Earnings Call: Q2 2021

Jul 28, 2021

Good day, ladies and gentlemen, and welcome to the NOV Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin. Welcome, everyone, to NOV's Q2 2021 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, 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 ks 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 release available on our website. On a U. S. GAAP basis for the Q2 of 2021, NOV reported revenues of $1,420,000,000 and a net loss of 26,000,000 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. Now, let me turn the call over to Clay. Thank you, Blake. During the Q2 of 2021, NOV's consolidated revenue increased 8% sequentially and EBITDA improved to $47,000,000 Excluding the benefit arising from the cancellation of certain offshore rig projects, operating leverage was strong at 50%, Owing to cost reductions in prior periods, while price increases in certain product lines helped offset the inflation we are seeing in most product lines. Coming out of a pandemic, which bankrupted many of our customers and eviscerated our backlog, our financial results improved, but remained below acceptable levels. Nevertheless, NOV's execution strengthened through a quarter of continuing supply chain challenges and COVID disruptions. We are pleased to see orders for both our Rig Technologies And Completion and Production Solutions segments rise significantly. Rig Technologies posted book to bill of 138% On strength in orders for Renewables and Completion and Production Solutions book to bill ran 167% in the 2nd quarter. Barring another round of COVID lockdowns, we expect the market to continue to strengthen, underpinned by broad economic growth, Higher commodity prices and the continuing worldwide build out of an offshore wind power toolkit. The company's portfolio of technologies developed over the past several years position extraordinarily well to capitalize both on the oilfield recovery underway As well as the enormous energy transition. The next 5 years look very, very interesting for us. Like global manufacturers across all industries, NOV experienced supply chain disruptions throughout the Q2, and we expect these challenges Just into 2022. Many steel mills that supply NOV bespoke metallurgies along with petrochemical facilities and plants that supply NOV Epoxy, resins, thermoplastics and elastomers are not fully up and running due to a combination of COVID, the February Texas freeze and in some cases disruptions in their own supply chains. Furthermore, transportation bottlenecks around the world, port congestion and port closures and freight costs that have quadrupled are adversely impacting suppliers 2 and 3 levels down from us, driving up input costs and lengthening delivery times on everything from steel to computer chips. In certain instances, we've been placed on allocations, but thankfully NOV's scale has enabled us to elbow our way to the front of the line. We think we are better positioned than our smaller competitors. Our size and scale generally give us access to a broader range of suppliers and our teams are managing through these challenges better than our competitors. The U. S. Market is also seeing a tightening labor pool adding pressure to cost and efficiency. Our customers tell us that attracting hands back to their oilfield service operations is very challenging. Interestingly, this is prompting greater customer interest in some of the new automation products we are now introducing to the market, which reduce the need for field labor. As we get back to growth in our factories, we're finding it challenging to attract workers as well. NOV is trying to stay ahead of the inflation threat Brought on by labor and raw material constraints by passing along these costs as price increases. Our success has varied depending largely on the level of excess Lower cost inventories remaining in our competitors' hands within these markets. Day by day, however, we know excess capacity within many categories of oil field equipment and consumables, think bits, drilling motors, fluid ends, is approaching depletion, offering the first opportunities In many quarters to heal pricing and profitability as the North American marketplace continues to get more active and offshore and international markets start to recover. The marginal cost of returning idled oilfield equipment, much of which has been cannibalized and stripped of consumables during the downturn, 2 of our large composite pipe plants in the Far East were shut down in late Q2 and remain closed until late last week. Operations in India, the Middle East, parts of Europe and Canada all experienced COVID disruptions of greater or lesser degrees. And generally, NOV did a better job of anticipating and managing through these obstacles in the 2nd quarter. Our Q2 results are an instructive reminder of the cyclical behavior of our segments. Wellbore Technologies is most closely tied to drilling And is an early cycle beneficiary of rebounding drilling activity, having bottomed in the Q3 of last year. Its last two quarters have seen it put up double digit as well as selected price increases where possible. Our other segments are driven more by capital equipment purchases and are therefore later cycle and lag wellbore technologies by 2 to 3 quarters. We believe both Completion and Production Solutions and Rig Technologies bottomed in the Q1 of 2021 And both posted double digit top line growth in the 2nd quarter. Book to bills above 100% for both in the 2nd quarter also support our outlook. All three segments see more or less the same macro environment. North American activity continuing its measured recovery driven by stronger commodity pricing, While governed by extreme capital discipline on the part of operators 2, National Oil Companies returning to work in fits and starts around the world with tenders being let for Hopefully, a broader resumption of activity in 2022 barring additional COVID drama and 3, cautious optimism in offshore markets With some limited project approvals flowing in the Gulf of Mexico, Brazil and Guyana, but many projects facing continuing delays and moving to the right. Overall, excluding the rig cancellation, NOV's consolidated North American revenues increased 22% in the 2nd quarter and international revenues increased 1%. Consolidated offshore revenues declined 5% sequentially in the quarter. Within Completion and Production Solutions, 6 of 8 businesses posted sequential revenue growth. Every business unit with exception of our Intervention and Stimulation Equipment business posted book to bill ratios above 100%. In addition to navigating supply chain issues, the segment made good progress on technical developments within its ideal e frac offerings in its renewables portfolio, particularly in the carbon capture space. A little more than half of Rig Technologies 2nd quarter orders came from the offshore wind space and the outlook for this area points to continued growth. Additionally, the tone from offshore drilling contractor customers is improving as they emerge from bankruptcy with stronger balance sheets. The 11% sequential improvement in spare