Good day, ladies and gentlemen. And welcome to the National Oilwell Varco First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Loren Singletary, Chief Investor and Industry Relations Officer. Sir, you may begin.

Thank you, and welcome everyone to National Oilwell Varco's First Quarter 2019 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and Chief Executive Officer; and Jose Bayardo, our Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risk and uncertainty 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. For a more detailed discussion of our 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. Reconciliation 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 2019, NOV reported revenues of $1.94 billion and a net loss of $77 million, or $0.20 per 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 on 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, Loren. In the first quarter 2019, NOV generated $1.94 billion in revenue, a decrease of 19% sequentially and an increase of 8% year-on-year. EBITDA was $140 million, down a $139 million sequentially, representing 30% decremental leverage as EBITDA fell by half. Late last year we witnessed one of the sharpest and fastest declines in oil price on record as WTI fell to $45 per barrel along with rising demands from investors that oil companies exhibit more capital discipline and austerity. Oil companies responded by signaling their plans to trim CapEx and reduce activity as we entered 2019. NOV's largest customers, the oilfield service companies that execute well construction plans for these oil companies, in trying to divine what the new year would hold, all seemed to decide that discretion is the better part of valor, and they threw the brakes on their spending for the tools that they buy from NOV. Oilfield service companies are skilled at slashing spending during market slowdowns and our phones went quiet in December and January. Our poor first quarter financial results reflect a sharp air pocket that arose from this latest round of capital austerity following that oil price dip. Broadly speaking, the factors that we cited on our last call underpinning our revenue guide down to be in the low teens ended up hitting with more ferocity than we expected leading revenues down 19% sequentially instead. While the outlook remains uncertain, WTI rebounding into the $60 range and Brent into the $70 range has helped improve our outlook, particularly in the offshore and international markets. Our Investor Day analysis showed just how physically asset intensive oilfield operations are and the amount of equipment that gets consumed for every barrel developed. That physical linkage between equipment and oil means that while oilfield…

Thank you, Clay. Before jumping into the results of our operations, I'd like to cover a couple items related to our balance sheet. Effective January 1st, 2019, we adopted the new U.S. GAAP lease accounting standard resulting in a $590 million addition to our assets and equal amount to our liabilities. In the first quarter of 2019, working capital increased $162 million, primarily due to $145 million build in our inventory. Finished goods that we expected to ship and translate into revenue during the quarter did not make it out the door due to customer deferrals, and we took receipt of raw materials in anticipation of future orders. Declines in AR were largely offset by declines in current liabilities. While we are not pleased with the magnitude of the increase in working capital, we are confident that in Q2 we will resume progress toward realizing our goal of working capital as a percentage of annualized revenue run rate below 35% by year--end. Turning to results of our operations. Our Wellbore Technologies segment generated $807 million in revenue during the first quarter of 2019, a decrease of $77 million, or 9% sequentially. Lower volumes and pricing pressure in North America for certain products drove decremental EBITDA margins of 49% resulting in a $38 million decrease in EBITDA to $117 million, or 14.5% of sales. The segment's short cycle, activity-driven product offerings performed as anticipated during the quarter, but the capital equipment components within this segment, namely our drill pipe business, suffered the same customer-driven equipment deferrals and slow-to-develop order book that impacted our other segments. Customers deferred first quarter deliveries of new drill pipe into the second quarter due to the sharp fall in oil prices during Q4 and the corresponding reductions in U.S. land drilling activity. The result was a…

Thank you. [Operator Instructions] And our first question comes from Byron Pope with Tudor Pickering Holt. Your line is open.

And congratulations on managing through what's a tough environment. Clay, you touched on this as it relates to Rig Technologies, but I think it's underappreciated the extent to which NOV provides a lot of aftermarket and consumables products. And just given it feels like U.S. land rig count is in the process of stabilizing in the next couple of months and international's trending in the right direction. Could you just frame for us for Wellbore Technologies and CAPS a way to think about either aftermarket or consumables system to help us -- help us think about your baseline level of demand?

