Good day, ladies and gentlemen, and welcome to the National Oilwell Varco First Quarter 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to National Oilwell Varco's First Quarter 2020 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the first quarter of 2020, NOV reported revenues of $1.88 billion and a net loss of $2.05 billion. 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, Blake. This has been a challenging time for all of us. As we always do, Jose and I will be discussing the results of operations through the first quarter of 2020 and our actions and expectations as we look to the future. However, first, I want to say that our thoughts are with those most affected by COVID-19, particularly those on the front lines of this crisis. In the past several weeks, we have sought to both protect the health of our employees and to serve our customers who are facing daunting challenges and are relying on NOV to keep their operations running. This has been no easy task. As of today, 64 NOV facilities around the world remain shutdown due to government mandates, which means approximately 3,300 of our valued employees globally are unable to come to work. This number varies daily with evolving government restrictions and was as high as 4,000 employees a few weeks ago. Additionally, thousands of other NOV employees have been working from home or are working reduced hours. The rest of our facilities remain operational, although challenged. Many are shorthanded and some working flex shifts. We are committed to operating in a safe manner as possible. And we've been able to do that, thanks in large part to the multitude of social distancing measures implemented by our management and the careful adherence to these measures by our employees. Social distancing at NOV includes modified scheduling, staggered lunch breaks, mandatory periodic hand washing, incremental facility cleanings, working from home where possible, telephone and video conferences instead of in-person meetings and increased spacing on shop floors. NOV's facility managers have stepped up to do an amazing job leading their teams safely through this scary pandemic, and I'm grateful for their leadership. NOV's employees are…

Thank you, Clay. NOV's consolidated revenue decreased $398 million or 17% sequentially due to seasonal declines in certain international markets, the ongoing contraction in U.S. drilling activity and COVID-19 related disruptions. Despite the sharp contraction in revenue, our accelerated and expanded cost out efforts limited sequential EBITDA decremental margins to 28%, resulting in a $110 million decrease in EBITDA to $178 million. Year-over-year revenue decreased $57 million, and EBITDA increased $38 million, which when adjusted for pricing and mix reflects the approximately $63 million per quarter or $250 million in annualized cost savings realized since the beginning of 2019. After we recognized the magnitude of damage COVID-19 would inflict on global energy demand, we immediately began implementing numerous additional cost cuts which include the elimination of certain layers of management and the acceleration of decisions to exit operations that did not meet our return thresholds. By decisively executing on these new initiatives, we have now removed costs that exceed our prior target for year-end 2020. We continue to execute on many longer lead time initiatives and, therefore, increased our total targeted cost savings relative to the beginning of 2019 to $625 million, which will require us to achieve an incremental $375 million in annualized cost savings during the remaining 3 quarters of 2020. Cash flow from operations was $39 million for the quarter and capital expenditures totaled $68 million, resulting in a small use of cash during the first quarter. While we expect to generate positive free cash flow the remainder of the year, the outlook remains opaque, and we anticipate working capital metrics will deteriorate due to the pressure on our customers to preserve liquidity and an increasing proportion of business from international markets. As Clay mentioned, we believe we have more than ample liquidity to navigate through the…

[Operator Instructions]. Our first question comes from the line of Bill Herbert of Simmons.

Thanks for the detail and the realistic outlook. Clay, a question for you. I was struck by the fact that you sort of issued the guidance internally for a very difficult two years, is what I heard correctly, with regard to your partners within NOV and your labor force on the one hand. On the other hand, I think you correctly talked about the damage that's being done to the supply chain in terms of the energy supply chain, the evaporation of Ford oil supply and the need for hydrocarbons going forward. So I would have thought that given the severity of the implosion in production, the damage to the upstream supply chain, with even modest reflating economic and demand growth next year, we would be in an expansionary mode for 2021. So I'm just curious as to your two year comment with regard to this is going to be a slog for two years.

