Q2 2023 NOV Inc Earnings Call
Okay.
Welcome everyone to <unk> second quarter 2023 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.
Meaning of the federal Securities laws.
Risks and uncertainty and actual results may differ materially no. One should assume these forward looking statements remain valid later in the quarter or later in the year for a more detailed discussion of the major risk factors affecting our business. Please refer to our latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission.
Our comments also include non-GAAP measures.
Conciliations 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 2023, <unk> reported revenues of $2 9 billion and net income of $155 million or <unk> 39 per fully diluted share.
Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release later in the call. We'll host a question and answer session. Please limit yourself to one question and one follow up to permit more participation now let me turn the call over to clay. Thank you Blake for the second quarter of 2023, we reported fully diluted earnings per.
Share of <unk> 39.
And EBITDA of $245 million on revenues of $2 1 billion. Adjusted EBITDA was the highest that we've seen since 2019 and earnings per share were the highest since the third quarter of 2015.
Second quarter revenue increased 7% sequentially and increased 21% compared to the second quarter of 2022 EBITA margin was 11, 7% of revenue up 180 basis points from the first quarter of 2023.
Sequential EBITDA leverage was 38% and year over year leverage was 26% on the 21% topline gain measuring from our pandemic low point in the first quarter of 2021 revenues have improved 68% off bottom driving 29% EBITDA leverage.
Book to Bill came in just shy of one but overall combined orders in the second quarter were up slightly compared to the first quarter levels.
While lower gas prices and tepid oil prices drove north American activity and ordering lower in the second quarter International and offshore activity continued to gain momentum our customers are mobilizing for significant offshore and international drilling campaigns over the next few years, which will require <unk> support.
We were pleased to see progress continue around the normalization of our supply chain in the quarter, but rapidly compressing delivery schedules for certain raw materials, we buy led to higher inventories this quarter up $163 million sequentially as inbound inventory receipts jumped while revenue grew 7% sequentially inventory increased 8%.
Sequentially with a work in process portion of inventory growing 13% sequentially.
There are three reasons for the increase first we are catching up on receipts of castings and forgings.
<unk> shutdown drove many foundries out of business foundries, which cast high strength steel and specialized molds to make custom critical parts for our specialized products, specifically steel castings, arriving during the quarter accelerated for top drive <unk> spherical <unk> mission flow products, and elevators, which underpin high production levels at certain.
Rig technologies plants, we will continue to reposition our supply chain for castings for additional product lines like pumps and iron Roughnecks through the remainder of the year, which we expect to keep inventories elevated through the third quarter before rolling over in the fourth quarter, which should see substantially improved cash flow as a result.
Wellbore technologies inventories increased sequentially as we received bar stock and heavy walgreen tubes related to the drill pipe disruptions, we had in the first quarter.
Drill pipe backlogs up nearly $90 million year over year. These inventories will flow out over the next couple of quarters also contributing to improving cash flow finally, while supplier reliability and lead times are broadly improving.
We are still fighting to catch up in certain component categories, we can't ship products unless they are 100% complete so.
So we have only 99% of components for one of our products in hand, it cannot be completed instead, it will reside and work in process inventory until the final part arrives.
The supply chain challenge also increased our contract assets another contributor to working capital by $67 million sequentially as milestone payments on large projects were delayed pending receipt of final components.
While we were pleased to see more critical inputs, arriving at our plants the supply chain related increases contributed to a disappointing rising consolidated working capital and working capital intensity, which increased from 31, 1% of annualized revenue in the first quarter to 32, 7% in the second quarter since our backlogs are strong in <unk>.
Demand high we expect this to be a temporary condition related to the normalization of our supply chains, which should begin to turnaround later in the year.
Turning back to the P&L, we can see the benefits of improving supply chain rolling through our results.
Wellbore technologies posted 8% sequential growth at 53% leverage our sharply improved sequential steel receipts and corresponding drill pipe shipments, which helped push EBITDA margins up to 24%.
The completion and production solutions segment posted 5% sequential top line growth at 43% leverage which improved EBITDA margins by 170 basis points from the prior quarter year over year. The group was up 18% at 33% leverage supply chain improvements within our XL systems in fiberglass businesses helped drive the strong.
Results out of the completion and production solutions segment Rick.
Our rig technology segment grew 10% sequentially, but only had 4% leverage due to a couple of items first sequentially higher expenses related to a full consolidation of our Keystone wind turbine towers startup business in the renewable energy space was a significant drag.
Additionally, poor mix within capital equipment, specifically more offshore crane revenue and less offshore rig revenue associated with 20000 Psi upgrades.