You bet, you bet. Yes, the Completion & Production Solutions group also provides a lot of capital equipment as well, and each of those business as units does provide a lot of aftermarket support to -- support an installed base out there. So, for instance, our Process and Flow Technologies group within CAPS, a big portion of their business is the ongoing support of a large installed base of progressing cavity pumps and reciprocating pumps and production chokes and things like that. And that's true kind of throughout the business units there within CAPS. And then in Wellbore Technologies, we do sell some capital equipment. Our WellSite Services group is a leader in the provision of solids control equipment, for instance. And we provide aftermarket support of shale shakers and centrifuges and other process equipment that's in the field. But the nature of those tends to be a little more consumable. So the shale shakers will go through a shale shaker screen every -- or have to be completely rescreened across the deck every week or so. So that's really nice ongoing sort of support for that equipment. So really it varies across all three segments, but all three segments have aftermarket and consumable elements to their businesses that our customers demand.

Okay, appreciate that. And then just one quick additional one. If I think about the international side of the business for Wellbore Technologies, could you just frame for us at a high level, which geo markets you think drive the international top line growth for Wellbore Technologies based on the opportunity set that you see today?

Yes, the strongest geo market that we've seen through the downturn has been the Middle East and the North Africa region. And we've been investing in that area and I think the growth prospects there are really bright. We had a lot of strong sales in Wellbore Technologies in the fourth quarter. Some of the -- for instance, some of the big tenders and things like that tend to come in big packages, and we had a couple of those go out the door in the first quarter that led to part of the falloff that you saw there in Wellbore Technologies in the first quarter. But the good news for us is that we won some important tenders in North Africa and the Middle East in the first quarter that will contribute to future quarter results. We're pretty -- we're pretty optimistic about the future for that area. But I'll tell you, as you know, Wellbore Technologies is present every major oilfield basin around the globe, and our fortunes are tied to those individual areas kind of their outlook for activity and so forth. And so customers around the world rely on NOV technology and Wellbore Technologies to support their operations.

Thank you. Our next question is from Bill Herbert with Simmons. Your line is open.

Clay and Jose, I think I heard you correctly saying that your frac related sales in Q4 were down close to 60% quarter-on-quarter. Was that correct?

Yes, in the U.S. -- pressure pumping sales in the U.S. down 58%.

Okay. Could you break that down between OEM versus consumables and spare parts and repair maintenance.

I don't have the breakout here in front of me, but I will tell you that all of those U.S. pressure pumpers are pretty good at stopping spending of everything. So it was both OEM capital equipment and aftermarket that felt the brunt of the round of capital austerity that we've all been hearing so much about.

So, notwithstanding the unrelenting service intensity of the business, that is the frac business, consumables and repair and maintenance slow down. And I'm just curious as to what their inventory is with regard to being able to sustain a cessation in consumption based upon the service intensity.

Bill, I'll first chime in and say that, Yes, it was across the board a slowdown, but the new capital equipment piece was certainly a higher percentage than what happens related to the ongoing consumable portion of the business. But really what you're raising is a really good point related to how sustainable is their ability to sort of postpone the inevitable, which is really taking care of a large equipment fleet that gets used day-in and day-out out in the field and -- our service customers can certainly slam on the brakes and screech just about everything to a halt for a period of time, but to some extent, you're delaying the inevitable, right. You continue to take care of the equipment. If North America oil and gas operators want to continue to see efficiency improvements in operations day to day, whether that's fewer days to drill, more stage count each and every day, customers have to take care of their equipment. I don't want to imply to you that our customers are not taking care of their equipment and setting themselves up for issues, but what I am implying is that you can delay things for a limited period of time before that catches up to you. Okay. And then, Clay, the last one for me. I am a little bit confused by the performance of the offshore related piece and CAPS in Q1, and moreover, the persuasively constructive broad-based narrative that's unfolding during Q1 earnings season about a blossoming in offshore spending. How can you reconcile those two?

