Q2 2021 Nov Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the <unk> second quarter 2020.
<unk> 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.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone 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 <unk> second quarter 2021 earnings Conference call with me today are clay Williams, our chairman President and CEO.
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..1 should assume these forward looking statements remain valid later in the quarter or later in the year for more detailed discussion on the merger.
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 2021, you know we reported revenues of $1.4 2 billion and a net loss of 26 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.
Later on the call we'll host a question and answer session. Please limit yourself to 1 question and 1 follow up to prevent more participation now let me turn the call over to clay. Thank you Blake during.
During the second quarter of 2021, Nov's consolidated revenue increased.
<unk> percent sequentially, and EBITDA improved to $47 million, 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 to offset the inflation, we're seeing in most product lines.
8 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, these execution strengthened through a quarter of continuing supply chain challenges and COVID-19 disruptions.
We are pleased to see orders for both our rig technologies and completion and production.
We shouldn't 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 second 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 buildout of an offshore wind power toolkit.
The company's portfolio of technologies developed over the past several years position us extraordinarily well to capitalize both on the oilfield recovery underway as well as the enormous energy transition.
In the next 5 years look very very interesting for us.
Like global manufacturers across all industries, we experienced supply chain disruptions throughout the second quarter and we expect these challenges to persist into 2022.
When he steel mills that supply Nov's bespoke metallurgy along.
<unk> chemical facilities and plants that supply 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 quadruple our 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 have been placed on allocations, but thankfully the scale has enabled us to elbow our way to the front of the line. So we think we are better position than our smaller.
While our competitors are size of 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.
Prompting greater customer interest in some of the new automation products. We are now introducing to the market, which reduced the need for field labor, but as we get back to growth in our factories, we are finding it challenging to attract workers as well.
<unk> is trying to stay ahead of the inflation threat brought on by labor and raw material constraints by passing along these courses.
As price increases on.
Our success is very 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 oilfield equipment and consumables I think bits drilling motors fluid ends.
Is approaching depletion offering.
Offering the first opportunities in many quarters to heal pricing and profitability as the North American marketplace continues to get more active in offshore and international markets start to recover.
The marginal cost of returning idled oilfield equipment much of which has been cannibalized from stripped of consumables during the downturn grows rig by rig frac spread.
By Frac spread as the industry steadily goes back to work.
Covid measures continued to impact operations around the world 2 of our large composite pipe plants in the far east were shutdown in late second quarter and remained closed until late last week operations in India, The middle East parts of Europe, and Canada all experienced.
Covid disruptions, a greater or lesser degrees and generally did a better job of anticipating and managing through these obstacles in the second quarter.
Our second quarter results on Instructive reminder of the cyclical behaviour of our segments. Wellbore technologies is most closely tied to drilling and is an early cycle beneficiary of rebounding.
Covid buying activity, having bottomed in the third quarter of last year.
Its last 2 quarters has seen it put up double digit topline growth at greater than 50% EBITDA leverage benefiting from the outstanding execution of cost reductions through the downturn.
As well as selective 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 first quarter of 2021, and both posted double digit topline growth in the second quarter book to bills above 100% for both in the second quarter also support our outlook.
On an all 3 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 to national oil companies returning to work in fits and starts around the world with tenders being let for hopefully a broader.
What a resumption of activity in 2022, barring additional COVID-19 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 in moving to the right overall, excluding the rig cancelation in obese consolidate.
<unk> North American revenues increased 22% in the second quarter and international revenues increased 1% consolidated offshore revenues declined 5% sequentially in the quarter with.
Within our completion and production solutions 6 of 8 businesses posted sequential revenue growth every business unit with the exception of our intervention and stimulation equipment business.
Bill ratios above 100%.
In addition to navigating supply chain issues. The segment made good progress on technical developments, when it's ideal <unk> offerings and its renewables portfolio, particularly in the carbon capture space.
A little more than half of rig technologies second 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 enquiries around rig reactivation and more engineering work, we are being asked to do around upgrading gop's automating pipe handling and.