And a poor mix with an aftermarket which saw higher mix of lower margin service and repair revenue contributed to the low leverage nevertheless, growing availability of castings forgings and other components are expected to lift rig technologies fourth quarter exit margins up into the low to mid teens, while it is encouraging to see nov's consolidated EBITDA margins improved sequentially.
Margin still remain below where they should be in a moment Jose will offer you forward guidance, which points to stronger performance in the back half of the year, particularly in the fourth quarter. Nevertheless, we see opportunities for further improvement and have begun executing additional cost reduction measures, which will run throughout the next four quarters, which we estimate will contribute another $75 million annually.
To drive better margins and returns upon the completion of our cost reduction program. Many of our challenges have been symptomatic of the later cycle capital equipment sales nature of our business, while oilfield service companies have pledged not to spend capital their customers. The E&P companies are like what they see when they look at the technologies we've developed.
They are requiring and some demanding theyre well construction service providers enhance the efficiency of their operations and reduce their greenhouse gas emissions within Ob technology. The result is that momentum in our business is building post pandemic demand has been rising as a result backlog is up 32% for rig technologies, excluding the large Saudi order for <unk>.
<unk> 50 rigs, we won in 2017 and up 96% for completion and production solutions since the low point of the first quarter of 2021.
Wellbore technologies is benefiting from high offshore and international interest and more environmentally sound drill cuttings management and greenhouse gas reduction technologies by E&ps.
Which helped drive significant topline growth and leverage for our well site services business unit turning to drill bits advancements in PDC cutters have produce many record bit runs for <unk>, resulting in significant market share gains in a number of key markets at premium pricing, including Wellbore enlargement reamers offshore during the second quarter, our mechanical lock.
Cutter technologies have reduced our cost and improved our utilization of under reamers for PDC bits, we expect proprietary graphene cutter technology that we've been developing for the past few years to drive further gains through better performance at reduced costs for our beds, while also allowing <unk> to capture premium pricing <unk> presence in the digital space <unk>.
<unk> to grow as one of our major North Sea E&P customers extended its contract for wired drill pipe high speed data transmission from their bottom hole assemblies. It along with other offshore E&P operators continue to standardize on our proprietary wire drill pipe service for drilling efficiency and safety.
Our cloud based edge computing services also continued to gain traction.
<unk> coiled tubing customers are using our Max completions technology.
<unk> and optimize 169 units in the field and <unk>.
Users of this product more than doubled in the quarter to nearly 2700.
More major oil companies are utilizing our edge to cloud products to manage remote operations in real time with nearly 200 assets connected to the cloud between E&P and oilfield service customers.
Technology continues to see strong demand for real time monitoring of rigs around the world, including performance optimization tracking required by some IOC and automation lifecycle management for drilling contractors to achieve better asset efficiencies.
<unk> is also seeing high interest in its automated robotics products, having sold packages for six rigs with the first offshore system installed and commissioned in the second quarter.
Operators are pressing for reduced greenhouse gas emissions, leading to high interest in our powerplay product, which significantly reduces power consumption and diesel costs for offshore drillers.
Looking ahead in the near term, we believe North America land operations will continue to slow in the third quarter pending higher commodity prices, but our drilling contractor customers are keeping rigs ready for a resumption of higher activity in 2024 importantly, we expect international and offshore markets to overcome these near term North American headwinds as most nics.
Offshore focused ioc's are pressing forward with aggressive campaigns, specifically, we were pleased to see growing activity in West Africa Asia, The North Sea and offshore Mexico and continued strength in the Middle East, Guyana, Brazil, and North Africa as major project FID does grow we see a strong sales pipeline emerging for our gas.
<unk> and <unk> products, which typically lag by six months to 18 months, having delivered our fourth new land rig into the Saudi market and with lots of interest in digital technologies across the region. We.
We are ready to drive substantially improve drilling efficiencies for <unk> around the golf.
As a leading independent provider of essential technologies and equipment for what is probably the world's most essential industry position.
Positioned to benefit from years of under investment as the industry equips itself to meet the challenges of providing energy security before I turn it over to Jose for those employees listening today I want to thank you for all that you do to take care of our customers and keep their programs on track you are simply the best in our customers. Appreciate you and I want you to know that I do too.
Then I'll turn it over to Jose thank.
Thank you clay Nov's consolidated revenue totaled 2.09 billion, a 7% sequential increase and a 21% increase compared to the second quarter of 2022.
Revenue related to offshore activity grew 18% sequentially and revenue from international markets grew 9%.