I hope you're right. To me -- what concerns me, and I don't spend a lot of time typically talking about the macro on these things, but what concerns me is 26 million Americans filing for unemployment. And I think the level of unemployment and economic uncertainty that has been injected into not just the U.S. economy, but developed economies around the world as a result of all of the countermeasures against COVID-19 means that we set ourselves up for a global recession and I think the prospects of us bouncing quickly back out of that are going to be limited because I think folks that are -- have lost their jobs are going to be hesitant to go back to spending what they did prior. And so no one really knows, and I'll stress, I'm terrible at forecasting this sort of stuff. But I think that means that a recession that drifts on for -- on the order of 2 years or so means that we'll have suppressed levels of demand for oil through that time period. Ultimately, we are going to recover, and I think I was pretty emphatic in my opening statement on that. I don't know the timing, but we're bracing ourselves for longer and -- but I'd add, I hope we're wrong. I hope demand comes back strongly and intersects with supply, which is going to -- clearly going to be destroyed through 2020, like a spending and force shut-ins are going to see that, that happens.

Got it. And as a -- yes, and as a global manufacturer, just given the dislocations that we're seeing, the continued and aggressive decoupling away from China for good reasons, are there any parts of your supply chain -- significant parts of your supply chain that need to be rewired and thus will mute the rate of profit recovery on a rebound in activity?

That's a really good question. And what I would say, Bill, is that our -- overwhelmingly, our primary focus is taking costs out of our supply chain with respect to sort of hypothesizing some future black swan scenario where we're going to wish we had a different rewired supply chain, that's not really the immediate concern. The immediate concern is taking cost out to resize ourselves to the diminished view of -- that we see for demand in the coming 8 quarters. And so that's really what's guiding our actions rather than trying to, for instance, move away from China.

And Bill, this is Jose. I'd also add that while we had our disruptions that certainly created challenges during the quarter, we have been and continue to be very thoughtful in terms of how we scale down the organization and how we position our manufacturing capacity around the world, and it has served us very well even during that very challenged quarter. So some additional costs incurred and some slight delays, but really, we were able to meet all major customer needs by rerouting our goods around the world using the redundancies that we do have within the supply chain.

Yes, the scale of the organization, I think, gives us some flexibility that smaller enterprises might not have in dealing with that sort of things. So that's very helpful in something like this.

Our next question comes from Tommy Moll of Stephens.

Clay, I wanted to start on any anecdotes you could share from conversations with customers. I would assume that here in North America, the dialogue is pretty grim and that they're adjusting just like we see every week with the rig count updates, but really on the international side, how much visibility do you or they have into what the rest of this year could look like? And then on a related point, any update you could give us on any adjustments to planning for the Saudi JV?

Good question, Tommy. First, in North America, yes, they're reacting -- I mean the reaction has been as swift as any I've seen in my experience with respect to laying down rigs as quickly as possible. Once a rig finishes drilling up a pad, they're getting laid down. The industry has never faced shut-ins like we are facing right now. And so no one's wasting any time. The request for discounts have been immediate. And so the business really is -- I think one of the respondents to the Dallas Fed survey said the business in North America is just shutting down. And it just kind of feels like that right now. International, it's a little more measured, I think. I think we're definitely going to see an impact, but it's going to unfold a little more slowly. We are having conversations with our customers about their specific plans for projects. I'm not sure they know exactly how that's going to shape out. But generally, the -- we're hearing a lot of customers are planning on pushing back FIDs or projects they already haven't launched. The ones that they have launched, generally, we're hearing they intend to move forward with, they're going to go ahead and execute. And so we're pleased to have the backlog that we have. But I think Jose mentioned this in his prepared remarks that feed studies, for instance, on projects internationally, we're in conversations with customers that are saying, "Hey, let's take a little more time and maybe do another iteration of looking at how we make the -- take costs out of this project or so forth." So our expectation is that international will be down, but not nearly to the degree that North America will be. With respect to our Saudi JV, things are progressing well there. We got a bit of a late start on construction last year, but it's underway now. We're about 35% to 40% complete with construction. And although we've seen some COVID-19, a little bit of delays and disruption on the construction side of things in the kingdom, generally, that's moving forward and very excited about the prospects for that joint venture. Of course, just as a reminder for everybody else, that -- that joint venture and the build-out of a plant there in Saudi Arabia is tied to the $1.8 billion order that NOV secured for 50 land rigs. And I think our customer's expectation is to continue to push forward with that at -- as quickly as they can.

