Good day, ladies and gentlemen, and welcome to the NOV Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to NOV's Second Quarter 2021 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis for the second quarter of 2021, NOV reported revenues of $1.42 billion and a net loss of $26 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session.

Thank you, Blake. During the second quarter of 2021, NOV's consolidated revenue increased 8% sequentially, and EBITDA improved to $47 million, excluding the benefit arising from the cancellation of certain offshore rig projects. Operating leverage was strong at 50%, owing to cost reductions in prior periods while price increases in certain product lines helped offset the inflation we are seeing in most product lines. Coming out of a pandemic which bankrupted many of our customers and eviscerated our backlog, our financial results improved but remain below acceptable levels. Nevertheless, NOV's execution strengthened through a quarter of continuing supply chain challenges and COVID disruptions. We are pleased to see orders for both our rig technologies and completion and production solution segments rise significantly. Rig technologies posted a book to bill of 138% on strengthened orders for renewables and completion and production solutions book to bill ran 167% in the second quarter. Barring another round of COVID lockdowns, we expect the market to continue to strengthen underpinned by broad economic growth, higher commodity prices and the continuing worldwide build-out of an offshore wind power toolkit. The company's portfolio of technologies developed over the past several years positioned extraordinarily well to capitalize both on the oilfield recovery underway, as well as the enormous energy transition. The next five years look very, very interesting for us. Like global manufacturers across all industries, NOV experienced supply chain disruptions throughout the second quarter, and we expect these challenges to persist into 2022. Many steel mills that supply NOV's bespoke metallurgies, along with petrochemical facilities and plants that supply NOV epoxy, resins, thermoplastics, and elastomers are not fully up and running due to a combination of COVID, the February Texas freeze, and in some cases disruptions in their own supply chains. Furthermore, transportation bottlenecks around the world, port congestion, and port closures and freight costs that have quadrupled are adversely impacting suppliers two and three levels down from us, driving up input costs and lengthening delivery times on everything from steel to computer chips. In certain instances, we have been placed on allocations, but thankfully, NOV's scale has enabled us to elbow our way to the front of the line. So we think we are better positioned than our smaller competitors. Our size and scale generally give us access to a broader range of suppliers and our teams are managing through these challenges better than our competitors. The U.S. market is also seeing a tightening labor pool, adding pressure to cost and efficiency. Our customers tell us that attracting hands back to their oilfield service operations is very challenging. Interestingly, this is prompting greater customer interest in some of the new automation products we are now introducing to the market, which reduced the need for field labor. But as we get back to growth in our factories, we're finding it challenging to attract workers as well. NOV is trying to stay ahead of the inflation threat brought on by labor and raw material constraints, by passing along these costs as price increases. Our success has varied depending largely on the level of excess lower-cost inventories remaining in our competitors' hands within these markets. Day-by-day, however, we know excess capacity within many categories of oilfield equipment and consumables and bits, drilling motors, and fluid systems is approaching depletion, offering the first opportunities in many quarters to heal pricing and profitability as the North American marketplace continues to get more active and offshore and international markets start to recover. The marginal cost of returning idled oilfield equipment, much of which has been cannibalized and stripped of consumables during the downturn grows rig-by-rig, frac spread by frac spread as the industry steadily goes back to work. COVID measures continue to impact operations around the world. Two of our large composite pipe plants in the Far East were shut down in late second quarter and remained closed until late last week. Operations in India, the Middle East, parts of Europe, and Canada all experienced COVID disruptions of greater or lesser degrees. And generally, NOV did a better job of anticipating and managing through these obstacles in the second quarter. Our second quarter results are an instructive reminder of the cyclical behavior of our segments. Wellbore technologies is most closely tied to drilling and as an early cycle beneficiary of rebounding drilling activity, having bottomed in the third quarter of last year. Its last two quarters have seen it post double-digit top-line growth at greater than 50% EBITDA dollar leverage benefiting from the outstanding execution of cost reductions through the downturn, as well as selected price increases where possible. Our other segments are driven more by capital equipment purchases and are therefore later cycle and lag wellbore technologies by two to three quarters. We believe both completion and production solutions and rig technologies bottomed in the first quarter of 2021, and both posted double-digit top-line growth in the second quarter. Book-to-bills above 100% for both in the second quarter also support our outlook. All three segments see more or less the same macro environment. North American activity continuing its measured recovery driven by stronger commodity pricing, while governed by extreme capital discipline on the part of operators; national oil companies returning to work in fits and starts around the world with tenders being left for hopefully a broader resumption of activity in 2022, barring additional COVID drama; and cautious optimism in offshore markets, with some limited project approvals flowing in the Gulf of Mexico, Brazil, and Guyana but many projects facing continuing delays and moving to the right. Overall, excluding the rig cancellation, NOV's consolidated North American revenues increased 22% in the second quarter and international revenues increased 1%. Consolidated offshore revenues declined 5% sequentially in the quarter. Within Completion & Production Solutions, six of eight businesses posted sequential revenue growth. Every business unit with the exception of our Intervention & Stimulation Equipment business posted book to bill ratios above 100%. In addition to navigating supply chain issues, the segment made good progress on technical developments within its