Welcome, everyone, to NOV's Second Quarter 2023 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the second quarter of 2023, NOV reported revenues of $2.09 billion and net income of $155 million or $0.39 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay.

Thank you, Blake. For the second quarter of 2023, NOV reported fully diluted earnings per share of $0.39 and EBITDA of $245 million on revenues of $2.1 billion. Adjusted EBITDA was the highest that we've seen since 2019 and earnings per share were the highest since the third quarter of 2015. Second quarter revenue increased 7% sequentially and increased 21% compared to the second quarter of 2022. EBITDA margin was 11.7% of revenue, up 180 basis points from the first quarter of 2023. Sequential EBITDA leverage was 38% and year-over-year leverage was 26% on the 21% top line gain. Measuring from our pandemic low point in the first quarter of 2021, revenues have improved 68% off bottom, driving 29% EBITDA leverage. Combined book-to-bill came in just shy of one, but overall combined orders in the second quarter were up slightly compared to the first quarter levels. While lower gas prices and tepid oil prices drove North American activity and ordering lower in the second quarter, International and offshore activity continued to gain momentum. Our customers are mobilizing for significant offshore and international drilling campaigns over the next few years, which will require NOV support. We were pleased to see progress continue around the normalization of our supply chain in the quarter, but rapidly compressing delivery schedules for certain raw materials we buy led to higher inventories this quarter, up $163 million sequentially. As inbound inventory receipts jumped. While revenue grew 7% sequentially, inventory increased 8% sequentially, with the work in process portion of inventory growing 13% sequentially. There are three reasons for the increase. First, we are catching up on receipts of castings and forgings. The pandemic shutdowns drove many foundries out of business, foundries, which cast high strength steel and specialized molds to make custom critical parts for our…

Thank you, Clay. NOV's consolidated revenue totaled $2.09 billion, a 7% sequential increase and a 21% increase compared to the second quarter of 2022. Revenue related to offshore activity grew 18% sequentially and revenue from international markets grew 9%. Despite industry activity levels that declined in the U.S. and a tougher than average Canadian spring breakup, revenues from North America improved 4% during the second quarter. Adjusted EBITDA for the second quarter totaled $245 million or 11.7% of sales, representing an incremental flow-through of 38% sequentially. While our margins are moving in the right direction and the later cycle nature of our business starting to gain momentum from the significant growth in offshore and international markets, we’re not content with our performance. As Clay mentioned, we’re focusing on improving the margins in our business and have begun implementing strategic actions, which will lead to approximately $75 million of annualized savings within the next 12 months. These initiatives coupled with a strong outlook for the fourth quarter should lift our consolidated EBITDA margins into the low teens in the fourth quarter and set us up for stronger results in 2024. Clay covered the primary reasons for our increase in working capital, which resulted in a $72 million use of cash from operations during the quarter. This increase is transitory and should begin to unwind later this year. While working capital metrics are expected to improve by year end, we do not expect to return to our normalized levels of working capital until mid-year 2024. We continue to expect a strong exit to the year with revenues 5% to 10% higher than Q2 levels. Additionally, we anticipate up to $50 million in cash expenses related to our cost savings program. The combination of these incremental cash costs continued top line growth and…

Thank you. [Operator Instructions] Our first question is going to come from the line of Marc Bianchi with TD Cowen. Your line is open. Please go ahead.

Hey thanks. I wanted to first ask about the supply chain challenges that you guys have had. There have been a few different ones. I think they’re probably very unique in their description. But just broadly speaking, why do you think NOV has struggled so much with this over the past several quarters? And what gives you confidence that we won’t see that going forward?

Well, first, Marc, as we noted in our prepared remarks, we made good headway, particularly through the last two quarters on accessing in particular, castings and forgings, which has been a particular supply chain challenge. The pandemic, as I noted, drove a lot of foundries out of business. And so is out there with other industrial manufacturers trying to reposition supply chains, qualify new foundries, obtained [ph] castings that we need. These are all very specialized custom parts that these foundries cast for all of us. But stepping back and looking at NOV, we’re I think the largest manufacturer in oilfield services with a very broad portfolio of products. And so for instance, within Rig Technologies alone, we have something like 250,000 different discrete things that we buy to support our product lines out there. And included in that are very exotic steel that maybe only one mill in the world produces included in that are very high-performance polymers, [indiscernible] for instance, in gaskets and o-rings and items like that. We’re also a major purchaser of fiberglass for instance. I think we buy a million – we buy a lot of fiber glass annually. And so when the world shuts down its economies as it did during [Technical Difficulty] the and more disruptive to our business model within the oil field than just about anybody else out there. But if you look more broadly at other industrials, I know many are still pointing to reverberations coming out of that shutdown affecting their businesses in aircraft supply and automobiles in land crane manufacturer that I’m aware of. There’s a lot going on out there. But the good news is, our teams are getting better at managing it. We’re making progress there. We’re starting to see the logjam break and that may rise to higher inventory levels, our balance sheet this quarter and last quarter, but also gave rise to stronger incrementals and margins out of our business as we battle through this turmoil.