Despite industry activity levels that declined in the U S and a tougher than average Canadian spring breakup revenues from North America improved 4% during the second quarter.
Adjusted EBITDA for the second quarter totaled $245 million or 11, 7% of sales representing an incremental flow through of 38% sequentially.
While our margins are moving in the right direction and the later cycle nature of our business is starting to gain momentum from the significant growth in offshore and international markets. We're not content with our performance as clay mentioned, we're focusing on improving the margins in our business and have begun implementing strategic actions, which will lead to approximately $75 million of annualized savings within the next two.
<unk> months.
These initiatives coupled with a strong outlook for the fourth quarter should lift our consolidated EBITDA margins into the low teens in the fourth quarter and set us up for stronger results in 2024.
They cover the primary reasons for our increase in working capital, which resulted in a $72 million use of cash from operations. During the quarter. This increase is transitory and should begin to unwind later this year, while working capital metrics are expected to improve by year end, we do not expect to return to our normalized levels of working capital until mid year 2012.
Four we continue to expect a strong exit to the year with revenues, 5% to 10% higher than Q2 levels.
Additionally, we anticipate up to $50 million in cash expenses related to our cost savings program. The combination of these incremental cash costs continued topline growth and above normal working capital levels will likely cause us to fall short of prior full year free cash flow expectations. We now expect free cash flow to be roughly breakeven for the year.
However, this leaves us very well positioned for 2024 during which we anticipate free cash flow will exceed 50% of our EBITDA.
Moving on to segment results.
Our Wellbore technologies segment generated $804 million in revenue during the second quarter, an increase of $59 million or 8% compared to the first quarter and an increase of 21% compared to the second quarter of 2022 revenue growth was supported by activity gains in the international and offshore markets, particularly in the middle East in Africa and by a strong recovery.
Covering from the disruptions we had in our drill pipe business. During the first quarter. The segment also not solid revenue growth in North America. Despite softening activity levels due to continued market share gains in several business lines.
EBITDA improved $31 million to $164 million or 24% of revenue, representing 53% EBITDA flow through resulting from strong execution by our team, which was able to capitalize on rapid if uneven improvements in the global supply chain and obtain more appropriate pricing for our differentiated technologies.
Our <unk> business posted double digit sequential revenue growth with very strong EBITDA flow through achieving record high revenue and EBITDA the unit capitalize on improving demand in the eastern hemisphere with strong sales into the Middle East Asia, and Africa, which more than offset revenues from North America that declined in line with drilling activity levels the business.
Unit continues to see growing adoption rates for digital solutions and realized 32% sequential growth in revenues from its Max digital platform and as highlighted in the earnings release also entered into a global cloud agreement with a major IOC that will utilize a broad spectrum of the capabilities from our Max platform, including our kaizen intelligent driller optimize.
Well data for point of remote drilling monitor and rig <unk> 4.0, electronic drilling the quarter to improve its operational efficiencies.
Our downhole tools business reported revenue growth in the low single digits with outsized incremental margins mid teens growth in the eastern hemisphere, driven by strong fishing drilling tool sales in key middle Eastern markets and Asia more than offset softer results in the western hemisphere.
Revenues in the U S declined only 1% despite a 5% decrease in drilling activity levels and improving supply chain enabled the operation to significantly ramp manufacturing throughput of its high spec rotors and status for serious 55 drilling motor enabling the business to capitalize on ample demand for the product and capture additional market share are.
Motor runs per active U S drilling rig increased double digits sequentially in the premium product helped drive the improved margins for the business unit. We expect continued market uptake of our premium technologies and typical seasonal activity increases to drive continued growth for this business through the back half of the year.
Our rate hike log drill bit business posted strong sales into the middle East and Africa and continued market share gains in North America offset activity declines in the U S and Canada like our downhole business <unk> revenue per rig increased double digits. The result of the businesses technology leadership, which drives better performance in the world's most challenging formations.
As previously disclosed we are currently pursuing litigation against several companies involving royalties due under licenses related to certain bit leaching technologies developed by REIT hike log during the second quarter of 2023, the company accrued an incremental $10 million of receivables owed by non paying licensees, which represents approximately one.
Half of the revenues recognized during the quarter related to leaching technology licensing agreements for decades. The REIT HEICO log team has been responsible for developing generations of industry, leading drillbit technology and as clay highlighted we continue to push the leading edge of the bit space and expect our upcoming generation of technology to continue driving outsized performance for our.
<unk>.
