Good day, ladies and gentlemen, and welcome to the NOV First Quarter 2024 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, Ms. Amie D'Ambrosio, Director of Investor Relations. Ma'am, please go ahead. Amie D’Ambrosio: Welcome, everyone, to NOV's First Quarter 2024 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 uncertainties, 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 2024, NOV reported revenues of $2.16 billion and a net income of $119 million or $0.30 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, Amie. For the first quarter of 2024, NOV generated revenue of $2.16 billion, an increase of 10% compared to the first quarter of 2023. The company generated fully diluted earnings of $0.30 per share for the first quarter, down $0.02 compared to the prior year first quarter. Pretax profit increased 14% year-over-year, but a higher effective tax rate and lower income from our [indiscernible] joint venture in the first quarter led to lower earnings per share year-over-year. Adjusted EBITDA was $241 million or 11.2% of revenue, a $46 million increase from the first quarter of 2023, representing 24% leverage year-over-year. NOV's first quarter EBITDA and EBITDA margin were its highest in 9 years and overall, it was a solid start to 2024. We began the year with several new business leaders across our organization and began operating under 2 new segments: Energy Products and Services and Energy Equipment. Revenue from Energy Products and Services grew 8% compared to the pro forma first quarter of 2023 despite lower global rig count year-over-year. The segment continued to realize good adoption of its portfolio of technologies and a rising demand for the tools and consumables that manufacturers, particularly in the international and offshore markets. Year-over-year top line growth was broad-based as all but one of its businesses posted increased sales with completion tools, drill pipe and rig instrumentation in particular, posting strong double-digit gains. Our new Energy Equipment segment revenues grew even more, up 12% year-over-year on a pro forma basis. Rising offshore activity fueled demand for equipment tied to deepwater developments, FPSOs and drilling rig reactivations and recertifications, which enabled the segment to overcome lower sales of pressure pumping equipment to North America year-over-year. As part of our new structure, we are reporting a March 31, 2024 backlog for Energy…

Thank you, Clay. NOV's EBITDA increased 24% year-over-year to $241 million, with margins improving 131 basis points to 11.2% of sales. Cash flow used by operations was $78 million during the first quarter, driven primarily by seasonal build in working capital and annual payments made in the first quarter. Working capital increased $395 million sequentially due primarily to the decrease in accrued liabilities associated with the annual payments made during the first quarter and the 2 acquisitions we completed, which accounted for $106 million of the $127 million increase in inventory. While operations consumed cash, the use was well below what we consumed in the first quarters of the last 2 years, which reflects the turn in our business that gives us confidence in our ability to generate a substantial amount of cash flow over the next several years. We believe NOV is well positioned to deliver strong performance as the cycle matures from a nascent recovery and evolves into an environment where later cycle equipment and technology businesses will outperform. As Clay noted, an improved market environment, differentiated technologies that we've developed over the last several years and our focus on operational efficiencies will continue to push margins and cash flow throughout 2024 and beyond. Our base forecast contemplates a sustainable multiyear period with modestly improving industry activity led by the international and offshore markets. We expect soft activity in the U.S. through 2024, but anticipate a recovery in 2025 aided by increasing gas exports. However, we expect improvements in oil-directed activity in the U.S. to be modest with international and offshore activity, providing most of the incremental supplies required to fuel the growth of the world's economies. As a result, we expect a little less volatility in NOC and IOC drilling activity over the next several years versus…

[Operator Instructions] Our first question is going to come from the line of Jim Rollyson with Raymond James.

Nice quarter, first of all. Jose, you talked about free cash flow again and kind of the outlook over the next handful of years. You obviously got the negative quarter out of the way for the year seasonally, but is -- in the past, you have talked about this kind of EBITDA to free cash flow conversion rate in the plus 50% range. And as you think about just -- I want to state that for '24, but as you think about how that transcends over this '24 to '27 time frame that you kind of laid out, is that still the right range of conversion rate to use?

First of all, yes, as it relates to 2024, we continue to expect that we'll convert at least 50% of our EBITDA to free cash flow during the year. And if anything, we are confident about our ability to achieve, not exceed that. And then really I think the bulk of your question was related to the out years. Obviously, we're not ready to provide explicit guidance. We did provide kind of a little bit of information related to that from the standpoint of our return of capital program and plan. Bottom line is, as we look forward in time with sort of the base case scenario that I laid out where we expect slightly less volatile environment than we've been in over the past decade and steady, gradual improving activity levels, there's no reason why we shouldn't be able to maintain that level of free cash flow as a percentage of our EBITDA.