Okay. Great. That’s helpful context. Maybe switching over to orders. You expect some optimism for the second half, particularly as it relates to international and offshore. I was hopefully you could maybe help quantify what that might look like either on a book-to-bill basis or year-over-year growth? Just some sort of help with the quantification would be great.

I’m going to stop short of quantifying orders aren’t landed until we actually sign contracts. So we’re very optimistic, but we’re going to shy away from wrapping numbers around that. What I would tell you is that the general trends we’re seeing in the two segments that we report backlogs for are both positive. If you look at the second quarter for Completions & Production Solutions, we saw offshore accelerating our Process and Flow Technologies business, which sells gas processing technologies and components in the FPSOs had a book-to-bill approaching 190% with strong orders coming out of the North Sea and West Africa. Our XL Systems conductor pipe business, which sells into the offshore as well, saw strong bookings on strong shipments in the quarter. And so book-to-bill north of 100%. I think Jose detailed in flexibles, we’re really pushing price, and that slowed down orders this quarter, but our longer-term outlook is very strong. And so offshore portion of caps is trending up, whereas in the second quarter not surprisingly, given the softness in activity in North America, we saw orders slow. So our Intervention & Stimulation Equipment Group which sells frac equipment – equipment, mostly to the North American market, so book-to-bill down around 60% or so. And as we look forward, in Q3, we expect those two trends to continue. Our outlook for the offshore remains very strong. Again, gas processing technologies that we sell, we think we’re close to landing some meaningful work in the North Sea – some more meaningful work in the North Sea. As well as other offshore markets around the world. We expect North America to continue to be soft. This is kind of a hair trigger group of customers here in the U.S. and Canada. They respond very quickly to commodity…

Yes. Very thorough. Thank you. Thank you. Maybe just to quickly sort of wrap all that up, I mean, with the cross currents, it would seem that the bias is for third quarter to be above the first quarter, first half run rate. Is that maybe a fair conclusion if we could sort of wrap all that into…

Yes, but again, I'm going to heavily asterisk that as we always do, until these contracts are signed, they're not signed. And again, and across the board, we're really trying to push pricing to stay up with the significant inflation that we have seen out there coming out of the pandemic. And so it's always a dog fight, but yes, I think the backdrop is improving and our outlook is very bullish.

Great. Thanks so much, Clay.

Yes.

Thank you. And one moment for our next question. Our next question is going to come from the line of Luke Lemoine with Piper Sandler. Your line is open. Please go ahead.

Hi, Luke. Luke, you there?

Hey, sorry, I was on mute. Good morning. Clay, could you maybe elaborate on the additional $75 million of cost cuts and are dissuaded disproportionately to one segment?

No, what I would tell you is we've talked about this I think last quarter that we really think our margins need to be a little higher than we've been posting. And so we're always looking at opportunities to cut costs and become more efficient. But given some of the headwinds that we've had out there, some of these lingering inflationary impacts of COVID and other things that we faced, we recognized that we probably need to take action around trying to become even more efficient and in the manufacturer and delivery of our products and more efficient in the delivery of our services. Worth noting since 2019, we've had a significant cost reduction effort here at NOV, which resulted in the closure of like 700 facilities reduced our workforce by about 13% and so forth. So when we looked at further opportunities, a lot of the easy opportunities have been harvested already, and so it's going to take us a little while to get these, but over the past quarter we've looked at where we can focus on becoming more efficiency. So there's a – it's a number of items out there, but we feel pretty confident that it's going to flow out or flow into our P&L I should say over the next year. I do think if you're wondering Q3 impact will be pretty limited. Maybe just a couple of million dollars. But as we execute these actions, you'll see more of this in the out quarters.

Okay. And Jose, thanks for outlining the free cash trajectory in the back part of the year and into next. You talked about greater than 50% free cash flow conversion next year, which is partly a working capital catch up, but how do you think about normalized kind of free cash flow conversion after that?

Yes, Luke. It is a good question. So obviously, we're running hot as it relates to working capital. We were down in the mid 20% range from a working capital to revenue run rate not too long ago. This quarter we're at 32.7 [ph]. As we talked about in the prepared remarks, we expect to effectively crest during Q3 and then start to see an unwind back to more normalized levels. Realistically, that'll take a few quarters to play out probably through the middle part of next year. And that will of course drive a considerable amount of free cash flow in and of itself plus our levels of EBITDA we expect to continue to improve, improve our profitability, drive more to the bottom line, which should also flow through from a cash perspective. And not giving free cash flow guidance for 2025, really beyond, I'm sorry, 2024 beyond the sort of greater than 50% of EBITDA because it's highly dependent on what our growth rate will be in 2024, right? I think 50% should be the bottom end of the range in terms of conversion relative to EBITDA. But if you end up in a flattish environment, it could be well beyond that number. So hopefully that at least helps frame it a little bit better.