Adding crown mounted compensator 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 Adobe team continues its development of high value solutions that support the energy transition and I wanted to share a couple of updates during.
During the quarter, we advanced conversations with 1 of the largest solar EPC providers to develop a solar panel tracking system and in the accompanying supply chain. We are 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 orders soon.
This crane underpins a clever new installation method that will facilitate the adoption of toller lower cost land towers that we are working with Keystone tower systems to manufacture at our facility in Pampa, Texas that we've described on previous calls we successfully tested our new inline chain tension or that will be used to facilitate the offloading of floating wind turbines.
And entered into an agreement with cerulean wins 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.
<unk> M. A C team has been working with a customer to design and deliver a proprietary system that automatically tilts and Orient a ceiling mask improving.
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 shifts carbon footprint by 40% to 50%.
There's also a lot happening in the geothermal market.
Moving to our REIT HEICO log PDC cutter technology continues to drive improvements in economic returns for the geothermal industry and tubes scopes TK liner product line is becoming an indispensable piece of large geothermal projects internationally as evidenced by contract awards this quarter for approximately 60000 feet of large diameter.
<unk>.
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.
<unk> 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 these engineering and manufacturing expertise to the energy transition continues to unearth compelling path to future growth turning back to our traditional oilfield markets. Despite all the downsizing we've executed.
Product past several years, our sustained investments in R&D now provide <unk>, an outstanding portfolio of new products and technologies that position us well as we move into a recovering oilfield market.
Our <unk> 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 <unk> and third parties. These include optimization apps that utilize high speed data from the bottom of the hole transmitted through Nov's <unk> wired drill pipe network currently providing higher levels of efficiency and safety to several critical north sea rigs and our rig in Saudi Arabia.
<unk> 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 powerplay in eco boost products and subscribers to Nov's rig century predictive analytics product. The oilfields 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&P e&ps to scope and develop the <unk>.
Peter we're also bringing new directional drilling tools like our proprietary agitator friction friction reduction tools are select shift downhole adjustable bent sub our vector series of rotary <unk> tools and market, leading drilling motors and <unk> tools.
And it will be read HEICO log leads the industry in bit and cutter technology, having lifted its mark.
Ada Verder materially through superior performance over the past several quarters on the Frac side, we're excited about the prospects for Nov's ideal Frac technology as well as our proprietary quick latch connection systems Flex connect Frac hoses and the digital enhancements, we are developing around monitoring controls and predictive.
Market share in this space.
After several years of cost cutting restructuring pivoting and innovating and Ob has reset and transformed its business utilizing new developments and 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.
Analysts, we've developed ways to reduce their carbon impact and we are winning over new customers, who are building out new forms of low carbon energy as the world continues to heal from the COVID-19 pandemic and the global economy tries to recapture some sense of normalcy Adobe is poised to benefit in both our traditional oil and gas businesses and.
<unk>, our new newer ventures in the renewable space.
I'm enormously proud of and I know these 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.
And required to cultivate these opportunities it's our fantastic team of employees, who will make them on to those of you listening. Thank you.
With that I'll turn it over to Jose. Thank you clay for the second quarter of 2021, Nov's consolidated revenue rose, 13% sequentially to 142 billion.
And EBITDA was $104 million or 7.3% of sales.
Second quarter revenue included $74 million 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 $1.3 4 billion.
And EBITDA was $47 million or 3.5% of sales.
Consolidated U S revenue increased 27% sequentially 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 second quarter.
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 million in cash flow from operations capital expenditures totaled $49 million, resulting in a $128 million of free cash flow during the second quarter, we redeemed the remaining $183 million of our senior notes due in December 2022, and we ended the quarter with $1.6 billion of cash.
$1.7 billion of gross debt and only $114 million 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 million in revenue during the second quarter, an increase of 50 million.
5 more 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 and.
On an improved cost structure higher volumes and pricing improvements more than offset inflationary costs and drove 58% incremental.
Margins, resulting in a $29 million increase in revenue to $63 million or 13, 6% of sales.
Our REIT HEICO log 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.
Improved 10% sequentially with our NOC customers signaling an intent to continue increasing activity over the next several quarters.
