NOV Inc. Q2 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to Q2 NOV, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D'Ambrosio, Director of Investor Relations. Please go ahead.

Welcome, everyone, to NOV’s second quarter 2024 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 2024, NOV reported revenues of $2.22 billion and a net income of $226 million or $0.57 per fully diluted share. 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. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Thank you, Amie. NOV’s second quarter revenues of $2.2 billion increased 6% compared to the second quarter of 2023. Year-over-year double-digit growth in international markets and 6% growth in the offshore easily overcame a modest 1% decline in North American sales. The company posted fully diluted GAAP earnings for the second quarter of $0.57 per share, up $0.18 year-over-year, helped by gains from our divestiture of our Pole Products business during the quarter. Second quarter EBITDA improved 15% year-over-year to $281 million. Strong sequential EBITDA leverage of 66% was driven by the impact of cost reductions undertaken over the past several months, along with a pull-forward of some work and very good execution. Consolidated EBITDA margin of 12.7% improved sequentially and year-over-year due to the cost savings and rising margins in NOV’s revenue out of backlog, which accounted for about 25% of our revenue mix during the second quarter. Exploration in new offshore basins, greenfield and brownfield offshore development for both oil and gas, and international development of unconventional resources are emerging as the primary growth drivers for NOV, as the strength and duration of this cycle remains on display. Stable oil prices and a strong long-term outlook for natural gas and LNG demand are supporting E&P investments in these. In fact, industry forecasts are calling for several additional final investment decisions, or FIDs, for big offshore projects following the significant ramp of the past three years, which are expected to drive sharply higher demand for offshore production assets like FPSOs. National oil companies or NOCs have been clear about their higher spending plans to achieve ambitious goals to boost production. These trends have important implications for NOV’s business. For international land developments, E&P operators need better drilling, stimulation, and production equipment and technologies, like those developed and honed in North America’s unconventional shale laboratory over the past two decades. As a reminder, the U.S. shale revolution began with a retooling of its drilling fleet to AC power and high-spec capabilities early in the century. That was step one, followed by the build-out of substantially more and more efficient hydraulic fracturing equipment, two things that never happened across the Middle East, Asia-Pacific or Latin America. New international wells also need miles of corrosion-resistant flowline, plus chokes, valves, processing equipment and the like. NOV is a leading global provider of all of these. Offshore E&P operators need drilling rigs to be reactivated after long periods of inactivity, which accelerates the corrosion caused by salt air and these also need to be retrofitted with drill pipe bits and drilling tools. Our organization supports the majority of the global offshore drilling fleet as a leading drilling equipment OEM. Drilling rig reactivation activity has been strong over the past few quarters as we’ve worked to put assets back to work. Offshore operators also need platforms and FPSOs and subsea flowlines and production kit, ranging from flexible and composite piping systems to gas treatment pumps, valves and chokes. Again, NOV is a leading global provider of these and we are now also seeing rising demand for production technologies we provide, which drove the strong level of orders this quarter. NOV’s opportunity per FPSO production vessel ranges from $100 million in benign waters up to $700 million in harsh environments. Book-to-bill was nearly 180% in the second quarter. Driven by strong demand for flexible pipe for deepwater FPSO developments, bookings were also buoyed by demand for well intervention equipment for both offshore and international markets, along with a large order for wind towers that Jose will speak to later. Onshore tendering and drilling activity continues to be strong in the Middle East and is rising in Latin America and Asia as NOCs pursue aspirational production targets, particularly around gas, and employ unconventional production technology, many for the first time. Most of these customers understand that the economics of unconventional technology work best with modern AC-powered rigs supported by advanced control systems, with downhole bits and friction reduction tools that enable longer laterals and higher production per well, and with safe and efficient pressure pumping spreads and cooled tubing units that derisk completions. They understand the fluid handling and corrosion challenges of high flowback rates of fluids carrying heavy abrasive loads through their processing plants. They understand that NOV can help them navigate these challenges with our unconventional production technology that enables profitable development of their resources. NOV is well positioned to capitalize on the building offshore and international momentum. On the other hand, in North America, we see a different and more challenging picture through the second half of 2024. Onshore activity in the U.S. continues to slow due to E&P merger integrations and low natural gas prices as the market awaits more LNG export takeaway capacity slated for 2025. Low natural gas prices and NGL prices, particularly in West Texas, reduce the realized wellhead revenues for operators and diminish their cash flows, wellbore construction economics, and their appetite to drill. Certain of our North American oilfield service customers are facing more price pressure as fleet utilizations fall, and most are increasingly cautious about their purchases, which led to an 8% decline in Energy Equipment revenues for the region year-over-year and drove North American mix down to 25% of segment revenue in the second quarter of 2024. In Energy Products and Services, with 51% of its mix from North America, you’d expect an even bigger impact from this trend. However, with market share gains in North America rising from new products and technologies along with revenues from our first quarter acquisition of Extract, North American revenues for our Energy Products and Services segment were actually up 3% year-on-year. So to sum it up, we’re very pleased with bookings during the quarter and 129% book-to-bill through the first half. While we are increasingly cautious about continued headwinds in North America, we think continued rising demand in offshore and international space will yield a book-to-bill greater than 1 for the second half of 2024. As they typically are, though, orders will continue to be lumpy quarter-to-quarter, and we do not expect a repeat of the second quarter’s exceptional bookings again in Q3. Turning to cost savings, to date we have substantially achieved the $75 million annualized cost reduction initiatives we announced last year through our new segment structure, workforce reductions and facilities closures. But we recognize we are facing a more challenging market in North America, and to achieve acceptable returns on capital, we can’t stop here. So we’re developing additional opportunities to further reduce costs and drive better efficiencies, focusing on what we can control. As always, that includes keeping an eye out for emerging technologies that we can bring to bear in our own operations, as well as our customers; technologies like AI, artificial intelligence. For the past few years, we’ve helped our customers optimize their drilling with AI through our KAIZEN app, and we’ve used AI to help write code here for a number of new NOV software products. More recently, we’ve begun to apply it to our own operations across more than 50 of our manufacturing facilities globally using a proprietary AI platform we call Iridia that we’ve developed internally to optimize capacity, improve machine tool utilization and drive better absorption and efficiency. The platform leverages NOV’s proprietary Max Edge devices to collect real-time data from sensors affixed to manufacturing machinery in our plants. The platform then feeds that data to AI prescriptive models that identify opportunity costs caused by throughput, quality or reliability issues. These models remove the guesswork to allow our operations team to quickly respond to issues and opportunities. The platform is highly scalable, and we plan to connect all our manufacturing machines worldwide beyond the several hundred that are using it today to help us improve utilization and results. NOV’s ability to quickly scale our operations as cycles dictate is a competitive strength that this system will enhance. We are also using AI to drive better forecasting. The supply chain drama arising from the COVID pandemic highlighted shortcomings in our lead time estimation and planning. In response, we are developing an AI solution to more accurately predict and manage vendor lead times to ensure we have inventory on hand when and where we need it. This will further optimize working capital while maintaining high reliability and logistical efficiency. We think steadily rising market demand in key offshore and international markets dormant for a decade, together with these technology-driven operating efficiency initiatives, new products and technologies we are bringing to the market, and further cost improvements are the prominent features that will guide NOV’s journey to better margins and returns. Our company is very well positioned to support and enhance our customers’ operations to drive better efficiency, to reduce emissions, and to improve their safety for the next several years. Before I turn the call over to Jose, I want to take a moment to thank our employees who may be listening this morning. As I just noted, we have a big opportunity in front of us as our offshore and international customers get back to work and as our North American customers continue to look to us for solutions to improve their business. They’re counting on us to deliver and I appreciate your hard work and creativity to support them. Thank you for the great job that you do.