Clay, that's all very helpful. Shifting to a bigger picture theme here. Over the history of the company, you've been involved or emphasized North America land versus international land versus offshore to different degrees, different points and cycles. So as we go into this downturn and you're looking at what businesses to continue to invest and where to prune investment and potentially exit altogether, can you give us any examples of decision-making around those product lines and potentially, as those decisions may be impacted by how you think the recovery takes place? And which markets you want to focus your exposure to as you said earlier, say, a couple of years forward from now?

Sure. Sure. I think -- by the way, I appreciate the question because I think it emphasizes the diversity of products that we offer, the diversity of basins and places that we work. And I think diversity is hugely important as we move through a downturn, diversity and scale. And the short way of saying it is, we'll work anywhere that we can make money and a return on capital that we invest. But I think it's just being a prudent and responsible steward of company assets, we need to look at that portfolio from time to time and recognize that technology changes things, the customer practices change things, the outlook changes things. So Jose, for instance, referenced our drilling fluids business in the U.S. that we shut down this -- we're in the process of shutting down currently. And part of our analysis there is that although we have terrific folks that work very hard in that business, it's very challenged from a competitive standpoint, logistics and scale matter there too. And since it's such a fragmented competitive landscape, it's very difficult there to earn an acceptable return on capital. That's the sort of process that we are going through with our portfolio and figuring out where can we invest to make the highest returns for our shareholders. Finally, when we kind of look to the recovery, frankly, I think if the supply and demand lines for oil cross as quickly and as dramatically as they might, given the scenario that I was just discussing earlier with Bill, I could see basins all around the world begin to come back if we are fortunate enough to experience a strong commodity price increase that drives activity across the oilfield. So I think the fact that NOV supports all of these operations around the world, land and offshore, North American as well as international production as well as drilling as well as exploration, I think that's a key strength of our enterprise. And investing within that framework, it always is a search for competitive advantage. Ultimately, competitive advantage is what drives returns on capital and so that's what we're seeking.

Our next question comes from Kurt Hallead of RBC.

Hope all your families are well.

Thank you, and likewise. I hope everybody listening is doing well too.

Clay, I always appreciate the perspectives that you bring and the insights and also appreciate the fact that you're willing to take a stab at how things may play out even if it's on a near-term basis. Just kind of curious as you kind of are navigating this challenging time. You talked about maybe working capital being -- generating free cash flow, but working capital being a little bit challenged in prior down cycle dynamics, NOV was able to generate substantial cash flow from working capital. So I was wondering if you might be able to kind of help us put that -- your commentary into perspective and how to think about maybe a working capital release in 2020?

I'll hand it to Jose here in just a second. Before I do that, I want to say, I think our organization, through the last few years, because of the focus on working capital, is developing better and better processes and muscle memory around working capital. And that's driving better efficiency on working capital. But I'll let Jose address that.

Yes. I actually think that's a really good -- that's the overarching theme. I think we have been incredibly focused on improving every facet associated with managing working capital across the organization. We've gotten much better at it, and that will serve us really well as we enter into this much more challenged operating environment. But there are some things that are certainly outside of our control. And so as I highlighted, the customer base is certainly much more stressed, and they're going to be doing what they can in order to maximize their liquidity. We also have our business mix that's going to shift more international -- to international markets where the payment terms are generally a little bit longer. But basically, the way that we kind of see the next several quarters, as we certainly expect working capital metrics overall to deteriorate. And I think as it relates to looking at DSOs, the 2015-2016 time period is probably a reasonable benchmark for how things could progress over the next several quarters. But we certainly don't expect inventory turns and overall working capital as a percentage of revenue run rate to deteriorate to those levels in the past because of our much improved processes and management. And at the end of the day, we're hesitant to put a number out there for you guys because there is such a lack of visibility as to how the back half of the year will play out. But as you highlighted, with the contraction of the top line in that type of environment, we're usually able to generate some good free cash flow.

