NOV Inc. Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to NOV's Second Quarter 2025 Earnings Call. Please be advised 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.

Welcome, everyone, to NOV's Second Quarter 2025 Earnings Conference Call. With me today are Clay Williams, our Chairman and Chief Executive Officer; Jose Bayardo, our President and Chief Operating Officer; and Rodney Reed, our Senior Vice President and Chief Financial Officer. 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 2025, NOV reported revenues of $2.2 billion and net income of $108 million or $0.29 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. For the second quarter of 2025, revenue of $2.2 billion was up 4% from the first quarter of 2025 and down 1% from the second quarter of 2024. EBITDA was $252 million or 11.5% of sales. Our Energy Equipment segment grew revenues 5% sequentially as the strong execution of capital equipment sales was able to more than offset a significant reduction in demand for aftermarket parts and services. However, the resulting unfavorable mix shift drove margins sequentially lower. Nevertheless, the segment delivered its 12th straight quarter of year-over-year margin expansion. Energy Products and Services solid 3% sequential top line growth handily outperformed a 6% decline in global drilling activity, buoyed by higher capital equipment sales and greater penetration of our efficiency-enabling technologies in key markets. That strength was partially offset by sharply lower demand for quick-turn consumable drilling and completion products in North America, Saudi Arabia, and Latin America, along with tariff-related and inflationary cost-pressure factors that together compressed segment margins. Against this backdrop, both segments remain focused on structural cost reduction and process improvement. Jose will provide additional detail on these initiatives later in the call. The 6% sequential decline in global drilling activity underscores market conditions that are growing more challenging. Macroeconomic uncertainty, the rapid unwinding of OPEC+ production quotas and conflict in the Middle East have made customers more cautious. In North America, exploration and production companies moved decisively to curtail short-cycle activity. The U.S. oil-directed rig count declined roughly 9% since March and modest gas rig additions could not fully offset the drop. Pricing pressure is intensifying. Internationally, conventional activity also eased. Saudi Arabia suspended additional onshore rigs and Argentina operator shifted focus from mature Comodoro operations toward the unconventional Vaca Muerta play. In offshore markets, tariffs and cost inflation are prompting some operators to slow-walk certain projects, which probably delays some final investment decisions. Importantly, we aren't seeing these projects canceled, and we are continuing to advance discussions and FEED studies on multiple deepwater programs. Our offshore drilling contractor customers expect their white space utilization challenges to ease in 2026. On the whole, the remainder of 2025 will be tough. We expect North American shale activity to drift modestly lower through year-end, while Saudi conventional drilling may not reaccelerate before 2026. We think global drilling activity will slow further through the second half. Nevertheless, we expect NOV's backlog and fourth quarter seasonal bulk tool purchases from international markets to support second half sales that are flat to up modestly compared to the first half. For the third quarter, we forecast year-over-year consolidated revenue to decline between 1% to 3% with adjusted EBITDA to land in the range of $230 million to $250 million. Looking past near-term turbulence, NOV's opportunity landscape is compelling. We expect offshore activity to accelerate in 2026, and our healthy pipeline of prospective FPSO awards should drive demand for NOV's production technologies. Globally, the push for secure affordable energy is accelerating investment in LNG and unconventional gas. Areas where our composite pipe, high-pressure, high-temperature solutions, and gas processing equipment excel. Our expanding digital automation platform is delivering measurable efficiency gains for customers. Importantly, our significant backlog and strong balance sheet give us the confidence and capacity to invest in these technologies. Overall, growing offshore drilling and development activity, stabilizing rig counts in the Middle East, and incremental growth in Middle Eastern and Latin American unconventionals set up a more favorable market for 2026 in our view, assuming commodity prices are reasonably well behaved. To all my fellow NOV employees listening today, I want to thank you for the terrific job that you are doing. Our customers count on you and me every day to help them navigate tough market conditions. And Jose, Rodney, Amie, and I appreciate all that you do to support them and each other. With that, let me turn it over to Rodney to review the results for the second quarter.