parts bookings during the quarter, more inquiries around rig reactivations and more engineering work we are being asked to do around upgrading BOPs, Automating pipe handling and adding crown mounted compensators gives us confidence that we are seeing more offshore drilling activity on the horizon. In the land rig space, our rig manufacturing JV facility in Saudi Arabia is nearing completion and work is currently underway on the first rigs. The NOV team continues its development of high value solutions that support the energy transition, and I wanted to share a couple of updates. During the quarter, we advanced conversations with 1 of the largest solar EPC providers to develop a solar panel tracking system in the accompanying supply chain. We're also in advanced talks to sell our proprietary mobile tower crane that will enable the construction of significantly taller, More efficient onshore wind farms, which we hope will result in a purchase order soon. This crane underpins a clever new installation method that will facilitate the adoption of taller lower cost land towers that we are working with Keystone Tower Systems to manufacture at our facility in Pampa, Texas that we have described on previous calls. We successfully tested our new in line chain tensioner that will be used to facilitate the offloading of floating wind turbines and entered into an agreement with Cerulean Winds to serve as the exclusive provider of floating and mooring systems for floating wind farms that will decarbonize oil and gas assets in the UK sector of the North Sea. Our NOV Gusto MSC team has been working with a customer to design and deliver a proprietary system that automatically tilts and orients a sailing mast, Improving the efficiencies of sales on large vessels. The initial application of this system is for a large cruise ship, but can also be used on large cargo vessels. The wind propulsion technology will supplement conventional propulsion systems and is expected to reduce the ship's carbon footprint by 40% to 50%. There's also a lot happening in the geothermal market. Our ReedHycalog PDC cutter technology continues to drive improvements in economic returns for the geothermal industry. Entuboscope's TK Liner product line is becoming an indispensable piece of large geothermal projects internationally As evidenced by contract award this quarter for approximately 60,000 feet of large diameter product. In fact, we are introducing several new products across many business units that are specifically designed for the geothermal market, which is now seeing strong surge in demand globally now. Our Process and Flow Technologies team has developed a concept design for a full scale carbon capture module, utilizing our expertise in gas Processing and treatment built over the last 40 plus years and we are in discussions with 2 potential customers for FEED studies utilizing this technology in Europe now. The application of NOV's engineering and manufacturing expertise to the energy transition continues to unearth compelling paths to future growth. Turning back to our traditional oilfield markets, despite all the downsizing we've executed over the past several years, our sustained investments in R and D now provide standing portfolio of new products and technologies that position us well as we move into a recovering oilfield market. Our Novos operating system is at work today on 74 drilling rigs with another 84 in backlog, enabling these land and offshore rigs To access 10 different optimization applications written by NOV and third parties. These include optimization apps that utilize high speed data from the bottom of the hole Transmitted through NOV's IntelliServe wired drill pipe network, currently providing higher levels of efficiency and safety To several critical North Sea rigs and a rig in Saudi Arabia. Novos also provides the digital foundation for our new automated drilling and tripping robots That we are introducing later this year. Several customers came out to see our cost effective industrial robots dope and trip over 25 stands per hour Without any human hands touching the pipe or the controls, offshore, we are seeing continued interest in reducing carbon emissions through our Power Blade and EcoBoost products And subscribers to NOV's RigSentry predictive analytics product, the oilfield's first commercial product introduced back in 2016 continued to grow. We're continuing to develop our edge computing solutions through our MAX platform, working closely with a handful of E and Ps to scope and develop the beta version. We're also bringing new directional drilling tools like our proprietary agitator friction reduction tools, our SelectShift downhole adjustable bent sub, Our Vector series of rotary steerable tools and market leading drilling motors and MWD tools. NOV Reid Hyka Log leads the And Bit and Cutter Technology having lifted its market share materially through superior bit performance over the past several quarters. On the frac side, we are excited about the prospects for NOV's ideal eFrac technology as well as our proprietary quick latch connection systems, FlexConnect frac hoses and the digital enhancements we are developing around monitoring, controls and predictive analytics in this space. After several years of cost cutting, restructuring, pivoting and innovating, NOV has reset and transformed its business, Utilizing new developments in everything from digital to composite materials, we've developed new high value ways to lift the efficiency and safety Of our customers' traditional oil and gas operations, we've developed ways to reduce their carbon impact, and we are winning over new customers who are building out new forms of low As the world continues to heal from the COVID-nineteen pandemic and the global economy tries to recapture some sense of normalcy, NOV is poised to benefit In both our traditional oil and gas businesses and our newer ventures in the renewables space. I'm enormously proud of NOV's dedicated, Creative service minded employees whose hard work through this downturn has enabled the bright future that lies ahead. While our global operational reach, Our integrated network of manufacturing assets and our strong balance sheet and financial resources are all required to cultivate these opportunities. It's our fantastic team of employees who will make them To those of you listening, thank you. With that, I'll turn it over to Jose. Thank you, Clive. For the Q2 of 2021, NOV's consolidated revenue rose 13% sequentially to $1,420,000,000 And EBITDA was $104,000,000 or 7.3 percent of sales. 2nd quarter revenue included $74,000,000 related to the final cash settlement and cost reimbursement from the cancellation of offshore project offshore rig projects. Excluding the settlement, revenue rose 8% sequentially to 1 point Significantly outpacing the growth in U. S. Drilling activity. International revenues excluding the settlement improved only 1%, But we began to see international growth accelerate late in the Q2. 