ideal e-frac in its renewables portfolio, particularly in the carbon capture space. More than half of Rig Technology's second quarter orders came from the offshore wind space, and the outlook for this area points to continued growth. Additionally, the tone from offshore drilling contractor customers is improving as they emerge from bankruptcy with stronger balance sheets. The 11% sequential improvement in spare parts bookings during the quarter, more inquiries around rig reactivations, and more engineering work we're being asked to do around upgrading BOPs, automating pipe handling, and adding crown mountain compensators gives us confidence that we are seeing more offshore drilling activity on the horizon. In the land rigs base, our rig manufacturing JV facility in Saudi Arabia is nearing completion and work is currently underway on the first rigs. The NOV team continues this development of high-value solutions that support the energy transition, and I wanted to share a couple of updates. During the quarter we advanced conversations with one of the largest solar EPC providers to develop a solar panel tracking system and the accompanying supply chain. We're also in advanced talks to sell our proprietary mobile tower crane that will enable the construction of significantly taller, more efficient onshore wind farms, which we hope will result in a purchase order soon. This crane underpins a clever new installation method that will facilitate the adoption of taller lower-cost land towers that we are working with Keystone Tower Systems to manufacture at our facility in Pampa, Texas that we have described on previous calls. We successfully tested our new inline chain tensioner that will be used to facilitate the offloading of floating wind turbines and entered into an agreement with Cerulean Winds to serve as the exclusive provider of floating and mooring systems for floating wind farms that will utilize carbonized oil and gas assets in the UK sector of the North Sea. Our NOV GustoMSC team has been working with a customer to design and deliver a proprietary system that automatically tilts and orients a sailing mast, improving the efficiencies of sails on large vessels. The initial application of this system is for very large cruise ships but can also be used on large cargo vessels. The wind propulsion technology will supplement conventional propulsion systems and is expected to reduce the ship's carbon footprint by 40% to 50%. There's also a lot happening in the geothermal market. Our ReedHycalog PDC cutter technology continues to drive improvements in economic returns for the geothermal industry. And Tuboscope's TK-liner product line is becoming an indispensable piece of large geothermal projects internationally, as evidenced by a contract award this quarter for approximately 60,000 feet of large diameter product. In fact, we're introducing several new products across many business units that are specifically designed for the geothermal market, which is now seeing a strong surge in demand globally. Our Process & Flow Technologies team has developed a concept design for a full-scale carbon capture module, utilizing expertise in gas processing and treatment built over the last 40-plus years. We are currently in discussions with potential customers for feed studies utilizing this technology in Europe now. The application of our engineering and manufacturing expertise to the energy transition continues to unearth compelling paths to future growth. Turning back to our traditional oilfield markets, despite all the downsizing we've executed over the past several years, our sustained investments in R&D now provide an innovative and outstanding portfolio of new products and technologies that position us well as we move into a recovering oilfield market. Our NOVOS operating system is at work today on 74 drilling rigs with another 84 in backlog, enabling these land and offshore rigs to access 10 different optimization applications written by NOV and third parties. These include optimization apps that utilize high-speed data from the bottom of the hole, transmitted through NOV's IntelliServ Wired Drill Pipe network, currently providing higher levels of efficiency and safety to several critical North Sea rigs and a rig in Saudi Arabia. NOVOS also provides the digital foundation for new automated drilling and tripping robots that we are introducing later this year. Several customers came out to see our cost-effective industrial robots, Dope and Trip over 25 stands per hour, without any human hands touching the pipe or the controls. Offshore we are seeing continued interest in reducing carbon emissions through our PowerBlade and EcoBoost products, and subscribers to NOV's Rigsentry predictive analytics product, the oilfield's first commercial product introduced back in 2016, continue to grow. We're continuing to develop our EDGE computing solutions through a Max platform, working closely with a handful of EMPs to scope and develop the beta version. We're also bringing new directional drilling tools like our proprietary agitator friction and friction reduction tools, our SelectShift downhole adjustable bent sub, our vector series of rotary steerable tools, and market-leading drilling motors and NWD tools. NOV's ReedHycalog leads the industry in bit and cutter technology, having lifted its market share materially through superior bit performance over the past several quarters. On the frac side, we're excited about the prospects for NOV's ideal e-frac technology, as well as our proprietary QuickLatch Connection Systems, Flex Connect Frac Hoses and the digital enhancements we're developing around monitoring, controls and predictive analytics in this space. After several years of cost-cutting, restructuring, pivoting, and innovating, NOV has reset and transformed its business, utilizing new developments in everything from digital to composite materials, we've developed new high-value ways to lift the efficiency and safety of our customers' traditional oil and gas operations. We've developed ways to reduce their carbon impact. And we're winning over new customers who are building out new forms of low carbon energy. As the world continues to heal from the COVID-19 pandemic and the global economy tries to recapture some sense of normalcy, NOV is poised to benefit in both our traditional oil and gas businesses and our newer ventures in the renewable space. I'm enormously proud of NOV's dedicated, creative, and service-minded employees whose hard work through this downturn has enabled the bright future that lies ahead. While our global operational reach, our integrated network of manufacturing assets, and our strong balance sheet and financial resources are all required to cultivate these opportunities, it's our fantastic team of employees who will make them home. To those of you listening, thank you. With that, I'll turn it over to Jose.