Got you. That's just helpful for modeling and how to think about this. And that takes me -- just glad to see the framework for the capital return program I think, a quarter earlier than you guys had promised, so even better. But as we look at you mentioned from the share repurchase program of $1 billion that, that's going to be opportunistically driven, maybe how you think about or how the Board thinks about where to allocate capital to that part of the equation versus your kind of supplemental catch-up at year-end? What drives the decision to move capital between those 2 means of returning capital to shareholders?

Yes. As you pointed out, the program is intended to be opportunistic. And as also I mentioned in the prepared commentary, we're really viewing our return on capital plan, and frankly, just the way that we look at cash flow across the board on an annual and then a multiyear basis. And so what we wanted to do was provide a very clear framework and assure our investors that every year, we will return at least 50% of our excess free cash flow. And so we intend to be opportunistic. We intend to, as we mentioned, increase the base dividend and then opportunistically buy back shares throughout the course of the year. And then depending on as to whether or not we're able to return the entire 50% plus of excess free cash flow during the course of the year or not, we would have the supplemental dividend early the following year to true up that return of capital to our shareholders. Some of the other variable that goes into the definition of excess free cash flow is sort of what we're seeing from an acquisition standpoint, and there could be times such as right now, there are a couple of small acquisitions that we've sort of factored into what we expect to be our excess free cash flow during the course of the year. Acquisitions are never done until they're done. And so if they don't materialize, if they don't transact, they don't close, we'll have extra capital at the end of the year that we would certainly need to return via that supplemental dividend. So hopefully, that helps frame how we're thinking about things.

And our next question is going to come from the line of Stephen Gengaro with Stifel.

I think the first question for me is when you think about the announcement of the return of capital framework, what's changed over the last couple of months that gives you the confidence to put it in place? I mean Jose, you talked a little bit about sort of the visibility on free cash, but it did come earlier than we expected. I'm just kind of curious what sort of drove the decision to announce this today as opposed to after maybe seeing more progress on free cash generation?

Before Jose answers, can I just say, Stephen, frankly, putting 2023 in a rearview mirror was a big plus for us. We've been very frustrated here with our supply chain disruptions and lack of free cash flow and got Q1 behind us and that -- I think that really -- looking forward, we think our shareholders need to know how we're thinking about returning the capital. And we said 90 days earlier than we had indicated before, it would be better off for all parties.

Yes. I think Clay summed it up pretty well. I think the only other thing that I would really add to that is that, obviously, we had -- we got through the typical ordinary course burn of cash from an operating cash flow and free cash flow standpoint in Q1, which is a big milestone that we wanted to get through. Also during the quarter, we had the $243 million that we spent on acquisitions. And then one of the items that allowed us to really gain additional level of confidence in addition to just what we're seeing from an operating environment going forward is the fact that we were able to close the divestiture early in Q2 to replenish our cash balance and really allow us to go ahead and start moving forward with the return of capital program. So feeling great about things from an operational standpoint. Great about the balance sheet and where we sit and feeling good about where the stock price is, that it will be a good accretive value proposition for our shareholders to buy back shares at this point in time.

Great. That's helpful. And then just one follow-up on the free cash side. We've talked historically about kind of working capital as a percentage of revenue and kind of where that has been historically versus in '23. How should we think about that unfolding over the next year or 2?

Good question, Stephen. So I think last quarter, I mentioned that at the end of this year, we expected that working capital as a percentage of our revenue run rate to see some modest improvement, basically 100 to 200 basis points. Now that's changed a little bit here with the completion of the recent acquisitions, which had a -- the acquisition had a very high load of working capital. As I pointed out in my prepared remarks, the bulk of the increase in inventory that we saw from Q4 to Q1 was a result of the acquisition. And we actually view that as a positive. We think that they, like every other manufacturer had, had challenges from supply chain standpoint and built up some inventory to work through those challenges. And I think we'll be the beneficiary of that as we sort of normalize inventory levels over the coming months and quarters, not quite prepared to sort of give you [indiscernible] answer as to what the new metric will be at the end of 2024. We've only had this under our belt for a couple of months now. But needless to say, we're more optimistic about converting working capital to cash during 2024 than we were a quarter ago as a result of this item.

