NOV Inc. (NOV) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the National Oilwell Varco 2012 Second Quarter Earnings Call. My name is Christine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Loren Singletary, Vice President of Investor and Industry Relations. You may begin.

Thank you, Christine, and welcome, everyone, to the National Oilwell Varco Second Quarter 2012 Earnings Conference Call. With me today is Pete Miller, our Chairman, CEO and President of National Oilwell Varco; and Clay Williams, our Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its second quarter ended June 30, 2012, please note that some of the statements we make during this call may contain forecasts, projections and estimates, including but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risk and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information may be found within our press release, on our website at www.nov.com or in our filings with the SEC. [Operator Instructions]. Now I will turn the call over to Pete for his opening comments.

Thank you, Loren. Earlier today, National Oilwell Varco announced second quarter 2012 earnings of $1.42 per share, on a record revenues of $4.7 billion. Excluding onetime transaction cost of $28 million, earnings were $626 million or $1.46 per fully diluted share. Operating profit for the second quarter was a record $907 million or 19.2% of sales. These results compare very favorably to the results of the second quarter 2011, and are continuing proof of the efficacy of our business model, our M&A strategy and our extensive product and service offerings to our customers. Additionally, today, we announced the quarter-ending backlog of $11.3 billion. Organic new orders for the quarter were $2.2 billion, and new orders through acquisition totaled $500 million, for total new orders of $2.73 billion, or 1.5x book-to-bill ratio. We're very excited about these results and they demonstrate the continued excellent execution and performance of our employees around the world. I will come back in a few moments for some brief comments regarding our operations, but at this time, I will turn it over to Clay to provide more color on our results. Clay?