Thank you, Clay. For the second quarter of 2021, NOV's consolidated revenue rose 13% sequentially to $1.42 billion, and EBITDA was $104 million or 7.3% of sales. Second quarter revenue included $74 million related to the final cash settlement and cost reimbursement from the cancellation of offshore rig projects. Excluding the settlement, revenue rose 8% sequentially to $1.34 billion, and EBITDA was $47 million or 3.5% of sales. Consolidated U.S. revenue increased 27% sequentially, significantly outpacing the growth in U.S. drilling activity. International revenues excluding the settlement improved only 1%, but we began to see international growth accelerate late in the second quarter. 50% incremental margins were the result of better absorption across our manufacturing base, better management of supply chain disruptions, price improvements in certain areas, and cost savings initiatives, which have nearly achieved our target for the year. Efforts to improve capital efficiencies across the organization helped drive $177 million in cash flow from operations. Capital expenditures totaled $49 million, resulting in $128 million of free cash flow. During the second quarter, we redeemed the remaining $183 million of our senior notes due in December 2022, and we ended the quarter with $1.6 billion of cash, $1.7 billion of gross debt, and only $114 million of net debt. We expect working capital will continue to be a source of cash through the second half of the year. Moving on to segment results. Our Wellbore Technology segment generated $463 million in revenue during the second quarter, an increase of $50 million or 12% sequentially. Revenue improved 14% in North America and 10% in international markets, as the early stages of a global recovery began to expand beyond the Western Hemisphere. An improved cost structure, higher volumes, and pricing improvements more than offset inflationary costs and drove 58% incremental margins resulting in a $29 million increase in revenue to $63 million or 13.6% of sales. Our ReedHycalog drill bit business posted solid top-line growth led by a 25% sequential improvement in U.S. revenue resulting from improving activity and market share gains. Outside North America, sales improved 10% sequentially with our NOC customers signaling an intent to continue increasing activity over the next several quarters. Our downhole tools business reported a 13% sequential improvement in revenue with most major regions realizing double-digit percentage growth. Improving adoption of our proprietary drilling tools that reduce trips maximize hydraulic flow and reduce friction such as our SelectShift and our agitator product lines continued in Q2. Notably, the unit also realized a sharp increase in demand for fishing tools and service equipment in many regions, indicative of what we believe is customers beginning to restock depleted worn-out equipment after years of underinvestment. Higher volumes improved operational efficiencies and price improvements more than offset inflationary forces allowing the business to deliver strong incremental margins during the quarter. Our Wellsite Services Unit saw revenue growth in the mid-single digits as our solids control business benefited from widespread activity growth, partially offset by continued COVID-related disruptions. The disruptions included the suspension of a large project in Mozambique, and the COVID-related shutdown of one of our wellsite manufacturing facilities in Malaysia, requiring us to incur additional charges to airfreight goods from our Conroe facility back to the Eastern Hemisphere. Wellsite Services will benefit from improving global drilling activity, but unlike pure service operations, we also expect the business to benefit from an inflection in capital equipment sales, as customers put rigs back to work and need to replace cannibalized shale shakers and centrifuges, or equipment that has been sitting in idle saltwater environments. Demand for capital equipment began to show signs of life in the second quarter with bookings improving 1.7 times off the very low mark realized in the first quarter of 2021. Our MD Totco business realized a double-digit sequential improvement in revenue with strong incremental margins. Revenue from service sensor and data acquisition sales and rentals improved 20% due to higher drilling activity and market share gains. The business unit's E-Valve digital drilling optimization service which utilizes our high-speed telemetry wide drill pipe posted a modest sequential decline in revenue due to the timing of crews and equipment transitioning to new projects after completing jobs, as well as supply chain challenges affecting our ability to source certain high-speed data networking components. Demand for this service remains robust, and the business was recently awarded a new three-year optimization project for a major operator in the North Sea. Our Tuboscope Pipe Coating and Inspection business posted an 11% sequential increase in revenue, with strong incremental margins during the quarter driven by a sharp increase in demand for our tubular coating services across all major markets. We realized a disproportionate improvement in demand for large-diameter TK-liner products which are high-performance glass reinforced epoxy liners that provide corrosion protection for tubular goods. In addition to the demand from geothermal markets that Clay mentioned, we're also starting to see U.S. customers resume investments in large-scale production infrastructure. We received an order for 121,000 feet of 12-inch line pipe for a saltwater disposal system in the Haynesville as well as an order for 14,000 feet of 16-inch line pipe for a system in the Permian. Tuboscope's tubular inspection operations grew at a more modest rate than its coating business but realized solid demand from steel mills and outside pipe processors as they ramp up operations. Our Grant Prideco drill pipe business posted revenue growth of 11% on higher sales and drill pipe and the delivery of the industry's first 3 million pounds, 20,000 PSI-rated landing string. Higher absorption and an intense focus on cost controls and an improved sales mix drove very strong incremental margins. Demand from North America continued to outpace international and offshore markets in the second quarter, but we expect to see international tendering activity increase during the second half of the year. While we're encouraged by the improving outlook, stretched supply chains and lead times will limit the ability for new orders to improve revenue beyond the orders we currently have in our backlog. Additionally, we believe the significant increase in steel costs could slow tender awards as customers acclimate to a new pricing environment. While the stage is being set for a strong recovery in 2022, we expect limited revenue growth for the drill pipe business in the second half of 2021. For the Wellbore Technology segment, we expect accelerating activity in the Eastern Hemisphere and modest improvements in the Western Hemisphere to result in 6% to 10% sequential growth in the third quarter. We anticipate improved absorption rates and higher pricing will be partially offset by inflationary pressures, ongoing raw material shortages, and a less favorable product mix in our drill pipe business, limiting incremental margins to the mid-20% range during the third quarter. Price increases in certain products, together with disciplined cost management, provide confidence in the segment's ability to achieve a mid-teen EBITDA margin by year-end. Our Completion & Production Solutions segment generated $497 million in revenue during the second quarter, an increase of $58 million or 13% sequentially. Lower margin sales, inflationary pressures, and operational disruptions limited incremental margins to 14%, resulting in EBITDA of $4 million or 0.8% of sales. Orders improved 37% sequentially, totaling $462 million for a book to bill of 167%. All but one business unit achieved a book to bill of above 100%, and the step change in order intake resulted in the segment achieving its highest booking quarter since 2019. Backlog for the segment at the end of the quarter