Let me -- let me clarify that. We -- if you go back a couple of quarters, the middle part of 2018, we were saying kind of based upon our near-term order book, we were expecting our offshore businesses within CAPS to bottom probably in Q4.

Okay.

When we got to Q4, if you recall, we said, well, we didn't bottom because we pulled deliveries out of Q1 and made those deliveries before year end. So we sort of depleted the cupboard rolling into the new year. And so the Q1 results that you see now of offshore products within the Completion & Production Solutions group reflect that. Yes, we're well aware of the sort of blossoming narrative out there, the rising level of optimism in the offshore around operators moving forward with FIDs and offshore field developments, and we're very excited about that. But it'll take a little time for that to show up in our P&L. We are already seeing the green-shoots of that in the order book in Q1. It just didn't show up as revenue.

Okay.

But, Yes, we agree with kind of what I think is growing conventional wisdom out there that the offshore is finally starting to come back, and we're also seeing that clearly in our Rig Technologies area where we're now working on 20 rigs, for instance, that are -- that were stacked that are being reactivated to tender on this growing body of work. So I hope -- I hope nothing that we've presented is out of line with that improvement in offshore that we see, but that's kind of where we are right now.

Thank you. Our next question is from Kurt Hallead with RBC. Your line is open.

Thanks, as always, guys, for all the good info and insights on what's going on in the marketplace and how you're trying to kind of manage through it. I know clearly it's not an easy dynamic. So, Clay, in that context, right, as you kind of go through the process of kind of controlling what you can control and kind of looking at kind of an internal focused dynamic, I just wonder if you could provide some additional insights along the lines of is it facility kind of rationalization, product line rationalization, just some additional insights as to kind of how you might see it evolve as year goes on.

You bet. I appreciate -- I appreciate the question, Kurt. Yes, I would say two areas of focus. The first and perhaps the most impactful is going to be around the administrative support functions that support our business units. And as you're aware, and probably many listeners are aware, we've long had a very decentralized model where we've sought to very clearly place responsibility and authority in the hands of our business unit and product line leaders and give them a lot of autonomy over how they manage their product lines and their business units globally in exchange for the accountability to earn return on the capital that they manage on behalf of our shareholders. And I think that's the best way to drive the best performance out of those business units and product lines. And what that is entailed has been an awful lot of functions that go into supporting a business. When we think about different ways to sort of organize ourselves, and I want to be completely clear on this, I think maintaining that decentralization, that sort of entrepreneurial spirit among our business unit leaders is critical. But the various functions that support those businesses, some are more strategic than others. And so we sort of prioritize those areas like sales, manufacturing, operations, engineering and support of those product lines I think is critical remain in the hands of our business unit leaders that we rely on to drive returns out of those businesses. But other administrative functions perhaps there's a better way. And so this next round of cost savings is likely to involve a reexamination of those support functions. How centralized are we? Can we use more shared service models around the globe to support these businesses? And we expect that to drive some level of cost savings. So that's kind of the -- that's kind of a first area. The second area is within the business units themselves, numbers are still not at the margin levels that they need to be at and they've renewed their focus on reducing their costs and efficiencies. I think Jose touched on a couple specific business units in Wellbore Technologies and elsewhere that are really looking hard at how they manufacture, where they manufacture that sort of thing. So that's going on down kind of more in the business units, and we also expect that to be fruitful. So it's really both of those things. With respect to facilities closures, we -- through the downturn, we've closed over 400 facilities. We closed 14 facilities in the fourth quarter. We closed 12 in the first quarter. We have -- I expect we'll have some follow-on facilities closures as well, but I think those kind of first two areas, the administrative functions and how we're organized and then the actual cost of goods sold, cost structures in our business units are kind of the main two areas that we're looking at.