I appreciate that incremental context. And maybe just as a follow-up. So Clay, you have been able to side step the empire-building temptation that has stretched the balance sheets of a lot of other companies. So kudos to you for doing that. As you kind of look out beyond the 2020 dynamic and you're pruning your portfolio, I was wondering if you could give us some insight as to what areas NOV could potentially improve or enhance their existing position through M&A once dynamics start to normalize?

Yes. Well, Blake is sitting here and he runs that effort for us. But what I would tell you is that we continue to look at opportunities, we continue to think through our strategic positioning and our competitive advantage that drives returns on capital and we continue to look for ways that transactions could potentially enhance that. But we also recognized we're in the middle of a heavy lift on taking costs out of our organization and scaling to kind of fit the near-term level of demand. And we're going to be very careful before we add more complexity to that effort or risk to that effort by piling on an acquisition. We have done small acquisitions. We did a couple last year. They were very strategic, great fits and are executing well on those. But we're just recognizing the value of the capital that we have access to and that, that value will increase in coming quarters and really try to make sure that we get that right. So I think M&A, it's played a big role in our past in helping build the company in the first place. And it's going to play a role as we evolve into the future. But we're kind of passing through this inflection point right now. It's going to bring asset values down. It's going to make opportunities more and more attractive. And so we're monitoring that closely.

Our next question comes from Sean Meakim of JPMorgan.

Clay, I was hoping to get more detail on the cadence of the cost out as we go through the year at $375 million across 3 quarters. The incremental in 2Q is pretty high, but of course, given how quickly revenue is falling, it's tough to match the cost in that quarter. Just curious how the back half of the year looks in terms of realizing those savings? And would you characterize them as principally fixed?

Yes. First, on the pace, the answer as quickly as possible. As you correctly point out, revenue is moving down rapidly, and we're working to try to adjust to that as rapidly as we can. And so quarter-by-quarter, we'll continue to update you. But there's a lot -- as you can appreciate, we went from $230 million in our model to $625 million in our model. And there's a lot of moving pieces with that. But I think that our team gets it. We're spurring that as quickly as we can. With respect to the nature of the cost savings, what I would say in round numbers, it's roughly half fixed, half variable, with a little more detail around that about 35% of the overall cost savings effort pertains to direct labor; a little bit less than 50%, I think 47% is indirect labor plus overheads plus corporate efforts plus some benefits changes; and then the -- about 8% or so pertains to facilities leases and facilities fixed costs; and then their balance, which I think is about 11% or so, is, not sure if it's fixed or variable, things like travel, entertainment, trade shows, that sort of thing that we're reducing. So if you kind of sort through all of that, I would say that's roughly half fixed, half variable. Another way to look at it is, so far, about 1/3 of it has been SG&A related and about 2/3 of it has been cost of sales related based upon the $21 million year-over-year improvement in SG&A that we -- that you see on our income statement. Does that answer your question, Sean?

Very much. Yes, that was really helpful. I appreciate that. Somewhat related, free cash was a little light relative to what would be implied by EBITDA and working capital benefit. Just the cash flow statement is condensed in the release. It would be great if you could just maybe help us with restructuring cash impacts in the first quarter and maybe what will you -- how would you characterize cash out kind of one time associated with the restructuring as you go through 2020?

Yes, Sean, it's Jose. Yes, so I guess as I turn to Q1, there certainly were some minor cash costs associated with the cost out program that will continue through the course of the year. And also with some of the restructuring and impairment charges, we did have some noncash charges that related to inventory as well, which also impacted the quarter. But if you compare this Q1 to the prior 2 Q1s, we actually had improvement in the free cash flow. Typically, Q1 has a lot of seasonal type expenditures that flow out making that quarter a little bit more challenged. So we certainly anticipate improvement as we move into the remainder of the year. And typically, from a cash cost associated with some of our restructuring charges, you can look at between 15% to 20% of the cost savings -- the annualized cost savings basically being our cost or real cash costs associated with getting those costs out of the system.