50% incremental margins were the result of better absorption across our manufacturing base, Better management of supply chain disruptions, price improvements in certain areas and cost savings initiatives, which have nearly achieved our target for the year. Efforts to improve capital efficiencies across the organization helped drive $177,000,000 in cash flow from operations. Capital expenditures totaled $49,000,000 resulting in $128,000,000 of free cash flow. During the second quarter, we redeemed the remaining 183,000,000 Our senior notes due in December 2022 and we ended the quarter with $1,600,000,000 of cash, dollars 1,700,000,000 of gross debt and only $114,000,000 of net debt. We expect working capital will continue to be a source of cash through the second half of the year. Moving on to segment results. Our Wellbore Technologies segment generated $463,000,000 in revenue during the 2nd quarter, An increase of $50,000,000 or 12% sequentially. Revenue improved 14% in North America and 10% in international markets As the early stages of a global recovery began to expand beyond the Western Hemisphere, an improved cost structure, higher volumes Pricing improvements more than offset inflationary costs and drove 58% incremental margins resulting in a $29,000,000 increase in revenue to $63,000,000 or 13.6 percent of sales. Our ReedHycalog drill bit business posted solid top line growth led by a 25% sequential improvement in U. S. Revenue resulting from improving activity and market share gains. Outside North America sales improved 10% Our downhole tools business reported a 13% sequential improvement in revenue with most major regions realizing double digit percentage growth, Improving adoption of our proprietary drilling tools that reduce trips, maximize hydraulic flow and reduce friction such as our SelectShift And our agitator product lines continued in Q2. Notably, the unit also realized a sharp increase in demand for fishing tools and service equipment in many regions, Higher volumes improved operational efficiencies and price improvements more than offset inflationary forces allowing the business to deliver strong incremental margins during the quarter. Our WellSite Services unit saw revenue growth in the mid single digits as our solids control business benefited from widespread activity growth, partially offset by continued COVID related disruptions. The disruptions included the suspension of a large project in Mozambique And the COVID related shutdown of 1 of our well site manufacturing facilities in Malaysia, requiring us to incur additional charges to Airfreight goods from our Conroe facility back to the Eastern Hemisphere. Well Site Services will benefit from improving global drilling activity, but unlike pure service operations, we also expect the business to benefit from an inflection in capital equipment sales as customers put rigs back to work and need to replace cannibalized shale shakers and centrifuges or equipment that has been sitting in idle saltwater environments. Demand for capital equipment began to show signs of life in the second quarter with bookings improving 1.7 times off the very low mark realized in the Q1 of 2021. Our MDtotco business realized a double digit sequential improvement in revenue with strong incremental margins. Revenue from surface sensor and data Acquisition sales and rentals improved 20% due to higher drilling activity and market share gains. The business unit's evolved digital drilling optimization service, Which utilizes our high speed telemetry wire drill pipe posted a modest sequential decline in revenue due to the timing of crews equipment transitioning to new projects after completing jobs as well as supply chain challenges affecting our ability to source certain high speed data networking components. Demand for this service remains robust and the business was recently awarded a new 3 year optimization project for a major operator in the North Sea. Our Tuboscope pipe coating and inspection business posted an 11% sequential increase in revenue with strong incremental margins during the quarter driven by a sharp increase in demand for our Tubular Coating Services across all major markets. We realized a disproportionate improvement in demand for our large diameter TK liner products, which are high performance glass reinforced epoxy liners that provide corrosion protection for tubular goods. In addition to the demand from geothermal markets that Clay mentioned, We're also starting to see U. S. Customers resume investments in large scale production infrastructure. We received an order for 121,000 feet 12 inches line pipe for saltwater disposal system in the Haynesville as well as an order for 14,000 feet of 16 inches line pipe for a system in the Permian. Tuboscope's tubular inspection operations grew at a more modest rate than its coating business, but realized solid demand from steel mills and outside pipe processors as they ramp up operations. Our Grant Prideco drill pipe business posted revenue growth of 11% on higher sales of drill pipe And the delivery of the industry's first £3,000,000 20,000 PSI rated landing string. Higher absorption and intense focus on cost controls And an improved sales mix drove very strong incremental margins. Demand from North America continued to outpace international and offshore markets in the 2nd quarter, But we expect to see international tendering activity increase during the second half of the year. While we're encouraged by the improving outlook, Stretched supply chains and lead times will limit the ability for new orders to improve revenue beyond the orders we currently have in our backlog. Additionally, we believe the significant increase in steel costs could slow tender awards while customers acclimate to a new pricing environment. While the stage is being set for a strong recovery in 2022, we expect limited revenue growth for our drill pipe business in the second half of twenty twenty one. For our Wellbore Technologies segment, we expect accelerating activity in the Eastern Hemisphere and modest improvements in the Western Hemisphere to result in 6% to 10% sequential growth in the Q3. We anticipate improved absorption rates and higher pricing will be partially offset by inflationary pressures, Ongoing raw material shortages and a less favorable product mix in our drill pipe business limiting incremental margins to the mid-twenty percent range during the Q3. Price increases in certain products together with disciplined cost management provide confidence in the segment's ability to achieve a mid teen EBITDA margin by year end. Our Completion and Production Solutions segment generated $497,000,000 in revenue during the 2nd quarter, An increase of $58,000,000 or 13 percent sequentially. Lower margin sales, inflationary pressures and operational disruptions limited incremental margins to 14%, resulting in EBITDA of $4,000,000 or 0.8 percent of sales. Orders improved 37% sequentially, totaling $462,000,000 for a book to bill of 167%. All but one business unit achieved a book to bill of above 100% And the step change in order intake resulted in the segment achieving its highest booking quarter since 2019. Backlog for the segment at the end of Our Intervention and Stimulation Equipment business posted solid improvements