Good day, ladies and gentlemen, and welcome to the NOV First Quarter 2022 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 NOV's First Quarter 2022 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, 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 security 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 2022, NOV reported revenues of $1.55 billion and a net loss of $50 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. [Operator Instructions] Now let me turn the call over to Clay.

Thank you, Blake. For the first quarter of 2022, NOV's revenue of $1.548 billion grew 2% sequentially, and EBITDA increased $34 million to $103 million or 6.7% of revenue. Year-over-year, revenues were up 24% at 34% leverage, reflecting positive impacts of aggressive cost reductions and some recent pricing recovery, offset by continued inflation and supply chain disruptions. Helped by continued high demand for offshore wind renewables along with rising oil and gas demand, orders were strong across the board as we put up a consolidated book-to-bill of 115% in the first quarter. The organization's execution against shifting challenges and supply chain freight and labor improved during the first quarter, in part by broadening our base of suppliers as well as recovering escalating costs through higher pricing, where costs for certain raw materials like resins appear to be easing. Unfortunately, a lot of components got worse during the quarter, steel forgings, polymers, fiberglass, electronics, stainless steel and switchgear most notably. Freight challenges intensified in the Eastern Hemisphere owing to the conflict in Ukraine and continued COVID impacts in the quarter. Recent standard cost rolls on many of our products moved up materially, reflecting the higher costs we face. Thus, considering all these extraordinary challenges, we were pleased to see improved execution and better financial results for the quarter. While results are still below acceptable levels, our outlook is constructive, given the steady tightening of oilfield services capacity that is driving accelerating demand for NOV's core oilfield products. This uplift is giving us improved line of sight towards healthier returns for our shareholders. For reasons I'll go into in just a moment I believe this up cycle will last a while. First, however, I'd like to take a minute and speak to some oilfield fundamentals. Construction in oil or gas well takes…

Thank you, Clay. NOV's consolidated revenue for the first quarter of 2022 was $1.55 billion, a 2% sequential increase compared to the fourth quarter of 2021 and a 24% increase compared to the first quarter of 2021. Rapidly improving market fundamentals, growing global drilling activity and actions taken to mitigate operational disruptions more than offset seasonal declines and continued extraordinary supply chain challenges. Adjusted EBITDA totaled $103 million or 6.7% of sales, a 220 basis point improvement in EBITDA margin compared to the fourth quarter and a 670 basis point improvement compared to the first quarter of 2021, representing 34% EBITDA flow-through. Our GAAP results for the first quarter of 2022 included $45 million of other items, which were primarily due to the partial impairment of assets and other charges associated with our operations in Russia, Belarus and Ukraine. Working capital increased $163 million, primarily due to a disproportionate number of shipments that occurred late in the quarter and intentional inventory builds to mitigate operational disruptions. Working capital was also affected by the normal increase in Q1 tax employee benefit and other payments, which further contributed to a $103 million use of cash from operations. Capital expenditures totaled $46 million for the quarter. While we've become more adept at navigating through the unprecedented number of ever-changing supply chain challenges, all of our businesses remain constrained by raw material shortages with significantly protracted and growing lead times for subassemblies, castings, forgings, electronics and motors. As a result, our throughput is constrained and we are not fully keeping up with inflecting demand. During the second quarter, we plan to build additional inventory buffers to position the organization to meaningfully improve throughput and operational results in the second half of the year. Moving on to segment results. Our Wellbore Technologies segment generated $608…

[Operator Instructions] Our first question comes from Ian McPherson with Piper Sandler.

And I appreciate the opening remarks that was -- that was a really spot on overview of our recent history, and I'm sure that you'll be treated to drinks at the bar this afternoon after that.

Yes, and that was my goal.

Exactly. There's always so much on the platter with NOV, and this might be a question. It's too hard to pin down, but everything is heating up and congested right now. Are there 2 or 3 category of products or within your main segments that are maybe the biggest catalyst for improvement with your throughput overall as we get into the second half and some of the supply chain gets unstuck. Is it the offshore -- the big chunky offshore rig reactivation projects that move the needle most? More on the offshore wind vessels, I think you said maybe 5 or 6 more that look like the one that you booked in Q1. Or is it the shorter cycle stuff that's accumulating and still has more of a conjested backlog right now or otherwise?