Thank you, Clay. NOV has consolidated the EBITDA and improved 15% year-over-year to $281 million, with margins improving 100 basis points to 12.7% of sales, reaching the highest level since 2015, supported by our $75 million cost-out program, which, as Clay mentioned, was substantially completed during the second quarter. Cash flow from operations was a healthy $432 million due to improvements in working capital and profitability. CapEx totaled $82 million, leading to free cash flow of $350 million, and we continue to expect that we will convert over 50% of EBITDA to free cash flow for the year. Much improved cash flow realized in the second quarter reinforces our already strong confidence that NOV’s capital-light business model will generate substantial amounts of free cash flow over the coming years. Last quarter, we unveiled our return of capital framework that is aligned with our longstanding capital allocation priorities. As a reminder, priority one is to defend the balance sheet. As expected, during the second quarter, our net debt-to-EBITDA leverage ratio fell below 1 and our gross debt leverage ratio remained below 2, meaning we now consider the balance sheet to be in an optimal condition, which paves the way to return a large portion of our future cash generation to shareholders while maintaining adequate financial flexibility. Second, we aim to properly maintain our asset base and invest in organic growth opportunities that drive superior risk-adjusted returns. During the second quarter, the bulk of our $82 million in capital expenditures was invested in building out our ability to support more of our customers with our latest efficiency-enhancing tools, technologies and services. Next, we always want to remain opportunistic regarding acquisitions and can accelerate strategic growth initiatives at attractive returns. In the second quarter, we completed our acquisition of Keystone Tower Systems, which I’ll talk more about in a moment, and we’re continuing to evaluate rifle-shot technology acquisitions that improve our strategic positioning. Lastly, we remain committed to returning at least 50% of our excess free cash flow, defined as cash flow from operations, less capital expenditures and other investments, to our shareholders on an annual basis. During the quarter, we stepped up our return of capital by increasing our dividend 50%, which amounted to $30 million paid in the quarter. We also bought back 2 million shares at an average price of $18.50 per share, totaling an additional $37 million. In sum, we returned $67 million of capital to our shareholders during the second quarter. As I just mentioned, during the quarter, we completed the acquisition of the remaining minority interest in Keystone Tower Systems. With NOV’s help, Keystone developed a proprietary spiral welding manufacturing technology that we think will be a game-changer in the wind industry due to not only its potential to reduce the cost and time to manufacture wind towers, but even more so due to its potential to enable the manufacturing of towers in the field. This avoids the logistical challenges that prevent land wind farms from using taller towers, which can access stronger, more steady winds and utilize larger turbines. Using taller towers can significantly improve the economics of wind power and therefore expand the geographical areas where you can cost-effectively produce wind power outside of the wind belt and into regions with higher populations and energy demand. We made our initial investment in Keystone during 2019 and increased our financial investment over time, becoming the majority shareholder in 2023. We also increased our investment with human capital over time by sharing our manufacturing expertise to help produce and sell Keystone’s first commercial tower sections and position the operation to be able to win a contract for 398-meter-tall wind towers from a major wind turbine OEM. With this win, we elected to exercise an option to buy out the remaining minority shareholders, and we are now working to significantly expand Keystone’s manufacturing capacity to begin making deliveries on this contract beginning mid-2025. This operation is really just getting started, but we’re excited about the long-term potential of this business. Moving on to our segment results. Our Energy Products and Services segment generated revenues of $1.050 billion in the second quarter, a 2% increase compared to the second quarter of 2023. EBITDA decreased $14 million to $184 million year-over-year or 17.5% of sales, due to a less favorable sales mix and a more challenging North American market. Sequentially, the segment realized 3% growth with 30% EBITDA flow-through. As a reminder, our Energy Products and Services segment generates income from three revenue streams: services and rentals, consumable products, and sales of shorter-lived capital equipment. The segment sales mix for the quarter was 48% service and rentals, 20% product sales, and 32% capital equipment sales. Revenue from service and rentals includes tubular coating and inspection services, solid control services, drilling data acquisition, analytics, and optimization services, and rentals of our downhole drilling tools, drill bits, and artificial lift equipment. During the second quarter, revenue from NOV service and rental businesses increased in the low-single digits year-over-year. With market share gains in the U.S., strong demand from international markets, and the contribution from our new artificial lift business more than offsetting the 12% decline in North American drilling activity. Excluding the contribution from our artificial lift business, revenues from service and rentals declined in the low-single digits year-over-year. Revenue from drill bit rentals in the U.S. held flat from the second quarter of 2023 despite the 17% decline in the U.S. rig count. We realized strong growth in the Permian Basin from the rapid adoption of our latest bit and cutter designs, which coincided with many operators reevaluating performance, bit designs, and vendors as they optimize hole sizes across much of the basin. Growth in the Permian offset declines in other areas of the U.S., resulting from lower activity in gas basins and the cooling effect of consolidation among oil and gas producers