Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Second Quarter 2020 Earnings Conference Call. [Operator Instructions] 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 second 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 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 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 2020, NOV reported revenues of $1.5 billion and a net loss of $93 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. 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. The second quarter of 2020 brought the full weight of the COVID-19 pandemic shut down on the global economy, driving oil contracts to negative prices and the U.S. rig count to levels never measured before, perhaps the lowest dating back to the 19th century. Consequently NOV's consolidated revenue declined 21% sequentially and EBITDA fell to $84 million or 5.6% of sales, as everybody in the oilfield, hunker down, cut costs and pray that this storm would pass. In the past, we stress that the ability to resize quickly and aggressively is an essential skill in our cyclical business and this is a core competency of NOV's line managers. In a few moments, Jose will detail for you, our cost reduction progress and expectations for the remainder of the year. As bad as this quarter was, it certainly would have been far worse without their decisive aggressive actions. However, our customers were also pretty good at reducing cost and preserving cash. So in addition to the operational headwinds brought about by COVID-19 facility closures, quarantine requirements and travel bans, we also faced the rapid deceleration of business in many areas, as customers halted all, but the most necessary purchases. In North American land, in particular, the violent reaction fell almost involuntary, like a reflex, while a couple of our non-oilfield businesses showed growth in the second quarter, nobody in the oilfield was immune to this unprecedented collapse in the industry as evidenced by all three of our segments, reporting sequential EBITDA declines. Even to those that have been through many downturns, the pace at which operators curtailed rig, completion and even production activity during the second quarter was breathtaking. The average U.S. land rig count fell 50% sequentially in the second quarter and the decline in U.S. completion…

Thank you, Clay. NOV's consolidated revenue decreased $387 million or 21% sequentially, as the global slowdown in oil and gas activity precipitated by the COVID-19 pandemic impacted all three of our operating segments. Despite the sequential fall in revenue, an intense focus on cost reductions and strong execution on existing backlog, limited decrementals margins to 24%, resulting in a $94 million decrease in EBITDA to $84 million. In early 2019, we began an extensive effort to better align our cost structure with anticipated market realities and when we saw early indications of the COVID-19 pandemic would drive economic shut downs and an associated collapse in oilfield activity, we materially expanded the scope and accelerated the implementation of our cost out initiatives. During the second quarter, we achieved an additional $320 million in annualized savings, bringing the total achieved to-date $570 million. Despite nascent indications that North American drilling and completions activity could increase later this year, we do not anticipate that any near-term improvements would be large enough to move the needle associated with a massive current supply-demand imbalance for oilfield service tools and equipment. Therefore, we continue to manage the organization with a lower for longer mentality. In doing so, we challenge every aspect of our organization to deliver ways in which we can drive further efficiencies and achieve acceptable levels of profitability and returns on capital, regardless of how difficult the environment. Yes, our actions involve implementing the traditional oilfield services downsizing playbook, a requirement to simply survive in this industry. But we're also pushing well above and beyond that game plan to drive every area of the company to execute faster, cheaper and better than ever. As Clay suggested, our customers, employees and other stakeholders know that NOV is in this business for the long haul and…

[Operator Instructions] Our first question comes from Bill Herbert of Simmons Energy. Your line is open.

Thanks, good morning. Jose, your guidance for CPS Q3, it looks like the decrementals are very steep, if my math is correct, what would be the reason for that? Is that mix or what?

Yes. It's really relatively small movement at the revenue level, it in mix that's causing that change.

Okay, got it. Clay, I'm going to ask you a macro question, which I know you love, but here's the question here. If you -- it's actually not so macro, but cycle-one-cycle, if you -- I guess, the question simply is, how do you feel about incremental margins coming out of this morass, once indeed the world does wake up to the fact that we need oil and gas again. And the context is that, all of your peers who have reported thus far are extolling stronger incrementals due to cost out relative to what was witnessed in the prior cycle. But the refrain, coming out of the morass in mid-2016 was exactly the same, there's going to be a vigorous uplift, you've taken so much cost out of the system, incrementals are going to surprise to the upside. In fact what happened was just the opposite, right? Margin expansion over of -- over the expansionary phase of the cycle fell well short of expectations. And I'm just curious as to what your perspective is once that date arise and how margins are expected to unfold?