was just north of $1 billion. Our Intervention & Stimulation Equipment business posted solid improvements in capital equipment and aftermarket sales. Modest demand growth for pressure pumping equipment in the U.S. and improved deliveries of coiled tubing units into international markets boosted capital equipment sales. We're providing higher levels of coating activity for pressure pumpers who need to replace or upgrade existing fleets. The pickup in inquiries is reflective of tightening supplies, the competition remains fierce, with the most difficult competition coming from idled equipment. While idled equipment limits sales and pricing, it also creates opportunities for aftermarket business. During the second quarter, we achieved notable sequential improvement in aftermarket sales as more customers look to put equipment back to work. In addition to a higher number of jobs, we're also seeing an increase in the average sales ticket. The amount of effort required to get equipment in working order along with the amount of cannibalization that has taken place tends to be strongly correlated to the amount of time equipment has sat against the fence line. We're encouraged by improving supply and demand dynamics as well as the growing opportunity to help customers improve operational efficiencies with our new technologically advanced product offerings such as our ideal e-frac system, QuickLatch Frac Hose, and our digital services. Field trials for our e-frac system have validated its ability to significantly reduce maintenance costs and increase pump volume nearly four times compared to conventional equipment while significantly reducing emissions. The system has successfully demonstrated its capabilities for several large independent operators and is currently en route to a job for a major IOC, where it will utilize line power from the grid. Our Process & Flow Technologies business experienced a high-single digit decrease in revenue during the second quarter. A significant pickup in sales from the unit's production and midstream offerings driven by North American customers restarting investments in production-related infrastructure was more than offset by operational challenges in several large projects. Security issues in Mozambique led to an indefinite suspension of a large gas treatment project, and delays and cost overruns due in part to COVID-related challenges adversely impacted two other projects. Some of these issues were outside of management's control. We're confident this business will deliver improved results in the back half of the year on better execution and a meaningfully improved backlog. Orders increased 2.6 times over the first quarter, and our pipeline of opportunities remained strong. Our subsea flexible pipe business posted a double-digit sequential increase in revenue with strong incremental margins as the operation partially recovered from manufacturing challenges associated with a new product that we described in Q1. Delays and final customer acceptance slowed production during the quarter, but order intake grew 85% sequentially, both of which will allow the unit to post better results in the third quarter. Our fiberglass business unit reported a 13% sequential increase in revenue with solid EBITDA flow-through despite the continuation of global supply chain and COVID-related difficulties. Supplies of epoxy resin and glass remained limited and a spike in COVID cases in Malaysia led to the government mandate to shut down our manufacturing facility in the region. Through NOV's scale and nimble supply chain, we've been able to secure raw materials and shift manufacturing plants in regions that are less affected by COVID outbreaks in order to meet customer needs. Supply chain challenges have also resulted in higher costs. We've seen certain raw material prices increase upwards of 40% and shipping costs increased fourfold compared to 24 months ago. To date, we've been successful in passing costs onto our customers, but the rapid rate of change is causing some customers to delay projects. We're also seeing deferrals of existing orders from our marine and offshore customers, who are very reluctant to park their vessels for upgrades when they can capitalize on extraordinarily high shipping rates. Despite the difficult operating environment, our fiberglass business achieved its highest level of backlog in the last five quarters. We're finally beginning to see a pickup in demand from midstream customers in the U.S. For the third quarter of 2021, we anticipate revenue from our completion and production solutions segment will improve between 5% to 10% sequentially, with incremental margins in the low-30% range. Our rig technology segment generated revenues of $487 million in the second quarter, an increase of 56 million or 13% sequentially. Second quarter revenues included $74 million related to the final settlement from the cancellation of certain offshore rig projects. Excluding the impact of the settlement, revenues declined $18 million sequentially to $413 million as improving aftermarket sales and progress on land rig projects were more than offset by lower offer rig equipment sales. Adjusted EBITDA excluding $57 million from the settlement improved $5 million to $18 million or 4.4% of sales due to a higher margin mix and improved operational efficiencies. Capital equipment orders for the segment more than doubled to $232 million, yielding a book to bill of 138%. As Clay mentioned, more than 50% of our Q2 orders related to wind installation vessel equipment where NOV's engineering designs and equipment continue to be the market standards. Orders received in Q2 position us to achieve our stated target of a $200 million annual revenue run-rate in our wind business by year-end. While awards have been robust during the past 12 months, we expect this momentum to continue and see the potential for wind-related revenues to achieve a run-rate of between $350 million and $400 million by the end of 2022. Encouragingly, capital equipment orders also improved sequentially and reflected three drivers at work in the drilling space. One is the desire to reduce environmental impact, which is driving sales of products such as our EcoBoost and our PowerBlade energy recovery systems. Two is the need to improve operational efficiencies via digital technologies and automation, which is driving demand for products such as our NOVOS automation and control systems. And three is the need to replace or upgrade capital equipment that has been stacked or inadequately maintained. Rigs that were stacked during the downturn will need to be reactivated, recertified, and in many cases upgraded to meet customer demands for the latest and most efficient technologies. Typically, the first rigs to be reactivated require the least amount of work, and the capital intensity of projects grows significantly as customers work deeper into their stacks. While land rigs do not suffer from the same rate of corrosion as offshore rigs, they do tend to suffer a great deal from cannibalization, which is becoming more apparent as our customers ask us to reinitiate maintenance refurbishment and reactivation services. A growing sense of optimism around improving activity, international land tenders and the potential need for incremental rigs in Brazil, Guyana, the North Sea, and even West Africa is catalyzing discussions around reactivations and upgrades, while improving balance sheets and cash flows will enable the investments. During the second quarter, our aftermarket sales improved 3% sequentially with spare part bookings growing 11%. While spare part orders remain lumpy, we anticipate aftermarket spending will move higher during the second half of the year, as the industry continues its nascent recovery. Better orders and market sentiment give us greater confidence in the improving outlook for the rig technology segment in 2022 and beyond. For the third quarter, we expect revenues for our rig technology segment to remain in line with the second quarter, excluding the impact of the settlement, with margins that are flat to down 200 basis points. And with that, we'll now open the call up to the questions.