Our next question is going to come from the line of James West with Evercore.

So I love to hear both your perspectives actually on this. Given that we've got an enormous number of offshore rigs that are going to [indiscernible] and will be turning to the right as we go through this year and next year for pretty long-term contracts and duration is extending, we're going to need, obviously, spare parts, but we're going to need a lot of offshore just equipment to be built, whether it's platforms [indiscernible], all the kind of stuff that you guys do. And so how are you thinking about the visibility? And secondarily, what kind of innovations because you guys are constantly innovating these products as equipment. Are you introducing to the market to make them more efficient; to decarbonize the operations, et cetera, as we see this long duration cycle play out here offshore.

Great question, James, and we appreciate you pointing out the fact that NOV has been a major innovator in the offshore market. And you -- more than anybody know the outlook for the offshore is very, very bright. There are lots of discoveries and developments and things going on in multiple basins around the world, including some new exploration basins that have emerged in the past few years with discoveries in Namibia and Guyana [indiscernible] and places like that, that are fueling all that demand and that's giving rise to a pretty bright outlook for FIDs around those projects and much higher level of offshore activity, which has pretty much lacking through the last decade. And so just to count how we participate in that, yes, we do support the bulk of the world's offshore drilling fleet because we built most of those rigs, and there is a rising demand for aftermarket support of those. We're reactivating a number now, we went through some statistics on that. I also pointed out the strong results in aftermarket in our rig business there, and we're well known for that. Those rigs need drill pipe. They need spare parts. They need solids control services. They need bits, they need downhole tools, hole openers, all of which we provide. And then on the production side, I think we're probably less well known for what we do there, but through the past 10 to 15 years, we've added a lot to what we sell into FPSOs. And so the outlook for floating production storage and offloading vessels, FPSOs, is similarly bright in the deepwater basins. And I think a disproportionate level of offshore activity is going to be focused on which will drive demand for FPSOs and there's some industry forecasts out there that have…

And then maybe just a quick follow-up for me. With the rigs that are working today and about to go to work, clearly, over the last decade, it was a tough time, and they dramatically reduced the number of amount of spare parts and stuff on the rigs. Are the rigs back up to kind of the normalized level of spare parts on the rigs that they usually require? I think for a deepwater rig, it's $50 million, $60 million or so worth of equipment? Or are they still a little understaffed?

Good question. The reason that we're reactivating, we've got close to 30 now that we're working on now part of the reactivation plan. We will replenish those spare parts that they depleted and our customers are really, really good at cannibalizing and going to their unutilized rigs and [indiscernible] rigs to source spare parts, both land and offshore. And so most of these rigs have been picked over already. So part of the reactivation plan for the rigs that we're working on now includes replenishing spare parts and so they can go back to work. And I guess probably to fill in the rest of the picture, too. It's interesting though that a lot of rigs that were delivered 2014, 2015, 2016, 2017 on the back end of the last kind of capital super cycle. Those rigs are facing their 10-year purpose survey. And so they have to come into a shipyard and be inspected and that's a pretty major point in their lives and an opportunity for NOV, too. Again, rebuild equipment, replace equipment, add additional capabilities, maybe oil and gas operator customers who want to add while those rigs are in the shipyards. And so we're kind of coming up to that for a lot of rigs in the fleet right now.

Our next question is going to come from the line of Tom Curran with Seaport Research Partners.

Clay, within that masterful expansive refresher you just gave us on all of the exposure in areas that NOV participates in from growing all the way through down the production infrastructure, capital equipment services. If we were to see a significant step-up in offshore orders coming out of 2024 into 2025, where would you most likely expect it to come from? Would it be, do you think, on the offshore drilling front in the form of upgrades or cold-stacked reactivations? Would you expect it to be the ramp in FPSO projects, maybe subsea infrastructure like [indiscernible] and other subsea hardware. Could you just give us an idea of sort of what the sequence of acceleration could look like to the extent we get some? Like I get the difference with this recovery, it's slower, steadier. But if we get an acceleration within offshore, where would you expect it?