Thank you, Pete. National Oilwell Varco produced solid results in its second quarter, delivering $1.46 per fully diluted shares in earnings, up 28% from a year ago, and up $0.02 or about 1% from last quarter, excluding transaction charges from all periods. Revenues were a record $4.7 billion, up 35% from the year earlier quarter and up 10% from the first quarter of 2012. All 3 segments produced record quarterly revenue during the second quarter. Operating profit x transaction charges was a record $907 million, up 27% from the second quarter of last year, and up 3% sequentially, and consolidated operating margins for the second quarter were 19.2%, excluding transaction charges. EBITDA was a record $1,084,000,000 for the second quarter. We have been investing heavily in our businesses, both organically and through M&A, and our second quarter results include a partial quarter for 6 businesses acquired during the period. These, together with the seasonal downturn we see every year in Canada resulted in sequentially lower margins, down 130 basis points from the first quarter. Operating leverage or flow-through was 6% on a sequential revenue gain, and 16% on a year-over-year sales increase as a result. Within our Distribution & Transmission segment, we were very pleased to acquire the Wilson Distribution business from Schlumberger, and Ensco, a Canadian electrical wire and cable distributor which, together, contribute about $190 million for a few weeks during the quarter. And just last week, we completed our previously announced acquisition of CE Franklin, another leading Canadian distribution business. These 3 businesses will serve to more than double the size of our Distribution & Transmission segment and more importantly, enhance NOV's distribution channels across North America, opening up new channels for NOV products into midstream and downstream markets. We expect to achieve meaningful efficiencies over the next 18 months through combining ERP systems and securing greater volume purchasing leverage. Integration has proceeded quickly and smoothly so far and we are pleased to welcome the CE Franklin, Wilson and Ensco employees into the NOV family. Within the Rig Technology segment, the second quarter saw us add NKT Flexibles to our subsea production equipment business, which complements our APL turret mooring systems and other FPSO package components. Demand for subsea equipment appears to be building after a slow 2011, and we have signed contracts for about $200 million in turret mooring systems, since June 30, following a light bookings quarter in Q2. Recent third quarter -- third-party reports from Quest Offshore, DDB Bank, Douglas Westwood and others point to 100-plus FPSO installations through 2016, which were nearly double the existing fleet. With leading products in turret mooring systems and flexible flow lines, risers and jumpers for the subsea, NOV is well-positioned to support this future growth. The Rig Technology segment also acquired Interflow, a leading provider of wells servicing equipment in Canada during the second quarter, which is being integrated into our well intervention and stimulation equipment group. We're excited about the new frac blenders, and pumpers, and cementers and other well service products and capacity this business brings for our franchise. We effectively sold out our coil tubing equipment for the remainder of 2012. During the second quarter, we began to see a decline in new orders for pressure-pumping equipments, but rising orders for coil tubing and wire line units nearly completely offset this decline. Same-store bookings x acquisition effects fell only 3% sequentially for this group, so the business has held up reasonably well. Nevertheless, we expect demand for pressure-pumping equipment to continue to face headwinds in the short run, giving slowing demand for pressure pumping services in North America. We expect this to be partially offset by international markets. Demand has continued to grow in Russia, China and the Middle East. Interflow, together with recent expansion CapEx, further strengthens NOV's already formidable position in the supply of critical hydraulic fracturing stimulation technologies that make shale play economics work. The Petroleum Services & Supplies segment acquired Zap-Lok Pipeline Systems within our Tuboscope unit late in the second quarter. Its revenue contribution during the quarter was therefore minimal, but we expect its low cost mechanical pipe connection technology to contribute meaningfully to Tuboscope's Thru-Kote and UV sleeve connections, and internal tubing coating products in the future by growing through our extensive international infrastructure. Finally, the Well Sites Services unit of PSNS acquired a small company which holds patented technology using our water-based drilling fluids products. All in, we spent $2 billion in cash for these businesses in the second quarter and expected after-tax return on capital of approximately 14%. We expect to continue to find and close attractive acquisitions and believe we find ourselves in a sweet spot in M&A. Sellers have the right mix of prosperity and fear, and we have a high level of conviction in our outlook for oilfield markets. We also have a strong balance sheet and a proven record of solid cash flow. As a group, these acquisitions closed in the second quarter illustrate well our expected returns and our strategies around capital deployment. First, they were all in oil and gas and touch customers and markets we know well. Second, they are simple business plans. Some are large consolidating transactions which we expect to yield meaningful efficiencies in economies of scales. Others are investments in new adjacent technologies that we can bring to market faster through our extensive worldwide infrastructure. Many bring follow-on opportunities for further growth investment. Still, others are new additions to product packages where we seek to standardize offerings to reduce risk and complexity for our customers. In each case, they represent strategies we successfully applied many times in NOV's past. Third, we believe we bought these businesses at fair and reasonable valuations. We've acquired nearly 300 businesses between National Oilwell and Varco over the past 15 or so years. And on average, we close one transaction for about every 7 that we look at. We are making acquisitions full-time, all the time, with a staff devoted to the effort to ensure that we stay in practice and that the process remains as dispassionate and objective as we can make it. We remain close to the market so that our investment decisions are informed, objective and well-reasoned, so that this isn't an ad hoc process subject to hijack by emotion. We run our discounted cash flow models through the pain and stress of down-cycles and we press for good value. In short, we know the market. Fourth, we are experienced at executing due diligence and focus closely on what matters most. We usually avoid stepping in bear traps. Finally, our operations managers are exceptionally good at integrating businesses, tackling organizational questions first, moving quickly and decisively. 300 acquisitions in 15 years means 300 integrations in 15 years. We've probably done everything wrong that you can do wrong on an acquisition and frankly, I wouldn't trade that experience for anything. Our integration processes are empirical and practical and they work. In addition to acquisitions, NOV has continued to invest in organic opportunities around the world, expanding manufacturing facilities for blowout preventers, top drives, drill pipe, tubular coating, coil tubing in units, pumps, power sections, downhole tools, composite pipe, marine connectors and aftermarket services. We're moving forward with a new test well research facility to ensure NOV's continued technical leadership on a variety of products. Our NKT acquisition brought with it a new flexible pipe manufacturing facility in Brazil. We expect our capital expenditures to total about $700 million this year, including a large flexible pipe plant in Brazil that NKT has underway. In the long run, deploying capital is arguably the most important function that management teams perform. Investment decisions, both organic and transactional, have a profound impact on the profile of an organization 10 years hence. We make these decisions with precisely that long view. The deployments you see are the seeds of future cash flows and technologies and capabilities that will bring opportunities to continue to build and grow our company and they reflect the responsibility to our shareholders, our customers and our employees that we take very, very seriously. We also rarely -- actually, we never time transactions perfectly. We serve cyclical markets and recognize that soon after closing, we may be faced with more challenging market conditions and we expect it out of the gate. We nevertheless proceed confidently for 2 important reasons. First, our business model is diversified within oil and gas. Early cycle distribution in Petroleum Services & Supplies businesses are juxtaposed on later-cycle Rig Technology businesses, which empirically lag about 7 quarters. And this has demonstrated compelling durability. I point you to our performance through the 2009 downturn, if you like to analyze this for yourself. NOV's balance between late and early cycle businesses enables us to shift resources from shrinking markets to expanding markets, making it incrementally easier for us to manage through down-cycles than our peers. Second, and most importantly, our strategies around capital deployment at National Oilwell Varco work mostly because of the terrific employees that Pete, Loren and I have the pleasure of serving. It is tough to assume leadership of a business just acquired with lots of new nervous employees, and take these new teammates to a new place of productivity and contribution. It is tough to open new plants in exotic locations, hundreds or thousands of miles outside of established supply chains and smoothly deliver the high-quality products our customers expect. But we make capital investment decisions confidently because we know our exceptionally capable operational leaders in the field will jump right in and make it look easy. We know that our teams can and will respond to market ups and downs decisively and appropriately. And for all these NOV professionals we work with, we are very, very grateful, they do a super job. Turning now to our segment operating results. Rig Technology group generated revenues of $2.4 billion in the second quarter, up 6% sequentially and up 27% compared to the second quarter of 2011. Operating profit was $571 million, giving operating margins for the group of 23.7%, down 70 basis points from the prior quarter. Incremental leverage or flow-through was 14% sequentially, and 11% year-over-year. Excluding the partial quarter results from the NKT Interflow acquisitions, revenues increased 2% sequentially, and flow-throughs were 31%. Operating margins on this basis were 24.5%, up slightly from the first quarter. Aftermarket sales increased 5% sequentially, and 20% year-over-year, and comprised 21% of the mix during the second quarter. We expect continued growth for spares and aftermarket services, given our recent capital investments in this area, along with a steadily growing install base of new high-technology rigs. Importantly, the very first floating rigs delivered this construction cycle are now approaching their fifth birthday. And we expect these rigs to begin to march into shipyards for their inspection soon, which will present NOV with new opportunities to sell spares and replacement and upgrade capital equipment to these rigs. Interest in new offshore rigs remain strong and steady. With limited deepwater and harsh environment jack-up availability, IOCs and NOCs anxious about their production targets, leading-edge day rates moving higher across a number of categories, ample capacity and pervasive hunger and highly qualified Asian shipyards and available financing, at least for established