Thank you, Clay. Second quarter consolidated revenue increased 4% sequentially and decreased 1% year-on-year. These results reflect strong execution on our capital equipment backlog that was largely offset by lower aftermarket spare parts and consumable product sales due to softer oil and gas activity, all of which drove an unfavorable change in mix across our businesses. Consolidated adjusted EBITDA was $252 million or 11.5% of sales. Margins were pressured by this less favorable sales mix, higher tariffs, inflation-driven cost headwinds, and certain charges in Latin America. During the quarter, we generated free cash flow of $108 million resulting in our team converting 83% of our EBITDA to free cash flow over the last 12 months. We continue to execute well on structural improvements to our working capital, including improved cash conversion cycle and inventory turns which have resulted in a 300-basis point improvement year-over-year in working capital as a percentage of revenue. Over the first half of 2025, we repurchased 10.9 million shares for $150 million. Since we announced our share repurchase program during the second quarter of 2024, we've repurchased approximately 25 million shares. Also during the quarter, we paid a quarterly base dividend of $0.075 per share and a supplemental dividend of $0.21 per share, resulting in dividends paid year-to-date of $135 million. Between share buybacks and dividends, we've returned $602 million to our shareholders while increasing our cash balance by $612 million since March 31, 2024. That's a total of over $1.2 billion in free cash flow during the last 5 quarters. Our tariff expense for the second quarter was approximately $11 million. Since our April earnings call, there have been many announcements impacting trade policy, including a June increase in the rate of Section 232 steel tariffs from 25% to 50%. We continue to leverage our supply chain experience, versatile manufacturing footprint, and opportunities to apply USMCA to further reduce our tariff expense. Assuming current tariff policies, we expect the impact of tariffs in the third quarter will rise to between $20 million and $25 million and then to between $25 million and $30 million in the fourth quarter, where it should level out. Of course, the trade policy situation remains very fluid, and the impact could be greater if tariffs go higher. Operationally, we're heavily engaged in rewiring our supply chain to minimize the impact. As a result of tariffs and persistent inflation in our supply chains, we're implementing cost reduction initiatives across the organization. Jose will cover specific actions we're taking. We expect the results of these initiatives will remove over $100 million in annual costs by the end of 2026. However, increasing tariffs and inflation remain headwinds, which will offset a portion of the savings. During the quarter, our tax rate was positively impacted by certain discrete items. We expect our full year tax rate to be between 26% and 28%. Also, we expect eliminations and corporate costs during the third quarter to remain in line with the second quarter of 2025. Moving on to segment results. Our Energy Products and Services segment generated revenue of $1.03 billion, a 2% decrease compared to the second quarter of 2024 due to lower global activity levels which are partially offset by higher sales from the segment's capital equipment offerings. Adjusted EBITDA declined $38 million to $146 million or 14.2% of sales. The higher decrementals were primarily the result of less favorable sales mix, tariffs and inflationary pressures, along with certain charges in Latin America. Year-on-year, product sales declined 20%, offset by improved sales of capital equipment. Sequentially, segment revenues were 3% higher with stronger results from capital equipment sales, including our drill pipe and composite solutions businesses. For the second quarter, the sales mix of Energy Products and Services was 50% services and rental, 34% capital equipment and 16% product sales. Revenue from services and rentals held flat year-over-year due to market share gains and new product expansions, offsetting the impact of reduced rig counts. Our Downhole Tools business grew rental revenue low-single digits compared to the prior year. Growing adoption of our high-performance drilling motors and our downhole setting tools in North America, along with increased rentals in international unconventional developments helped to overcome the effect of drilling activity declines in other markets. Similarly, rentals of our drill bits grew low-double digits year-over-year as operators in the U.S. continue to achieve higher rates of penetration and longer runs per bit using our high-performance bit cutter technology. U.S. land drill bit revenues grew over 30% year-over-year compared to a U.S. rig count decline of 5%. Tubular coating and inspection had a solid quarter with service revenue up mid-single digits year-over-year. Increased tubular coating throughput and growing traction of NOV's high-temperature TK-Drakon coating drove a low double-digit percent increase in North America coating revenue for Tuboscope year-over-year. The improvement in North America coating operations was partially offset by lower inspection revenues in Latin America. Solids control and waste management services declined by mid-single digits versus the prior year, primarily due to reduced activity in Mexico and Argentina's Comodoro conventional play. Higher solids control service and rental revenue in Africa and increased drilling activity in the UAE partially offset these declines. Capital equipment sales increased low-single digits year-over-year, primarily due to strong growth in NOV's Composite Solutions business, which more than offset a managed pressure drilling capital sale in the prior year that did not repeat. Composite solutions for oilfield infrastructure in the Middle East and North America, FPSOs and underground fuel handling tanks all realized robust sales. We expect increased growth in our Composite Solutions