That's great. Thanks for that, Clay. And maybe if I can have one additional follow up on that. Seen in the context of your guidance you provided for the second quarter, the highest growth rate coming in Completion & Production Systems. I heard your commentary about the dynamics at play with the U.S. service companies, frac service companies kind of squeezing on CapEx and everything else. So on the very, very near term basis, when you're looking at 15% growth rate, what is the primary or what are the few primary drivers of that rebound that you expect to see in the second quarter?

Well, the short answer is the 1.4 times book to bill gives us more confidence. It did -- a lot of that -- more than half of that came in -- or about half of that came in March. And so we have a fair amount of confidence around the second quarter guidance. And so that's the answer for that.

Any specific kind of product areas? Was it the fiber glass that's driving it? Is it the coiled tubing that's driving that? Just maybe some additional insights on it.

Really, Kurt, it's almost equal across the board. So Q1 was a little bit of a perfect storm, right. We had a lot of the offshore businesses still reaching for bottom and then we had this huge wave of capital austerity hit the North American service company marketplace before international markets had really set their budgets and gotten prepared to get back to work. So, as it relates to Q2, we see all three of those legs of the stool sort of picking back up and contributing to that top line growth. I think a lot of operators across the oilfield, when oil was trading down so hard late November and into December just sort of put the brakes on all buying, and then -- in lockstep, and then January, February it remained pretty muted. As oil prices have recovered, I think that's led to more purchase orders from lots of different corners of the globe coming in just generally. The only real exception to that, or at least the one that I can think of right now might be North American land drillers which they actually continued to slow through February and March and into April. But most of the other parts of the oilfield it felt like people are kind of getting back to work.

Thank you. And our next question is from Sean Meakim with J.P. Morgan. Your line is open.

So, Clay, maybe to start out, I was thinking about the relatively shorter cycle businesses, so Wellbore and CAPS, the decrementals in the first quarter were more severe than the incrementals that you're guiding, and you're guiding toward what seems like the low end of what you've been targeting this cycle as far as incrementals. It'd be great just to get a little more insight, what are you learning about this cycle in terms of how the operating leverage is working for those businesses as we -- you already did, say, 4 to 6 quarters ago. It'd be great to get little more insight into how you're thinking about that.

Well, Wellbore here in -- the high decrementals around the 9% sequential decline, 49% decremental, first we guided to I think 40% or low-40% range. So it was a little higher than we guided to. Half of the top line decline came out of the drill pipe business which historically has been a high leverage business, number one. Number two, we are under more pricing pressure in Wellbore Technologies and certain product lines, particularly downhole tools, that took a toll. And I would add to that, I think some of our solids control products were under more pricing pressure as well. We had a project wrap up in South America that took a toll on decrementals. We also have a phenomenon, and this isn't news to us, but when you do have a slowdown in activity, rental tools that have been out in the field working and generating revenue, they come back to the shop. And we spend a little money taking those apart and seeing what's damaged and replacing things and fixing them and getting tuned up to go back out again. So your expenses actually go up. So that little corner of our business has always had sort of high incrementals and decrementals. In terms of what I have learned, I've learned that when you have to face rising steel cost because of steel tariffs, it's tough to claw that back in pricing and gets doubly tough when oil declines to $45 a barrel in Q4. And so I think we're passing through some choppiness, some cost challenges, things like that, that we're having to deal with. But, look, our entire team has spent our entire career in oilfield services. I don't think there's anything new here we hadn't seen before. The other thing too, Sean, I would say our Completion & Production Solutions business, there are consumables and aftermarket embedded in that, but I think that's still mostly capital equipment kind of business and as we've characterized in the past, more of an offshore products business.