in capital equipment and aftermarket sales, Modest demand growth for pressure pumping equipment in the U. S. And improved deliveries of coiled tubing units into international markets boosted capital equipment sales. We're providing higher levels of quoting activity for pressure pumpers who need to replace or upgrade existing fleets. The pickup in inquiries is reflective of tightening supplies, Competition remains fierce with the most difficult competition coming from idle equipment. While idle equipment limits sales and pricing, It also creates opportunities for our aftermarket business. During the Q2, we achieved a notable sequential improvement in aftermarket sales as more customers look to put In addition to a higher number of jobs, we're also seeing an increase in the average sales ticket. The amount of effort required to get Working order along with the amount of cannibalization that is taking place tends to be strongly correlated to the amount of time equipment has sat against the fence line. We're encouraged by improving supply and demand dynamics as well as the growing opportunity to help customers improve operational efficiencies with our new Field trials for our e frac system have validated its ability to significantly reduce maintenance costs and increase pump volume Nearly 4 times compared to conventional equipment, while significantly reducing emissions. The system has successfully demonstrated its capabilities for Several large independent operators and is currently en route to a job for a major IOC where it will utilize line power from the grid. Our Process and Flow Technologies business experienced a high single digit decrease in revenue during the Q2. A significant pickup in sales from the unit's production and midstream offerings driven by North American customers, restarting investments in production related infrastructure was more than offset by operational challenges in several large projects. Security issues in Mozambique led to an indefinite suspension of a large gas treatment project And delays and cost overruns due in part to COVID related challenges adversely impacted 2 other projects. While some of these issues were outside of management's control, We're confident this business will deliver improved results in the back half of the year on better execution and a meaningfully improved backlog. Orders increased 2.6 times over the Q1 and our pipeline of opportunities remain strong. Our Subsea Flexible Pipe business posted a double digit sequential increase in revenue with strong incremental margins as the operation partially recovered from challenges associated with a new product that we described in Q1. Delays in final customer acceptance slowed production during the quarter, Order intake grew 85% sequentially, both of which should allow the unit to post better results in the 3rd quarter. Our fiberglass business unit reported a 13% sequential increase in revenue with solid EBITDA flow through despite continuation of global Supply chain and COVID related difficulties. Supplies of epoxy resin and glass remained limited and a spike in COVID cases in Malaysia led to the government Mandated shutdown of our manufacturing facility in the region. Through NOV's scale and nimble supply chain, we've been able to secure raw materials and shift manufacturing And regions that are less affected by COVID outbreaks in order to meet customer needs. Supply chain challenges have also resulted in higher costs. We've seen certain raw material prices increase upwards of 40% and shipping costs increase 4 fold compared to 24 months ago. To date, we've been successful in passing costs on to our customers, but the rapid rate of change is causing some customers to delay projects. We're also seeing deferrals of existing orders from our marine and offshore customers who are very reluctant to park their vessels for When they can capitalize on extraordinarily high shipping rates. Despite the difficult operating environment, our fiberglass business achieved its highest level of backlog in the last 5 quarters and we're finally beginning to see a pickup in demand from midstream customers in the U. S. For the Q3 of 2021, We anticipate revenue from our Completion and Production Solutions segment will improve between 5% to 10% sequentially with incremental margins in the low 30% range. Our Rig Technologies segment generated revenues of $487,000,000 in the 2nd quarter, an increase of $56,000,000 or 13% Sequentially, 2nd quarter revenues included $74,000,000 related to the final settlement from the cancellation of certain offshore rig projects. Excluding the impact of the settlement, revenues declined $18,000,000 sequentially to $413,000,000 as improving aftermarket sales and progress on land Rig projects were more than offset by lower offshore rig equipment sales. Adjusted EBITDA excluding $57,000,000 from the settlement improved $5,000,000 to $18,000,000 or 4.4 percent of sales due to a higher margin mix and improved operational efficiencies. Capital equipment orders for the segment more than doubled to $232,000,000 yielding a book to bill of 138%. As Clay mentioned, more than 50% of our Q2 orders related to wind installation vessel equipment where NOV's engineering designs and equipment continue to be the market Standards. Orders received in Q2 position us well to achieve our stated target of a $200,000,000 annual revenue run rate in our wind business by year end. While awards have been robust during the past 12 months, we expect this momentum to continue and see the potential for our wind related revenues to achieve a run rate of And reflected 3 drivers at work in the drilling space. 1 is the desire to reduce environmental impact, Which is driving sales of products such as our EcoBoost and our Power Blade Energy Recovery Systems. 2 is the need to improve operational efficiencies via digital technologies Automation, which is driving demand for products such as our Novos automation and control systems. And 3 is the need to replace or upgrade capital equipment to meet customer demands for the latest and most efficient technologies. Typically, the first rigs to be reactivated require the least amount of work And the capital intensity of projects grows significantly as customers work deeper into their stacks. While land rigs do not suffer from the same rate of Corrosion as offshore rigs, they do tend to suffer a great deal from cannibalization, which is becoming more apparent as our customers ask us to reinitiate Maintenance, refurbishment and reactivation services. A growing sense of optimism around improving activity, international land tenders the potential need for incremental rigs in Brazil, Guyana, the North Sea and even West Africa is catalyzing discussions around reactivations and upgrades while improving balance sheets Cash flows will enable the investments. During the Q2, our aftermarket sales improved 3% sequentially With spare part bookings growing 11%. While spare part orders remain lumpy, we anticipate aftermarket spending will move higher during the second half of the year as the industry continues its nascent recovery. Better orders and market sentiment