First, the rig reactivation offshore is underway. As I mentioned, we're reactivating a lot of rigs right now. Although you never say never in this industry. At some point in the future, we will see a new round of rig building. That's not in our near-term forecast. I think it is more likely to surprise to the upside is all the other more production-related offshore kit that NOV can provide to the FPSOs, including the flexible pipe and all the things that I just went through. And we have a very large and meaningful opportunity there. And that's a little bit later. These companies pull the trigger on their FIDs, projects that are kind of typically moved to EPCs for more detailed [indiscernible] are a little later in that sort of cycle. I think that's kind of what's next for NOV. But I also want to say shifting over to renewables, we have a fantastic opportunity that we haven't talked much about in the past, but it's around floating wind, in particular, in the North Sea, where we're working closely with kind of a partner over there or a party that's pursuing development. And that's a multibillion dollar kind of opportunity for NOV and it has implications for floating wind in deepwater areas in Asia as well. So not in the traditional oil and gas space, but in renewables, so we could see some help from that area as well. And then that's on top of the wind turbine installation in shallow waters, the fixed wind installation vessels that Jose mentioned. We wouldn't be surprised to see a couple of orders [indiscernible] in 2024, plus sort of growing demand for cable-lay vessels that also support those offshore shallow water installations as well. So there's a lot happening offshore, and that's really good for NOV given our high mix and high level of participation and expertise in that area.

Got it. Got it. And thanks for highlighting what's happening on the renewable side as well. Just as a follow-up here then, you had mentioned that Jose has some stats with regards to where you're at currently with reactivation, recertification and upgrade projects. I believe your backlog around this time last year stood at 83 projects. Could you just give us an update on where you're at?

Yes. I think I mentioned just a moment ago, 30 offshore rig reactivation projects. Those are all that are north of the $2 million number. We have a lot smaller rigs that we also do work and also in this project.

And our next question is going to come from the line of Scott Gruber with Citigroup.

Clay, I'm curious how the Saudi CapEx shift impacts NOV? I imagine [indiscernible] jackups go down, there's eventually a hit to Grant Prideco and potentially some other product lines. But then you have a greater quantum of onshore rigs going to work over the next few years, which all require new pipe and bids, et cetera, at start-up. So if you put the new builds to the side, which have long been contracted, how should we think about the Saudi CapEx shift towards onshore impacting NOV?

Yes, it's a good question, Scott. We would prefer that we keep both sets of rigs joining, but that doesn't fit their plans. We understand the energy ministries directing Aramco to back off adding 1 million barrels per day, given that the natural gas liquids coming from the gas developments are going to add liquids to the Kingdom and as well, they'll displace black oil that they are burning for electricity generation over there. And so it makes sense, I guess. That's led -- as you know, to the suspension of -- I think they've announced 20 jackups, contract suspended, maybe a couple more to come. The good news is 6 of those that have been suspended so far have either secured work elsewhere or very close to securing elsewhere, a couple in the Arabian Gulf, couple in India, I think one in Africa, one in the Asia Pacific area. And so they're finding homes elsewhere. And so we're hoping we'll continue to support those rigs as they move to other markets. On the positive side of that ledger though, we continue to be very excited about the Kingdom's goal to lift their gas production 2.5 Bcf per day, mostly coming from their unconventional Jafurah gas field development, which they did FID, I think, back in 2020. The rig count there has continued to grow. They are securing new rigs for both that as well as, I think, additional gas production out of [indiscernible] just a couple of weeks ago, celebrated 23 new rigs bringing into the Kingdom. And that's in addition to the rigs that we're building in the Kingdom [indiscernible] that are going to work. What's interesting to us about that -- there's a couple of things are. First of all, the reasons they're bringing in are all AC powered. They're all available to be more closely controlled with electronics and software. It's really a step-up in technology. And I think that speaks to Aramco's desire as well as other NOCs around the Kingdom -- around the Gulf, we're seeing the same desire to bring in better technology rigs and to help sort of bridge the performance gap between the rig fleet that they have versus the rig fleets that what they can do. And so that's, I think, a good development for us. And then the other way, NOV can and is participating in that is through the supply of all of the production equipment and kit that I mentioned earlier. We manufacture chokes in the Kingdom. We're the largest provider production chokes worldwide, the largest provider of composite piping systems worldwide, and we're seeing big orders and a lot of demand in the Kingdom to support gas production in both of those areas in addition to separators to gas dehydration technologies. Again, we're the largest provider of that. And so there's a lot of ancillary kits to get pulled through those gas developments that would benefit NOV as well.

And then as the jackups go back to work, is that feeding upgrades to equipment? Are there dollars flowing to NOV as those rigs mobilize elsewhere?

