team of people, a defined operating model, and a no barriers culture that enables this success. I was originally attracted to Drillquip given the strength of both their team and technology. And since closing the transaction, I have gotten to know the people and products even better, and my enthusiasm for the potential of the new Innovex has only grown. What drillquip brings to the combined company is incredibly difficult to replicate, particularly in the high performance offshore and international markets in which the company historically operated. There is a definitive moat around the drillquip business due to the high barrier to entry and high cost of change for our customers. Highly engineered 20,000 PSI deepwater subsea wellheads and large bore expandable liner hangers are the definitive big impact small ticket products. And I love that about the DrillQuip business. What was apparent to us during the early stages of our conversation with DrillQuip and what has only become more obvious after the merger is that the operating model was inadequate to serve customers and generate sufficient returns. Infrastructure from a pre-2014 vertically integrated world and a set of priorities that focused on following a process for the sake of process, rather than serving the customer, hindered both growth and financial performance. As we apply a no barriers approach to these challenges, there is an enormous opportunity for the company, our employees, and our customers. We will recenter the organization around fulfilling our commitments to our customers and driving cash flow and returns. Once transformed, this business will have a significantly enhanced bond with its customers. This process will not be simple, and it may be choppy. There will be a short-term impact on the business results. In evaluating the combined business accounting policies, we believe it most prudent to shift how revenue is being recognized in the subsea wellhead franchise. Historically, DrillQuip has adhered to a percentage of completion accounting method, recognizing revenue in increments as the manufacturing process is completed. Although this process has some merit, we believe it is more appropriate and beneficial to convert to a point-in-time method, which among other impacts will change the priorities of the entire organization. Instead of prioritizing work that optimizes revenue recognition, we will prioritize work that satisfies our customers and prioritizes cash flow. This is one example of many we will employ to optimize process, improve deliveries, and generate cash flow. However, in the short term, it will lead to some lumpiness in results and may delay when revenue is recognized versus the historical periods. It is critical that customers can trust in the commitments we make to them. This pertains to both quality and timeliness. Brokeup has a phenomenal record of delivering the best-in-class subsea wellheads, as well as many other products. However, on-time delivery of subsea products has been just 25%. which compares to InnoVEX's on-time delivery of 90 to 95%. This performance has weighed on Drillquip's market share, margins, and free cash flow, but this is fixable. We have a well-worn playbook that suggests it's not only fixable, but we believe will transform the financial results of the business by attacking this aggressively. Some history is helpful here. When InnoVEX acquired Rubicon in 2021, One of the iconic product lines we acquired was Logan Fishing Tools, where we design, manufacture, and sell an array of fishing tools. At the time of that acquisition, on-time delivery and gross margins were similarly low, which created numerous problems for our customers as well as for ourselves. It took some time, but over a year or two, we were able to radically transform the supply chain to achieve 90% to 95% on-time deliveries. which helped increase gross margins to exceptional levels, driving strong returns on our invested capital. In addition to the opportunities I just discussed, there's a significant potential to grow revenue by leveraging the strength of the combined portfolio. Inovex has long provided cementing tools in the U.S. Gulf of Mexico, often on wells with a drill-quip wellhead. However, we have had a limited market share in the international deepwater market, And the combined organization will benefit from the opportunity to provide the whole array of casing-mounted products from the wellhead to the toe of the well, significantly enhanced by Droquip's strong market share outside the U.S. Gulf of Mexico. The wellhead is typically the first well-centric consumable product procured for deepwater wells, and that early visibility will give us a significant advantage on offering a combined package well ahead of our competition. Similarly, when we look at North America, our geographic footprint is significantly expanded in the new InnoVEX. Historically, we were very underweight Canada, but going forward, we can now leverage our drill equipment to strengthen this market to pull through many of our legacy products. We've already seen success in this area, with early wins leveraging the combined footprint to sell conventional liner hangers in Brazil and Mexico, as well as being awarded a project with a large IOC in the Gulf of Mexico provide centralization solutions in combination with an 18 by 22 inch big board liner hanger. And this has occurred in just a few weeks since closing. We believe these examples can be replicated many times over. We have the ability and the will to transform the new InnoVEX into something truly unique and valuable for the benefit of our employees, our customers, and our shareholders. I will now hand the call over to Kendall to discuss Q3 results and our outlook for Q4.