continues to have on activity. Internationally, bit rentals and borehole enlargement services improved slightly on increased activity in the Middle East, more than offsetting lower activity in Latin America. Revenue from downhole tool rentals improved 3% from the second quarter of 2023. We realized a low- to mid-single-digit decline in North America against a rig count that decreased 12%, a result of rapidly growing adoption of our latest drilling technologies that allow operators to more efficiently drill high-pressure and long lateral wells. Demand for our tools is generally driven by footage drilled, but higher levels of drilling complexity require more of our technologies for efficient operations. For example, as customers push beyond 2-mile laterals, they’re realizing the benefit of running multiple zero-pressure drop agitators in their bottom-hole assembly. And for wells drilled with rotary steerable tools, our PosiTrack torsional vibration mitigation tool enables operators to maintain higher weight on bit, allowing them to drill further without damaging the BHA. While international revenue from downhole rentals was mostly flat year-over-year, we expect to realize strong growth over the mid- to long-term, driven by increasing activity in the unconventional plays of the Middle East. Revenue from solid control services realized a low single-digit growth rate compared to the second quarter of 2023. In North America, rapid adoption of NOV’s new Alpha shale shaker, which offers significantly higher cuttings handling capacities, greater safety, and lower costs, mostly offset meaningfully lower drilling activity in North America. Revenues from the Eastern Hemisphere improved on higher activity levels and increasing adoption of new technologies, including the Alpha shaker and our iNOVaTHERM Waste Treatment System, which efficiently treats oil-based drilling waste at the wellsite, allowing customers to eliminate the costly transport costs while meeting all environmental requirements for disposal. Revenues from rentals of our drilling data acquisition systems improved year-over-year, with a low single-digit decline in North America being more than offset by improved activity in the Eastern Hemisphere. Our Downhole Broadband Solutions wired drill pipe services operation is gearing up for a big 2025. Sequential revenues were mostly flat, but profitability declined, with the operation beginning to carry additional costs as it readies itself for significant growth. As noted in our significant achievements, we signed a framework agreement with a major Norwegian oil and gas producer associated with their intent to deploy our services across their rigged fleet. We also recently had two additional significant customer wins with our DBS offering. After completing a drilling campaign months ahead of schedule and with better well placement than the customer expected, leading to improved productivity, an operator extended its contracts with us for another two years. And earlier this week, after realizing strong results from a trial with our DBS services, a major NOC in the Middle East awarded us contracts for one offshore and one land rig to begin operations at the end of the year. Lastly, our Tuboscope operations experienced a low- to-mid single-digit decline in revenues on lower demand for inspections of oilfield tubulars and for drill pipe coating in the U.S. Revenue from product sales, which include consumable products used in drilling and completion operations, improved in the mid-to-low 20% range year-over-year, and excluding the acquisition of our artificial lift business was up low single digits. The small year-over-year increase was primarily the result of higher product sales in the Eastern Hemisphere from our Tuboscope operations, including our pipe connection systems and sleeves and bulk powder coating shipments. A low 20% increase in sales of completion tools with significant gains in the Middle East, North Sea, and North America, along with an increase in bulk drill bit sales into Africa and Asia. These increases were partially offset by lower sales of fishing tools and components for managed pressure drilling equipment. Sales of capital equipment within the segment, including composite pipe and tanks, drill pipe, conductor pipe, shell shakers and managed pressure drilling equipment fell in the low-to-mid single digits compared to the prior year, due primarily to lower drill pipe sales, which declined in the low 20% range due to a sharp falloff in demand from U.S. land markets, partially offset by improving demand from international land markets. The decline in our drill pipe business was more than offset by higher deliveries of MPD equipment and a modest improvement in sales of fiberglass equipment, where there’s growing demand from composite pipe in the oil and gas fields of the Middle East, and for corrosion resistant composite tubulars and tanks for use in FPSOs. Bookings for our fiberglass business increased 25% sequentially and include orders for 462 kilometers of fiber spar spoolable pipe and 128 kilometers of bond strand pipe destined for the Middle East. For the third quarter, we expect revenues for our Energy Products and Services segment to be flat to up in the low single-digit percent range when compared to the third quarter of 2023, with EBITDA between $175 million and $190 million. Our Energy Equipment segment generated revenues of $1.204 billion in the second quarter of 2024, an $87 million or 8% increase year-over-year compared to the second quarter of 2023. EBITDA improved $43 million to $142 million or 11.8% of sales, representing an incremental flow-through of 49%. The outsized incremental margin was a result of cost savings, the improving quality of our backlog and a more favorable sales mix. Double-digit revenue growth from both international land and offshore markets more than offset a slight decline in sales into the North American land market year-over-year. Normalizing for the divestiture of the segment’s Pole Products business, revenue increased roughly 10% year-over-year. As a reminder, this segment is primarily a later cycle capital equipment business that has two revenue streams: equipment sales and aftermarket sales and services. During the second quarter, equipment sales accounted for approximately 