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.
Sales of semis hydraulic flow and reduce friction such as our select shift and our agitator product lines continued in Q2 new.
Notably the unit also realized a sharp increase in demand for fishing tools and service equipment in many regions indicative of what we believe is customers beginning to restock depleted worn out equipment after years of Underinvestment.
Mark 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 well site 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-19 related disruption.
On 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.
Well site services will benefit from improving global drilling activity, but unlikely.
Rupture on 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.
Pure is 1.7 times off the very low mark realized in the first quarter of 2021.
<unk> M D Taco 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 market share gains.
The business unit's evolve digital drilling optimization service, which utilizes our high speed telemetry wired drill pipe posted a modest sequential decline in revenue due to the timing of crews and 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.
Improving 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 tuba scope 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.
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.
Sure. We received an order for 121000 feet of 12 inch line pipe for saltwater disposal system in the Haynesville as well as in order for 14000 feet of 16 inch line pipe for our system in the Permian.
<unk> tubular inspection operations grew at a more modest rate than its coating business, but realized solid demand from steel.
Steel mills and outside pipe processors as they ramp up operations.
Our grant <unk> drill pipe business posted revenue growth of 11% on higher sales of drill pipe and the delivery of the industry's first 3 million pounds 20000 Psi rated landing strength.
Higher absorption and intense focus on cost controls and.
Infrastructure sales mix drove very strong incremental margins day.
A man from North America continued to outpace international and offshore markets in the second quarter, but we expect to see international tendering activity increased during the second half of the year.
We are encouraged by the improving outlook stretch supply chains and lead times will limit the ability from new orders.
Orders to improve revenue beyond the orders we currently have in our backlog. Additionally.
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 2021.
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 third quarter, we anticipate improved absorption rates and higher pricing will be partially offset by inflationary pressures ongoing raw material shortages and a less.
Less favorable product mix in our drill pipe business limiting incremental margins to the mid 20% range during the third quarter.
Price increases in certain products together with disciplined cost management provide confidence in the segment's ability to achieve mid teen EBITDA margin by year end.
Our completion and production salute.
<unk> generated $497 million in revenue during the second quarter, an increase of $58 million or 13% sequentially.
Lower margin sales inflationary pressures and operational disruptions limited incremental margins to 14%, resulting in EBITDA of $4 million or 8% of sales orders improved.
<unk>, 77% sequentially totaling $462 million for a book to bill of 167%, all but 1 business unit achieved a book to bill of above 100% and a step change in order intake resulted in the segment achieving its highest booking quarter since 2019.
Backlog for the segment.
<unk> third quarter was just north of $1 billion.
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 coil tubing units into international markets boosted capital equipment sales.
We're providing higher levels of.
Quoting activity for pressure pumper, who need to replace or upgrade existing fleets.
The pickup in inquiries as reflective of tightening supplies, but competition remains fierce with a most difficult competition coming from idle equipment.
While idle equipment limit sales and pricing it also creates opportunities for our aftermarket business.
During the second quarter, we achieved a notable sequential improvement in aftermarket sales as more customers look to put equipment back to work in.
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 equipment 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 technologically advanced product offerings, such as our ideal E. Frac system quick latch, Frac hose and our digital services.
Trials for.
Brack system have validated its ability to significantly reduce maintenance costs and increased 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 in route to a job for a major IOC.
Or are equal utilized line power from the grid.
Our process and flow technologies business experienced a high single digit decrease in revenue during the second quarter, 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.
Correctional 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-19 related challenges adversely impacted 2 other projects or some of these issues were outside of managements control. We're confident this business will deliver improved results.
On the back half of the year on better execution, and a meaningfully improved backlog.
Orders increased 2.6 times over the first quarter and our pipeline of opportunities remains strong.
Our subsea flexible pipe business posted a double digit sequential increase in revenue with strong incremental margins as the operation partially.
<unk> recovered from manufacturing challenges associated with a new product that we described in Q1.
Delays on final customer acceptance slowed production during the quarter, but order intake grew 85% sequentially both of which should allow the unit to post better results in the third quarter.