give us greater confidence in improving outlook for our Rig Technologies segment 2022 and beyond, for the Q3, we expect revenues for our Rig Technologies segment to remain in line with the 2nd quarter, Excluding the impact of the settlement with margins that are flat to down 200 basis points. And with that, we'll now open the call up to questions. Thank you. Please stand by while we compile the Q and A roster. Our first question comes from the line of Ian Macpherson with Piper Sandler. Your line is now open. Thank you. Good morning, everyone. Morning, Ian. Good morning, Ian. Hi. I was a little surprised just at the end there, Jose, that RigTech revs will be down after the strong Q2 bookings, so maybe just a little flavor behind that please. And then just more generally, I wanted to ask if the strength in RigTech and Katz bookings in Q2 looks projectable into the back half and whether we should start to see Sustained revenue growth starting to kick in as you've described 2 or 3 quarters on lag after wellbore. It looks like Q2 orders support that, but just wanted to get more visibility into the back half of the year across those later cycle businesses. Yes. Good questions, Ian. So really as it relates to rigs specifically, the guidance is really for Revenues that were in line with the quarter excluding the impact of the settlement. So basically flattish type guidance. So really it sort of corresponds with exactly the heart of the bigger question, which is the timing related to the bookings that we're receiving. So Yes, we're in the process of rebuilding some of the backlogs that got fairly well depleted last year. That takes a little bit of time. We've had a couple of quarters in a row of a nice Pickup and see that trend continuing at least until the Q3 and likely well into 2022 and beyond. But you got to bear in mind that a lot of the projects that we're booking are very large scale long term projects that effectively have an S curve Type revenue profile, meaning starts off very small, builds up over time and then has a tail off as it reaches the end of the life cycle. And again, that tends to be on average for some of these bigger projects about a 2 year time horizon. Yes. That's for the wind vessels. Yes. As well as some of the larger projects within the caps segment. Yes. And your second question in terms of the outlook is that, yes, it remains pretty strong on both for rig, both the wind side In terms of continuing interest by the industry and adding capacity, we've got conversations underway with several Participants in that space as well as potential new entrants into the offshore wind installation space, and as well on the offshore rig side. As Jose mentioned, a lot of interest in potentially reactivating rigs and upgrading rigs and specifically adding pipe handling capabilities, automation, The OP upgrades, those sorts of things. And so, our outlook, it remains pretty constructive for the next couple of quarters. Excellent. Thanks, Clay. So very positive, not really surprising, but positive to hear that you're succeeding with your cost pass throughs In this very challenging cost and supply chain environment, is the nature of these pass throughs more of a variable Surcharge or is there some opportunity for you to put through pricing that's going to be stickier when the world Eventually calms down. We don't know if that'll be later this year, into next year, what have you. But just generally, maybe it's Too broad to generalize, but if you can, is it a sticky price increase or is it more of a variable surcharge environment for your business broadly? That's a great question, Ian. I would and it really varies by product line, by geography, and it has a lot to do with the supply and demand in those specific areas. What I tell you is that the phrase surcharge is a much easier sell in this market than price increase. We are getting some price increases, but I think most of these Our surcharges and as Jose mentioned too, during a downturn, you throw in a lot of freebies like mobilization, Maybe standby is free, those sorts of things, and we're clawing a lot of that back. And so those are effectively price for us, but we're sort of taking back some of the discounts effectively that were given through the downturn. So it really varies a lot. We're hopeful that this will continue and we'll be able to do some healing as we talked about in our prepared remarks and get margins to expand. But right now, it's just mostly sort of covering the inflation that we're seeing out there. Okay, got it. Thanks, Clay. You bet. Thank you. Our next question comes from the line of Chase Mulvehill with Bank of America. Your line is now open. Hey, good morning everybody. I guess, firstly, just wanted to talk about orders. Obviously, orders were pretty strong I'm in 2Q. Could you maybe just take a moment and talk about the sustainability of orders as we get into the back half of the year? And maybe I'm not sure if you're prepared to kind of give this number or not, but if we basically add up the large flexibles order and the turret order And the wind turbine installation vessel order, like how much did that amount to? And why I'm asking this is really what I want to is really kind of the base order rate and then we can kind of layer in some of the lumpier, larger orders that could hit in the back half of the year. Yes, I understand. And thanks for the question, Chase. I'm going to stop short to quantifying the specific contribution of those categories. I will though Reiterate a couple of things we said in our prepared remarks. One is in rigs orders, it was just a touch more than half The orders related to wind installation vessels and our outlook there remains very constructive. And so very pleased to see those large Projects moving forward and NOV strong participation in them. And just as a reminder, that can Depending on what parts of that vessel those vessels would be win, that can be upwards of $80,000,000 per vessel, if we win everything From design to jacking systems to handling equipment to cranes. And so but our outlook there remains Very strong and believe that the world needs something on the order of 2 to 3 dozen offshore wind installation vessels That's working off of a low single digit base right now. And I would add that the U. S. Needs Jones Act compliant when Installation vessels. And so we're building the 1st in Brownsville, Texas right now and expect more to be added. And so we Expect for really the next few years for that business to remain strong and robust. And then in addition, the rig equipment Area, our outlook there based on specific conversations with mostly offshore customers It's constructive as well. And so we expect the next couple of quarters at least in that area to remain strong too. And then turning to Completion and Production Solutions, pleased to see more activity, conversations Starting to heat up a little bit around, some of the projects around the globe. We think that's helped by Our customers' technical teams that are guiding and specifying and procuring the hardware around these project developments, Getting back in the office and