Our well site services business reported high single digit sequential revenue growth with strong incremental flow through improving demand for solids control equipment and services in the eastern hemisphere and growing demand for our managed pressure drilling product offering more than offset a slowing north American market.
As the offshore recovery continues to gather momentum. This business is very well positioned to benefit recent investments in MPD and waste disposal technology, along with strategic investments in key markets such as Guyana should result in outsized growth for this business in the coming quarters.
Our tube scope pipe coating and inspection business posted mid single digit sequential revenue growth was solid Incrementals inspection service operations posted improved revenues in all regions, including the U S where drill pipe that is increasingly run hard and extended lateral wells is driving greater demand for drill pipe threading machining services coding revenues improved.
On higher demand for drill pipe coating services, partially offset by lower sales of pipe sleeves, and glass reinforced epoxy liners relative to the very strong shipments in the first quarter. We're also realizing strong demand for our TK $3 40, Tc low thermal conductivity coding, which was originally introduced for geothermal applications while <unk>.
<unk> has been solid and geothermal markets more oil and gas operators are realizing excellent value from our proprietary coding and hot rock formations. This coding protects bottom hole assemblies by maintaining a lower fluid temperatures, which has led to operators realizing 20% improvements in rates of penetration in these harsh environments, while we believe lower <unk>.
Manufacturing activity and continued softening of drilling activity in the U S will negatively impact the second half key international markets, including Brazil, and the middle East should more than offset these declines driving modest revenue growth and a slightly improved sales mix.
Our grant <unk> drill pipe business executed a meaningful recovery from the vendors disruption that left the operations short on bar stock for tool joints in the first quarter, resulting in the business achieving its highest revenue in the last eight years and its highest level of profitability since 2014.
After an exceptional first quarter of bookings orders declined modestly demand in the eastern hemisphere in offshore markets remains solid, but lower drilling activity in the U S is resulting in contractors beginning to use pipe from stacked rigs and defer new orders looking ahead, we anticipate a slight decline in revenues for this business during the third quarter, but a solid backlog and demand.
From International markets has the business well positioned to deliver a sizable increase in revenues in the fourth quarter.
For our Wellbore technologies segment, we expect building momentum in international and offshore activity to offset declines in the U S, resulting in third quarter revenue and EBITDA that is approximately in line with the second quarter. We also expect the building momentum in international and offshore markets to more than offset bottoming North American activity, resulting in the segment delivering fourth quarter revenue.
That is 5% to 10% higher than the second quarter, our completion and production solutions segment generated revenues of $753 million in the second quarter of 2023, an increase of 5% compared to the first quarter and an increase of 18% compared to the second quarter of 2022.
Revenue growth was the result of an improving supply chain for XL systems in fiberglass.
Progress on projects and backlog and opportunities in international markets.
EBITDA for the second quarter was $69 million or nine 2% of sales up $15 million from the first quarter and up $37 million from the second quarter of 2022.
Sequentially EBITDA flow through of 43% resulted from a better sales mix and improved project execution.
While capital equipment orders for North America has softened in certain large offshore <unk> of slipped demand from international and offshore markets remain solid driving $450 million orders, an increase of 11% compared to the first quarter and bringing the portion of our backlog related to international projects up to 75%.
Our XL systems conductor pipe connection business continues to capitalize on the early stages of a robust offshore recovery posting a strong sequential increase in revenues in its fourth straight quarter with a book to bill of over 100% led by growing demand from West Africa.
Activity remains high which should result in continued solid intake during the third quarter. We expect results for XL systems business to decline modestly in the third quarter, but the operation is preparing for a significant increase in shipments in the fourth quarter that will support significant drilling programs in 2024.
Our subsea flexible pipe business posted a low single digit increase in sequential revenue during the second quarter, while order intake declined we do not believe our bookings were representative of underlying fundamentals, we see rapidly growing demand for flexible pipe at a time when excess industry capacity has been absorbed operators are struggling to understand the rapid change in pricing.
Amex, which resulted in multiple large tenders not being awarded after bids came in at pricing that was well above operators budgets.
We do not believe this reflects loss work and these projects are expected to move forward. However, there are likely to be slight delays in the award processes as operators adjust their budgets for our flexible pipe market is quickly gone from having ample excess capacity the industry demand exceeding capacity.
We're increasingly confident that our deliberate approach in which projects we sign up will allow us to realize meaningful improvements in this operations margins as we transition from projects that originated during the depths of the downturn to projects that are now being signed in a much healthier market environment.
Our process and flow technologies business posted a mid single digit sequential increase in revenue with improved progress on our wellstream processing projects, partially offset by small declines in the business units APL and production and midstream operations.