I'll let Jose offer his opinion. Just off the cuff, I would say, I think the shorter cycle catching up improving the situation around our very, very constrained supply chain challenges meeting sort of the near-term demand of supporting rigs and frac fleets and stimulation equipment going back to work, both land and offshore, I think that's kind of the biggest near-term needle mover for for NOV. As Jose mentioned in the guidance, we're facing some constraints in rig around catching up on our spare parts backlog and working through that. But the other 2 segments as well are battling through. But longer term, yes, I think these larger projects will contribute, and we're going to continue to see good demand for renewables and offshore wind revenue opportunities for NOV. And so it's -- what I like about where we are today is, in my opening remarks kind of reflected this, I feel like we're sort of at an energy crossroads, and it's going to take all forms of energy. And I think NOV has -- I think we've improved the optionality embedded in the portfolio of what we bring to not just traditional oil and gas and now, LNG, but also to the renewable space as well.

I’d add that, yes, I absolutely agree with what Clay said. In the prepared remarks, we attempted to highlight a couple of the areas that are more constrained from a near term standpoint in our downhole tools business and our rig aftermarket operations. We've got some real constraints there. But really we've got the same kind of constraints all across the organization. So we have constricted throughput due to the supply chain challenges that we've been having across the organization. Yes, I think one of the things that Clay also touched on in his prepared remarks is that basically the need is for oil from all sources of the -- around the world. And we're starting to see that in the conversations with our customers. And so it's hard to single our any one specific business that over the mid- to longer term is going to do particularly better because right now, it feels like demand is on the cusp of inflecting all across the board. So clearly, Wellbore has had a really nice recovery to date, but that recovery has been disproportionately weighted towards the North American marketplace, international markets starting to come on. So still see a lot of running room in terms of Wellbore's ability to continue to generate really good growth at good incrementals going forward. And the other 2 segments being much more capital-oriented, are really just starting to get up and going, and we've got to really resolve some of the supply chain trends that we think will get much better. We'll be able to manage much better as we get into the second half.

Okay. And then along that same day in Jose, I think one thing that everyone in OFS and equipment has had in common this quarter has been more working capital intensity in the beginning of the year, a symptom of better growth for the year. But I don't know. I'm sorry if I missed this in your comments, does that impact your prior view on getting to positive free cash flow for the full year? Does it move it out to next year? Or do you see the swings coming back your way to deposit free cash for the full year?

Yes. It's a good question, Ian. And it's really to be determined to some extent, I'll explain what I mean by that. But really, the use of cash in Q1 really shouldn't have been a surprise. Typically, that's what happens during Q1 due to seasonality associated with employee benefit costs, tax payments, other annual type payments that take place early in the year. And additionally, as I mentioned during the prepared comments, we had quite a large amount of our sales and products shipped late in the quarter, which resulted in a bigger -- a slightly bigger than anticipated build in AR, but also begin taking much more proactive measures to build buffers within our inventory base to mitigate -- to attempt to mitigate those supply chain disruptions. And so as we look forward, we're not focused -- certainly, we've always been very focused on free cash flow generation throughout the cycle, right? But there are times in the cycle when things are going really well, meaning revenue is growing at a rapid pace to where that becomes a little bit more challenged. And so through a combination of our view of a much higher exit rate to 2022 and the need to continue building buffers in our supply chain through the course of the year, we're not really extremely focused on making sure that we're free cash flow positive for the full year. But what ultimately happens there will be dependent on the trajectory of the business, and we're anticipating there to be a pretty steep trajectory going into 2023.

Yes. Yes. And I would add too, I think, longer term, the organization has done a really good job of developing muscles around working capital intensity. If you look at our -- this quarter, I think we were 27% of annualized revenue, working capital intensity at year-end, we're 25%. Those are materially lower than they were a year or 2 ago. We got a lot better at this. But as Jose said, in response to sort of making our supply chain a little more bulletproof and response to vendors, for instance, having increasing their minimum order quantities, things like that, that's pushing us up a little bit. But I think longer term, that better management of working capital is going to translate to higher cash flow in the future.

Our next question comes from Scott Gruber with Citigroup.

So coming back to the outlook for Wellbore beyond the second quarter, if we do start to see some of these supply chain issues affecting that segment beginning to fade, is there another period of growth in Wellbore in the U.S. that would be in excess of the rig count? Or we have to point the cycle where those begin to converge? And then thinking on the international side of the business, obviously early innings. The big service companies are discussing 15% growth in the second half. I just wanted to see if you guys would expect something similar for Wellbore on the international side?