enterprises, our offshore drilling contractor customers find themselves in a uniquely attractive place. What I said earlier about capital deployment decisions having profound implications for the success of a business tenure, hence, applies to them too and they're planting the seeds for their future earnings and cash flow through fleet expansion. The Land businesses is a little slower. Our North American land customers are continuing to build rigs, to which they have previously committed, but flattening to slightly declining day rates, very low gas prices and slightly lower oil prices appear to us to have curbed their enthusiasm, at least partly. Five years ago, such a market mixture would probably result in a dead stop, but interestingly, I think they are merely dialing back a little now. The difference is that there is a higher level of conviction amongst them in their need to retool their fleets to modern AC-powered, quick move, electronically controlled Tier 1 rigs. Market conditions are moderating the pace of retooling, but retooling is moving forward nonetheless. International land prospects are brighter. Markets are strong in Latin America, the Middle East and Southeast Asia in particular. These markets lag North America in adoption of modern Rig Technology, but if history's a guide, international markets will fully embrace these new technologies and that trend appears to be moving forward. Second quarter revenue out of backlog for the entire group increased 6% sequentially, and 31% year-over-year, totaling $1,817,000,000. This is more than offset by new capital equipment orders of $2.2 billion, plus another $511 million of backlog that came in with NKT and Interflow acquisitions for a total of $2,733,000,000 in new orders flowing into backlog. Second quarter new orders included drilling equipment packages for 6 new floaters, including 1 for a shipyard in Brazil, and 5 jack-up drilling equipment packages. Pending backlog as of June 30, 2012, was $11,280,000,000, of which, 14% was for land and 86% offshore, and 8% domestic and 92% international. Of orders on the books at June 30, we expect approximately $3.9 billion to flow out as revenue during the remainder of 2012, $4.9 billion to flow out in 2013, and the balance to flow out thereafter. We delivered 5 floaters during the second quarter, bringing our total to 137 offshore rigs supplied to the industry since 2005. Our order outlook for the third quarter is strong, as there are a number of drilling equipment packages for Brazil that have not yet been awarded. Additionally, there is interest in construction of floaters in Asia to fill the gap between now and delivery of the rigs out of new shipyards in Brazil, plus growing interest in new deepwater frontiers in West Africa, East Africa, a recovering Gulf of Mexico, the North Sea and Southeast Asia. Included in these are inquiries around harsh environment semis. Most jack-up inquiries have come from smaller national oil company and line drilling contractors who tend to be very price-sensitive. Despite NOV's strong market position, we still face strong price competition from aggressive competitors. And overall, drilling equipment pricing has never returned to 2008 level. Looking forward into the third quarter of 2012, we expect strong sequential sales growth up in the high single-digit percentage range at roughly flat operating margins as compared to Q2. We expect start-up costs associated with plant expansions in the U.S., softening shipments in North American service rigs, frac spreads, land drilling rigs and higher revenues from lower-margin FPSO products to be roughly offset by rising high-margin new rig project shipments. The Petroleum Services & Supplies segment generated record revenues of $1,776,000,000, up 4% sequentially and up 31% year-over-year. Operating profit was a record $393 million and operating margins were 22.1%, down about 70 basis points sequentially. Compared to the first quarter of 2012, the $72 million revenue increase produced only 7% operating leverage or flow-through due to Canada breakup and some mixed changes I'll detail in a moment. Year-over-year flow-through normalized for the seasonal Canada effect and were therefore, a more normal 35%. From a regional perspective, U.S. revenues grew 5% sequentially, and totaled 55% of segments mixed in the second quarter. Canada declined 14%, and totaled 7% of the mix. And international revenues increased 5%, and totaled 38% of the segment's second quarter mix. International growth was highest in the Middle East and Africa. As is typical for the segment, seasonal declines in Canada due to breakup came at very high decremental, north of 70%, particularly in sales of downhole products and services. But these sales declines were more than offset by strong sequential performances from other parts of PSNS, including Mission Products and XL Systems. Drill pipe production increased 7% sequentially to new record levels, driving sharply higher margins helped by favorable mix of premium 4-inch XT pipe. However, orders for drill pipe had slowed in recent weeks and we are very cautious about the remainder of the year. Demand for Tuboscope tubular inspection and tubular coating in North America, together with sequentially higher sales of mill equipment, led to slightly higher sequential revenues and margins there. Sales of composite and fiberglass pipe increased sequentially as well, with lower oilfield demand in North America, more than offset by eastern hemisphere sales into FPSO construction projects carrying strong margins. Continued incremental cost savings from the Ameron acquisition drove operating margins higher there as well. Well Site Services posted slightly higher revenues but margins fell, due primarily to the Canadian break up effect and some pricing pressures in the U.S. As we enter the third quarter 2012, we expect Petroleum Services & Supplies segment sales to begin to face some more headwinds in the North American markets, partly offset by continued growth overseas. As U.S. rig counts have flattened and maybe trending downward, we are beginning to see what we believe will be a modest downturn in activity. Specifically, bookings for new drill pipe, drilling and well servicing pump products and composite line pipes have all seen declines in the U.S. in recent weeks. While other products within the segment, notably Downhole Tools, XL systems and certain Well Site Service lines have seen sales trend higher lately. We believe commodity price softness will probably have an impact on drilling activity and potentially limit rig count recovery out of breakup in Canada through the second half of the year. However, we could be wrong. With gas back up over $3, and with WTI now flirting with $90, the North American rig count may well stabilize, potentially even grow. The Gulf of Mexico is marching steadily back to a robust level of activity and we know of 58 new offshore rigs that we expect to order drill pipe over the next year and a half. Nevertheless, as of today, we see a little more caution in our North American customer spending. Given that backdrop with nearly 60% of segment revenues derived from North America, we perceive Petroleum Services & Supplies revenues declining 1% or 2% from the second quarter to the third and post slightly higher -- sorry, posting slightly lower margins. During acquisitions, the Distribution & Transmission segment posted 38% higher sequential sales from the first quarter to the second, and 84% higher year-over-year sales. Revenues were $780 million and operating profit was $54 million. Operating margins were 6.9% of sales. Sequential flow-through or operating leverage was 5% and year-over-year operating leverage was 8%. Mix for the group's second quarter were 79% North American and 21% international. Almost all of the sequential growth was accounted for by the acquisitions of Wilson and Ensco. The legacy NOV distribution services portion of the segment saw its Canadian revenues decline 26% sequentially due to breakup, but its U.S. and international operations offset the declines dollar for dollar. The recovery of offshore drilling in the Gulf of Mexico, project driven valve sales in Azerbaijan and higher North Sea activity contributed to the quarter sales. Higher sequential transmission sales of Ameron products were partly offset by lower Mono sales of industrial products and delays in international artificial lift projects in Latin America. Demand for Mono power sections for drilling motors remains very high. As you can imagine, the group is very busy integrating all of the acquisitions made through the past couple of months and they're making great progress. NOV's combined purchasing power across is now more than doubled distribution business is substantial and we are working to capture additional savings for migrating to a single ERP platform. All in, we expect meaningful savings from the integration which will make our new combined business more efficient. Looking into the third quarter 2012, we expect Distribution & Transmission group revenues to increase substantially, as we pick up by full quarter's results from Wilson and Ensco and almost 1 full quarters revenue from CE Franklin. We expect margins to decline into the mid-5% range, owing to the new mix of business along with North American activity headwinds I discussed earlier. Turning to National Oilwell Varco's consolidated second quarter 2012 income statement, gross margin declined 160 basis points and SG&A increased $24 million, primarily due to the impact of acquisitions made during the quarter. SG&A as a percent of sales was 8.7% in Q2, down from 9.1% last quarter, and down from 10.7% last year. Interest expense of $9 million is expected to rise to about $12 million or $13 million in the third quarter due to debt taken on related to acquisitions. Equity income in our Voest-Alpine JV was $19 million, up $2 million sequentially, on higher sequential OCTG and line pipe volumes. We expect equity income to decline in the third quarter due to scheduled mill maintenance. Other expense improved $8 million from the first quarter due to FX and lower bank charges. The book tax rate for the second quarter was 32.1%, close to our expected rate for the remainder of the year of about 33%. Unallocated expenses and eliminations on our supplemental segment schedule was $111 million in the second quarter, up $10 million sequentially due to higher intersegment sales eliminations. Depreciation and amortization was $157 million, up $9 million from the first quarter due to new acquisitions. EBITDA excluding transaction charges was a record $1,084,000,000, up $46 million sequentially to 22.9% of sales. National Oilwell Varco's June 30, 2012 balance sheet includes total debt of $1.4 billion, an increase of $938 million sequentially to finance acquisitions and domestic tax payments made during the quarter. Cash was $1.9 billion at quarter end with approximately 88% of the balance located overseas. Consolidated working capital excluding cash and debt was $5.9 billion, or 31.2% of annualized sales, up $1.6 billion from the first quarter due mostly to taxes and acquisitions. Inventory accounted for about 60% of our working capital growth of $973 million, with $689 million of that flowing in from acquisitions in the quarter. Legacy NOV business has increased inventory, $284 million, mostly in Rig Technology to support backlog requirements. Faster shipyard construction cycles are accelerating [indiscernible] deliveries from us. Other inventory growth occurred across numerous plant expansion initiatives we are getting up and running across all 3 segments. Domestic and international income tax payments drove accrued taxes down $441 million sequentially and were a significant use of cash in the quarter. Cash flow used by operations was $253 million for the second quarter due primarily to the income tax payments and other working capital items. CapEx was $140 million in the second quarter, and we expect it to rise in Q3 and finish in a range of about $700 million for the full year. So now let me turn it back to Pete.