business due to continued infrastructure build-out in international unconventional markets and fuel handling markets in North America. Turning to product sales within Energy Products and Services. Revenue decreased 20% compared to the second quarter of 2024, primarily driven by market uncertainty, which amplified the effects of the decline in global market activity with customers limiting their quick-turn consumable purchases mostly related to drilling. For the third quarter, we expect revenues from our Energy Products and Services segment to be flat to down 2% when compared to the third quarter of 2024 with EBITDA between $130 million and $150 million. Moving to our Energy Equipment segment. Revenue for the second quarter of 2025 was $1.21 billion, nearly unchanged from the second quarter of 2024. Despite the flat revenue, EBITDA increased $16 million to $158 million, resulting in a 130-basis point increase in EBITDA margins to 13.1% of sales, driven by higher-margin backlog and operational efficiencies that more than offset an unfavorable mix shift that resulted from a sharp decline in aftermarket sales. As Clay mentioned, this was the 12th straight quarter of year-over-year margin growth for the Energy Equipment segment. Capital equipment sales accounted for approximately 62% of the segment's revenue mix in the second quarter of 2025, up nearly 8 percentage points year-over-year, driven by production and drilling equipment. Aftermarket sales and services accounted for the remaining 38% of energy equipment revenue in the second quarter. In our Drilling Equipment business, aftermarket revenues were down sharply year-over-year due to customers reducing spending in response to global trade uncertainty and lower oil price. Spare parts bookings fell sharply during the quarter. We do not expect these levels of spare parts bookings to be sufficient for the industry long term despite the pullback we've seen in rig counts globally. Additionally, service utilization fell due to a slowdown of projects in China, but recertifications and upgrades remain active in Europe, Africa, the U.S., and Brazil. We're seeing automation upgrade opportunities, which Jose will cover in more detail. Revenue from aftermarket parts and services for intervention and stimulation equipment was down high-single digit percentage year-over-year due to the decline in North America completion activity. Turning to the capital equipment portion of the Energy Equipment segment, revenue grew low-double digits year-over-year, led by growth from our process systems, subsea flexible pipe, and marine and construction businesses. Bookings declined 4% sequentially to $420 million. Customers are trying to assess the longer-term impact of recent volatility in commodity prices, geopolitical conflicts, cost inflation, and trade policy uncertainty, which have resulted in certain projects pushing to the right. While uncertainty may continue to impact the timing of investment decisions, currently, we're not seeing projects being canceled. Second quarter revenue in our Subsea Flexible Pipe business reached an all-time high, growing significantly year-over-year with robust EBITDA flow-through, resulting from higher margin projects. The capacity in the market remains tight, and the outlook for our Subsea Flexible Pipe business remains constructive. Our Process Systems business also achieved record high revenues with significant year-over-year growth, bookings were solid and included a monoethylene glycol unit for an operator in the Eastern Mediterranean in support of the global gas infrastructure build-out. While the forecast for FPSO final investment decisions in 2025 has moderated, the outlook remains encouraging. The onshore production market continues to be active for large international gas fields and we're actively pursuing several projects that we expect to be awarded over the next 12 months. Our Process Systems and Subsea Flexible Pipe business combined have booked $1.6 billion in orders over the last 5 quarters. Our Production and Midstream business also reached its highest quarterly revenue since 2019 due to growth in unconventional gas markets and strong execution. Targeted R&D and investments in our production-related offerings have resulted in our Subsea Flexible Pipe, Process Systems, and Production and Midstream business revenues increasing from less than 20% of energy equipment revenue in 2021 to approximately 30% of the segment's revenue in 2025, evidence that our innovation is driving growth and delivering solutions the industry depends on. Capital equipment sales from our Intervention & Stimulation Equipment business decreased double digits year-over-year due to a steep drop in demand for pressure pumping equipment in North America, partially offset by solid demand for coiled tubing and wireline equipment in international markets. We continue to see a growing number of opportunities for sales of completion equipment into international markets, particularly for the growing unconventional plays in the Middle East and Latin America. Revenue from our drilling capital equipment increased in the mid-teens year-over-year due to greater progress on projects. The outlook for drilling capital equipment orders remains modest, given market uncertainties. Our Marine and Construction business experienced a high-single digit increase in revenue compared to the second quarter of 2024, driven by greater progress on crane and cable-lay projects. After booking an order for a cable-lay vessel in the first quarter, we received an order for a wind turbine installation vessel in the second quarter. We continue to have active dialogue with customers for both cable-lay vessels and wind installation vessels, and we see a healthy demand for our electric cranes, driven by new build activity for multipurpose supply vessels. For the third quarter, we expect Energy Equipment segment revenue to decrease between 1% to 3% compared to the third quarter of 2024 with EBITDA in the range of $145 million to $160 million. With that, I'll turn the call over to Jose.