Orders for the business unit increased more than threefold sequentially, representing the best bookings quarter for this business in two years, our wellstream processing operation booked an order for a sizeable mono ethylene glycol regeneration reclamation unit for the North Sea and our APL operation received an order for a submerged swivel in yoga destined for a project in West Africa.
While operators remain somewhat cautious due to global economic uncertainties the pipeline of potential offshore projects continues to grow similar to our subsea business. We expect the rapidly improving market environment for this business to result in meaningful margin expansion during 2024.
Our intervention and stimulation equipment business realized a slight sequential decrease in revenue with lower deliveries of pressure pumping equipment, mostly offset by higher aftermarket sales and strong deliveries of coiled tubing equipment.
This more favorable business mix drove a modest sequential increase in EBITDA.
Declining completions related activity in North America broke the business unit streak of six straight quarters with a book to bill of greater than one while quoting activity declined only 4% and the average size of opportunities increased orders for new equipment pushed out at service companies focused on their existing asset base driving incremental demand for aftermarket spare parts and service.
<unk>.
Demand from international and offshore markets remains healthy, which led to solid orders for our coiled tubing wireline and pressure control equipment.
Our fiber glass systems business posted a high single digit increase in revenue with strong incrementals softening demand.
<unk> in the North American oil and gas market was more than offset by robust sales in the chemical and industrial markets, which included the businesses initial shipments of FM 49 to two compliant fume and smoking source composite dux for a major semiconductor manufacturers chip foundry. The first of several large projects, we believe our fiber glass systems business will see.
Port.
Additionally, the operation realized higher demand for scrubber systems in Asia, while the North American oil and gas markets have softened demand remains robust in the middle East and North Africa, which we expect will drive strong results in the second half of 2023 for the business unit.
For our completion and production solutions segment, we expect growing demand from improving offshore markets will offset softer conditions in North America, resulting in third quarter results that are in line with the second quarter. However building momentum in offshore markets are giving us growing confidence in the segment's ability to achieve low double digit EBITDA margins by year end.
Our rig technologies segment generated revenues of $606 million in the second quarter, an increase of $56 million or 10% compared to the first quarter and an increase of $144 million or 31% compared to the second quarter of 2022.
The sequential increase in revenue was driven by greater levels of service and repair work in our aftermarket business and higher revenue conversion from our backlog of capital equipment projects, adjusted EBITDA increased $2 million sequentially and $30 million year over year to $71 million or 11, 7% of revenue at.
As clay mentioned incremental EBITDA flow through was limited.
Due in part to a less favorable sales mix and higher startup costs related to our new wind tower venture.
New orders totaled $222 million, representing a book to bill of 108% and total backlog for the segment at quarter end was $2 89 billion bookings declined $29 million sequentially due to a sizable order for wind installation vessel equipment in the first quarter that did not repeat however orders for our rig equipment were solid and we booked 11 top tier.
<unk> and 10 iron Roughnecks for land rigs in the Middle East several automation packages for offshore rigs and eight of our new electric lattice boom cranes for multiple operators, we're capturing a strong market position in this growing zero emission market niche for our all electric cranes based on our unmatched reliability.
The early phase of a robust recovery in offshore exploration and development is underway driving an increasing pace of offshore drilling tendering activity. After numerous bankruptcies in 38, Drillships a number equal to over half the drillships working today that were scrapped over the past eight years available rigs are increasingly hard to come by consequently, we have seen.
<unk> offshore drilling day rates continue to inflect higher with some of our key customers announcing drillship contracts in north of $500000 per day in recent weeks expectations are for rates to continue to rise in order to incentivize additional rig reactivation as the low hanging fruit has mostly been pulled out of the stack.
Additionally, confidence in the long term sustainability of the cycle combined with concerns related to rig availability is also causing the length of contract terms to inflect with a recent contract extending out to 2029.
There are limited number of remaining Drillships that are not spoken for and are either warm stacked or in yards waiting to be completed and cold stack rigs will require significantly more capital to get back into proper working condition and to outfit with the latest technologies that operator's desire.
As we help our customers dig deeper into the stack of rigs to reactivate, we expect to see an increasing number of opportunities with large larger scopes and expect projects to include a growing amount of associated capital equipment orders.
While the outlook is promising our aftermarket business is already benefiting from growing rig reactivation and the continued normalization of maintenance capital spending by drilling contractors.
Spare part bookings increased for the sixth consecutive quarter and revenues from both our service and repair operations grew approximately 17% sequentially.