Thanks, Clay. I want to make a few brief comments on some issues that I think are very important to us as we look to the future. On the last 3 or 4 conference calls, you've heard me expound loquaciously on shales, so I'm not going to talk too much about shales today. But needless to say, for every segment of our business, shales are exceedingly important. They continue to be important, I think, especially North America, and they're something that are going to continue to provide growth for us. But the 3 things I'd like to kind of emphasize today are: Number one, it's our organic growth and what we're doing in plant expansion around the world. We really have some neat things going. In particular, we've just started construction of a new facility in Russia. That facility will be building rigs. The Russians are in dire need of the technology that we have and I think it's really going to be very, very important that we're able to do some things. When you see companies like Exxon moving into Russia, you know that the demand for quality equipment is going to improve. And I think that's something that's going to be very important for us and we're situating ourselves and within about a year to a year and a half, we'll be producing, I think, some fine equipment into that Russian market. But it's not just Russia. We're doing things in Southeast Asia. We're expanding our fiberglass facilities down there. We're doing things in the Middle East. Basically, all over the world, we're expanding our facilities and our ability to be able to help our customers there. And what that really does, and you'll start to see that, I think, as we go out a year, a year and half, is it reduces our transportation cost tremendously. It puts us in a position to be able to take advantage of a lot of the things that we have going on and building the products that we're building and putting them in there. So that organic expansion is very, very important. It really is important when you look at on a 5 to 10-year basis. Clay pointed out a lot of the things we're doing on M&A, but really, that organic expansion is one of the things that's really, really going to be a growth thing for the future. Secondly, I think is deepwater again. We're starting to see the Gulf of Mexico come back. That will be very beneficial to every one of the elements that we have on our company, every division is going to do well. But more importantly, look at the day rates of companies like Seadrill just signed up for. And then that's one of the reasons that we're very bullish on the fact that there will be more deepwater rigs constructed and we like our position in that marketplace. So I think deepwater will continue to be a big theme for us as we move forward. And then finally, the thing I want to talk about is technology. We have so many good things in technology today. And when you're looking at this, everybody out there that's drilling wants the best they can get. And we're doing some really, really cool things. I talked last time about our NOVA control systems and we were able to show that to a lot of our customers at OTC and they were very, very impressed. And I think that's a game changer. That's going to be a product that I believe that it's going to be -- allow people to do so many things with automation and the like on drilling rigs, but it really is going to position ourselves for wonderful growth into the future. Secondly, you're looking at things like BOPs. We've completed, organically, a lot of R&D facilities over the last couple of years. We've invested heavily in this because we know the industry needs the best products they can get. They need the most reliable products, they need the highest-quality products and we're positioning ourselves to be able to maintain that status as we move forward. We have Helios bids, we have our vertical drilling machines, we have pipe handling for land rigs, we're continuing to raise the bar. When people say, well, we're going to compete with NOV because we're going to have these products. That's okay, because we're going to continue to raise that bar and have new products out there that are really going to guide us to the future. So I think those are the 3 things, operationally, that we're really excited about right now. It is that organic growth, the resurgence that we believe, both in deepwater, the building continues, but the drilling is going to improve around the world and then finally, the technology. So those are the things we're excited about. We like where we're going. I think this quarter was a good quarter for us, especially in the order arena. And the good news is every time we deliver one of those rigs, we have to support that rig for the next 25 years. And so we like where we are. So Christine, with that, I'll open it up for questions that our listeners might have.