Thank you, Rodney. As we respond to a softening global marketplace, we remain focused on positioning the company to capitalize on three longer-term trends that we believe will drive the industry over the next decade. One, offshore production supplanting U.S. unconventional resources as the dominant incremental source of global oil supply; two, accelerating demand for natural gas, driving meaningful growth from global unconventional gas resources; and three, the application of modern technologies to drive additional efficiencies in oilfield operations. Today, uncertainty is driving extreme fiscal austerity and a greater emphasis on operational efficiencies. Customers are pushing their procurement teams to negotiate better pricing, but are also looking to and willing to invest in solutions that improve recovery rates, lower costs, improve safety and reduce environmental footprint. In offshore markets, IOC and NOC customers remain confident in the mid- to longer-term outlook due to plateauing North American production, offshore breakeven that are sub-$50 per barrel, and growing demand for cost-effective secure and reliable sources of energy. Existing projects continue to move forward at a healthy rate and as Rodney mentioned, our businesses are executing exceptionally well on our healthy backlog of offshore production-related projects, driving a 9% sequential and 6% year-over-year increase in revenues from offshore markets. Entering 2025, our customers had ambitious expectations regarding offshore final investment decisions, and we're planning to advance 13 FPSOs during the year. Supply constraints, including long lead times for gas turbines and compressors, congestion in shipyards, inflation and macroeconomic uncertainties have caused customers to delay certain final investment decisions. We are collaboratively sharpening our pencils to help offset project costs that have increased 10% to 15% through more standardization and better coordination of order timing. These actions would allow us to build the same structures for multiple projects on one production run, improving efficiencies, throughput, and cost. While we've seen final investment decisions push to the right, to our knowledge none have been canceled, and the mid- to longer-term outlook remains bright. Industry forecasts call for more offshore final investment decisions this year and see the potential for up to 50 FPSOs through the end of the decade. Additionally, demand related to LNG products remains solid as evidenced by a sizable award NOV received during the second quarter for a large submerged swivel and yoke system for a floating LNG project in Argentina. Delays of offshore production vessel deliveries continue to have knock-on effects in the drilling space, resulting in the near-term white space utilization challenge that our customers face over the next couple of quarters. As Rodney mentioned, our aftermarket business experienced a double-digit percent decrease in revenues, driven by a sharp reduction in spare part bookings during the second quarter. Customers tapped the brakes while digesting the macroeconomic and geopolitical volatility and after some of them gave themselves a little breathing room after making extra purchases in the first quarter to get in front of higher tariff costs. While this pullback was sharper than anticipated, we expect a slight rebound in the third and fourth quarters. For the full year, we now expect our drilling equipment aftermarket businesses revenue to decline in the mid-teens. While near-term expectations have been tempered, our offshore drilling contractor customers remain confident in a meaningful recovery beginning in the second half of 2026 which would spur additional demand for spare parts, upgrades, and other projects as rigs prepare to move on to new contracts. We're already seeing some signs of this through a growing number of projects we are planning to execute in the second half of the year. Consistent with the themes I previously mentioned, customers are investing in enhanced capabilities that drive operational efficiencies such as increasing hook load capacity and automation. There's strong demand for deepwater rigs that have 7th-gen high-spec capabilities, including hook load capabilities of 1,400 tons or more and enhanced automation. We've had quite a few inquiries regarding additional hook load upgrades, and we recently commissioned four automation packages, including one with our robotic system that allows for completely hands-free tripping. We now have robotic systems active on four rigs with another 11 in the pipeline, and we continue to see growing interest from our customer base. International land markets remain mixed. In the Middle East, growing activity in the UAE, Qatar, and Oman, along with demand for investments in infrastructure and capital equipment for the emerging unconventional basins are offsetting a stronger-than-anticipated deceleration in Saudi Arabia. The increasing number of rig suspensions in Saudi have led to a sharp decline in revenues for our shorter-cycle Energy Products and Services segment in the Kingdom. Similar to other markets, customers across the Middle East are looking for ways to become more efficient. While procurement groups are pushing on pricing through competitive tenders, they are more open to direct awards related to differentiated solutions that drive operational efficiencies such as the order we received for several surface automation systems that use our NOVOS Multi-Machine Control system and Kaizen drilling optimizer. Additionally, while NOCs are increasingly leaning on major OFS companies for lump sum turnkey work, those OFS companies are increasingly turning to NOV for access to our technology to lower their R&D expenses and reduce investments in their asset base. Demand for capital equipment in the Middle East remains resilient as customers continue to invest in upgrading and modernizing drilling and completion equipment needed to efficiently develop unconventional resources. Investment in production infrastructure needed for future development also remains strong, driving healthy demand for our composite pipes and our chokes. Despite the potential for additional rig suspensions, continued investments in equipment and infrastructure, along with some early discussions related to upcoming tendering leave us optimistic for a potential rebound in activity by mid-2026. Similar to the Middle East, conditions in Latin America are also mixed. Mexico, Colombia, and Ecuador remain challenged. In Argentina, we are seeing a slowdown in the mature conventional Comodoro field and a shift to the unconventional resources of the Vaca Muerta in the Neuquén Basin, which as Rodney touched on, required us to incur some charges as we repositioned our operations in the country. While the slowdown in the Comodoro has had a negative effect on our business over the past year, the longer-term