With increasing manufacturing throughput, we expect to realize a greater pace of higher margin spare part deliveries in the second half of the year.
While orders for our marine construction business were down sequentially due to the lack of a wind installation vessel award during the quarter were actively engaged in a number of tenders and are optimistic about the order outlook for this piece of the business in the second half of 2023 and beyond.
King out to the latter part of this decade, there is still a projected shortfall in vessel capacity for the number of projects that have been sanctioned developers continue to list the inability to contract adequate wind construction vessel supply as one of their chief operational concerns a fear we're more than happy to help alleviate.
Looking forward, we believe accelerating production and an improved mix in both our aftermarket and our capital equipment operations will translate into improved results for our rig technologies segment in the coming quarters for the third quarter. We expect revenue for the segment to grow approximately 5% with incremental margins in the 30% range. We expect the segment to have an additional 5% to 10% sequential.
Growth into the fourth quarter and end the year with low teen EBITDA margins.
While the midpoint of our segment level guidance implies a very modest improvement in our consolidated company results. During the third quarter, we believe the combination of improving international and offshore markets and the proactive measures, we're taking to improve our profitability will drive meaningful improvements in the fourth quarter, resulting in EBITDA in the $300 million range and setting.
US up for even better performance and stronger cash flows in 2024 with that we'll open the call to questions.
Thank you.
To ask a question. Please press star one on your telephone.
And then wait for your name to be announced to withdraw your question. Please press star one again.
As a reminder, we ask that you. Please limit yourself to one question and one follow up question before returning to the Q1 moment, while we compile our Q&A roster.
Our first question is going to come from the line of Marc Bianchi with TD Cowen. Your line is open. Please go ahead.
Hey, thanks.
I wanted to first ask about the supply chain challenges that you guys have had.
Then a few different ones I think they are probably.
Very unique in there.
And Theyre description, but just broadly speaking why do you think <unk> has struggled so much with this over the past several quarters.
What gives you confidence that we won't see that going forward.
Well first mark.
As we noted in our prepared remarks, we made good headway, particularly through the last two quarters on accessing and particular castings and forgings, which has been a particular.
Supply chain challenge.
Pandemic as I noted drove a lot of foundries out of business and so.
He's out there with other industrial manufacturers trying to reposition supply chains qualified new foundries painted castings that we need these are all very specialized.
Custom.
<unk> that these foundries cash for all of us, but stepping back and looking at <unk>.
I think the largest manufacturer in oilfield services with a very broad portfolio of products and so for instance, within rig technologies alone. We had something like 250000 different discrete things that we buy to support our our product lines.
Out there and and included in that are very exotic steels that maybe only one mill in the world.
Produces.
<unk> in that are very high performance.
<unk>.
<unk> on for instance, in gaskets and O rings and.
Items like that were also a major purchaser of fiberglass for instance, I think we by $1 million.
We buy a lot of fireworks paas annually.
And so when the world shuts down its economies as it did during the <unk>.
And more disruptive to our business model within the oilfield than just about anybody else out there, but if you look more broadly at other industrials.
I know many are still pointing to reverberations coming out of that shutdown affecting their businesses and aircraft supply in automobiles in.
Our land Crane manufacturer that I'm aware of there is a lot going on out there, but the good news is our teams are getting better at managing it we're making progress there we're starting to see the logjam break.
And Dave.
Dave Wise too.
Higher inventory levels, our balance sheet this quarter and last quarter, but also gave rise to stronger incrementals in margins out of our businesses as we battle through this turmoil.
Okay, Great. That's helpful context, maybe switching over to orders you expressed some optimism.
For the second half, particularly as it relates to international and offshore I was hopeful you could maybe help quantify what that might look like either on a book to bill basis or year over year growth.
Just some sort of help with the quantification would be great I'm going to stop short of quantifying orders arent landed until we actually sign contracts.
So we're very optimistic but but.
We're going to shy away from wrapping numbers around that what I would tell you is a general trend. So we are seeing in the two segments that we report backlogs for our both positive if you look at the second quarter for our completion and production solutions, we saw offshore accelerating.
Our process and flow technologies business, which sells gas processing technologies and components.
Dsos had a book to bill approaching 190% with strong orders coming out of the North Sea and West Africa, Our XL systems conductor pipe business, which sells into the offshore as well saw strong bookings on strong shipments in the quarter and so book to Bill North of 100%.
Jose detailed and flexible as we are really pushing price and that slowed down orders this quarter, but our longer term outlook is very strong and so offshore portion of caps.