54% of the segment’s revenues. Aftermarket sales and service accounted for the remaining 46%. The segment’s capital equipment sales increased in the mid-single-digit percent range or roughly 10% when normalized for the divestiture of our Pole Products business, and aftermarket revenue improved in the upper single digits relative to the second quarter of 2023. Most of our aftermarket revenue comes from our large installed base of drilling equipment and Intervention & Stimulation Equipment. Our rig equipment business saw a high-teens percent increase in its aftermarket revenue year-over-year, led by higher spare parts sales and a significant increase in projects to reactivate, recertify and upgrade offshore rigs. As offshore rigs have gone back to work and idle rigs that could have been cannibalized for parts have diminished, excess inventories of spare parts have been depleted by our customers, and their fleets of active rigs are now providing steady demand for spare parts, recertifications, and special purpose survey work, which are typically done once every five years. As the global fleet ages, recertifications are requiring more parts and services, leading to strong aftermarket demand for NOV as the leading OEM in the space. In addition to traditional aftermarket spares and services, we’re building a steady stream of recurring revenues from subscription services that include support from our 24x7 remote support center, which is currently monitoring 244 offshore rigs, regular updates and support from our NOVOS multi-machine control and process automation systems, where we currently have 125 systems deployed, 26 being installed, and another 63 in our backlog. And support for our recently introduced robotic systems has seen rapid adoption during the second quarter, including new orders for another 10 systems from eight different drilling contractors. Our Intervention & Stimulation Equipment units’ aftermarket revenues were down in the low-teens year-over-year due to declines in North American activity. While we may not have quite reached the bottom in demand for aftermarket parts and services in the North American completions market, demand from international markets continues to improve and should begin to more than offset sluggish demand in North America. Moving to the capital equipment side of the business, as we mentioned in our last call, we had a significant order slip from Q1 into Q2, which contributed to a very strong level of orders and a book-to-bill of 177% during the second quarter. Book-to-bill for the first half of 2024 was 129%. Orders for large pieces of capital equipment are inherently lumpy, so we don’t get too excited about bookings in any individual quarter, but instead focus on what our customers are telling us related to their upcoming needs. And what we’re hearing from them suggests that we can expect bookings to remain solid in the second half of the year. During the second quarter, we posted a significant year-over-year improvement in sales of drilling equipment. Land deliveries increased on improved progress on Saudi new builds and a sizable increase in top drive and iron roughneck deliveries. Offshore capital sales growth has been driven by pull-through from rig reactivations and a general uptick in automation upgrades. Offshore activity remains strong and we expect continued reactivations and recertifications from the aging fleet to drive upgrades that will require meaningful capital equipment orders. Revenue for the Marine and Construction business posted a slight decline compared to the second quarter of 2023, with higher revenues from cableway vessels and electric cranes not quite offsetting lower revenues from wind turbine installation vessels. Orders were solid for offshore wind and construction businesses, and we booked a repeat order for our NG-20000 WTIV design and jacking system for Europe’s largest installation vessel owner in the offshore wind space. Despite delayed FIDs and inflationary impacts on developers’ projects, the outlook for orders of WTIVs, cableway vessels, and heavy lift equipment for FPSOs and offshore construction vessels remains promising, with the possibility of one to two more vessels in the second half of the year. Capital equipment sales by our Intervention & Stimulation Equipment business improved almost 10% compared to the second quarter of 2023. Solid execution from the business unit’s growing backlog of wireline equipment and higher shipments of coil tubing equipment more than offset only slightly lower shipments of pressure pumping equipment. Despite soft demand from North America, the business posted its fourth straight quarter with a book-to-bill better than 1 on continued strength and demand for wireline and coil tubing equipment from international markets. Our process systems operation achieved a low single-digit revenue increase year-over-year resulting from the strong execution on a large processing module for the North Sea. We expect a modest step down in revenues from this operation in the third quarter, but longer-term, the outlook for this operation is bright, and we’re seeing growing demand for new monoethylene glycol units, which are sizable, higher margin FPSO modules where our process systems team provides unmatched capabilities and experience. Our Production and Midstream business saw mid-teen percentage improvement in revenue compared to the second quarter of 2023 with a large increase in shipments of production chokes in the Middle East outweighing softer demand for chokes and pumps in North America. Lastly, our subsea flexible pipe business unit continued to capitalize on robust demand for subsea flexible pipe. The business has increased its backlog by more than 80% over the last year, achieving an all-time high and providing a clear path to significant top-line growth with much improved margins beginning in 2025. Awareness of limited remaining industry production capacity is driving operators to place orders further in advance, creating a positive outlook for additional orders, some of which are now for delivery stretching into 2027. For the third quarter, we expect revenues for our Energy Equipment segment to be flat to up a couple of percent compared to the third quarter of 2023, with EBITDA between $140 million and $160 million.