And Sean, other thing I'd add related to the -- related to CAP segment and the decrementals that you saw there is obviously really as it relates to both those segments, volumes fell harder than anticipated and that obviously contributed to generating a higher decremental. But within the CAP segment, as I just previously mentioned, we had a little bit of a perfect storm and Q4 was obviously a good quarter across the board. We had a pull forward and sort of an extension of what we expected related to a bottoming of the offshore components of the business that were somewhat to some extent relying on some offshore bookings that were booked at a better portion of the cycle. And so it's kind of good news, bad news. Bad news is the decrementals that you saw this quarter. The good news from our standpoint is that from this point forward, most of the businesses should be moving in a similar direction, and we should -- and we're a lot more confident about the ability to predictably generate incrementals that are more in the upper 20s to lower to mid-30s for that segment. Up to this point in time, we've had -- since the bottom of the down cycle, we've had North American-centric businesses improving on the bottom -- off the bottom, while the offshore was still bottoming out at pretty high decrementals. So we're finally at the point to where we think everything has found a bottom, and we should have most businesses aligned in the same direction.

Got it. I think both of those comments were insightful. I appreciate that. Similar I suppose, preannouncements aren't common in your history, which I guess is probably in contrast to many of your customers in our coverage. So as this -- as you've made a concerted effort to move toward a shorter cycle portfolio, you're going -- you're trying to skate to where the puck's going. Does this make the overall business harder to forecast? Or how do you think about how that facet of your job has been changing this cycle as the portfolio has shifted?

Well, first, as you know, we have a very diverse portfolio both across products and consumables and aftermarket and spare parts and sectors of the industry we provide; and secondly, geographically around the globe. But what I'd -- what I'd say is, it's rare to have a 19% sequential decline in revenue. And I think Jose made this point earlier, the just evaporation of orders from North American pressure pumpers, as well as the bottoming of offshore backlog for us in the same quarter was kind of the double whammy in terms of the big picture here. But as you're well aware, NOV is the leading provider of capital equipment and aftermarket support in most of the individual oilfield service verticals that do most of the well construction activity globally. So oilfield activities are highly cyclical business. It's never been easy to forecast, but this was a particularly sharp decline coming after the quarter in which we saw a particularly sharp decline in crude prices, in fact one of the steepest declines on record I think. So I think those two things are really linked together, and hopefully we'll see more stability going forward.

Thank you. And our next question comes from Chase Mulvehill with Bank of America. Your line is open.

Hey. So I guess question on the cost savings, in your guidance, are you able -- in 2Q, are you going to see a benefit from cost savings or is that kind of more in the back half of the year in 2020?

It's going to take three or four quarters. As we mentioned it's a more of structural sort of thing and a heavier lift. And so I think realistically this is going to take three or four quarters to unfold. We do expect to start to see a little bit of that in Q2, and I think that's baked in Jose's guidance. But it's going to take a little while to unfold.

Can you talk a little bit about the cost savings, which segments -- it sounds like it's kind of turning to a little bit more outsourcing on the supply chain. Just a little bit more color would be helpful.

Not really outsourcing on the supply chain, but again more -- what I'd say is more administrative support of our various business units and product lines globally. So we operate through 14 business units in 66 countries, and there's a lot of sort of overhead that goes along with that. And as volumes -- we're making good progress on the recovery. We had 10 quarters since the beginning of 2016 where we saw rising revenues, rising profitability, moving toward recovery. For us, this quarter was a signal that, hey, that maybe a little further out than we would like, and we really need to roll up our sleeves and get back to taking a hard look at the administrative support of our business units. In terms of outsourcing or supply chain, again, I think there will be some changes there, but by and large, I view that as a strategic function that we'll continue to have a lot of oversight from our operations, but along with other manufacturing, engineering, that's more strategic functions that I mentioned earlier. But we do think this is a right thing to do for the Company at this point in time and it's complicated. It's a heavy lift. It's painful, but necessary.

Helpful color. Last one. Just on the aftermarket in the Rig Tech segment, could you maybe just talk to the 2019 outlook and what kind of growth you expect? I think you said it was 54% of revenues. If we look at that kind of on a year-over-year basis just maybe kind of guide us to kind of how you're thinking about that from a growth perspective?