Yes, definitely. Thanks so much.

Thanks, Luke.

Thank you. And one moment for our next question. Our next question is going to come from the line of Jim Lyson with Raymond James. Your line is open. Please go ahead.

Good morning, guys.

Good morning, Jim.

Good morning, Jim.

There has been a lot of talk this quarter, the offshore and international theme has obviously been kind of moving up into the right for the last handful of quarters, but there's kind of been more discussion around it this quarter from a strength and particularly a duration standpoint. And since you fly all over the world and talk to a lot of folks, I would love to kind of get your thoughts and what you're seeing from customers maybe that supports this kind of duration comment. And maybe just what out of all of that, what's – what are you seeing that gets you the most excited about this?

That's a great question, Jim. First I don't think I'm going to provide any different view than you've heard from the big three and others in the space. We're all pretty excited. We're seeing rising demand for offshore drilling assets broadly and deep water drilling assets specifically. And I think that's generating a lot of excitement. What's behind that are IOCs and NOCs, both that are – they see the need to develop their offshore fields and move forward with very aggressive drilling campaigns. And notably, the offshore has been pretty absent, frankly, since about 2014. And so we feel like we're moving through an inflection point. What's interesting about that, I mean, there's been a lot of cost rationalization, not just here at NOV, but elsewhere around the world. And activity levels today, we're still not quite back to where we were even in 2019. And so a lot of room to run and with rising demand for EMP customers I think that points to a cycle that's going to have a long lot of longevity to it. I'm going to also add a little more color. I think there's sort of two parts to this wave. The early part I think is going to be a little more brownfield tieback folks focused. And following that though, I think you're going to see a lot more, a lot more FIDs. I've seen estimates of 500 million – 500 billion in offshore FIDs through 2026, which point the more greenfield developments and both Brownfield as well as Greenfield fits sort of our product offering. And so NOV is prepared to really meet that demand. But looking at our situation, I feel like we're on the cusp of really kind of three things that are going to help improve results. The…

Excellent. And from a margin perspective. Obviously, margins have been creeping higher, certainly a better improved quarter versus last with some of those issues kind of unwinding. But as we think about this going forward, between your kind of additional cost savings opportunity over the next four quarters. The pricing push that you guys are working towards and just kind of building momentum from an order uptake perspective, how do we – where do margins – where do you think normalized margins should be on a consolidated basis? And if you kind of bucket it into the different categories that would get you there, like how do you get there?

Yes. We made good progress in Q2. I think margins on a consolidated basis, up 180 basis points to 11.7%. Wellbore we're on [Technical Difficulty] made good progress this quarter, but it has a ways to go. And then rig backed up a bit, but we think with offshore coming back, it will continue to push higher. But I think we get into I think, Jose mentioned, low teens by year-end. And then in 2024, squarely in the mid-teens, certainly by the end of 2024 is sort of what our outlook calls for.

Great. Thanks for the answers, Clay.

You bet. Thanks, Jim.

Thank you. And one moment for our next question. And our next question comes from the line of Stephen Gengaro with Stifel. Your line is open. Please go ahead.

Thanks. Good morning everybody.

Good morning, Stephen.

I think the first – just to follow up on the prior question. When we think about the backlog, and obviously, there's a lot of different pieces in the backlog over the last year plus. How is that pricing versus kind of what you've been unrealizing over the last year within Rig Tech especially, is it – so what I'm getting at is the margin expansion coming from just better overhead absorption? Or is it better margin flow-through from what's in the backlog?

Yes. In Rig Tech, we've been – I would say margins have been pretty steady and stable. They vary a lot by product category. Some of the products that we sell are more – frankly, they're just more competitive than others. And so where we have proprietary technology, we tend to do the best is what we've been in investing in [Technical Difficulty] and we know, we recognized a long time ago, we need to make smart iron, not just iron. And so we continue to make our iron smarter. So I think Rig's been pretty stable. And I think that there's – again, we're optimistic as demand comes back in the offshore, particularly for capital equipment. I think there's good potential for that to improve. CAPS has been more challenged. We – if you go back a year or two, we discussed some challenged projects that we had in Completions & Production Solutions, where we were executing projects in Asian shipyards, relying on the Asian supply chain and a lot of Asian plants in Malaysia and Indonesia that were all disrupted and we learned that – and you never get perfect sort of inflation protection in any contract. But as a result of that turmoil and the inflation, higher cost that came out of it, the margins for the low – or for the long-term, long-cycle portion of the CAPS backlog, we've got some headwinds. And what we've been booking since then are far better margins. And so there is a distinct sort of high-grading process underway for that backlog. And that's, call it, two-thirds or so of the CAPS backlog. The other one – is quick turn. So it doesn't reside in the very long. And so we've had the ability to sort of reprice in the inflationary environment that we've been in for the last couple of years. And so that's already – I'd say that's already recovered.