Thank you. Our first question comes from Jim Rollyson from Raymond James.

Hey. Good morning, Clay and Jose.

Good morning, Jim.

Good morning, Jim.

We received solid results and impressive bookings, which we anticipated and benefited from the slippage. Clay, it seems you may have replaced more than 20% of your backlog in one quarter with new bookings, and we’ve been consistently seeing improvements in margins embedded in the backlog. If I’m interpreting the numbers correctly, you provided guidance for the third quarter, and if you project into the fourth quarter from the annual guidance, your EBITDA margins appear to be moving into the 14% or higher range in the fourth quarter. Could you share some insights on that margin trend in the backlog and how pricing in the backlog is shaping up in real-time?

During the pandemic, we ended up with frame agreements that were not as inflation-protected as we had anticipated, which included more challenging payment terms. While we are still fulfilling those agreements, they are contributing less to our revenue each quarter. We are acquiring new work with much better terms and margins, which I find very encouraging. As we approach 2025, there are a few significant agreements that will conclude, which will likely lead to improved margins. We have been diligently focusing on enhancing our margins, and the recent $75 million cost reduction is contributing to this improvement, with more initiatives planned. We have new leaders from our reorganization who are exploring ways to enhance margins, particularly in underperforming areas. Our outlook remains strong, and for Q4, we anticipate margins around 14%. Traditionally, Q4 is our best quarter for margins, and we expect to see an upward trend in margins over the next few years due to the strengths we are experiencing in offshore and international markets.

Got it. That’s helpful. You mentioned an interesting point about the FPSO side. If some forecasts suggest there will be nearly 50 additional FPSOs in the next five years, there is a revenue opportunity ranging from $100 million to $700 million per FPSO, depending on factors such as size, scale, and distance from shore. I'm curious what your typical win rate is, as those numbers could be significant within a small segment of your operations. What are your thoughts on this?

Each of these situations involves competitive bidding, but we typically enter with a robust technology portfolio. Our strengths primarily lie in process systems, gas dehydration, and seawater treatment processes, backed by extensive experience as a global leader in these areas, including modules for FPSOs designed to manage fluids. We also supply a significant amount of composite piping systems for seawater fire suppression and ballast systems, maintaining a strong market presence. In addition, we provide cranes, turret mooring systems, and offloading systems. Our position in subsea flexible pipe is another key area where the company enjoys a solid reputation. We have several strong business sectors catering to this trend. However, I want to note that our acquisition of purchase orders occurs later than some competitors since our approach is more product-centric. Consequently, we often don't secure FPSO-related purchase orders until six to eighteen months post-FID. Nevertheless, our customers are currently noticing high utilization rates in manufacturing plants, not just ours, but others worldwide. This issue is becoming an earlier consideration they must factor into their project planning.