Thank you. Our first question comes from a line of Ian Macpherson with Piper Sandler. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Ian.

Hi. I was a little surprised just at the end there, Jose, that rig tech revenues are expected to be down after the strong Q2 bookings. So maybe just a little flavor behind that, please. And then just more generally, I wanted to ask if the strength in rig tech and cap bookings in Q2 looks projectable in the back half and whether we should start to see revenue growth kicking in, as you've described a two or three-quarter lag after wellbore. It looks like the Q2 orders support that, but just wanted to get more visibility in the back half of the year across those later cycle businesses.

Yeah, good questions, Ian. So really, you know, as it relates to rigs specifically, the guidance was really for revenues that were in line with the quarter excluding the impact of the settlement, so basically flattish type guidance. And really, it sort of corresponds with exactly the heart of the bigger question, which is the timing related to the bookings that we're receiving. So we're in the process of rebuilding some of the backlogs that got fairly well depleted last year. That takes a little bit of time. We've had a couple of quarters in a row of a nice pickup, and see that trend continuing at least until the third quarter, and likely well into 2022 and beyond. But you have to bear in mind that a lot of the projects that we're booking are very large scale long-term projects that effectively have an S-curve type revenue profile, meaning it starts off very small, builds up over time, and then has a tail off as it reaches the end of the lifecycle. And again, that tends to be on average for some of these bigger projects about a two-year time horizon.

That's for the wind vessel -

As well as some of the larger projects within the caps segment.

And Ian, your second question, in terms of the outlook, remains pretty strong for both rig and for the wind side in terms of continuing interest by the industry in adding capacity. We've got conversations underway with several potential participants in that space, as well as potential new entrants into the offshore wind installation space and as well, on the offshore rig side. As Jose mentioned, there is a lot of interest in potentially reactivating rigs and upgrading rigs, specifically adding pipe handling capabilities, automation, the OP upgrades, those sorts of things. And so our outlook remains pretty constructive for the next couple of quarters.

Excellent. Thanks, Clay. So very positive, not really surprising, the positive to hear that you're succeeding with your cost pass throughs in this very challenging cost and supply chain environment. The nature of these pass throughs is more of a variable surcharge, or is there some opportunity for you to put through pricing that's going to be stickier when the world eventually calms down? We don't know if that'll be later this year into next year, or what have you. But just generally, maybe it's too broad to generalize, but if you can. Is it a sticky price increase? Or is it more of a variable surcharge environment for your business?

That's a great question, Ian. It really varies by product line and geography, and it has a lot to do with the supply and demand in those specific areas. What I tell you is that the freight surcharge is a much easier sell in this market than a price increase. We are getting some price increases, but I think most of these are surcharges. And as Jose mentioned too, during a downturn, you throw in a lot of freebies like mobilization, maybe standby as free and those sorts of things. And we're calling a lot of that back. And so those were effectively price increases for us, but we're sort of taking back some of the discounts that were given through the downturn. So it really varies a lot. We're hopeful that this will continue, we'll be able to do some healing, as we talked about in our prepared remarks and get margins to expand. But right now, it's just mostly sort of covering the inflation that we're seeing out there.

Okay, got it. Thanks, Clay.

You bet.

Thank you. Our next question comes from the line of Chase Mulvehill with Bank of America. Your line is now open.

Hey, good morning, everybody. I guess, firstly, just wanted to talk about orders. Obviously, orders were pretty strong in Q2. Could you maybe just take a moment and talk about the sustainability of orders, as we get into the back half of the year? And maybe I'm not sure if you're prepared to kind of give this number or not. But if we basically add up large flexible orders and the turret order and the wind turbine installation vessel order, like how much did that amount to? And why I'm asking this is really what I want to understand is really kind of the base order rate. And then we can kind of layer in some of the lumpy or larger orders that could hit in the back half of the year.