Thanks. And then my other question was around just order flow on the CAPS side, but particularly on the sort of transition to e-fleets and with the next year Patterson merger, I think you guys had some equipment with next year, not positive. But are you seeing much there? I mean where do you think that sort of stands right now as people kind of work toward that transition and the impact it has on your products?

Yes. Yes. What we hear from our pressure pumping customers is that there low emissions fleets are the ones that are continuing to work and that most of the utilization and pricing pressure has been on the Tier 2 diesel fleet at kind of the other end of the scale, and the expectation is that will continue. Now I would point out that many of the eFrac fleets, the eFrac fleet [Technical Difficulty] contracts as part of the reason that they're utilization. But to answer to your question, there's a lot of interest in continued adoption of electric technologies and as well direct drive turbine technologies, both of which reduce emissions along with sort of Tier 4 DGB fleets that are driving interest out there. So despite the tick down in orders for equipment in that area in the second quarter. We're continuing to talk about a few operators about these low emission fleets. And so that could be some upside surprise in the second half of the year and into 2024. But overall, I think the whole pressure pumping space continues to target reducing emissions. What we also hear is that they're being pressed by their E&P customers with planned contribution. So I think that will keep part in this. And one last comment on this because we have a product that we introduced in equipment which is designed to power eFrac pumpers and sort of – rather than sort of pull the trigger on a very large capital expenditure on a brand-new e-fleet – this enables pressure pumpers to step down their greenhouse and gas emissions by substituting out higher – conventional frac pumps for eFrac pumps and also benefit from a smaller footprint on kind of a unit-by-unit basis.

Hey Stephen, sort of even to think about a little bit, as we mentioned in the prepared remarks that the quoting activity has been has continued to be really strong within the North American marketplace for pressure pumping due to what Clay commented about. But I'd also add that part of it is equipment has been run extremely hard. There's still a lot of pent-up demand for major overhauls, replacements and refurbishments. Now time will tell how this plays out, but I'm pretty optimistic that this will pull back that we're seeing in North America will be pretty short-lived as it relates to demand. For the products and services that we sell into that space because there is not a lot of – there was not a lot of excess capacity. Now the pumpers have a little bit of white space and a little bit of a pullback. But if we see a tick up in activity and the confidence sort of comes back in, I think the orders will start flowing back in pretty quickly even for the DGB fleets and the repairs and refurbishments of traditional Tier 4 fleets.

Steve, you here and Michelle, can you go to the next question?

[Operator Instructions] Our next question and last question will come from the line of Scott Gruber with Citigroup. Your line is open. Please go ahead.

Yes, good morning. Thanks for squeezing me in.

Good morning, Scott.

Clay, I just want to follow up on the comment, I think you made earlier. Did you comment that you thought you could get to a mid-teens margin in late 2024 or it's an important point? I want to make sure I heard that correct?

Yes, we did. We think we'll be kind of low teens in Q4 this year and continue to push that up in 2024.

Got you. And then Jose, you mentioned getting back to a normalized level of working capital I think the last target for working capital as a percent of revenues was around 25%. Is that the level we should think about in terms of normalized in mid 2024?

Yes. We were 25.2% in Q4, and it's moved up pretty significantly through the first six months of the year. So we've demonstrated we can land in that mid-20% range. But as Jose pointed out earlier, a lot depends on kind of the future outlook, so building backlogs and so forth. Mike push that in would you say high 20% range?

Yes, I think the normal range is going to be between sort of that mid-20s and mid- to upper 20s is where we should be, Scott. As Clay touched on, it's going to depend on the market environment just like the environment that we're in right now. Yet, it's compounded by the fact that we've seen just sort of the cork got unleashed to a certain extent, related to supply chain. But also, we would normally be at a slightly [Technical Difficulty] just due to the backdrop where we're anticipating – in the fourth quarter. So when we're gearing up for large deliveries, you can see that tick up. But in a more normalized environment, you'd be more towards the mid- to lower end of that range. So I think that's how a good way to sort of think about it. It will ebb and flow, but we certainly should be in that sort of mid- to upper 20% range in terms of working capital as a percentage of revenue run rate.

Got it. That provides you good framework. Appreciate it.

Thanks, Scott.

Thank you. And this does conclude the question-and-answer session. And I would like to turn the conference back over to Chairman and CEO, Clay Williams for any further remarks.

Thank you, Michelle. Thank you all for joining us this morning, and we look forward to updating you on our third quarter results in October. I hope everyone has a nice day.

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