Is trending up whereas in the second quarter not surprisingly given the softness in activity in North America, we saw orders slow so our intervention and stimulation equipment group.
Shell's Frac equipment, <unk> equipment, mostly to the North American market saw book to Bill down around 60% or so and as we look forward to Q3, we expect those two trends to continue our outlook for the offshore remains very strong.
Again gas processing technologies that we sell we think we're close to landing some meaningful work in the North sea some more meaningful work in the North Sea.
As well as other offshore markets around the World I expect North America to continue to be soft. This is this is it.
Kind of a hair trigger group of customers here in the U S and Canada, they respond very quickly to commodity price movements and and declines in activity that we've seen and so not surprisingly, they're curtailing their spending but I would say.
Maybe there is upside a little later in the year.
And we're seeing more demand out of international markets, along with continuing demand for lower emission technologies, So DGB frac fleets.
Technologies urban direct drive and so forth so possibility of surprised to the upside, but we're right now not foreseeing it but overall pretty strong international offshore outlook driving the completion and production solutions.
Backlog and before I leave that segment also do want to point out what we're trying to accomplish here in caps is to high grade our contracts here.
We are on a long term projects, we have a lot of inflation protection, but it's never perfect.
Covid.
Was a significant disruption to projects that we've discussed on prior calls and we're still battling through inflation coming out of Covid and so forth. So we're trying to push for better pricing margin better contract terms and continue to high grade debt.
Backlog as we've been doing for the past.
Youre plus turning to rig.
Again in the second quarter, we had a touch more land orders than we had offshore and as Jose mentioned strong demand for top drives iron Roughnecks a spherical.
Out of the Middle East and some from North America.
But also continued demand for our Adam our T X rig automation.
Offering and.
And then the offshore this quarter was characterized by mostly pipe handling electric trains.
Novo systems, when we look to the third quarter, we expect that to flip around and we think.
Land demand is probably going to slow just a tad but offshore should continue to be strong specifically, we're looking at partial upgrade packages for two floating rigs that would our customers are thinking about reactivating.
We have line of sight on another wind turbine installation vessel.
And I think Jose mentioned that would be pretty meaningful Q3 edition.
And a couple of platform offshore platform rig upgrades that we're that we're looking at so.
The dynamic that's at work their rig.
It's mostly offshore and as more owners are floating rigs look at reactivating rigs, particularly cold stack rigs cold stacked rigs that have been cold stacked for a long time, it's a much more meaningful revenue opportunity for the.
And given all the flurry of contract signings and the tightening supply demand picture for floaters in particular with I think there are 2009.
Semis and Drillships out there that have been that are cold stacked that potentially could come back to work I think that is going to be a good order.
Opportunity for these rig technologies segment does.
Is that helpful.
Yeah.
Thank you. Thank you maybe just quickly sort of wrap all that up I mean.
With the cross currents it would seem that the bias is for third quarter to be above the first quarter first half run rate is that maybe a fair conclusion.
If we could sort of wrap up.
I am going to heavily asterisk that as we always do until these contracts are signed or not signed and again across the board, we're really trying to.
Pushed pricing stay up with the <unk>.
<unk> inflation that we have seen out there coming out of the pandemic and so it's always it's always a dogfight, but yeah I think Scott I think the backdrop is improving and our outlook is very.
Very bullish.
Great. Thanks, so much clay.
Okay.
Thank you and one moment for our next question.
Our next question is going to come from the line of <unk> with Piper Sandler. Your line is open. Please go ahead.
Thank you Sir.
Sorry, I was on mute.
Good morning.
Clay could you maybe elaborate on the additional $75 million of cost cuts and are these weighted disproportionately to one segment.
No what I would tell you as we've talked about this I think last quarter that we really think our margins needs to be a little higher than we've been posting in so.
We're always looking at opportunities to cut cost and become more efficient.
But given some of the headwinds that we've had out there some of these lingering.
Inflationary impacts of Covid.
And other things that we faced.
Recognize that we probably need to take action around trying to become even more efficient.
And the manufacture and delivery of our products and more efficient in the delivery of our services worth noting since 2019, we've had a significant cost reduction.
Effort here at <unk> at.
<unk>, which resulted in.
The closure of like 700 facilities reduced our workforce by about 13% and so forth. So when we looked at further opportunities a lot of the.
The easy opportunities has been harvested already and so it's going to take us a little while to get these but.
Over the past quarter.
We've looked at where we can.
Focus on becoming more efficiency. So there is.
It's a number of items out there, but we feel pretty confident.
It's going to flow out flow into our P&L I should say over the next year.