Yes. I think -- I don't know this precisely. I think it was up high-single digits or maybe low-double digits year-on-year, although it was down sequentially, which it always is seasonally. A lot of our customers in the fourth quarter wrap up equipment repair, refurbishment activities and then they kind of restart in Q1 with new budgets. So we also saw in the first quarter which is very encouraging the highest level of spare parts bookings that we've seen since I think early 2015, and it had a little more of an offshore flavor to it and it was I think tied to this phenomenon that I described earlier about more offshore rigs going back to work and replenishing stocks of spare parts. So if the narrative that we think we're seeing out there of more offshore projects being FID'd, more offshore drilling under way, more rigs readying themselves to bid into that continues, I think we're going to continue to see more growth in aftermarket demand to support those activities by our customers. And again, with largest installed base in offshore rig equipment out there, I think it's really well positioned and we're enhancing the value that we add into those activities utilizing these digital products that we've been working on. So, we're -- a lot of these rigs that we've built over the past few years are instrumented for condition-based monitoring, and we're actually discovering as we're going through rig reactivation activities with our customers, the ability to have experts around the world monitor what's going on, on the rig as systems are restarted that's a big plus. And so again, we've been steadily quietly investing in our aftermarket capability. And I think as the industry gets back to work offshore and there's more drilling, we'll certainly be a beneficiary of that.

Thank you. And our last question comes from James West with Evercore ISI. Your line is open.

So Clay and Jose, if we think about North America is not going away, it's going to churn equipment. We know there's a lot of structural equipment in quick cycle business, international better, offshore better. Can you remind us roughly of the buckets of kind of revenue or earnings that are generated by those three because I think there's some disinformation out there that you're only supplying frac spreads into the U.S. market?

Yes. Let's disabuse everyone of that notion.

Right.

Yes. Let's disabuse everyone of that notion. We sell well intervention and stimulation equipment globally. So, Yes, in the first quarter our mix was 66% land and 34% offshore, and in our first quarter revenues was 45% North America and 55% international on a consolidated basis. Is that what you're ...

Okay. That's exactly what I'm looking for, Yes.

Yes.

Okay. That's exactly what I'm looking for, Yes. Yes, I think that's a good point to hammer home because the estimates have probably dropped too far, especially if 1Q was a perfect storm as Jose alluded to. I think secondarily, maybe it's a broader topic and it's been asked a couple different ways so far, but I get the decentralization. We do live in a different world now for spending on equipment and capital disciplined type world, but we're going to need equipment. Do you need to do -- outside of the cost savings, you talked about some facility closures here and there? Does there need to be a bigger strategic review of your global operations?

In terms of a strategic review, what I would tell you is that we're always going through our portfolio of businesses. We've had a divestiture last year. We're in the process of looking, and I think we're close to divesting other smaller businesses. James, you've heard us talk before when it comes to acquiring businesses needs to be a better owner and that's kind of something that we look for. How can NOV bring more value to that enterprise and be a better owner of it? Likewise, the businesses that we do own that are not earning good returns on the capital we have invested in them, I think we have an obligation to divest those businesses. And so we do periodically kind of look at their performance and have made some divestitures, and I would expect that we would -- that we would continue to. But in terms of our overarching, NOV as the leading provider of capital equipment to oilfield services, I like where we're at. We went through a detailed review of the strategic and competitive advantage implications of that positioning in the oilfield. And I think the differentiated model that we operate here at NOV is unique and it's compelling. I think it's incredibly hard to replicate by others. And although -- and I would add too, we also highlighted that it's perhaps a little more volatile than others in the oilfield because of the nature of what we do. I think we saw a little bit of that in the first quarter, but in the long run I think this is a great way to earn a good return on our shareholders' capital.

That's great to hear. Okay. Thanks, Clay. Just so you know, on our metrics, our proprietary metrics, you rank the best of the entire oilfield service group on shareholder alignment.

Thank you. And ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to Clay Williams for his final remarks.

Thank you, Carmen, and thank you all for joining us this morning. We look forward to updating you on our actual second quarter results on our call in July. Have a great day.

And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program. Have a wonderful day.