Yes. I think a couple of things that are helping wellbore grow beyond sort of the rate of the rig count. Number one, I think we need to continue to get sort of real pricing increase across what we provide to the space; number two, a lot of the technologies we've invested in are coming into the North American market and other markets as well, particularly around things like drill bit cutters that are demonstrating much better efficiency; number three, drilling contractors are moving towards larger drill pipe. So there's been a big push by operators to utilize 5.5-inch drill pipe, which is a little bit bigger than more conventional 5-inch drill pipe. And the reason that the operators are pushing for that are better hydraulics. And so I -- we kind of are starting to see this need to swap out drill streams supporting the industry's drilling efforts across North America. And then you can add to that a number of sort of downhole tools, motors and things that, again, we've invested in technology that demonstrates better productivity. So I think it's a pretty good tailwind to outperform rig count growth in Wellbore Technologies. Also, too, probably want to mention our digital offerings in the space. Our M/D Totco Group within Wellbore Technologies is getting really good traction on a number of things that they're doing with their edge computing solutions as well as their wired drill pipe drilling optimization offerings.

And Scott, maybe the other thing I'd add is. Look, if you sort of -- not every -- we don't necessarily expect everything to play out the way that it has in the past, but sort of looking at sort of recent performance of Wellbore segment, you go back to prior dip in 2016, which was sort of the prior low mark for the business. It is about $511 million in revenue for the segment. We're roughly 19% above that level right now. Then you go back to sort of the 2018, 2019 time frame for that segment, and we were pushing over $800 million a quarter in revenue for that segment. And as you recall back then, we saw a nice recovery in the North American marketplace, but really never fired on all 8 cylinders with a strong international market. And here, as we're sort of looking at a prolonged multiyear up cycle, I think there's still a tremendous amount of upside over the long term for the Wellbore Technologies segment.

That's a good lead into my follow-up question, which is on the international side. There just still seems to be an unduly large technology gap between onshore drilling in the U.S. and the rest of the world. As we think about the retooling cycle here, is this just going to be a typical retooling cycle internationally? Or do you sense a real appetite to meaningfully enhance the technology deployed, thinking about material upgrades to rigs, potentially newbuild rigs and then obviously, the digital application side of things. Are you starting to sense a real appetite to meaningfully step up the technology to deploy internationally?

That is a great question. I think a lot of operators around the Arabian Gulf are watching sort of what's happened in North America with respect to big gains in drilling efficiency and leaps and bounds that the industry here has been able to accomplish and then looking at their own rig fleets and capabilities. It's different rocks, different set of challenges, but recognizing there's a lot of improvement that can be brought to bear in that region. And it really needs to be brought because a lot of those countries around the Middle East are now looking at the need to produce more natural gas or looking at unconventional technologies to make that happen, and that really rests squarely on much better drilling efficiencies. And so that was -- that all kind of went into the calculus, I think around our joint venture with Aramco in the Kingdom to build out rig manufacturing capabilities. These are going to be much higher capability rigs that we're producing there. We delivered the first one in January. We'll soon have the second one ready to go. And so that's going to bring new technology. And I would add, and this is, I think, pretty important. And it was in our release as well as Jose's prepared remarks. We've had recent pilot projects around that, the Middle East region where now the national oil companies are trying our new digital products and our machine learning, artificial intelligence capabilities to optimize drilling. One of the NOCs is getting ready to spud its third pilot with wired drill pipe. And so there's a lot of interest in the possibilities that -- of new technology, a lot of interest in what NOV can bring to their drilling efforts there to make them not only more efficient but safer, more predictable. And so I think we're really set now for a meaningful sort of retooling of capabilities across the Middle East region.

Our next question comes from Arun Jayaram with JPMorgan.

Clay, I wanted to get your thoughts on how the long cycle part of your business could play out from here. We see a couple of divergent trends. One, obviously, high commodity prices and energy security concerns, particularly post Russia-Ukraine. But on the other hand, your traditional OFS clients appear to be being much more measured on spending growth capital or adding incremental capacity with most of their CapEx now focused, call it, on refurbishment and reactivation. So I wanted to see if you could offer some thoughts there.

Yes. It's a really good question, Arun. I would say all up cycles sort of start this way. People come out of the bottoms having just reduced a lot of costs and had to shrink their workforce and being very stingy with their expenditures are careful about reinvesting in the business. But as I mentioned, I think we're facing some significant structural challenges getting production back to growth on a global basis. And I think what we're going to run into is that they're going to run out of rigs to reactivate out of frac fleets to put back in the field. The ones that are left have been cannibalized. And so that just -- it takes capital. And I think I think as they gain pricing power, which this quarter has been really interesting to kind of hear their reports of how their first quarter -- it feels like, to us, they're getting a lot more purchasing -- our pricing power across their businesses that sort of paves the way for reinvestment in their fleets and to kind of build out the infrastructure required, which look at the end of the day, you have to put heavy assets back in the field to drill wells and bring production on. And so I think this will all follow as we get kind of deeper into this and the supply addition -- structural challenges become more evident. The other thing that really has to happen, and this is -- and I'm kind of shifting to the offshore, capital availability to the offshore. Many of the public drillers are just coming out of bankruptcy. But as I said, I think it's -- the production is going to be required from really all sources as we move for the next few years. And so we see rising day rates then becoming more supportive of higher cash flows that will reduce the cost of capital to those drillers. And so we'll kind of get back to growth, which is something I think the world's going to sorely need.