Our fiberglass business unit reported a 13% sequential increase.
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 menu at manufacturing facility in the region.
Through <unk>.
Scale on nimble supply chain, we've been able to secure raw materials and shift manufacturing plants in regions that are less affected by COVID-19 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 increased 4 fold compared to 24 months.
Months ago.
To date, we've been successful in passing costs onto 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 upgrades 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 third quarter of 2021, we anticipate revenue from our completion and production solutions segment will improve between 5% to 10.
10% sequentially with incremental margins in the low 30% range.
Our rig technologies segment generated revenues of $487 million in the second quarter, an increase of $56 million or 13% sequentially second quarter revenues included $74 million related to the final settlement from the cancellation.
Relation of certain offshore rig projects, excluding the impact of the settlement revenues declined $18 million sequentially to $413 million as improving aftermarket sales and progress on land rig projects were more than offset by lower offshore rig equipment sales.
Adjusted EBITDA, excluding $57 million.
From the settlement improved $5 million to $18 million or 4.4% of sales due to a higher margin mix and improved operational efficiencies.
Capital equipment orders for the segment more than doubled to $232 million, yielding a book to bill of 138%.
As clay mentioned more than 50% of.
Q2 orders related to wind installation vessel equipment, where <unk> engineering designs and equipment continues to be the market standards on.
<unk> received in Q2 position us well to achieve our stated target of a $200 million annual revenue run rate and 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 a wind related revenues to achieve a run rate of between 350 and $400 million by the end of 2022.
Encouragingly capital equipment orders also improved sequentially and reflected 3 drivers at work on the drilling space.
1 is the desire.
To reduce environmental impact, which is driving sales of products such as our eco boost in our apparel blade energy recovery systems.
2 is the need to improve operational efficiencies via digital technologies, and automation, which is driving demand for products such as our novo's automation and control systems and 3 is the need to replace or upgrade.
<unk> from equipment that has been stacked or inadequately maintained.
Rigs that were stacked during the downturn will need to be reactivated recertified and in many cases upgraded to meet customer demands for the latest and most efficient technologies.
Typically the first rigs to be reactivated they require the least amount of work and the capital intensity of projects.
Capital is significantly as customers work deeper into their stacks.
While land rig do not suffer from the same rate of corrosion is 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.
Grooving activity international land tenders, and the potential need for incremental rigs in Brazil, Guyana, the north Sea and even West Africa, It's catalyzing discussions around reactivation and upgrades, while improving balance sheet and cash flows will enable the investments.
During the second quarter, our aftermarket sales improved 3%.
Round and 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 an improving outlook for a rig rig technologies segment in 2000.
In 'twenty 2 and beyond.
For the third quarter, we expect revenues for our rig technologies segment to remain in line with the second 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 to ask a question.
You will need to press Star then 1 on your telephone to withdraw your question. Please press the pound key.
Standby, while we compile the Q&A roster.
Our first question comes from the line of Ian Macpherson with Piper Sandler Your line is now open.
Yeah.
Thank you and good morning, everyone. Good morning Ann.
Hi.
I was little surprised just at the end there.
I'd say that rig tech reps would be down after the strong.
Q2 bookings, so maybe just a little flavor behind that please and then just more generally I wanted to.
If the strength in rig tech end caps bookings in Q2.
<unk>.
Projected ball 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 the Q2.
Ask support that but just wanted to get more.
Visibility into the back half of the year across those later cycle businesses, yes.
Yes, good good good questions and so really as it relates to rig specifically the guidance is really for.
Revenues that were in line with the quarter, excluding the impact of.
2 orders on that so basically flattish.
<unk> guidance and really it sort of corresponds with exactly the heart of the bigger question, which is the timing related to the bookings that were that were receiving so we're on 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.
Several quarters in a row of a nice pick up and see that trend continuing at least until the third quarter and likely well into 2022 and beyond.
But you've got to bear in mind that a lot of the projects that we're booking are very large scale long term projects debt effectively have an S curve type revenue.
New profile, meaning starts off very small builds up over time, and then has a tail off as it reaches the end of the lifecycle and again that tends to be on average for some of these bigger projects about a 2 year time horizon.