Yeah, I understand that. And thanks for the question, Chase, I'm going to stop short of quantifying the specific contribution of those categories. I will reiterate a couple things we said in our prepared remarks. One is in rigs orders, it was just a touch more than half of the orders related to wind installation vessels and our outlook there remains very constructive. So very pleased to see those large projects moving forward and NOV's strong participation in them. And just as a reminder that depending on what parts of those vessels, those vessels will be wind that can be upwards of $80 million per vessel, if we went everything from design to jacking systems to handling equipment to cranes. But our outlook there remains very strong and believe that the world needs something on the order of two to three dozen offshore wind installation vessels. And that's working off of a low single-digit base right now. I would add that the U.S. needs Jones Act compliant wind installation vessels. And so we're building the first in Brownsville, Texas right now and expect more to be added. For really the next few years, we expect for that business to remain strong and robust. And then in addition, the rig equipment area, our outlook there based on specific conversations with mostly offshore customers, is constructive as well. And so we expect the next couple of quarters at least in that area to remain strong too. And then turning to completion and production solutions. Pleased to see more activity, conversations starting to heat up a little bit around some of the projects around the globe. We think that's helped by our customers' technical teams that are guiding and specifying and procuring the hardware around these project developments, getting back in the office and interacting with each other. And I think that's helpful to our customers to actually move forward on FID-ing these project developments. A lot of things, as we mentioned still moving to the right, but pleased to see some of those flow. And that sort of trend is translating through our offshore drilling contractor customers, who are now much more active with us in requesting engineering work to be done on their rigs looking at reactivations and upgrades that we referenced. So on the whole, hopefully we're pulling out of the big downturn from 2020 related to the pandemic. COVID still out there, still affecting our operations, but generally, I think moving into a period of much more constructive order outlook overall.

Perfect, appreciate the color. The follow up here is just really kind of when we think about the margin progression as we kind of go through the next few quarters. Obviously, you've got a lot of friction, supply chain, and raw material costs, things like that. Can you help us understand kind of how much of kind of this friction is kind of more temporary versus structural? And know how much of that structural inflation you can actually offset with higher pricing over time?

Yeah, we're pretty - generally when it comes to the inflation question, it's probably an overgeneralization. But I think oilfield services broadly, is better positioned in most industries to tackle and overcome inflation. And that's because it's such a volatile industry always has been. It's tied to the cyclicality of oil and gas, that there's a lot of awareness across this industry of pricing leverage. And so I think it's in our DNA broadly and in particular here at NOV. We're very tuned into our costs. We're actively managing this through conversations with our customers, it's helpful that the inflationary trends are so widely known and that our customers are seeing it in all areas of their business as well. That sort of facilitates the conversation. So I'm pretty confident we can manage through this. Not to say we're not going to see some short-term disruptions here and there, but we'll be able to manage through the inflationary headwinds. But on the whole, we think that the outlook remains good. Things are getting more constructive. The short-term headwinds that we faced in the first and second quarter, really not entirely, but clearly mostly related to COVID impacts on our fabrication operations in Asia, and the Far East on a couple specific projects that Jose mentioned, that's weighing on the margins. Frankly, those continued into July into the third quarter. We're going to continue to see those be a little bit of a headwind and trying to manage through it. Then there are secondary effects of COVID on the supply chain. So being on allocations for fiberglass, for resins, for certain epoxies, for many of the raw materials, as well as the sub-assemblies and components that we buy is a headwind as well, which is sort of a second derivative of COVID. That's a challenge as well. Those are temporary. They should dissipate when they do. Then I think we'll be able to get back to a more normalized healthier margin level.

Thank you. Our next question comes from the line of Neil Mehta with Goldman Sachs. Your line is now open.

Thank you. Good morning team. So I want to start off on offshore wind. You provided the $350 million to $400 million run-rate by the end of 2022 on the call. Can you help us understand the mix there? Are you expecting to see increased wind vessel installation numbers above the $200 million? Or are there other items that we should think of incremental to the $200 million? And just in general, how should we think about the margins on those types of orders?

Hey Neil. I mean, I perfectly understood your question in terms of the composition. But what we're talking about there is purely related to the offshore wind installation opportunity set that is in front of us. Every month, every quarter, seems like the opportunity set has continued to grow. We're really pleased with the way that business is shaping out. We just want to make sure that people understood that we're not topping out at $250 million a year run-rate at the end of this year. The opportunity set continues to grow. We'll continue to have a nice growth profile through the course of 2022. That does not include the potential for other opportunities within the wind space, whether it's floating wind type opportunities, or things that we're doing related to land market-related wind activities. And then, your question about the margin. I think in the past, we've said that in a lot of respects, the average installation vessel for us is very similar in size as well as really margin profile to a super high spec jackup rig. So it's a nice business and a nice opportunity for us.