outlook in Argentina remains very promising. We continue to see solid demand for our completion equipment and our downhole tools that drive efficiencies in extended lateral wells, which recently enabled our customer to achieve multiple drilling and completion records in Vaca Muerta. In North America, operators have moved decisively to curtail oil-directed activity, only partially offset by an increase in gas-directed drilling. Our business has outperformed changes in activity levels through continued market share gains but the environment is becoming more challenging with many North American service companies and operators implementing restructuring and cost savings programs. Land-focused oilfield service customers are limiting capital equipment purchases while running equipment extremely hard and cannibalizing stacked equipment as a source of spare parts, potentially setting up an inevitable replacement cycle. E&Ps are shrinking capital plans and are seeking pricing concessions, but they continue to prefer best-in-class products that drive efficiencies. They are designing well construction plans to achieve the lowest possible cost per foot. We've recently seen a push by multiple operators to reduce hole sizes and clearances to optimize hydraulics, drill faster, lower material costs, and reduce environmental impact. This shift created opportunities for us to gain share with several customers who took the time to reassess the effectiveness of the components in their bottomhole assemblies. They recognize the superior performance of NOV's offerings and ultimately standardized on our kit. Customers are also looking to gain an edge through the use of better digital solutions. During the quarter, a major land drilling contractor decided to standardize on NOV's next-generation Electronic Drilling Recorder and Remote Drilling Monitoring applications powered by our Max platform, which will enable the customer to reduce complexity and offer advanced digital capabilities to its customers. As mentioned, the decline in oil activity in the U.S. has been partially offset by an increase in gas-directed drilling. As operators target deeper, higher-pressure wells with higher bottomhole temperatures, particularly in the Haynesville and Eagle Ford, we're seeing increasing adoption of our Drakon thermal insulated pipe coating and our Tundra Max mud chillers, each of which significantly enhances performance and longevity of bottomhole assemblies. While our latest generation of performance-enhancing technologies are commanding solid demand with accretive margins, the market environment has grown more price competitive. Over time, our better technologies have taken share from competitors, and some are now using price concessions to try to win back work in a market where tariffs are increasing product costs. Our team has done an outstanding job managing through the complexities of the continuously changing tariff policies, and we continue to do all we can to mitigate as much of the roughly $300 million in annual tariff costs that we would incur if we sat still. As Rodney mentioned, we recognized a total of $11 million in tariff expense during the second quarter with roughly 70% of this expense hitting our Energy Products and Services segment. We expect tariff expense to step up over the next 2 quarters and level off between $25 million and $30 million during the fourth quarter. We'll continue to identify additional measures to mitigate these costs or pass them on to our customers, but this will continue to be challenging given the current market dynamics. In order to offset these margin pressures, we're ramping up efforts to drive internal efficiencies and reduce costs across NOV. We've identified over $100 million of savings that we expect to capture by the end of 2026 through: one, simplifying, standardizing, and centralizing business processes. Since late last year, we have been developing plans to redesign certain business processes across NOV with a goal of lowering costs, reducing time, and further improving our customers' experience doing business with NOV. This will be a multiyear effort, but we have begun executing process changes and expect to begin realizing savings from this initiative later this year. Two, strategic sourcing. Tied into the efforts to standardize our processes, we are working to further leverage our spend across the organization to maximize our economies of scale through high-quality, low-cost sourcing, which is shifting under evolving trade policies. Three, business and facility consolidations. During the second quarter, we began consolidating our completion tools operation into our Downhole Tools business, and we merged our Grant Prideco and XL Systems conductor pipe casing and connector businesses into a new unit called Tubular Products. The consolidations allow us to better share resources between product lines and drive efficiencies and cost savings. Within other business units, we're consolidating facilities to unlock further efficiencies from lower overhead, rent and utilities, and better utilization of our asset base. Four, exiting product lines in certain markets. We're exiting product lines in markets in which we do not see a near-term path to generating an appropriate rate of return. While exiting markets will reduce total revenue and EBITDA, these actions will be accretive to NOV's margins and return on capital. We also continue to work on plant-level operational efficiencies with a relentless focus on operational excellence. For example, in one of our plants, we're investing in an initiative where we expect to take our manufacturing cycle time down from 60 days to less than 20, which should lower our cost, free up working capital, and allow us to be more responsive to demand. Near term, it will be difficult for these actions to outpace the effect of lower activity, higher tariffs, and other inflationary costs, but over time, our efforts to better harness the power of NOV's platform will drive higher profitability, allow us to continue to generate significant levels of free cash flow, and further improve responsiveness to our customers. Technology and innovation remain core to NOV and the actions we are taking will increase collaboration across our businesses, enabling us to better leverage the unique combination of capabilities and data which reside under NOV's roof. I'm confident our efforts will accelerate innovation and pioneer technologies to address the most pressing needs of our customers. As Clay mentioned, NOV's future is compelling. The incredibly smart, talented, and dedicated people of NOV are continuously driving improvements across the organization, positioning us exceptionally well to capitalize on longer-term trends that will require more of NOV's technology and services to develop affordable, secure, reliable, and cleaner sources of energy to power the world. With that, we'll open the call to questions.