Yes. Good, thanks for the question, Bill. I'd say the uplift and kind of a nascent recovery that we saw in 2017 and then through, at least the first-half of 2018 in less consolidated portions of oilfield services, what participants didn't get was pricing leverage. And so, although a lot of costs were taken out '15, '16 I would submit, I think, there -- you didn't see many sectors getting the sorts of pricing gains that we would have gotten coming out a prior downcycles. So if you go back to prior downcycles, where now you're going into recovery and you're pulling out and things are getting better. After a period of significant rationalization with that pricing leverage, typically, the sector has outperformed on incremental results. And if you, kind of, step through that scenario here we are in -- really kind of year six of cost reductions, a lot of pressures on our organization to shrink and as a result I think, culturally NOV and our peers in oilfield services have gotten really, really focused on costs and close management of cost and expenses and so forth. And so when demand starts to come back, which it always does in oilfield services, your initial reaction is to try to meet the demand without adding headcount, without adding a lot of resources and capital and you -- we all use price frankly to manage that level of demand. And so you, enter - typically enter into a period where quarter-by-quarter you outperform on incrementals where you're getting really good operating leverage, because you have taken a lot of cost out of the system, plus the extra, sort of, jet fuel of pricing leverage, and that's the kind of recovery that we're looking forward to. And for what it's worth, I…

Thank you, sir.

Thank you, Bill.

Our next question comes from Tommy Moll of Stephens. Your line is open.

Good morning and thanks for taking my questions.

Morning, Tommy.

I wanted to start on the cost cut theme and really more on the process, whether that's internal with the board or potentially with third parties. Can you just lay out for us what inning we're in there in terms of what you have in front of you to review? I'm just trying to get a sense of how much work is yet to be done when we may hear from you on another target that could potentially be higher than the one that you just raised again today? And then on a related point, as you've gone through the process thus far, have you come across any areas where you are under investing or you realize you had more commercial opportunities than anticipated and you've actually gone the other direction?

Yes. Great question. Tommy. I would say I think we've raised our cost estimate with this program every quarter since we started this process in early 2019, including the second quarter that we just announced last night. The process really involves our operations teams making iterative passes through how they accomplish their work and looking at how to accomplish that work most efficiently and that answers sort of changes as the outlook for demand changes. And also, as we are willing to undertake more structural changes in how we do business. And for instance, I think Jose in his prepared remarks talked about shared services for instance, so which is a little heavier lift. And so as we've kind of move through this process for the past few quarters, that's what we've done. And the cost savings, it's a very, very detailed list of actions that they're undertaking ranging from new sources of materials that we use in our business to closing facilities to workforce rationalization and those sorts of things. In the most recent quarter, we upped our estimate by $75 million. So we're now targeting $700 million by year-end. A lot of the reason for that is, has to do with our low order rates that we saw in both rig and Completion & Production Solutions. And so those two groups today given outlook around orders, let's go back and see what else we can do. That's the kind of thing that we do, but it's monitored very closely. It's both a bottoms-up, so these individual steps that we track as well as sort of a top-down, we look for evidence of progress in our ledgers and make sure that this is all hanging together and we're making -- we're accomplishing the cost savings that we are sharing…

Thank you, Clay. That was very helpful. And for a follow-up, I wanted to shift to a bigger picture theme here, the energy transition so-called, it's certainly garnered a lot of attention lately and both in the boardrooms and with investors. And so as you've alluded in the past though that transition may take longer than is currently assumed by a lot of folks. So I wonder if you might share what you think some folks may be missing here and how are you positioning NOV for the way that you see the world's energy mix evolving?

Well, a great question. If you look at history -- energy transitions are really all about infrastructure and capital and technology and history would point to transitions that take decades, many decades, arguably centuries and mankind, sort of, transition from coal to oil and from the 19th century to the 20th century, and the 20th century to the 21st century, we're going to transition to something else with a lower carbon footprint. We sort of get that. But if you look around, 99 point something percent of the world's automobiles are powered by gasoline or maybe diesel but products that the oil and gas industry produces in their [tens] if not hundreds of millions of vehicles around the globe. 100% of the aircraft around the world are powered by products from the oil and gas industry. 100% of construction equipment is powered by products from the oil and gas industry. The construction equipment that build our buildings and maintain our roads, 100% of tractors and combines are powered by products from the oil and gas industry. 100% of locomotives and tractor-trailer rigs that deliver Amazon packages and all the freight that we rely on in addition to our food supply are powered by this industry. So if you step back and look at all those categories of equipment and ask yourself, so how many tens of trillions of dollars with the T, is invested in that infrastructure and that infrastructure doesn't move one inch without products from the oil and gas industry. This is not a transition that's going to go very quickly. It's going to go, but it's not going to happen quickly. So a few years ago, we stepped back and said, we can figure out how to help that and accelerate that in a lot of ways,…

Very helpful. Thank you, Clay. And I'll turn it back.