That's for the wind vessels, yes.
As well as all of that.
As well as on the larger.
<unk> with them within the caps segment, yes.
Yes.
Your second question in terms of the outlook as 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.
Okay.
Participants on 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 specifically.
Specifically, adding pipe handling capabilities automation.
But the op upgrades those sorts of things and so our outlook.
Pretty constructive for the next couple of quarters.
Excellent thanks, Bryan so.
Very positive not not really surprising that policy to hear that you are succeeding with your cost pass throughs from this very challenging cost.
<unk> and supply chain environment.
Is the nature of these pass throughs more of a variable surcharge or are you or is there some opportunity for you to put through pricing thats going to be stickier.
On the World eventually comes down but don't know if that will be later this year into next year, what have you, but just.
Costly maybe its 2.2.
2 broad generalized but if you can is it a sticky price increase or is it more of a variable surcharge environment for.
New business globally.
That's a great question Ian.
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 would tell you is that the phrase surcharge is a much easier sell in this market and price increase we are getting some price increases, but I think most of these are our surcharges and as Jose mentioned 2 during a downturn you're throwing a lot of freebies like mobilization Navy standby as free those sorts of things.
Just Jim requiring a lot of that back.
So those are effectively price increases for us, but we're sort of taking back some of the some of the discounts effectively that were given through that through the downturn. So it really it really varies a lot. We're hopeful that this will continue and we'll be able to.
Do some 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 net debt, we're seeing out there.
Okay got it thanks Clay you.
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.
Firstly, just wanted to talk about orders.
Obviously orders were pretty strong in <unk>.
<unk> could.
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.
We add up the large but flexible as orders.
The current order.
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 understand 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.
Yeah, I understand and thanks for the question Chase I'm going to stop short of quantifying.
Specific contribution of those those categories I will though.
Reiterate a couple of things we said in our prepared remarks, 1 is in rigs orders. It was just a touch more than half of the orders related to wind installation vessels in our outlook there.
Very constructive and so very pleased to see those large projects moving forward in <unk> and will be strong participation in them and just as a reminder, that can depending on what parts of that vessel those vessels will be when that can be upwards of $80 million per vessel, if we win everything.
There remains on designed jacking systems to handling equipment.
The 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 and Thats working off of a low single digit base right.
Al.
And I would add debt.
The U S needs Jones Act compliant wind installation vessels and so we're building the first.
In Brownsville, Texas, right now and expect more to be added and so so we.
Specced for really the next few years for that business to remain.
Right now long and robust and then in addition, the rig equipment.
Area.
Our outlook there based on specific conversations with mostly offshore customers.
As constructive as well and so we expect the next couple of quarters at least in that area to remain strong.
2.
And turning to completion and production solutions.
Pleased to see more activity conversation starting to starting to heat up a little bit around.
Some of the projects around the globe.
We think thats helped by our customers technical teams that are 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 thats helpful too to our customers to actually move forward on these projects and so.
A lot of things as we mentioned still move to the right, but pleased to see some of those flow.
In addition.
What a trend is translating through our offshore drilling contractor customers, who are now much more active with us in and requesting engineering work be done on their rigs looking at reactivation and upgrades.
We reference so on the whole yes.
Hopefully, we're pulling out of the big downturn.
From 2020 related to the pandemic still.
Covid, it's still out there still affecting of our operations, but generally I think moving into a period of much more constructive order outlook overall.
Alright, perfect appreciate the color.
Follow up here is just really kind of think about the margin progression as we kind of go through.
And then in 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.
Through debt with higher pricing over time.
Yes, we're pretty generally when it comes to the inflation question.
It's probably an over generalization, but I think oilfield services broadly is better positioned than most industries too to tackle and overcome inflation and that's because it's such.
All the volatile industry always has been it's tightened tied to the cyclicality of oil and gas that theres a lot of awareness across this industry of of pricing leverage and so so I think it's in our DNA broadly and in particular here at <unk> and so we're very tuned into our costs. We are actively managing.