Our first question comes from Jim Rollyson with Raymond James.

Clay, when you kind of step back and look at all the changes that have been going on, it seems like nonstop for several quarters and the things you've been doing and as I look at margins, they obviously have come down from kind of the trajectory we were hoping to be getting towards mid-teens and kind of indicated to go down a bit further, at least through 3Q. I'm just curious, as you stand back and look revenues, they were actually pretty decent this quarter relative to the range. And you look at kind of mix changes that have been going on and maybe where that leads you into '26? You look at the cost stuff that Jose and Rodney just spent a bunch of time going over and the impact that has. Like how are you thinking about where margins maybe could possibly bottom here in the next handful of quarters? And then what ultimately gets you to starting to ramp that back up, do you think? Because it's not like we are completely lacking potential, but...

It's a great question, and I appreciate you asking. It has been somewhat frustrating. We were making progress in margins, essentially tripling them from 2021 through the full year of 2024. Despite facing challenges in our Energy Products and Services group due to a high North American mix and declining activity in North America, overall consolidated margins were on the rise. However, developments in the first half of 2025, such as OPEC+ reintroducing over two million barrels to the market and ongoing tariff concerns coupled with worries over economic growth, have made things much tougher. Rodney and Jose explained the actual tariff impact on our results, and importantly, Jose walked through our plan to address this, which involves continuing to cut costs. I'm very optimistic about this approach as it should help prevent further margin declines in the latter half of the year and, more importantly, position us for recovery in 2026 when offshore activities resume, allowing us to improve our margin progress. Looking at the broader picture, if you set aside the current headwinds and the concerns over tariffs, economic growth, and excess oil supply, I am genuinely excited about the future of this company. There are two significant developments in the oilfield that will really drive NOV's success in the coming decade. Firstly, after two decades of refining unconventional technology in North America, we're witnessing a definitive application of this technology in international shale basins by serious E&P unconventional drillers like EOG, OXY, and Continental across various countries—not just Saudi Arabia and Argentina but also places like Turkey, Oman, Australia, Pakistan, the UAE, Bahrain, and Algeria. This successful unconventional development necessitates considerable infrastructure buildout, which is where NOV excels. Secondly, the resurgence of deepwater activity, which has been stagnant for about a decade, is another crucial factor for us. Exxon has demonstrated the potential in Guyana, and other players are proving that there are still significant economic reserves to be found in deepwater basins, with promising exploration and discoveries in Namibia, Senegal, Suriname, and the Eastern Mediterranean. Increased gas activity is also evident in Asia and the Gulf of Mexico. All of this requires the advanced tools and technology that NOV specializes in, which will continue to expand. With strong economics expected even at prices below $50 per barrel, as Jose noted, deepwater output is projected to rise to around 13 million barrels per day by the end of 2026, effectively replacing North American shale as a new source of production. I firmly believe we have much brighter days ahead. While we do face some challenges in the next few quarters regarding margins due to tariffs and inflation, I am confident that we will overcome these obstacles and witness rising demand in these emerging areas.

And I guess I'll shift gears since you just laid that out. I presume the deepwater market is the bigger of the two next 5- to 10-year opportunity sets for you?

Probably, but I think both significant trends will require a lot of NOV technology and tools. We're here to make that happen.

Our next question comes from Stephen Gengaro with Stifel.

I was curious, at a high level, Clay, when we think about the macro environment, we're always looking for signs of a bottom. What are you focused on in the next two to four quarters that indicates to you that things are improving? How do you consider the market? And I understand it might be a bit challenging, but how does this situation compare to previous cycles you've experienced?

Nothing particularly unexpected given the pressure on commodity prices. This is typical for our customers. We've become adept at managing downturns, and that's what some of our customers are doing, while others are not. Regarding what will drive growth for NOV, especially with offshore drillers anticipating increased activity in the second half of 2026, we expect to receive more inquiries about equipment projects and spare parts, which will positively impact our drilling segment. Despite low orders in Q2 affecting our book-to-bill ratio, the production side of our Energy Equipment business remains robust and is performing well, which we believe will continue. However, currently, the market is facing pressures from commodity prices, uncertainties in demand growth, and OPEC's additional barrels, which have diminished the urgency in our customers' plans. We expect to see a recovery starting in 2026 as the excess barrels are absorbed and the industry advances its LNG projects, leading to a more optimistic outlook.

Great. And then the other question I had was around cash generation. Can you sort of share kind of an updated thoughts on how we should think about working capital as the year evolves? And maybe kind of a normalized level of CapEx we should be thinking about over the next couple of quarters.

Yes, Stephen, this is Rodney. Thanks for that question. So we are really, really proud of the team's efforts over the last 12 months. We highlighted a really strong free cash flow conversion on a trailing 12-month basis of over 80%. Q3 working capital as a percentage of revenue at 30%, it's about a 300-basis point improvement year-on-year. As we look at the second half of the year, the couple of data points we mentioned previously, CapEx to be relatively consistent with last year, maybe slightly up. And we've mentioned working capital as a percentage of sales for a full year basis to be in the range of 27% to 29%. So as we look at that in terms of free cash flow conversion on a full year basis, sort of getting to the top end of that range in terms of 29% of working capital, as a percent of revenue that would get us to a free cash flow conversion of EBITDA to a little over 50%. If we're a little bit better on the working capital side, closer to sort of 28%, 27%, that free cash flow conversion would move up higher from there. But good outlook on cash flow for the second half of the year.

Our next question comes from Doug Becker with Capital One.

Clay, you've taken a lot of cost reduction steps over the last several years. I was just hoping to get some context about what size market you're preparing for. So is it one with slightly higher activity than today, a little bit lower and maybe it's some mix with more active offshore and a little less active onshore? But just trying to get a sense for what you're prepared for and what else might be available on the cost reduction initiatives.