Thanks, Tommy.

Our next question comes from George O'Leary of TPH and Company. Your line is open.

Good morning, guys.

Hey, George.

Hey, George.

The color on the North American fluids market over the last couple of quarters was interesting and you mentioned you have some customers -- one, you're looking at deploying new business models and changing the way the kind of game is done. But customers are looking to come back to suppliers that they can depend on. I just wondered, if you could frame, how that fluids business looks moving forward in more detail and compare in contrast, maybe what you will do on the North American side versus the international side to the degree if that there is a major difference?

Hey, George. This is Jose, I'll chime in here. So, yes, there is a lot of commentary related to our WellSite Services segment in our prepared remarks and there has been over the last couple of quarters, as really a great example of the work that Blake and his team are doing, related to helping our businesses make really thoughtful and informed decisions about where it makes sense to -- for the company to deploy and keep capital. And as part of that review process, one of the things that jumped out to us is that our U.S. Fluids business while always profitable was very working capital intensive. And as we sort of looked at our opportunity with our scale in that business is being, one that we saw few competitive advantages, that we could bring to table within the North American marketplace. So I think we mentioned last quarter that we were exiting that business and we completed the exit of that business during the second quarter of this year. And therefore, had an outsized impact on the revenue decline within that business. The other element that we talked about was the solids control element of our WellSite Services business in which we are, sort of, a clear market leader in that respective area. And if you look at sort of through the cycle returns for that business, it has been very good. Obviously, with a major contraction in the rig count within North America, you see a pretty quick fall off of that business. And well things don't look fantastic, spot point in time, what we are seeing, again is through the cycle, good opportunities for us, particularly as we're seeing more and more of the smaller competitors exit the space and create additional opportunities for us, just by their exit. But also, just due to the fact that customers are better recognizing the importance of long-term viability, commitment and really quality of delivery within the market. So those are some of the things that we were really trying to highlight in those prepared comments.

Yes. In addition to solids control, where we can measure market share and we've clearly gained share areas like bits, coiled tubing, other areas we're seeing market pure tick up, as Jose said on a smaller market, but we're clearly gaining share and we're hearing from our customers that they are more comfortable with a supplier that has staying power.

Helpful framing. Thank you, Jose and Clay. And then, just -- I apologize if I missed it, but I didn't hear anything with respect to the 2020 CapEx budget that may just mean that it's unchanged. It seems like looking at the first half of the year, there is a shot that you guys under spend that $250 million watermark, is that possible or am I reaching a bit?

Yes. The $250 million number is still our budget for 2020. And yes, we -- the spending came down a little bit in the second quarter, in part due to some of the challenges that we had in terms of advancing construction of our facility in Saudi. But we do anticipate that the rate of spend will pick-up a little bit into the third quarter. And so, we're holding from on our target. And then, as we've talked about in the past, once that plant is behind us, we anticipate getting back to our prior levels of about 3% revenue run-rate for CapEx spend, if not a little bit lower than that depending on the market environment next year.

Very helpful. Thanks for the color.

Sure. Thanks.

Thanks, George.

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

Hey, good morning. I just...

Hey, Chase.

Morning, Chase.

Hey good morning. I guess I wanted to talk a little bit about fourth quarter. I mean, you touched on it slightly, and I just want to make sure that I'm kind of reading the tea leaves right. Commentary seemed to suggest that 4Q could be down versus 3Q. So I don't know if maybe you can confirm that, was that kind of more of a revenue commentary or an EBITDA commentary? And then, maybe just touch on to the free cash flow a little bit, you talked about it being positive. But with, if it's going to be down a little bit, how should we think about free cash flow and kind of some of the moving pieces between working capital and cash taxes?