Excellent. Appreciate it. I’ll turn it back.

You bet.

Thanks, Jim.

Hey. Good morning, Clay, Jose?

Good morning, James.

Good morning.

Guys, I had a question on land rigs, both domestic U.S. land rigs and then the fleet that’s being retooled and built for the international markets. So, I’m hearing a bit about some upgrades here and there in the U.S. Some of that’s software, of course, but there’s equipment upgrades and some changes to the rigs, and of course, there’s a total retooling of the fleet internationally. I wondered if you could, I know this is a pretty broad question, but if you could maybe bucket what are the leading kind of upgrades or changes or equipment asks on these new either upgraded rigs or the new rigs?

Well, that’s a great question, James. As you know, the appetite to spend a lot of capital is pretty limited by North American land drillers and access to capital, cost of capital, that’s a factor in their level of appetite for new technologies. We sort of recognized this several years ago. So, our development focus around new technologies focused on land drilling has been around cost-effective ways to achieve rig-of-the-future type performance levels with a reasonable sticker cost, if that makes sense. And we also recognized that digital technologies were going to be a big part of that, and so that’s why we introduced our NOVOS operating system to support our rigs, which really opens up their operations to a lot of applications, some developed by NOV, some developed by others in a way that can really drive efficiency. So, I’ve been seeing a really good uptake on NOVOS. I think Jose quoted some really good numbers in his prepared remarks earlier about installed base. And what’s interesting about that, James, is that that provides a digital foundation for automation. So the other thing we’ve done is develop a very cost-effective way to bring robots to the rig floor and to the racking board and to really create truly a hands-free environment and a lot of buzz in the industry around that capability. I would add that not only are drilling contractors excited about this because it helps them manage their workforce and increases efficiency, but operators are also interested. This is what we are seeing in terms of demand behind the scenes. Several major international oil companies have adopted this technology and are discussing its implementation with their drilling contractors for both land and offshore operations. This is shaping the demand for technologies that improve drilling in North America. In contrast, the significant modernization of the North American rig fleet towards AC technologies, which was a rapid and purpose-driven upgrade for better capabilities, has not occurred in most international locations.

Right.

So, what we’re seeing now is NOC and operator preference for AC-powered rigs, some of these technologies that I mentioned, and that’s driving demand for those kinds of rigs in those marketplaces, most notably around the Middle East, but also interest in Latin America and a few other places.

Got it. That’s very helpful. I have a follow-up regarding the Keystone acquisition. We’ve been observing your interest and the growth of that business, and it appears you’ve reached a significant milestone, which has led to fully integrating the business. I’m curious about who you are replacing, what the competition looks like, who the incumbents are, and if there is any technology on the market similar to your spooling technology.

Great question, James. There is, of course, an existing group of competitors that have been supplying traditional wind towers for both land and offshore markets. The fabrication process for these towers is slow and heavy. The design they offer is not optimal for what is needed in the marketplace. Our long-standing mission has been to enhance the efficiencies related to global energy production. We recognized that there are more effective methods to operate in the renewable energy sector, which clearly required significant improvement in economics. Obviously, before us, the industry had done a great job bringing down costs through more standardized manufacturing processes and getting towers taller and going to bigger turbines. They were hitting a wall and our brilliant scientists and engineers put their hats on and tried to identify ways to further drive the improvement in economics. And while we were working on our own solutions, we came across this really smart group of individuals that had designed this technology, the spiral weld technology that not only allows you to manufacture wind turbine towers at a faster rate but also using less steel, so lower cost, faster production. And what we really got excited about was the longer-term potential of building these plants in fields where you can more optimally design these tower sections. So, traditional wind tower that’s built right now to overcome the logistics of getting up and down the highway, even for the tower heights they’re building today, the bottom portion of the tower is using much thicker steel than you should. Ideally, you would have a wider base with thinner steel; that would be much more efficient, plus you could go to much taller heights. If you build the tower sections in the field and assemble in the field, you can overcome that issue, have an optimally designed tower and go to much higher heights and utilize bigger turbines, driving much better economics. So, obviously, our first foray here is to prove out the technology, which we’ve done. We have sold commercial sections out of our plant, our fixed plant in Pampa, Texas. We’re working really hard to scale up those operations to begin making deliveries under this new contract in mid-2025. And then we’ll see where the business takes us, but as I mentioned, we’re really excited about the long-term potential of this business.

You bet. Thanks, James.

Yeah. Good morning. Clay, I wondered if you can kind of …

Good morning.

Good morning. Clay, could you expand on the benefits from the recent organizational re-segmentation? You mentioned some new leaders and the transition from three segments to two. Also, could you provide an update on the $75 million cost-saving initiative, and indicate if there might be further developments in that area?