interacting with each other, and I think that's helpful to our customers to actually move forward on FID in these projects. And A lot of things, as we mentioned, still move to the right, but pleased to see some of those flow. And then in addition, that sort of trend is translating through our offshore drilling Contractor customers who are now much more active with us in requesting engineering work be done on their rigs, looking at reactivations and upgrades That we referenced. So on the whole, hopefully we're pulling out of the big downturn from 2020 related to the pandemic. Still COVID is still out there, still affecting our operations, but generally I think moving into a period of much more constructive order outlook overall. All right. Perfect. Appreciate the color. The follow-up here is just really kind of when we think about the margin progression As we kind of go through the next few quarters, obviously, you've got a lot of friction, supply chain, raw material costs, things like that. Can you help us understand kind of how much of kind of this friction is kind of more temporary versus structural And how much of that structural inflation you can actually offset with higher pricing over time? Yes, we're pretty generally, when it comes to the inflation Question, it's probably an overgeneralization, but I think oilfield services broadly is better positioned than most industries To tackle and overcome inflation, and that's because it's such a volatile industry, it always has been. It's tied to the cyclicality of oil and gas That there's a lot of awareness across this industry of pricing leverage. And so I think it's in our DNA Broadly and in particular here at NOV. And so we're very tuned into our costs. We're actively managing this through conversations with our customers. It's helpful that the inflationary trends are so widely known and that our customers are seeing it in all areas of their business as well. And so that sort of facilitates the conversation. So I'm pretty confident we can manage through this, not to say we're not going to see some short term disruptions here or there, But we'll be able to manage through the inflationary headwinds. But on the whole, we think that the outlook remains good. Things are getting more constructive. The short term headwinds that we faced in the 1st and second quarter, Really not entirely, but clearly mostly related to COVID impacts on our fabrication Operations in Asia and the Far East on a couple of specific projects that Jose mentioned, that's weighing on the margins. And frankly, those continued into July, into the Q3. And so we're going to Continue to see those be a little bit of a headwind and trying to manage through it. And then it's kind of the secondary effects of COVID On supply chain, so being on allocations for fiberglass, for resins, for certain epoxies, For many of the raw materials as well as the subassemblies, components that we buy, is a headwind as well, which is Sort of a second derivative of COVID that's a challenge as well. Those are temporary. They should dissipate. When they do, then I think we'll be able to get back to a more normalized, Healthier margin level and looking forward to that. Thank you. Our next question comes from the line of Neil Mehta with Goldman Sachs. Your line is now open. Thank you. Good morning, team. So I want to start off on Good morning. I want to start off on offshore wind. You provided the $350,000,000 to $400,000,000 run rate by the end of 2022 on the call. Can you help us understand the mix there? Are you expecting to see increased wind vessel installation numbers above the $200,000,000 or are there other items That we should think of incremental to the $200,000,000 And just in general, how should we think about the margins on those type of orders? Yes. Hey, Neil, I may not have perfectly understood your question in terms of the composition, but what we're talking about there is Purely related to, the offshore wind installation opportunity set that is in front of us. Every month, every quarter, it seems like, the opportunity set has continued to grow. And so we're really pleased with the way that that business is shaping out and we just wanted to make sure that people understood that we're not topping out at that 2 $50,000,000 a year run rate at the end of this year and that's it, but the opportunity set continues to grow and we'll continue to have a nice growth profile through the course Of 2022. And so that does not include the potential for other opportunities Within the wind space, whether it's floating wind type opportunities or things that we're doing related to land market related Wind activities. And then your question about the margin, I think in the past we've said That in a lot of respects, an average installation vessel for us is very similar in size as well as Really margin profile to a super high spec jackup rig. So it's a nice business and a nice opportunity for us. Yes. One really interesting thing that we're hearing as well, and as we described in the past, and I know you're Familiar with is that the world sort of building out this fleet to handle the much larger turbines that are going in offshore that are as tall as a 50 story building at the hub height And has an inadequate fleet to install that. And those sort of next generation Turbines are just now being started to be built and supplied by the OEMs. The industry is already thinking about sort of the next generation beyond And to the extent that comes about and now we're talking about not 13, 14 megawatts, but 20 or maybe 25 megawatt towers, That too is going to require even larger vessels, bigger handling equipment, larger cranes and the like. And so there is a potential follow on opportunity beyond sort of the current Number of vessels that we see as being required to support the industry's installation of these offshore these fixed offshore wind power generation assets. That's really helpful. I think it sounds like the $350,000,000 $400,000,000 is baseline, but there Some incremental opportunities that could make this an even bigger business, a bigger part of your business. The follow-up is, obviously, There's been a lot of OPEC headline volatility here over the last couple of weeks. But the output Is one that's very clearly positive for Middle East activity. How do you see NOV is Position to capture, some of the increase in activity in the Middle East and any comments You can have around some of the conversations you're having with your customers there. Yes, very good question, Neil. We're very excited about the Middle East, In part because if you look back at where we have really expanded our footprint and our capabilities, it's Clearly been that region, the GCC area, and Saudi Arabia in particular, But our presence across the GCC is much, much larger than it was 5, 6, 7 years ago. And so we've invested in A number of new manufacturing and field support operations across that region. We have our joint venture with Aramco to manufacture 50 High spec land drilling rigs as well as support additional offshore rig building for the region. And so I think we're really, really well positioned