Our next question comes from George O'Leary of TPH & Company.

Just given how important Wellbore Technologies has come -- become to the EBITDA stream, curious given your prepared remarks as you talked through that segment's results and kind of the pruning of the portfolio and decisions to exit businesses and regions as well, I think if I heard that right. The decrementals are expected to be relatively elevated in the second quarter, historically, that's a high incremental decremental business. But I was wondering if you could talk to beyond Q2, and I realize if revenue falls off really sharply, that's a totally different discussion. But if there's an opportunity to lower those decrementals, again, absent a sharp revenue fall off as we progress through the year for that business in particular.

Yes. George, it's Jose. I'll take a stab at that here initially. And -- as we were, I think, kind of touched on in one of the prior questions, when revenue does decline so quickly and so rapidly, it's very difficult for the cost out efforts to keep pace with those reductions. And even last quarter, as we were talking about Q1 of this year, we -- due to the timing of some of those cost out efforts, we expected a little bit of a slowdown, which that combined with the shortfall off in revenue that we saw from Q4 to Q1 led to some fairly high incrementals. And if you sort of take the midpoint of the guidance of roughly 25% decline from Q1 to Q2, that's another very challenged environment in order to maintain relatively low decrementals. So certainly, as we start getting closer to bottom and things start to level off, some of those cost savings will catch up, and we certainly expect those decremental or incremental margins to improve considerably. But overall, that segment has done a phenomenal job, really since the depths of Q2 of 2016, which is sort of the prior cyclical low, where they -- from trough to the recent peak, they delivered roughly 57% incremental margins. We gave the example earlier about the year-on-year comparison. Q1 of 2019 to Q1 of 2020 is reflective of about $110 million of cost savings that they've achieved, which really mitigated decrementals to 12%. So they're doing a phenomenal job and they will continue to do that as we move forward in time.

Great. That's a very helpful color, Jose. And then just on your last call, you guys noted that you closed, I think, 483 facilities since 2015. And you kind of talked about things like renegotiating real estate costs with your landlords and things like that. But how much is left to do on the facility closure or consolidation front as you contemplate the $625 million in cost savings program? How much is really left to do there? It seems like you guys have done a lot of work on that front already.

Well, we have, but again, don't -- I mean we're resolute in doing whatever we have to do to adjust to the marketplace. So we do have additional facility closures planned and have made some announcements around those. I think we have 29 closures that are pending right now and 27 that were actually closed in the first quarter. I mean we're doing whatever it takes to make sure that we're sized to continue to generate as much cash and EBITDA as possible through the downturn.

George, I'd also add that we've certainly done quite a bit in order to -- to this point, in order to consolidate some of our key manufacturing operations and by doing that improving efficiencies. A lot of that has been done. There's more left to be done, as Clay touched on. There's still a number of facility closures that are underway. I mentioned a couple of manufacturing facilities that we're closing and consolidating in my prepared remarks. But one of the other things that we have available to us is that we still have a large number of service, repair, aftermarket type facilities around the world which are easier to scale up and scale down. And when the market gets challenged, particularly in certain markets that are no longer meeting our returns thresholds, those are some of the targets that we started going after as well. But doing it in a very thoughtful manner to make sure that we continue to take care of our customers and can scale back up quickly and efficiently when we're called upon to do so.

At this time, I'd like to turn the call back over to Clay Williams for closing remarks.

I want to thank all of you for joining, both investors as well as any employees that might be listening. And as Bill Herbert brought up early in the questioning, we do believe we're in for a very challenging 2-year period ahead of us. But there is one thing that I really think is important to emphasize to everyone listening, and that is that NOV really is built to weather this. The diversity of our business model along multiple dimensions, our access to capital, our strong balance sheet, but above all, just could not be more proud of the employees of NOV who are well practiced in controlling costs when times get tough. So thank you for all that you're doing. Please, everybody remain safe. And we'll speak to you again next quarter. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.