Such as through conversations with our customers.
It is 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 thats 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.
That's right.
We will be able to manage through the.
On the inflationary.
Headwinds, but but on the whole.
On.
We think that.
The outlook remains good.
Things are getting more constructive.
On the.
The short term headwinds that we faced in the first and second quarter.
Really not entirely but it's clearly mostly related to COVID-19.
Impacts on our fabrication operations in Asia, and the far east on a couple of specific projects that Jose mentioned.
<unk> is weighing on the margins and frankly.
Those continued into July into the third quarter and so we're going to continue.
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-19 on on supply chain. So.
Being.
The patients for 4 fiberglass resins for certain of Pax seats for many of the raw materials as well as the.
Subassemblies components that we buy.
As a headwind as well, which is sort of a second derivative of COVID-19.
Thats a challenge as well those are temporary they should dissipate when.
On out and I think we'll be able to get back to a more normalized healthier.
Yeah.
Margin level and looking forward to that.
Thank you.
Our next question comes from the line of Neil Mehta.
Welcome.
They do your line is now open.
Thank you good morning team.
So I wanted to start off on more on and I want to start off on the offshore wind you provided the $354 million run rate by the end of 2022 on the <unk>.
Can you help us understand the mix there or are you expecting to increase.
Greece when vessel installation numbers above the $200 million or are there other items debt.
We should think of as incremental to the $200 million and just in general how should we think about the margins on those type of orders.
Yes.
I mean on perfectly understood your question.
<unk>.
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 day.
Every every month every quarter it seems like the opportunity set has continued to grow and so we're really pleased with.
In terms of that business is shaping out and we just wanted to make sure that people understood that we're not topping out at $250 million a year run rate at the end of this year on that said that the opportunity set continues to grow and that will continue to have a nice growth growth profile through the course of 2022.
And so that does not include.
The way 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.
A lot of respects.
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.
What is really interesting.
Quick 1 really interesting.
The thing that we're hearing as well as we described in the past and I know you are familiar with the world sort of building out this fleet to handle the much larger turbines that are going in offshore that are.
<unk>, a 50 story building at the hub height and has an inadequate fleet to install.
Install that.
And those those.
Sort of next generation turbines are just now being started started to be built and supply by the Oems. The industry is already thinking about sort of the next generation beyond that and to the extent that comes about and now we're talking about not 13, 14 megawatts, but 'twenty 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.
Our generation assets.
That's really helpful.
Thank you.
<unk> it sounds like the $350 million $400 million baseline, but there are some incremental opportunities.
It could make this an even bigger business is a bigger part of your business.
On the follow up is.
Obviously, there has been a.
Lot of.
OPEC headline volatility here.
Last couple of weeks the output is 1 that's very clearly.
Positive for Middle East activity, how do you see <unk>.
<unk> is positioned to capture.
The increase in activity in the middle East and any comments you can have around some.
Year over locations Youre, having with your customers there, yes, very good question Neal 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.
In Saudi Arabia.
In particular.
But our presence across the GCC is much much larger than it was 567 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 the Ram co to manufacturer 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 debt regions move towards a higher level of activity.
We've been hearing lately.
Through the first half of the year.
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 <unk> around the region have announced that they are that were suspended through COVID-19 that are sort of getting back to work now.
And that's in addition to sort of standard kind of oilfield.
Good day work, which which shows up.
At <unk>.
On the form of of tenders around components that are used in operation. So so I think in terms of annual or biannual tenders for bids for fishing tools for downhole drilling motors those sorts of things.
Data simply we've had 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 1 of the large in a season in a region that they need to increase their fleet of equipment to support unconventional.
Drilling and completion activities and so.
Realizations with them about about supporting their efforts in that area.
As well as.
Theres not a lot going on in the land drilling space for our rig technology group right now except in that region, where there is a couple of inquiries around additional land drilling assets and so on the whole very.
<unk> comment about the outlook for the middle East that it's getting back to work following a big shut down.
Due to Covid, we will add the region is very close ties to India, and so on India Indias Covid situation became more tense here.