[Operator Instructions] And our first question comes from David Anderson of JPMorgan. John David Anderson - JP Morgan Chase & Co, Research Division: Clay, did I hear you say $200 million award for turret this quarter that just came in?

Yes, it didn't show up in Q2, David. It was after the close of the quarter. So this will -- and actually, it's not one turret, there's a number of pieces of equipment there and a couple of customers. But they aggregate to a lot of signings of orders here in just the past couple of weeks. It will show up in Q3. John David Anderson - JP Morgan Chase & Co, Research Division: Okay, because I was actually kind of wondering about when you guys are bidding on rig, your rig packages, are you generally bidding on FPSO. I think you and I have talked about this, this is generally kind of piecemeal -- what is the bidding process like right now at FPSO? Sort of a new business for you. When you go into that, are you selling a package, are you offering a package or is it individual pieces and maybe could also provide a little context in terms of what that bidding activity has been like in FPSOs now, say compared to, I don't know, 6 months ago or so?

Yes. That's a great question. Well, first, to answer your first question is the bidding process has been painfully slow here, the last few quarters. It's a market that's kind of we're still recovering, I think, to some degree, from the downturn from '09. Good news is though it's distinctly recovering, inquiries are rising and the like. We, as you know, our strategy here is to try to offer more of a packaged offering of FPSO components and in some way, change how that industry views these projects and execute these projects. And we think, by doing that, we can improve the efficiency, we can drive more standardization. And so we're having a number of conversations, they're very interesting and some enthusiasm in those, with shipyards and others about how -- what that might look like. But that's a very slow evolution and process and so that's kind of going on behind the scenes. In the mean time, we're in there, bidding. Still more on a component by component basis and slugging it out. But our outlook is improving. NKT came in and we've seen a rising interest in their products for flexible flow lines which, of course, plug in to FPSOs. And APL has a lot of good things going on too. So our bullish outlook on market demand is as enthusiastic as it ever was and I'm pretty excited about what's out there over the next couple of years. One final point to make here though is that, I think, the owner or operators of FPSOs, there's a couple of large ones that have some -- it's well-known that they're struggling a little bit with their business models and I think that's kind of what our customers are sorting through right now. Who's going to own and operate these things and how they're going to make money at it. John David Anderson - JP Morgan Chase & Co, Research Division: So kind of an opportunity from competitor weakness?

Yes. Partly. Some of those owner operators are vertically integrated. As you know, we don't want to own and operate them. We just want to sell components into them, but we're also taking a look at their business model and figuring out what can we do to help them make a better return on investment. Ultimately, that's going to be the key, the path to success for us. If we can transform what we sell, make it more standardized, reduce the risk around building these large complex vessels and so that all parties have a better idea of what's going to cost. There's less uncertainty for shipyards, or less uncertainty for the owners operators of these things. And that's -- again, I'll stress, it's a very long-term strategy. That involves a lot of evolution of thinking across everybody that participates in this space. And -- but the end goal here, I think, is an attractive place where everyone involved here can make good returns and good profits on these projects.