to capitalize on that region's move towards a higher level of activity. What we've been hearing lately through the first half of the year is sort of this accelerating interest in getting back to work there. And so there have been a number of high Profile projects, that have some of the NOCs around the region have announced that they're that were suspended Through COVID, they are sort of getting back to work now, and that's in addition to sort of standard kind of oilfield day to day work, which Shows up at NOV in the form of tenders around components that are used in Operations. So think in terms of annual or biannual tenders for bits, for fishing tools, for downhole drilling motors, those sorts of things. Recently, we've had inquiries from a handful of smaller service companies that work in the region around Well servicing equipment and they're being told by one of the large NOCs in the region that they need to increase their fleet of equipment to support unconventional Drilling and completion activities. And so, we're in conversations with them about supporting their efforts in that area, As well as there's not a lot going on in the land drilling space for our Rig Technology Group right now, except in that region where There's a couple of inquiries around additional land drilling assets. And so on the whole, very excited about the outlook For the Middle East that it's getting back to work following a big shutdown due to COVID. I will add the region has very close ties to India. And so when India's COVID became more tense, here a couple of months ago that it did affect operations in the Middle East, but hopefully we're starting to put that behind us. Thanks guys. Thank you. Our next question comes from the line of George O'Leary with TPH and Company, your line is now open. Good morning, Jose. Hey, George. I don't want to put the cart before the horse and look out too far, but just thinking about Q4 2021 and the level of orders you guys linked in this quarter, just curious if you have any sense for how robust Year end sales could be versus history of George, are you there? We're getting a weak connection with you. George, can you hear us? It looks like George has been disconnected. I'll move on to our next question. Our next question comes from the line. I was about to say, sorry, George, please dial back in. We'll try to get your question answered. So Sorry, Sarah, go ahead. No problem. Our next question comes from the line of Marc Bianchi with Cowen. Your line is now open. Hi, Marc. Hey, thanks. Hey, guys. So there's several issues with the supply chain, right? There's inflationary pressures in terms of price and the cost of stuff. There's COVID issues that you talked about sort of disrupting sort of functionality of the supply chain. And then I suspect there's just other capacity utilization issues that have disrupted How much putting the pricing increase and the cost of stuff aside, just the disruption to activity and if you have to Move manufacturing to another part of the world or you have to expedite stuff from across the world to one other place. How much is that weighing on your margins right now? If I take the guidance, kind of implies like a 4% to 5% EBITDA margin for the Q3. I'm just kind of curious if all this disruption were out of the way, what kind of margin rate will we be seeing? Mark, it's a great question. It's extraordinarily difficult to answer, other than to say, We go through intensive detailed reviews with 18 business units every quarter. And I would tell you, it came up in every single business unit. We a lot of time talking about it, because it's kind of everywhere. The shutdown of the global economy in 2020, it's hard to overstate how That's been to a tightly wound global supply chain and we're seeing it kind of all over the place. That's not to say we're not managing through it. I think our folks are doing a great job Covering inflation with price increases and surcharges like we talked about earlier. They're doing a great job finding alternative ways to meet the needs of our customers, Fine alternative suppliers. Our scale is really helping out here a lot. But It's sort of a really, really extraordinarily challenging time coming off of an extraordinarily challenging event. But what I would say is that the allocations in certain raw materials, the difficulty of getting certain Subcomponents and the difficulty of getting integrated circuit boards are more challenging than just the straight costs That we're seeing, the cost, like I said, we're more or less able to cover that through pricing and surcharges, but it's the disruption because we need all of the parts to The modules that we put together, the products that we deliver before we can deliver that. So we're short One component, well, that disrupts our production schedule and is a problem. So I would add to that, this global supply chain that was so tightly wound pre pandemic It was really facilitated by a robust ecosystem of industrial suppliers and distributors. And in 2020, they all found their business under a lot of pressure and so many of them depleted their inventories as well. So in sort of normal times, you have industrial distributors of steel, of all these components of sub assemblies and the like, Who would absorb shocks from either the production side of things to the extent shocks would arise from time to time Or on the demand side of things, but they performed a very important sort of shock absorber function. And when they depleted their inventories in 2020 and inventories are still very, very lean. They took out sort of one of the shock absorbers That NOV and other industrial manufacturers relied upon. And so, that's another sort of factor that's exacerbating the challenge here. But Very, very proud of NOV's ability to manage through this, to creatively work through new solutions and to access What we need, where we need it and to try to stay ahead of the challenges. And like I said, I think we're getting better at it. Q2 was a little better than Q1 and so we're working our way through it. Yes, super. I mean, I guess related to that, Chase asked a question earlier about order progression and I think you guys mainly responded to rig. But Just in terms of caps, I mean, is this issue, the supply chain issue something that we should think about, maybe limiting the caps order progression In 3rd Q4 or could we still see the $400,000,000 to $500,000,000 kind of level that you did this quarter? We remain pretty bullish on Demand, the oilfield is kind of waking up and North America got back to growth late 2020. The sort of inflection that we feel like we're moving through now is that international markets and just to some degree, offshore markets as well I feel like they're starting to go up. And so we remain optimistic about orders for caps through the back half of the year. Great. Thanks so much, Clay. You bet. You bet. Thank you. Thank you. Our next question comes from the line of Vebs Vaishnav with Coker and Palmer. Your line is now open. Hi, Vebs. Hi, gentlemen. Hey, how are you doing? You for taking my question. So maybe if I try to think about what is the underlying