We are ready for and optimistic about a significantly larger market across all these categories. As I mentioned earlier, we are observing a rise in demand for unconventional technology and tools in international unconventional markets and an increasing need for technology tools in deepwater. While I believe this potential is on the horizon, we must also be realistic. Our customers are currently dealing with concerns regarding commodity prices. In the meantime, as Jose pointed out, we are focused on improving efficiency, consolidating facilities when possible, and closing locations where we are not generating profit, recognizing that we may need to exit those markets. Ultimately, we have to adapt to the current market conditions and strive to become the best company we can be based on what is available. However, I remain confident that growth lies ahead for us. The industry is at a crossroads with North American shale, which has significantly contributed to market supply over the past decade. While I’m not suggesting we have reached the peak, we are definitely closer to it than we were a few years back. The industry is discovering that deepwater production is becoming the next viable option to meet additional oil demand, and there is also a growing recognition that offshore locations can yield gas that may be converted to LNG. Thus, our strategy at NOV is to adapt to our customers' needs and align with the demand for our products and technologies.

Yes. And Doug, it's Jose. I'll tag on to that. So as Clay touched on, this isn't sort of a radical downsizing that we're going through because we think that the market has fundamentally changed. I think look when we came into 2024, we were pretty optimistic about the outlook for the next several years and how well the company was positioned for where the market was heading with plateauing North American production, more activity going to the international and offshore. What has changed is an acceleration of the unwinding of OPEC+, the trade uncertainty and the tariff costs that have come into that. It's all created a lot of geopolitical macroeconomic uncertainty. So I mean the way I look at it is these are transitory-type items, the rapid unwind of OPEC+ is painful near term, but probably positive for the overall industry longer term. And so as it relates to the actions that we're taking, this is really just a continuation and maybe a slightly harder lean into the actions that we have been taking over the last several years to really position ourselves to capitalize on where we see the market going into the future. So the things that I talked about related to structural cost savings on driving process improvements and efficiencies, those are things that we've been working on for some time. Also, we've been making a lot of investments in our manufacturing capacities overseas knowing that that's where the market is heading. So there's really just a shift that's underway and a repositioning of the business. So don't take it as, 'Hey, we're downsizing because future activity will be lower.' No, we don't think that's the case. We just think that activity will be positioned in different markets going forward. And frankly, we've been working on that for the last 4 or 5 years.

That makes a lot of sense. Maybe just sticking with the cost efforts of $100 million, just kind of spread evenly between the fourth quarter of this year and through 2026.

Yes, I believe that's a reasonable assumption. We're not going into details about specific dollar amounts per quarter. However, as I mentioned, there have been efforts in place for the last few quarters, and you’ve noticed some minor restructuring charges during that time. Now, as I said, we are intensifying our efforts. In addition, during the past 2 or 3 quarters, we have been planning these changes. Therefore, implementing these measures gradually over the next few quarters seems sensible. But as noted in our prepared remarks, there are some cost-saving initiatives that will be partially offset in the near term by increased tariff expenses. Nonetheless, as we progress into 2026, we hope to regain any lost ground and find ourselves in a strong position to achieve significantly higher margins.

Our next question comes from Grant Hynes with JPMorgan.

So you provide a pretty encouraging update on the flexible side. And maybe I was just wondering if you can highlight some of the outperformance there. It looks like $1.6 billion of orders in the last 5 quarters across process systems and subsea flexible pipe. And I think with NOV recently participating in that Petrobras flexible contract over $1 billion in total. Is that what we could expect in bookings kind of in 3Q? Or I guess how we should think about timing there?

I'm going to refrain from giving specific guidance on individual orders, but generally, the Flexible Pipe business, which caters to deepwater development, is performing exceptionally well with remarkable execution and strong orders over the past year. However, when we examine the second quarter orders for the Energy Equipment group, we notice that they were quite low because these orders are often large and sporadic. The book-to-bill ratio of 66% was lower than anticipated, as we didn't expect to reach $1 billion but thought it would be nearer to that figure. The lower ratio was primarily due to the lack of orders for flexible pipe in the second quarter. To elaborate on that, we see significant variability in book-to-bill ratios across different products and markets within the Energy Equipment segment. In deepwater production, we manufacture gas processing equipment, cranes, swivel stacks, and turret mooring systems for FPSOs, with the swivel stack and Turret Mooring System business achieving over 200% book-to-bill in the second quarter, indicating strong orders. Similarly, the gas processing sector exceeded 100% book-to-bill, reflecting solid demand. In the offshore production sector, we noted decent demand in the second quarter. Interestingly, demand for intervention and stimulation equipment, which is mainly used in North American fracking, also hit 100% book-to-bill despite low demand in North America and rising demand for unconventionals internationally. Looking forward, offshore drilling faced low bookings in the second quarter, below 30% book-to-bill for rigs due to challenges in the upcoming quarters. In contrast, wind and offshore construction demonstrated strong demand with over 150% book-to-bill. We observed significant variability in demand across the four main markets in energy equipment, which are subject to fluctuations because our orders can be irregular. As for the third quarter, we're optimistic about flexible pipe. We've already secured an order exceeding $100 million in the initial weeks of Q3, suggesting a solid chance of returning to over 100% book-to-bill with strong pipeline projects. The gas processing segment has large projects, and while tendering activity is up year-over-year, it may fall slightly below 100% book-to-bill in Q3. For drilling, we anticipate continued order pressures, likely remaining low this quarter, even with some interest in enhancing hook load capacities and pressure capabilities. Although there’s the potential for a new jackup later this year, we're not relying on it. Regarding stimulation equipment, it may exceed 100% book-to-bill in Q3. Wind and offshore construction remain robust, and we expect to see a cable-lay vessel and a wind turbine installation vessel in the latter part of the year, alongside strong demand for subsea cranes. Overall, while demand varies across these markets, the flexible pipe segment has been executing exceptionally well and is experiencing high demand levels.