Here are a couple of months ago did affect operations in the middle East, but hopefully we're starting to put that behind us.
Thanks Curt.
Thank you.
Our next question comes from the line of George O'leary with TP <unk> Company. Your line is now open.
Great Good morning Jose.
Hey, George.
Okay.
Cargo from the courts.
We're excited to farm.
Thinking about Q4, 'twenty, 1 and the level of orders and guidance in this quarter.
Just curious if you have any sense for how robust your npls.
<unk> history.
Sure George are you, there, where we're getting on weak connection with you.
George can you hear us.
And it looks like George has been disconnected.
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 questions answered so good.
Sorry, Sir go ahead.
No problem on next.
It comes from the line of Mark Bianchi with Cowen. Your line is now open.
Hi, Mark Thanks.
<unk>.
So there's several issues with the supply chain right. There's inflationary pressures in terms of price on the cost of stuff. There's COVID-19 issues that you talked about sort of disrupting sort of functionality.
Reality of the supply chain and then I suspect there's just other capacity utilization issues that have disrupted the supply chain, how how much putting the pricing increase in 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 1 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 third quarter I'm just kind of curious if all this disruption we are out of the way what kind of margin rate will be seeing it.
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 and we spent a lot of time talking about it.
Because it's kind of everywhere.
The shutdown of the global economy in 2020 is hard to overstate how.
Disruptive that's been to.
Tightly wound global supply chain, and we're seeing it kind of all over the place that's not to say we are 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 are doing a great job finding alternative ways to meet the needs of our customers.
Hi.
Hey suppliers, our scale is really helping out here a lot.
But but it's it's it's sort of a really really extraordinarily challenging time coming off of a extraordinary extraordinarily challenging event.
But.
What I would say is that the allocations in certain raw materials.
Aerials or difficulty of getting certain sub sub components and the difficulty of getting Inc.
Graded circuit boards.
On our more challenging than just the straight costs that we're seeing on the cost like I said, we are more or less able to cover that through through pricing and surcharges, but it's the disruption because we need all.
All of the parts to the.
The modules that we put together the products that we deliver before we can deliver that so were short 1 component well that disrupts our production schedule and has a problem. So.
I'd add to that.
Yes.
This global supply chain that was so tightly wound pre pandemic 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.
And so in the sort of normal times, you have industrial distributors of steel of all these all these components of sub assemblies and alike, who would absorb shocks from either the production side of things to the extent chucks would arise from time to time or on the demand side of things, but they performed a variant.
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 1 of the shock absorbers that debt debt <unk> and other industrial manufacturers relied upon and so.
That's another sort of factor that's exacerbating the challenge.
But very very proud of <unk> ability to manage through this.
Creatively.
Through new solutions into access.
What we need where we need it and to try to try to stay ahead of the.
The challenges and like I said, I think we're getting better at it Q Q2 was a little better than Q1.
And so.
We're working on our way through it.
Super.
I mean, I guess related to that <unk> asked the question earlier about order progression I think you guys mainly responded to rig but just in terms of caps.
This is this issue of the supply chain issue something that we should think about.
Maybe limiting the caps order progression in third and fourth quarter or could we still see the 400 to 500 kind of level that you did this quarter.
We remain pretty bullish on demand the oilfields kind of waking up and North America got back to growth late 2020.
Sort of the inflection that we feel like we.
We're moving through now is the international markets.
To some degree offshore markets as well are electric starting to go up and so so we remain optimistic.
Orders for cash through the back half of the year.
Great. Thanks, so much clay you bet you bet. Thank.
<unk>.
Thank you.
Our next question comes from the line of debt fashion off with Coker <unk> Palmer. Your line is now open.
Hey, how are you doing thank you for taking my question.
So.
Maybe if I try to think about what is the underlying.
<unk> profitability of the business not duty.
Obviously the guidance.
On it still trying to.
Trying to improve on activity on everything, but if I think about net in next 2.3 years it.
Can we get back to that 15% plus EBITDA margins, we saw back in 2013.2000 <unk>.
Given how much cost we have taken out.