profitability of the business, Not today. Obviously, we are still trying to improve on And activity and everything. But if I think about, let's say, in next 2, 3 years, can we get back to the 15% plus EBITDA margins We saw back in 2013 to 2015, given how much cost we have taken out. I'm going to stop sort of forecasting that. But if you look back at our long term track record, which Vebs, I know you're familiar with, and we've demonstrated Very strong profitability, when in better parts of the cycle. And so I think that's very reasonable. It's not hard to construct a scenario where, yes, we get back to 15% EBITDA margins. We're also Very focused on return on capital. And I would tell you at that level and a little higher level of revenue, we would be earning very good returns On total book capital and which is obviously our goal. And so yes, a lot of structural Heavy lifting since the 4th sorry, since the Q1 of 2019, we've taken out nearly $850,000,000 of costs, Which are structural costs and so our business is a lot better, it's a lot more efficient, as well as we've made all these investments in digital capabilities, And new automation capabilities and renewables capabilities and the like. And so I think the company is really pretty well positioned to deal with a better market. And I know everybody is aware of this, but probably worth noting, we just moved through a year that saw record low levels of rig activity dating back to When records began being kept in World War II, negative oil prices, I mean, it's just an extraordinarily historically bad downturn In the oilfield. And so we're coming off of that. And so, we're a long way from being in the good part of the cycle, but looking forward to getting there and generating a lot better financial Thanks. And maybe in the same vein, given how we are changing business more revenues coming from the wind I don't know if it changes the margin profile, but if I think about the free cash flow margins longer term, how should we think about NOV's free cash flow margins, this free cash flow over sales given the We've been liquidating working capital Through the downturn and one of the things that we're most proud of is the fact I think we're a lot better at working capital management and Which is generating good free cash flow for the business. But as Jose mentioned, we're down into the high 20% range As a percent of annualized run rate revenue run rate now for working capital, expect further improvements and expect working capital to continue to be a source of cash. And so it's really those processes and those disciplines that are embedded in the business now that I think will help maximize performance in a better market environment. Yes. And the other thing I might add, Vebs, is and maybe I'm not sure you're getting at this in your question at all or not, but something to be aware of We've historically been a very, very capital efficient business, right. Clay talked about the improvements that we've made structurally related to the focus that we've had on working capital, but also as you sort of alluded to the changes in our business and the portfolio that will occur over time related to the energy transition, one of the things that we're really excited about is the ability to leverage our existing skill sets as well as our existing asset base To capitalize on those opportunities, so really no virtually no incremental capital required to pursue those And while this year, frankly, our capital spend was higher than otherwise would have been because of one unique opportunity with the Saudi rig manufacturing plant. We expect to remain back in the 2.5% to 3% capital expenditures to revenue run rate type spending going forward. That's a good point. Thank you for taking my questions, gentlemen. You bet. Thanks, Vebs. Thanks, Vebs. Thank you. Our last question will come from the line of Stephen Gengaro with Stifel. Your line is now open. Thanks. Good morning, gentlemen. Hi, Stephen. Two things. 1, following up on the prior line of questioning. The balance sheet is obviously in good shape. You're Generating cash, how do you think about the uses of cash as we go forward here over the next 1 to 2 years? Yes. It's a good question, Stephen. And look, I think we've been pretty clear in the not so distant past and we've been pretty consistent over the last Several years regarding how we think about capital allocation hierarchy. And we continue to remain Very focused on achieving our gross debt to EBITDA target of 2 times or better over time. However, as you pointed out, balance sheet is in great shape and you can really be, I guess, rest assured That we're not going to stockpile excess of cash as we move forward in time. So our outlook seems to improve Day by day, which is wonderful, but given that we're only 1 quarter removed from breakeven EBITDA, There's still a little bit more work and healing that we want to have come into the equation. And there's still, as we've talked about during Call some uncertainties related to the emergence of the Delta variant that keeps sort of rearing its head and causing some disruptions. But it feels like everything's headed in the right direction, and really ultimately it's going to depend on the trajectory that takes hold in 2020 2 and beyond. So if it's a very, very steep trajectory, we might have some working capital needs that we need to fund Or we could end up in a position where we have quite a bit of excess capital that will need to and will return to shareholders. Also, we maintain a strong balance sheet for a number of reasons, but one of those reasons is to be able to remain To maintain our ability to play offense even in the depths of a downturn, which I think we've done pretty effectively over the last Clay highlighted a lot of new products and technologies that we've been working on and developing and it's their time to shine in improving Market opportunity. So we want to continue to be opportunistic as it relates to being able to fund high return investment opportunities. And We really are thinking about it, but being 1 quarter away from EBITDA, it's probably a little premature to outline A specific plan to return capital, but it certainly is something that we review just about every quarter with our Board and that conversation will remain A good topic. Yes. Great. Thanks. And then just one other quick one. On Rig Systems, The non backlog revenue in the quarter was pretty strong in the second quarter. Is there anything that I should be reading into that as far as going forward? Or was there anything that Pushed that number up artificially in the quarter? Yes, aftermarket was up a little bit. And Yes. As we mentioned, our bookings for spare parts, mostly offshore, have been up double digits last 2 quarters. Okay, great. Thank you, gentlemen. Thank you, Stephen. You bet. Thank you. Thank you. This concludes today's question and answer session. I will now turn the call over to Clay Williams for closing remarks. Thank you, sir. We appreciate everyone joining us this morning. Look forward to updating you on our Q3 results in October. So have a great rest of the week. Thank you.