Yes. Chase, it's Jose. So I'll try that -- try to take that. So the commentary that I was providing, I think it was really related to our Completion & Production Services segment and a couple specific business units there, where our bookings have been relatively light over the last couple of quarters. Really, what we're trying to put out there is that there is still a tremendous amount of uncertainty over the next couple of quarters, right. You sort of look at the massive amount of disruption that took place at the end of Q1 and then into Q2 or effectively our customers weren't were even able to sort of come into their offices. So we think that had a big impact in terms of the timing of order flow. And we mentioned that most of our customers are telling us that orders are not being canceled, they're being pushed. Some of them were being pushed, more significantly than others. We think, there are a number of orders that we expected to obtain in Q2 that are likely Q3 type events. And so, really just trying to say that if that does not materialize, if there is further disruption and further issues associated with order intake, the backlog starts looking pretty light in some of those businesses. And so, you could see a harder step-down in Q4, if orders do not materialize. And I guess, the second part of your question as it pertains to cash flow, again a significant amount of uncertainty in terms of how the rest of the year plays out but what we do anticipate is, further harvesting of cash flow from our working capital, even given that some of those working capital metrics would likely deteriorate a little bit further from here. And what I mean by that is, you look at the DSO that could tick-up a little bit higher as the revenue-base continues to shift more towards international markets and customers face a little bit more stress and strain. Again longer cycle business also has longer turns, cycles related to inventory, so expect that to get a little bit worse. But as we look at other components of working capital, for us, you look at contract assets and contract liabilities, the anticipated movements in those give us confidence that we should still see some reasonably healthy cash flow in the second half of the year.

Okay. All right. That make sense. One quick follow-up, kind of, maybe coming back to Bill's question at the beginning. Obviously, you've done a lot of rationalization of cost across the organization. But what levels of revenue, do you think you've actually right-sized your business towards, as we think about the recovery and maybe hitting the high end of those incrementals, as you don't have to bring back any kind of fixed costs?

Well, we are continuing to adjust to market that's obviously facing, right now, pretty historical challenges and working hard to maintain positive EBITDA and cash flow as best we can through that. What I'd tell you is that we're doing that and taking out certain facilities and plants, because we have a great deal of confidence in the ability of our leadership when called upon to rebuild that and to respond to higher levels of demand. And I think, we've got a great track record with respect to doing that. And frankly, that's really kind of a necessary skill set in oilfield services. The way to survive these downturns and really prosper in the upturns, really is to move aggressively on costs, and when called upon and then when demand comes back to move aggressively to expand to rising demand in a way that's smart and cost effective and so forth. And so, hard to part to put a number on that level of revenue. But as I said earlier, our management team continues to iterate, kind of, quarter-by-quarter with respect to outlook for their businesses, not just 90 days out, but over the next few quarters as best as anyone can tell and adjust their businesses to stay healthy as best they can through that.

Okay. All right. I'll turn it back over. Thanks.

Thanks Chase.

Our next question comes from Sean Meakim of JPMorgan. Your line is open.

Thank you. Hey, good morning.

Good morning Sean.

Hi, Sean.

Just a couple of points of clarification. So, you noted $320 million of annualized benefit from the costs out in the second quarter, $570 million to-date, another $75 million identifies, so $700 targeted out by year-end. Can you maybe just give us an estimate of how much of a cushion that gives you when you lap that full $700 million in '21? So in other words, how much of a year-on-year benefit do you get next year? Is that may be $100 million, $150 million something like that?

I think, we have to work through the math.

Yes. Yes, there certainly is a timing element to when the savings come in. And I think, we've done a reasonable job of providing you the updates in terms of the amounts realized every quarter over the last several quarters. So we could certainly go through that math and maybe we can follow-up with you post call and do that offline Sean.

Okay. Sure. Yes, no problem. And then, I guess another point of clarification. The guidance that you gave for the third quarter is inclusive of the savings you expect to capture in the third quarter, correct?

That is correct.

Okay, great. Thanks very much.

Thanks, Sean.

Thank you.

That's all the time we have for questions. I'd like to turn the call back over to Clay for closing remarks.

Thank you, Michelle. First and foremost, I want to say again, how much I appreciate the hard-work that our employees are doing under some extraordinary challenges and conditions out there. And so, thank you those of you who are listening. I'd ask everybody on the call to do what you can to stay safe, to keep others around you safe. And lastly, we all look forward to speaking with you about our third quarter results in October. Thank you very much.

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