Appreciate the in-depth color there. And maybe just as a follow-up, I think you mentioned the commissioning of some automation platforms and the robotics system sort of in the pipeline. And as we think about the recovery kind of in offshore, could you maybe give us a sense of what the rate of adoption has looked like on some of this technology?

Yes, it's Jose. We are really enthusiastic about the developments in automation, seeing strong traction in the market and an expanding pipeline. It all began with the commercialization of our NOVOS platform a few years ago, and adoption is continuing to grow rapidly. So far, we have sold around 220 NOVOS systems, of which about 134 have been installed and commissioned. We have a strong pipeline of systems awaiting implementation. Robotics is showing great promise and generating substantial interest. Currently, we have four commercial systems operating, including both land and offshore rigs, and another 11 in the pipeline. We've received very positive feedback from our customers, with some suggesting that this could be the industry's next top drive, which is very exciting and suggests great potential for this offering. Additionally, we have various digital services supporting drilling, and increasingly, completion and production-related services. Overall, we are witnessing strong uptake across our platform. Sequentially, revenue from our digital products has increased by 7% and is up 25% year-over-year. Recently, we launched the Max production addition to our Max platform for artificial lift, and the response from customers has been very encouraging, with installations and adoption doubling in the last quarter. Everything is trending positively for automation and digital solutions, and we see significant growth potential moving forward.

Our next question comes from John Daniel with Daniel Energy Partners.

Clay, this morning Ranger announced plans to build a couple of electric rigs following Axis's lead. While this may seem small to you, could you discuss the opportunity for retrofitting the U.S. well service fleet in your mobile rig business and provide your outlook on that?

Yes, I would say that as a matter of policy, I don't like to comment on any specific customer or project. However, I can say that many categories of fit-for-purpose oilfield equipment have transitioned to electrical systems over the last couple of decades. For instance, drilling rigs have evolved from mechanical torque to DC electric and then to AC electric. This progression has also occurred in wireline units and coiled tubing units across various categories. There is a growing interest in further advancing the technology towards AC electric, which allows for improved electronic controls. Regarding well service rigs, which you are well aware of, they tend to be older and quite basic across the U.S. I believe there is significant potential to enhance these rigs with more modern electric assets that offer better precision. Transitioning to electric could make these service rigs safer while also providing real-time monitoring capabilities that enable condition-based monitoring and predictive analytics, thereby enhancing maintenance programs and extending the lifespan of the equipment. This presents yet another category of oilfield equipment that could benefit from a shift to electric systems.

Okay. I won't name the customer, but one company has ordered a 2.875 unit coil. I'm curious if we could see some structural changes in the 2.875 market regarding the size of CT units, which seem to keep getting bigger. Maybe Jose has some insights on this.

Yes, John. So yes, there's a lot of things going on, consistent with the commentary and the primary theme that we're seeing across all markets is that folks are willing to pay for things that can drive improvements to their economics, right? And so there's always been the challenge of, okay, how deep and how far out can you go from a coiled tubing drill-out standpoint, which is the quickest, most efficient way to do the drill outs, and we've seen tubing sizes get bigger, strings get longer, equipment getting bigger and bigger. And the need for, frankly, better technologies to continue that trend of going from 1 mile laterals to 2 miles to 3 miles. And now at times, we're seeing 4 miles. So bigger tubing diameter along with, frankly, one of the things that we're really excited about is our Downhole Tools business has pioneered an Agitator system, not just for the BHA of a coiled tubing string, but has a really proprietary connection that can be used to join two separate strings of pipe and connect them to be able to enable even longer lateral usefulness related to coiled tubing drill out. So there's a lot of innovative things that continue to go on within NOV, and we're going to continue to be on the front end of those things.

I'd now like to turn the call back over to Clay for any further remarks.

Thank you, Kevin, and thanks to all of you for joining us this morning. We look forward to discussing our third quarter 2025 results with you in October. Kevin, you may wrap up the call.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.