Thank you, Arun. About a year ago, we launched a cost-reduction program of $75 million. This followed several larger initiatives we had implemented earlier that involved reorganizing and re-segmenting the company. We have brought in new business unit leaders and have seen some long-serving employees retire, which has allowed for fresh perspectives and new opportunities. We are still executing the plan developed under the previous management, and now, as we find ourselves in the middle of 2024, we are identifying additional opportunities. So, some specifics around that would include things like more centralized manufacturing organizations and some re-engineering opportunities on the supply chain, folding in some of these new technologies like I talked about in the prepared remarks, utilizing AI to monitor our machine tools, for instance. And it also involves a process that we’re going through with these new leaders to take a fresh look at all of our locations and operations around the world and analyze these from a return on capital standpoint. And so, I think there will be continued rationalization. And so that’s underway. It will continue a while. And as you know, probably better than most, we’ve been doing a lot of rationalization and a lot of cost reductions here for really the past decade. And so, a lot of the easy things have been done. These are all higher degree of difficulty type things, but I think we’re going to continue to get better and more efficient. That’s going to, as I said, be a bit of a tailwind on margins going forward.

Great. My follow-up is I’m wondering, Clay, if you could comment on what you’re seeing in terms of the rig reactivations, recertifications kind of process, and maybe you could touch on the potential impact to NOV from some of the offshore rig consolidation activity we’ve seen more recently?

We observed a significant increase in rig reactivations from 2022 to 2023, and this trend is still ongoing. This is due to our engineers conducting surveys on the rigs to determine their needs for special purpose work typically required every five years, which often involves equipment replacement or upgrades. As these rigs enter the shipyard for necessary maintenance, there is a trade-off in lost drilling opportunities. This has positively impacted our business. The industry is making rational decisions, leading to the reactivation of the most affordable and easiest rigs first. As demand increases for more rigs, the cost per rig is rising. We've certainly benefited from this trend and continue to do so. Even though we are busy, with over thirty rigs currently in shipyards being reactivated, there remains significant potential for further activity. There are currently seven floaters under construction that had their operations paused during the downturn over the past decade, along with 25 others that are cold stacked. Additionally, there are 14 floaters and seven jackups that were being built and also suspended, plus another 39 cold stacked rigs. These rigs represent potential candidates for reactivation that we could benefit from. However, to be completely honest, many of these may not be cost-effective to reactivate, and companies looking for a rig might consider new builds instead. Nevertheless, there is still potential for growth in this area, and we are pleased to assist our customers in realizing this potential. Regarding consolidation in the offshore sector, we are familiar with all parties involved, and ownership of NOV equipment is unlikely to be a significant factor. We maintain strong relationships with our partners in offshore drilling and look forward to continuing to support their efforts and enhance the efficiency of their operations.

Thanks, Clay.

You bet. Thanks, Arun.

Hey. Thanks. I’d like to start by following up on AJ’s question there about the aftermarket services. One of the things that I think has been a …

Okay.

Thanks. I think one of the things that I think has been a big benefit over the past couple of years is the special survey work, which I think, if we sort of map out when these rigs were delivered, would suggest maybe there’s a challenging comp when you get to 2025. Can you talk about that a little bit? Like, is there a slug of revenue that goes away in 2025, and we could see maybe the aftermarket service have a little bit of a headwind related to that?

Regarding the special purpose survey aspect, Marc, we don’t really anticipate significant changes. The reason is that multiple generations of offshore rigs have been delivered over the years, particularly following the super cycle around 2008 to 2014. Many construction projects were ongoing globally, and rigs continued to be delivered during that time. These deliveries have been spread out, but also, these rigs require maintenance every five years. I would note that the 10-year special purpose survey tends to be more expensive than the five-year, and similarly, the 15-year survey generally costs more than the 10-year survey. And so that sort of diversity of, let’s call them birthdays, plus the fact that some rigs have been interrupted from COVID and other downturns in the industry, let’s say, plus the fact that not all SPSs are kind of equal opportunity for NOV kind of levels that out more. The key driver for us is the fact that the offshore fleet broadly is going back to work, and the offshore fleet broadly has already cannibalized everything they can cannibalize. And so a healthier level of activity and not having to compete with an overhang of excess supply of spare parts and equipment that can be repurposed is the main driver for NOV’s business. Does that make sense?

No. It makes perfect sense and I hope that my birthday parties that I’m paying for over the next few years don’t go up and up and up, but we’ll see.

You’re not getting older, you’re getting better.

In terms of the order outlook here, so for…

Yeah.

I think I heard you say, Clay, in your prepared remarks, you’d expect greater than one book-to-bill in the second half, and I just want to make sure that that was what I caught, or were you referring to…

Yes.

And I think, Jose, you mentioned a couple of wind insulation vessels that are kind of in the pipeline and could be awarded. Do you need those to convert to greater than one book-to-bill or do you think you can get there without those one-offs?

They would be helpful, but we have ways to achieve that without needing support, as you know, Marc. However, these situations can be uncertain, which is why we're cautious about providing extensive order guidance. I can tell you there are several avenues to reach a book-to-bill ratio above 1. In any given quarter or six-month timeframe, we secure some orders while missing others. Overall, feedback from our operations team indicates a positive outlook for demand in the upcoming quarters. Additionally, our long-term perspective on offshore and international markets is optimistic, and these will drive future orders.