One really interesting thing that we're hearing as well as we've described in the past, and I know you're familiar with, is that the world's sort of building out this fleet to handle the much larger turbines that are going in offshore that are as tall as a 50-story building at the hub height, and has an inadequate fleet to install that. Those sort of next-generation turbines are just now being started to be built and supplied by the OEMs. The industry is already thinking about sort of the next generation beyond that. To the extent that comes about, we’re now talking about not 13-14 megawatts, but 20 or maybe 25-megawatt towers, that too is going to require even larger vessels, bigger handling equipment, larger cranes, and the like. There is a potential follow-on opportunity to be seen beyond sort of the current number of vessels that we see as being required to support the industry's installation of these fixed offshore wind power generation assets.

That's really helpful. I think it sounds like the $350 million to $400 million is a baseline, but there are some incremental opportunities that could make this an even bigger business, a bigger part of your business. The follow-up is, obviously, there's been a lot of OPEC headline volatility here over the last couple of weeks. But the output is one that's very clearly positive for Middle East activity. How do you see NOV positioned to capture the increase in activity in the Middle East? And any comments you can have around some of the conversations you're having with your customers?

Yeah, very good question, Neil. We're very excited about the Middle East in part, because if you look back at where we have really expanded our footprint and our capabilities, it's clearly been that region, the GCC area, and Saudi Arabia in particular. Our presence across the GCC is much, much larger than it was 5-6-7 years ago. We've invested in a number of new manufacturing and field support operations across that region. We have our joint venture with Aramco to manufacture 50 high spec land drilling rigs, as well as support additional offshore rig building for the region. I think we're really, really well positioned to capitalize on that region's move towards a higher level of activity. What we've been hearing lately through the first half of the year is sort of this accelerating interest in getting back to work there. There have been a number of high-profile projects that some of the NOCs around the region have announced that were suspended through COVID that are sort of getting back to work now. And that's in addition to sort of standard kind of oilfield day-to-day work, which shows up at NOV in the form of tenders around components that are used in operations. We're very excited about the outlook for the Middle East that it's getting back to work following a big shutdown due to COVID. I will add, the region has very close ties to India. So India's COVID situation became more tense here a couple of months ago. It did affect operations in the Middle East, but hopefully, we're starting to put that behind us.

Thanks, guys.

Thank you. Our next question comes from the line of George O'Leary with TPH & Company. Your line is now open.

Good morning, Clay. Good morning, Jose.

Hey, George.

I don't want to put the cart before the horse and look out too far. But just thinking about Q4'21 and the level of orders you guys ramped in this quarter. Just curious if you have any sense for how robust year-end sales could be versus history.

George, we're getting a weak connection with you.

George, can you hear us?

It looks like George has been disconnected. I'll move on to our next question. Our next question comes from the line of Marc Bianchi with Cowen. Your line is now open.

Hi, Marc.

Thanks. Hey, guys. So there's several issues with the supply chain. There's inflationary pressures in terms of price in the faster stuff. There's COVID issues that you talked about sort of disrupting functionality, the supply chain. And then I suspect there's just other capacity utilization issues that have disrupted the supply chain. How much of, putting the pricing increase and the cost of stuff aside, just the disruption to activity? If you have to move manufacturing to another part of the world, or you have to expedite stuff from across the world to one other place, how much is that weighing on your margins right now? If I take the guidance that kind of implies like a 4% to 5% EBITDA margin for the third quarter? I'm just kind of curious if all this disruption were out of the way, what kind of margin rate will we be seeing?

Mark, it's a great question. It's extraordinarily difficult to answer. Other than to say, we go through intensive detailed reviews with 18 business units every quarter, and I would tell you, it came up in every single business unit. We spent a lot of time talking about it, because it's kind of everywhere. The shutdown of the global economy in 2020, it's hard to overstate how disrupted that's been to a tightly wound global supply chain. We're seeing it kind of all over the place. That's not to say we're not managing through it. I think our folks are doing a great job covering inflation with price increases and surcharges, like we talked about earlier. They're doing a great job finding alternative ways to meet the needs of our customers, find alternative suppliers. Our scale is really helping out here a lot. It's sort of a really, really extraordinarily challenging time coming off of an extraordinarily challenging event. What I would say is the allocations in certain raw materials, the difficulty of getting certain sub-components, and the difficulty of getting integrated circuit boards are more challenging than just the straight costs that we're seeing. The costs like I said, we're more or less able to cover that through pricing and surcharges. But it's the disruption because we need all of the parts to the modules that we put together the products that we deliver before we can deliver that. If we are short one component, that disrupts our production schedule and is a problem. I would add to that, this global supply chain that was so tightly wound pre-pandemic, was really facilitated by a robust ecosystem of industrial suppliers and distributors. In 2020, they all found their business under a lot of pressure. Many of them depleted their inventories as well. In sort of normal times, you have industrial distributors of steel of all these components of sub-assemblies in the like, who would absorb shocks from either the production side of things, to the extent shocks would arise from time to time or on the demand side of things. That performed a very important sort of shock absorber function. When they depleted their inventories in 2020, and their inventories are still very, very lean, they took out sort of one of the shock absorbers that NOV and other industrial manufacturers relied upon. Very, very proud on NOV's ability to manage through this to creatively work through new solutions and to access what we need where we need it, and to try to stay ahead of the challenges. Like I said, I think we're getting better at it. Q2 was a little better than Q1. We're working our way through it.