David, I might add too. If you take a look at what we've done with drillships, it's really been the exact model. If you go back to the mid-90s and look how our drillships were built and you look at how they're built today, it's totally different. That's one of the reasons you aren't having the cost overruns, you aren't having all the issues you had back in the mid-90s. And so we -- it's our desire and I think it's our vision and we'll get there, that we're going to replicate what we've done for drillships with the FPSO market. John David Anderson - JP Morgan Chase & Co, Research Division: Great. Speaking of profitability, you're talking about rig tech margins being basically flat in 3Q. I assume flat from the 24.5 number that you guys -- ex acquisitions I assume, that was the number you're talking about?

We're going to quit reporting ex-acquisitions because now everybody's part of NOV. But now I'm -- let's say around 24 is what our forecast calls for right now. If you recall, as we move into Q3, we're going to have a larger contribution from a couple of acquisitions, NKT and Interflow, who has good margins, but they're not up where Rig Technology margins are. So as the mix moves more in that direction in Q3 compared to Q2, that will offset some of the margin improvements that we're expecting in the other parts of the base NOV business and Rig Technology. John David Anderson - JP Morgan Chase & Co, Research Division: Right. That was actually what I was getting -- what I was actually getting at. I was just maybe if you could just kind of help us understand a little bit of how this mix is shifting? Of course, we're all looking back at the past for -- still looking towards the future and things are always changing with you guys in terms of your acquisitions and by the way, you don't have to justify your acquisitions with us. But in terms of us who are looking out there with these different components, it sounds like you've worked through that lower price backlog on the rig equipment and now the higher price backlog is coming through. Can you just help us understand so, I don't know, the next year or so, how you see that playing out and how margins start to uplift and what we should be expecting?

I think margins are going to gradually improve here, but I'll stress gradually and maybe after moving sideways again for another couple of quarters. The factors driving this are, you cited a big one, we did get improved pricing on rig DEPs through 2011, mostly in the drillship end of things and semi end of things. But that improvement is going to be mitigated by a couple of things. One is these 2 acquisitions coming in with a little lower margins involved, a pick up in results coming from APL, the turret mooring business, again, good margins but not as strong as the base Rig Technology margins. Headwinds in the land business, particularly coming from our North American customers that I highlighted in my comments, and that affects all things from drilling rigs, to well servicing rigs, to frac spreads and pressure-pumping equipment. And so it's a couple of offsetting factors there. I'd also throw in the fact that with all the plant construction and the expansion that's going on around the world, we have a lot of start-up cost and just took on, with NKT, a very large plant in Brazil that's got some start-up cost that are going to -- its going to carry as well. So as opposed to where we were 3 months ago, 6 months ago, in terms of margin outlook, some negatives had popped up in the market. And also, we've added in these businesses. Great businesses, good long-term growth prospects, but they're going to be a little more limiting on the margin here in the short run.

Our next question is from Marshall Adkins of Raymond James. J. Marshall Adkins - Raymond James & Associates, Inc., Research Division: I'll try to keep it relatively quick here. I think the biggest surprise for a lot of us was how well PS&S and distribution did. And particularly given the declining North American rig count that we've seen, I mean, I guess, I certainly think of it as if the U.S. rig count is falling in a meaningful way, and certainly, Canada falling seasonally, that sequentially, things are going to be pretty ugly but you're one of the guys that have -- you've put up pretty good numbers here so you did...

Marshall, you can take as much time as you would like. J. Marshall Adkins - Raymond James & Associates, Inc., Research Division: Well, I want a little more color on, you mentioned drill pipe was one of the reasons why that happened, but just give us a little more color on both those divisions, on why we didn't see the kind of the normal decline of business with the decline in rig count?

Yes, Drill Pipe was the biggest single piece -- I'll focus on PS&S. Drill pipe is the biggest single piece. They just had a great quarter. There were some headwinds operational last quarter -- last couple of quarters, that they kind of worked their way through. And record level of production of Drill Pipe this quarter, they've never done as much. And also, it's more focused in North America, that's not without much contribution from our Chinese plants. And so just a super job by that group and that drove great incrementals and good margins there. The other 2 standouts in the quarter, I would add, would be our XL Systems business which we probably don't talk enough about. These are marine connectors offshore. They had a real solid quarter as well. And thirdly, just an outstanding performance by Fiberglass Pipe. They took on the Ameron acquisition late last year and this is a great little case study about some of the themes that I was speaking to earlier, in terms of how well we -- our guys can integrate businesses and make them profitable. They have just done a super job of rationalizing cost, of moving glass purchases over to lower-priced contracts, resin purchases over to lower-priced contracts to really get benefit of economies of scale, doing away with duplicative overhead structures, that sort of thing. And so they had a terrific quarter as well. And so I'd highlight those -- I'd say all of our business did really well, but I highlight those 3 in particular.

And I might add, Marshall, when you look at our PS&S business, and we've talked about this a lot, everybody knows our position in the drilling rigs, and everybody knows what we do on drillships and semisubmersibles. When you start talking about names like Tuboscope, and Brandt, and ReedHycalog, and our Downhole motors and our Fiberglass and all that, those are all market-leading names. And I think we have such good presence in the market that even though there are some softness with the declining rig count, those market-leading names are going to be the last business that people get rid of. They're going to get rid of some of the folks that are chasing those market-leading names, but not those, and that's one of the reasons where we've had success. J. Marshall Adkins - Raymond James & Associates, Inc., Research Division: And you weren't getting any -- on addition, you said, you weren't getting any of the cost savings from Wilson blowing through yet, I mean, there's no way?

Not much.

Not yet, not yet, but we'll get it. But again, we had -- predominantly, there weren't that much of Wilson in the distribution numbers. And our distribution guys continue just to do a phenomenal job of what I call rubbing the buffalo off the nickel. Those guys control -- they control their cost about as well as anybody. And I think, as we integrate quicker and quicker with the Wilson deal, you'll see the same sort of results coming out of that.