It may. It depends on what their operator in these new markets wants. I would say most upgrades to drilling equipment today are really prompted by the operator customer requiring. There's not a lot of speculative investment by offshore drilling contractors, given what most of them just went through around adding equipment. But the operators are stepping up and helping them out by paying higher moat fees or paying for new equipment through the day rate. And they're also offering longer terms, I think for both jackups and floaters, you're seeing fixtures extend out to be longer contracts, so that both parties have a shot at getting payback on these new capital investments and new capabilities in there. That's kind of the dynamic at work there. So it depends on what the operators in these new markets want.

And our last question is going to come from the line of Kurt Hallead with Benchmark.

I always appreciate the color and the insight, very informative. So I got one big-picture question and then one financial question. So let me hit the financial question up first, right? You guys referenced you still have more coming on the cost reduction front. So I appreciate that dynamic. As we get out beyond 2024, I'm just kind of curious as to what do you see the primary driver for margin improvement? Do you think is it going to be more internal? Or is it going to be external, for example, like pricing power or those dynamics? Just a little -- how -- I'd like to get your sense on how you're thinking about the margin improvement once you get beyond '24?

Kurt, thanks for the good question. I'll start off and Clay, I'm sure, will want to chime in on this one as well. But I think what we see is that there are several opportunities to continue to see an improvement in our margin over the next several years. So obviously, you touched on the cost-out program. We're still in the relatively early phases of that $75 million cost-out program, really got started at the very end of last year, and we probably worked about -- we have worked our way through about 30% of that at this point in time. We expect that to pick up a bit into Q2, which is why you see an improvement in the incremental margins. But -- and we're always going to be -- but really expect that to wind out as we work our way through Q3 and Q4. We're going to continue to look for other opportunities. We're always looking to streamline and optimize the operations within the company. But the work we've done -- obviously done a tremendous amount of heavy lifting over the last several years, and this is another small step, relatively speaking, from a cost-out standpoint that we'll have wrapped up in '24. As we get into '25 and beyond, you're going to see the continued progression of lower-margin contracts and projects winding out of the system. We've been seeing that over the last several quarters. We'll see that gradually take place through the remainder of '24. And then as Clay touched on expectations for one of our businesses, in particular, to really come to an end of some of those contracts quite suddenly really at the end of '24, and should more or less be a step change in '25, which should allow more margin improvement. That's one out of many businesses, but still makes a difference. Also, we'll continue to see improved absorption across the entire footprint. I think when we get into '25, we'll see continued strong activity in international and offshore markets and we expect North America to be much healthier. Right now, we have cross-currents with international more than offsetting what's happening in North America, but North America is certainly a drag. And if we can get all 8 cylinders firing, that's another step-up from a margin improvement standpoint, just from a throughput point of view. And then lastly, pricing, as the cycle progresses and advances and matures, that's really when we have a better opportunity once capacity is fully absorbed and it becomes more of a conversation of how quickly can I get something versus what's the price. That's sort of the final leg up that we are looking forward to and counting on in the not-too-distant future.

That's great color. And then, Clay, bigger picture dynamic, right? We've had a lot of discussion of late increasing crescendo discussion around the data center build-out and what that's going to mean for grid demand, et cetera, right? So I guess I'm curious on 2 fronts. Number one, do you see an opportunity for NOV to provide some element of equipment into the data center build-out infrastructure and/or what do you think the ultimate pull is going to be with respect to your customer base in terms of drilling activity, track activity and so on?

Yes. I think we're probably, frankly, more likely to be a customer of those data centers as our digital offering continues to grow. I mean we're employing artificial intelligence and a lot of sophisticated edge compute and cloud offerings, which is growing pretty rapidly here. But kind of the second order implications for our business as we both know, these data centers are going to drive up electricity demand across the U.S., which is going to require more natural gas, require more sources, electricity, including renewables. And Kurt, as you're aware, we're pursuing very disruptive technology in the land win space that we're pretty excited about through our Keystone efforts and making good progress there. And so I think NOV's participation in that phenomenon of U.S. electricity demand rising sharply is going to be more around helping our customers actually provide that electricity, both renewables as well as in the traditional natural gas space. And so really kind of interesting developments in that area.

Thank you. And I would now like to hand the conference back to Clay Williams for further remarks.

Thank you, Michelle. Appreciate everyone joining us this morning, and we look forward to speaking to you again in July when we report our second quarter earnings. Thank you.

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