Yeah. Super. Thank you very much. I’ll turn it back.

You bet. Thanks, Marc.

Good morning, Clay.

Good morning, Luke. We’re having a hard time hearing you. Oh, there you are. Good.

Luke, good morning.

Yeah. You had good orders here in 2Q in Energy Equipment, and you talked about book-to-bill being above 1x in the second half of the year, and I know it’s kind of early days, but just kind of a broader NOV, might be difficult to do without quantifying, but could you just help us kind of frame how you see 2025 shaking out in your broad outlook as of now?

We are cautious about providing specific numbers, but thematically we feel positive about the international and offshore markets, expecting them to have sustained progress. NOV will play a key role in this, which should lead to improved conditions in 2025, including better margins and stronger demand. The uncertain factor for me is North America, especially with ongoing conversations regarding the possible resurgence of gas drilling in the region and the increased LNG takeaway capacity that could significantly benefit the operators’ economics. Additionally, the completion of integration activities among the merging E&P companies would also contribute positively. However, for now, North America remains the biggest uncertainty. Overall, I believe the positive trends in offshore and international markets will more than compensate for any ongoing challenges we face in North America. Jose, do you have anything to add?

No. I completely agree with everything that Clay just mentioned. North America is definitely the wild card. The international offshore situation continues to look very promising, which is reflected in our backlog. Regarding North America, even a slight increase in activity could significantly impact demand for capital equipment in that market. We are hopeful that we are close to a low point in overall activity. While we are not expecting a huge rebound, we believe that even a moderate increase in 2025 will generate more demand for capital equipment.

Okay. Got it. Thanks much.

Thanks, Luke. You bet.

Thanks. Good morning, everybody.

Hi, Stephen.

So, two quick ones from me. Just first on the cash flow side; obviously, free cash flow is strong in the quarter. Maybe for, Jose, when we think about the rest of the year and you kind of think about the journey you’ve been on recently to get to this point and the confidence level in free cash generation, how should we think about sort of just the key components of it over the next couple quarters? And I imagine your confidence level is clearly increasing here on cash generation over the next couple years?

Absolutely, Stephen. A few quarters ago, we gained strong confidence that we had turned a corner, and we expect to generate significant free cash flow over the next several years. We demonstrated this in the second quarter and to a lesser extent in Q4 of last year. While we are in a good position, it's important to note that free cash flow can be unpredictable due to factors like delivery timings, receivable collections, and milestone payments. Our guidance remains that we will convert at least 50% of our EBITDA into free cash flow this year. We experienced some early collection in Q2, so we anticipate a decline in Q3 and then a robust free cash flow in the fourth quarter, as is customary. And as we go forward beyond 2024, as I’ve said before, don’t see any reason why we shouldn’t continue to generate free cash flow at a rate that’s sort of equal to or better than that 50% of our EBITDA. So, I feel really great about things. Obviously, we’ve been working on working capital. There’s more opportunity on that front in terms of where the cash comes from, but also just obviously higher levels of profitability drive more free cash even without a material movement in our working capital balances. So, things look really good from a free cash flow standpoint that will ultimately translate into what we return to our shareholders.

Great. No. That’s very helpful. And the other just quick question, just from a macro perspective, you talked a little bit about North America land and the uncertainty next year. In your view, and you guys have looked at this a long time, what do you think needs to happen? I mean, do you think it’s just the M&A kind of pause that’s creating some of the apprehension along with gas prices? Do you think there’s anything else at work which is kind of leading to maybe lower activity than at least we would have thought at this point of the year?

That’s a really good question. Certainly gas would help a lot. I think gas has taken a big toll. Even liquids producers have exposure to gas prices and that’s affected activity here. Beyond that, in terms of what kind of lights up the North American rig count again now. I’m not sure I have a good guess as to what that might be other than to just point out the fact that this is a very, very creative and entrepreneurial group of producers here in North America and, man, they always seem to come up with something. And 20 years ago it looked like North America was continuing to drift down and had its best days were in the rearview mirror and then all of a sudden, you have the shale revolution here. I’m not certain what the next revolution will look like, but I know there are many intelligent individuals in the exploration and production community working towards that goal. What would greatly assist us is that our customers in North America have excelled in capital discipline and have significantly reduced their spending on new technology. We are continuing to explore what comes next in this area, and as I mentioned earlier, I believe that increased automation in drilling is key. There are some senior leaders from major oil companies who share this vision. Therefore, I am quite optimistic about the opportunity ahead of us to enhance automation and the digital tools used to optimize drilling across rigs throughout the U.S. and North America. And the drillers here, I’m sure they’re going to do it again this quarter, talk about improving efficiency and continue to get better at what they do, and so we’re looking for opportunities to help support them do that.

Excellent. Yeah. Thanks for the call.

You bet. Thank you, Stephen.

Thank you. At this time, I would now like to turn the conference back over to Clay Williams for closing remarks.

Thanks, Fiji. We appreciate everyone joining us this morning and we look forward to sharing our third quarter results with you in October. I hope you have a great day. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.