Our next question is from Jim Crandell of Dahlman Rose. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Clay, you mentioned a couple of times in your remarks about for prospective rig orders, that there was a fair amount going on in Brazil. Would that be for floaters built by Hyundai and Samsung, or would it be more orders for you out of yards in Brazil?

Actually, we're seeing both. We're seeing a lot of interest on the Seche-Atlas project, that Petrobras has sponsored in Brazil, to be built in Brazil, but we're also seeing interest by drilling contractors who see an opportunity here to -- as I described it earlier, to fill the gap. It's going to be a while, it will be several years before those rigs start flowing out of the shipyards in Brazil. And so I think there's opportunities for drilling contractors to build rigs with Samsung and Hyundai and DSME and others in Asia, to potentially go to work in Brazil for 3, 4, 5, 6 years before those Brazilian rigs come on. So that, I think, is influencing demand in Asia as well. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Okay. And Pete, is there any short of any change in your view about how your traditional customers are approaching the new order market for drillships in harsh environments semis? It seems that as soon as they accept deliveries, they're ordering more. We're exercising options in placing new options, Ensco with 2 more today, do you see this thing keeping a barreling along in companies, and there'll be a number of drillships on the books for your traditional customers for 15 delivery in the next few months?

Yes. Jim, I think our outlook is really pretty consistent with what we've talked about in the last 6 months, and you're kind of seeing that happen. As some of these rigs come out, as they get contracted, people are ordering more. And if you look at the economics on it, the beauty of this, and I tell everybody, just look at what the day rates are getting and then you'd kind of back into what these things are selling for. And the economics are pretty darn compelling. I think the, number one, we've talked about this a lot, people need a newer rig fleet, they need the new technology that's out there. And if they are able to just kind of keep churning and bringing these things on every couple of years the way they are, I think that's going to repopulate the rig fleet. It's going to increase the deepwater fleet, which is what you need. And so we don't see any abatement in that. And we kind of like where our position in being able to provide those rigs to our customers. So I'm pretty bullish that this is going to continue for some time. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: And Pete, correct me if I'm wrong, but have you said in the past that if Hyundai and Samsung keep their prices flat more or less, you will probably keep your prices flat too, especially given that many customers sort of cite the, let's say, the lower cost of rig, that's one of the reasons that they're in there, ordering. Does that create any margin issues for you by sort of -- if that is in fact your strategy, keeping your prices flat in here?

Well, I think, Jim, our strategy, again, is going to be -- it's pretty simple. I mean, we watch what the drilling contractors are getting. And we kind of know if they're getting a certain level, that our pricing can adjust accordingly. And so that I think that's one of the things that we certainly are going to look at. If you start seeing rigs going out $700,000 a day, that indicates the maybe you ought to be raising your prices some. But at the same time, the real advantage to us is efficiency. And one of the things that when I was talking about my comments earlier, about the organic growth that we've had, one of the things we've done is invest and buy some companies in Korea, and that allows us to be able to reduce our cost. So as we're reducing our cost, and even if we keep the pricing flat, that's going to give us margin enhancement. And that's really the key to everything that we try to do because pricing, as I tell everybody, somewhat ephemeral, it can go up and it can go down, but efficiency gains stay with you. And if you can do that, that's going to help your margin. So we watch that pricing very, very closely and we'll adjust accordingly, based upon what we think the economics that could be handled by our customers. James D. Crandell - Dahlman Rose & Company, LLC, Research Division: Okay. And last question, Pete. What's been your experience recently in terms of deepwater rig orders from traditional customers, in terms of them ordering additional BOP stacks?

It's happening, Jim. I think a lot of them are taking a couple of stacks per rig. We're having some of our traditional customers that are coming in and are ordering one-off stacks now. I think everybody realizes the need for that and I think that's going to be a business that's going to continue to be very, very strong for ourselves in that arena.

Our next question is from Brian Uhlmer of Global Hunter.

I have 2 specific questions. Number one, we're talking about the 5-year surveys and rigs coming back into the yard and also, I wanted to kind of address what potential upgrades and the opportunity per rig looks like? Are we talking about BOP control systems upgrades, pipe handling? What type of equipment and what do you think the opportunity per rig is on the 5 years? And then number 2, or hitting some 10 years from the previous cycle, do you think there's some major upgrade opportunities, like the diamond rigs where you have $100-plus million opportunity with those rigs?

Well, Brian, obviously, the older the rig, and especially a rig that's 10 years older is going to have a lot more of an opportunity. And probably the biggest reason is because a lot of the equipment that's out there has changed so dramatically in technology. You're going to want to -- you might even want to swap out a top drive and you might want to get a new age control system or a new age pipe handling system. And clearly, you'd want to look at the BOP and get the most recent mug system that you could have on in the control system. So the 10-year-old rig would be certainly, I think, a little bit more lucrative. The 5-year-old rig, what you're talking about there is probably going to be a lot more just refurbishment. And almost like taking your car in to get it tuned up and different things like that. And we're always reluctant to put a number, simply because there's differing levels of how our equipment's taken care of. And that's -- you might have one top drive but maybe the diligence on the maintenance wasn't quite as good as it should've been. And that could -- a top drive overhaul could cost as much as $0.5 million. But another top drive may have had things going on continuously in a little bit better maintenance program. And so that overhaul might not be anywhere near as much, it might be $125,000, numbers like that. And so I will say this, there'll be good numbers but it's very difficult for us to give you something that says this is absolutely what we'd be looking at. Because if there's too many variables, it's kind of a set of quadratic equations, there's so many variables in there. But it is business and I think will be a very good for us in the long term.