Yeah. Super. I mean, I guess related to that, and Chase asked the question earlier about order progression. I think you guys mainly responded to rig. But just in terms of caps. I mean, is this issue, the supply chain issue something that we should think about maybe limiting the caps order progression in third and fourth quarter? Or could we still see the 400 to 500 kind of level that you did this quarter?

We remain pretty bullish on demand. The oilfields are waking up in North America and got back to growth late 2020. The inflection that we feel like we're moving through now is the international markets. Thus, to some degree, offshore markets as well feel like they're starting to go up. We remain optimistic about orders for caps through the back half of the year.

Thank you. Our next question comes from the line of Veb Vaishnav with Coker & Palmer. Your line is now open.

Hi, Vebs.

Hey, how you doing? Thank you for taking my question. So maybe if I try to think about what is the underlying profitability of the business, not today? Obviously, we are still trying to improve on an activity and everything. But if I think about, let's say, in the next two to three years, can we get back to the 15% plus EBITDA margins we saw back in 2013 to 2015, given how much costs we have taken out?

I'm going to stop short of forecasting that, but you look back at our long-term track record, which Vebs, I know you're familiar with. We've demonstrated very strong profitability in the better parts of the cycle. I think it's very - it's not hard to construct a scenario where we get back to 15% EBITDA margins. We're also very focused on return on capital, I will tell you at that level, and a little higher level of revenue, we would be earning very good returns on total book capital, which is obviously our goal. Yes, a lot of structural heavy lifting since the first quarter of 2019, we've taken out nearly $850 million of costs, which are structural costs. Our business is a lot better, it's a lot more efficient as well, as we've made all these investments in digital capabilities, in new automation capabilities and renewables capabilities and the like. I think the company's pretty well positioned to deal with a better market. I know everybody's aware of this, but probably worth noting. We just moved through a year of record-low levels of rig activity dating back when records began being kept in World War II negative oil prices. It's just an extraordinarily historically bad downturn in the oil field. We're coming off of that. We're a long way from being in the good part of the cycle, but looking forward to getting there and generating a lot better financial results.

Thanks. And maybe in the same vein, given how we are changing business, more revenues coming from the wind vessels. I don't know if it changes the margin profile. But if I think about the free cash flow margins longer term, how should we think about NOV's free cash flow margins over sales, given that -

We've been managing our working capital through the downturn. One of our proudest achievements is our improved ability to manage working capital, which is resulting in strong free cash flow for the business. As Clay mentioned, we've made structural improvements focusing on working capital. Additionally, as you noted, our business and portfolio will evolve over time with the energy transition. We are excited about leveraging our current skill sets and asset base to seize these opportunities, which require virtually no additional capital. Although our capital spending this year was higher than expected due to a unique opportunity with the Saudi rig manufacturing plant, we anticipate returning to a capital expenditure run rate of 2.5% to 3% of revenue moving forward.

I think that's a good point. Thank you for taking my questions, gentlemen.

You bet. Thanks, Vebs.

Thanks, Vebs.

Thank you. Our last question will come from a line of Stephen Gengaro with Stifel. Your line is now open.

Thanks. Good morning, gentlemen. Two things. One following up on the prior line of questioning. The balance sheet is obviously in good shape, you're generating cash? How do you think about the uses of cash as we go forward here over the next one to two years?

Yeah, good question, Stephen. We've been pretty clear in the not so distant past and we've been pretty consistent over the last several years regarding how we think about capital allocation hierarchy. We continue to remain very focused on achieving our gross debt-to-EBITDA target of two times or better over time. However, as you pointed out, balance sheet are in great shape. You can really be, I guess, rest assured that we're not going to stockpile excessive cash as we move forward in time. Our outlook seems to improve day-by-day, which is wonderful. Given that we're only one quarter removed from breakeven EBITDA, there's still a little bit more work in healing that we want to have come into the equation. There are still uncertainties related to the emergence of the Delta variant that keeps rearing its head and causing some disruptions. It feels like everything's headed in the right direction. Ultimately, it's going to depend on the trajectory that takes hold in 2022 and beyond. If it's a very, very steep trajectory, we might have some working capital needs that we need to fund, or we could end up in a position where we have quite a bit of excess capital that we'll need to and will return to shareholders. We maintain a strong balance sheet for a number of reasons, but one of those reasons is to be able to maintain our ability to play offense, even in the depths of a downturn, which I think we've done pretty effectively over the last several years. Clay highlighted a lot of the new products and technologies that we've been working on and developing. It's time to shine and improving market opportunity. We want to continue to be opportunistic as it relates to being able to fund high-return investment opportunities. We're really thinking about it. But being one quarter away from EBITDA, it's probably a little premature to outline, a specific plan to return capital. But it certainly is something that we review just about every quarter with our board. That conversation will remain a good topic.

Yep.

Great, thanks. And then just one other quick one. On rig systems, the non-backlog revenue in the quarter was pretty strong in the second quarter. Is there anything that I should be reading into that as far as going forward? Or was there anything that pushed that number up artificially in the quarter?

Yeah, aftermarket was up a little bit? And as we mentioned, our bookings for spare parts, mostly offshore, have been up double digits the last few quarters.

Thank you. This concludes today's question-and-answer session. I will now turn the call over to Clay Williams for closing remarks.

Thank you, Sara. We appreciate everyone joining us this morning. Look forward to updating you on our third quarter results in October. So have a great rest of the week. Thank you.

Ladies and gentlemen, this concludes today's conference call.