Great. And just my follow-up. Jose, just looking at kind of the numbers, NOV essentially was able to deliver it in 1Q, what the Street was modeling in terms of 2Q in terms of EBITDA. Getting just some questions around, you provided some some color on revenue growth and some broad margin comments. We kind of stuck in your Wellbore caps and Rig Tech guide or model, and we were getting call it, EBITDA in the low 120s. And I was wondering if you could maybe give us maybe a range of use on -- for our math that is in the ballpark around 2Q.

Yes. So I think we were pretty clear in terms of the typical guidance that we give by segment for each of the 3 segments in the prepared remarks, and as usual, we'll be posting a copy of the prepared remarks immediately following the call so you can get additional clarity on that. But in terms of where you're coming out, I think if you take the midpoint of the range that we provided, you're not far off of that guidance.

Our next question comes from Marc Bianchi with Cowen.

I wanted to go back to the kind of order outlook. You guys had some prepared remarks about -- and it was just discussed in the prior conversation about customers having a lot of pricing power now, rig rates getting back to $30,000 or getting up to $30,000 a day. That would seem like a level where they should be pursuing new builds. But if you go back to all the public company calls, they were all saying, we're not going to build, we're going to be capital discipline and so forth like our customers. So I'm curious, is your view more based on what they should be doing? Or are you getting feedback and doing RFPs for potential new builds, maybe it's from the privates. So I'm just curious if you could help square that for us.

First, if you look at the absolute rig count, let's talk about North America first. The absolute rig count still is not to where it was pre-pandemic, right? So there's still a lot of iron that's underutilized out there. And as Jose mentioned, we are supporting their efforts to reactivate ridge, put them in the field. As well as if you compare today's market versus the pre-pandemic market, their costs are higher and so forth. So they need a higher day rate to attract new build. So our outlook for new build rigs in -- land rigs in North America, yes, that could come -- it is at least several quarters out, if not longer. But if you pivot to look at international markets, particularly in the Middle East for the reasons I just mentioned, I think that's where we really start to see a lot more interest in just outright new builds. And so that's kind of how I would see the next call it, 18 months playing out, Marc.

Okay. That makes sense, Clay. I guess in that vein then, everybody is kind of curious when we're going to see the real inflection in orders. I guess, second quarter of last year, you had things started to get back on track. But then we've sort of been stuck in this range for several quarters now. I would suspect that maybe there's -- inflation is making it difficult. There's a lot of rewriting of terms and things like that as you try to get orders booked. But what does that look like over the next several quarters?

Just noting, I mean we've had, what, 5 quarters in a row of book-to-bill north of 1. So orders have been going the right way, and our backlog has been building. My prior answer referred to most -- obviously, the rig -- land rig demand pivoting to caps. Caps backlog, I think, has roughly doubled year-over-year. And our outlook is really, really good. It did -- orders went down sequentially for caps -- but book-to-bill at 110% was still north of 1, right? So we're still building backlog and backlog was up a few percent sequentially for the Completion & Production Solutions. One of the near-term headwind challenges we've got to work through for Caps. It's more obviously more production related. And so these are large projects for the offshore that they're tendering and looking at booking. Some of the owners of those projects in the first quarter are getting revised cost estimates from our groups, right? As we look back on our recent experience fabricating projects and Asian shipyards and all the headaches we've been battling through with COVID and supply chain disruptions and so forth, along with other vendors in that ecosystem doing the same thing along with the fact that a lot of the shipyards are seeing as when demand has picked up as LNG demand has picked up, they're looking at a little higher costs on these projects. And so in the first quarter, I know a few of them are drawning a deep breath and just sort of revisiting their conviction around higher price decks, offsetting the higher costs. I think the economics are still good. I think orders are going to flow. But here in the near term, I think that's been a little bit of a break on recent orders. But nonetheless, let's don't overcomplicate this. Oil is trading at a really high price. There's been a lot of reengineering, a lot -- around a lot of these big projects around the globe. They are needed by the globe. I think that will become more evident as a year -- next year unfolds. And so I think these projects are going forward, and that's going to translate to higher orders for NOV.

That concludes today's question-and-answer session. I'd like to turn the call back to Clay Williams for closing remarks.

Great. Thank you. I appreciate everyone joining us this morning, and we look forward to discussing our second quarter results with you in late July. So have a good day.

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