I'm going to stop short of forecasting that but if you look back at our long term track record, which beds. I know you are familiar with and we've demonstrated very strong profitability.
When.
And.
Parts of the cycle and so so I think that's very reason its not hard to construct a scenario, where we get back to 15% EBITDA margins.
Also very focused on return on capital on I would tell you at that level and a little higher level of revenue we would be earning.
Good returns on.
On total book capital and.
Which is which is obviously our goal.
And so yes, a lot of structural heavy lifting since the fourth sorry since the first quarter of 2019, we've taken out nearly $850 million of costs.
Which are structural cost and so our business is a lot better a lot.
More efficient.
As well as we've.
Made all these investments in digital capabilities in new automation capabilities in renewables capabilities and the like and so I think the company is really pretty well positioned to deal with a better market.
I know everybody is aware of this but probably worth noting we just move through a year that saw record low.
Low levels of rig activity dating back to.
When records began being kept them where were 2 negative oil prices I mean, it's just an extraordinarily.
Historically bad downturn in the oil field and so we're coming off of that and so we're a long way from being in a good part of the cycle, but looking forward to getting their engineering a lot better financials.
Yeah.
Thanks and may be in the same vein given how we are changing business more revenues coming from the wind vessels.
I didn'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 free.
Free cash flow margins.
The resulting zone.
Yes.
Given what we've been we've been liquidating working capital through the downturn and 1 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.
<unk>.
We're down to 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 will 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 better.
Market environment.
The other thing I might add.
Maybe not.
Im not sure Youre getting answers your question.
At all or not but something to be aware of is.
We've historically been a very very capital efficient business right you talked about the improvements that we've made structurally related to the.
So 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 1 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.
Required to pursue those.
And while.
This year frankly, our capital spend was higher than it otherwise would've been because of 1 unique opportunity with the Saudi.
Rig manufacturing plant, we expect to remain.
Focus on the.
2.5% to 3% cap.
Capital expenditure revenue run rate type spending going forward.
I think that's a good point, thank you for taking my questions gentlemen.
You bet, Thanks, Matt Thanks, Adam.
Thank you our last question will come from the line.
Line of Stephen <unk> with Stifel. Your line is now open.
Thanks, Good morning, gentlemen.
Steven.
2 things 1.1 following up on on the prior line of questioning.
Balance sheet is obviously in good shape, you're generating cash.
How do you think about the uses of cash as.
As we go forward here over the next 1 to 2 years.
Yes, good question Stephen.
I think we've been pretty clear.
And 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.
New 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 sheets in great shape, and you can really be I guess.
Rest assured.
We're not going to stockpile.
Excess.
Cash as we move forward in time so.
Our outlook seems to improve day by day.
<unk>.
Wonderful, but given that we're only 1 quarter removed from from breakeven EBIT.
There's still a little bit more work on healing that we want to have come into the.
Yes equation and there is still as we've talked about during this 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 is headed in the right direction.
And really ultimately going to depend on the trajectory that takes hold in 2022.
And beyond so if it's a very very steep trajectory, we might have some working capital needs that we need to 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 we'll return to shareholders.
Also.
We maintain.
<unk> and balance sheet for a number of reasons, but 1 of those reasons is to be able to remain.
To maintain our ability to play offense, even in the depths of the downturn, which I think we've done pretty effectively over the last several years you know clay highlighted a lot of new products and technologies that we've been working on and developing and it's their time to shine.
On an improving market opportunity. So we want to continue to be opportunistic as it relates to being able to fund high return investment opportunities. So.
We really are.
Thinking about it but being 1 quarter away from from EBITDA, its probably a little premature to outline.
A specific plan to return on capital, but it certainly is something that we review just about every quarter.
With our board and that conversation will remain.
Good topic.
Great. Thanks, and then just 1 other quick 1 on rig 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.
Aftermarket was up a little bit.
As we mentioned our bookings for spare parts, mostly offshore been up double digits.
Past 2 quarters.
Okay, great. Thank you gentlemen, thank you Steven 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 third quarter results in October.
Have a great rest of the week. Thank you.
Ladies and gentlemen, this concludes today's conference call.
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