Yes, a lot of the sales we're making in these overhaul cycles too are dictated by EMP customers. The rig goes into the shipyard every 5 years -- 5, most people are aware of it but those that aren't, they'll get inspected for insurance certificates, for Coast Guard certificates and the like, in most rigs are on a 5-year cycle. While they're in, that's an opportunity for us to do this work. The customers that they're going to work for next, as they come out of the shipyards, will often specify equipment changes, upgrades and the like. And so that drives a lot of the equipment that we can sell into that project. And then another potential opportunity for us is what we were talking about just a moment ago. I think some of these rigs are probably going to be looking at adding a second BOP, and looking to see whether that's feasible and the like. And so that's the developing trend that may give this next round of 5-year overhauls a little different flavor too.

Great. And for my second question. A little bit on artificial lift, You mentioned some delays there that had an impact on it, and you also mentioned, obviously, Mono on the power section business, that remains very high. I would imagine that's also true for the progressive cavity pumps. And kind of curious what product lines outside hydraulic lift and PCPs, if you're expanding artificial lift and how -- what order of magnitude that can grow to, as we look through the next back half of the year?

Yes, that's mostly within our distribution business and so we're mostly selling items made by others there. But along the way, our Mono business, manufacturers, progressing cavity pumps and so that fits well. And we've, over the years, developed drive heads for those rod pumps, some other technologies along the way. So I think we're kind of gradually adding a few products here and there to expand our offering. But obviously, artificial lifts is a big market. We have a pretty interesting position in our distribution and channels to that market. And the specific names I was referring to in my comments were some -- we often sell into large projects overseas. And in this instance, we had 1 or 2 of those in Latin America that were delayed out of Q2 into Q3, so that's what's going on there.

And our last question is from Robin Shoemaker of Citi.

I wanted to ask about Brazil. You had a rig order, a deepwater rig order. Was that a fully integrated package like the 7 that you booked last year?

Yes.

Yes.

It was, okay. And so just in terms of timing of additional, we keep hearing about the 33 rigs that you're planning to build in Brazil, sounds like 7 plus 1, 8, have been awarded the rig equipment package. What is the timing on the remainder, to your knowledge?

Robert, if we could good answer that with clarity, we would be certainly clairvoyant. Our experience, and we have a lot of experience in Brazil, is you kind of work on their time. I would hope that probably, you'd see a lot of awards this year through the remainder of the year, but that is a hope and not a certainty. The certainty is the awards will be made, but whether they're made through the remainder of this year, first part of next year, you never -- time has a different meaning. And this isn't something that's -- and I don't mean to be critical, it's just the process down there, the way it works. The good news is rigs are going to be ordered and we like where we are. But the medium news is that to give you an exact timing would be pretty close to impossible.

Yes, okay. And so, I guess, the 8 that you have in backlog now, do have like specific schedule delivery dates on all of those?

Absolutely. Yes, we have. Just like we do when we work with a shipyard in Korea, Robin. We've got milestones. I mean, we know exactly how we're going along. What we're going to be doing when certain things are going to be delivered. I mean, these projects are very, very complex. And we have milestones for both payments and deliveries of certain things. So we know exactly when these things should be delivered and how they're going to impact us. And that's one of the reasons when Clay talks about revenues out of backlog, we're able to figure that because we have so many projects and we just kind of backtrack through our milestone list to be able to give you those numbers.

Okay. So my other question then has to do with the North American market. Drill pipe sales are slowing down and so forth. Are you seeing evidences that drilling contractors or land drilling contractors are doing what they've done previously, which is to take equipment, drill pipe and other equipment off of idle rigs or so-called cannibalization phenomenon, as more rigs are laid down. Or do you think that is less likely to be a factor because when it does happen, it tends to kind of exacerbate the sales drop of certain drill pipe and other equipment more than really is the underlying demand, if you know what mean?

Robert, I think you're going to see less and less of that. Actually, I would say this, number one, drilling contractors have been very disciplined, especially when you look at other downturns, they've been able to maintain their day rates probably at a higher level than one would expect. But secondly, the real player over the last few years in the shales has been technology. And a lot of the rigs that you see that might get laid down, quite frankly, might not come back to work again because it's kind of the worst rig is the one that's going to be released. And even if one of the good rigs is drilling one of the wells that you want to stop on, you'd still move that good rig to another well and release one of the older rigs. So I don't think you'll see quite the same phenomenon. Now drill pipe is a little bit more fungible, you'll move drill pipe around, but I don't think you'll see it when it comes to the rest of the equipment. And if anything, I would argue that if there's a slowdown and then you come back up again, that bodes well for the equipment and manufacturers because they're want to bring out the best equipment they can get and that's where the technology factor comes in. You see things like the Rapid Rig, and the ideal rig that we do. You see all the different rigs like Helmerich & Payne, and Patterson, and neighbors all have out there. It's always the best rig wins. So we think that in the long run, that will probably bode well for us.

I would now like to turn the call back over to Mr. Miller for closing remarks.

Well, thank you, all very much for listening in and we look forward to talking to you at the end of our third quarter. So thank you very, very much.

Thank you. Ladies and gentlemen, a playback for this call will be available through August 25, 2012, at 1 (888) 843-7419. This concludes today's conference. Thank you for participating. You may now disconnect.