I do think if you're wondering Q3 impact will be pretty limited.
Maybe just.
A couple of million dollars.
But as we as we execute these actions you'll see more of this in.
Quarters.
Okay and Jose Thanks for outlining the free cash flow trajectory in the back part of the year.
And into next.
You talked about greater than 50% free cash flow conversion next year, which is partly a working capital catch up but how do you think about normalized kind of free cash flow conversion after that.
Yes Luke.
It's a good question. So obviously, we're running hot as it relates to working capital.
We were down in the.
The mid 20% range from a working capital to revenue run rate not too long ago. This quarter were at 32 points.
Yes.
As we talked about in the prepared remarks, we expect.
Secondly, crest during Q3, and then start to see.
Unwind back to more normalized levels realistically that will take a few quarters to play out probably through the middle part of next year.
And that will of course drive a considerable amount of free cash flow in and of itself plus our levels of EBITDA, we expect to continue to improve.
Prove our profitability drive more to the bottom line with should also flow through.
From a cash perspective.
And not giving free cash flow guidance for 2025 really beyond I'm, sorry, 224 beyond.
Greater than 50% of EBITDA.
Because it's highly dependent on what our growth rate will be in 2024, right I think 50% should be the bottom end of the range in terms of conversion relative to EBITDA, but if you ended up in a.
A flattish environment it could be well beyond that number so hopefully that helps.
Helps frame it a little bit better.
Yes definitely.
Thanks, so much.
Thanks Luke.
Thank you one moment for our next question.
Our next question is going to come from the line of Jim Rollyson with Raymond James Your line is open. Please go ahead.
Good morning, guys.
Good morning, Jim Jim here.
There's been a lot of talk this quarter.
Sure.
Theme has obviously been kind of moving up into the right for the last handful of quarters, but there's kind of.
Been more discussion around it this quarter from our strength and particularly a duration standpoint.
And since you fly all over the world and talk to a lot of folks who would love to kind of get your thoughts and what youre seeing from customers maybe that.
Supports this kind of duration comment in and maybe just what out of all of that whats. What are you seeing that gets you. The most excited about this.
That's a great question Jim first.
I don't think I'm going to.
Provide any different view than than.
And then you've heard from the big three and others in the space. We're all pretty excited were seeing.
Rising demand for.
Offshore drilling assets broadly in deepwater drilling assets, specifically and I think thats generating a lot of excitement whats behind that are.
IOC and NOC is both that are they see the need to develop their offshore.
Fields and move forward with very aggressive drilling campaigns and notably the offshore spin.
Frankly since about 2014, and so we feel like we are moving through an inflection point.
What's interesting about that I mean, there's been a lot of cost rationalization not just here in <unk>.
Elsewhere around the world.
And and activity levels today, we're still not quite back to where we werent even in 2019.
So a lot of room to run and with rising demand for E&P customers.
<unk>.
I think that points to a cycle that is going to have a lot of longevity to it.
I'm going to also add a little more color I think theres sort of two parts to this wave early part I think is going to be a little more brownfield tieback focused and following that though I think youre going to see.
A lot more a lot more.
I've seen estimates of 500 <unk> hundred billion in offshore Fid's through 2026, which point the more greenfield developments.
Both brownfield as well as greenfield fit sort of our product offering and so nov's prepared to.
Two.
It really meet that demand, but looking at our situation I feel like we're on the cusp of.
Really kind of three things that are going to help improve results. So first is <unk>.
The resumption of offshore.
Activity and the continued building of international land activity is going to bring pricing leverage back to <unk>, we've raised prices, but it's been hard to carve out margin expansion based on that and I think.
With rising demand, that's going to help from pricing leverage.
<unk> some of these lower margin contracts I mentioned earlier, we're continuing to burn those off and high grade our backlog with higher margin.
Contracts and Thats going to continue to proceed into 2024, and then thirdly and this is probably the biggest thing is just getting all the supply chain turmoil behind us this normalization of supply chain and kind.
It kind of getting back to more normal sort of lead times on our products. When we get more normal lead times from our vendors I think is going to kind of help Hawaii, but but if you kind of round out the picture. We've spent a lot of the last decade investing in technologies and we've talked on the call today about wired drill pipe and its continued adoption for <unk>.
Sure operators in the North Sea for Middle East operators on land investments in technology, which is driving better performance new downhole tools with.
Zero pressure drop agitators and on demand agitators and better performing drilling motors low emissions fracking equipment.
Our ideal frac, our rig automation offering which.
Has mechanical robot arms.
Tripping pipe on the rig floor.
And then all of our digital products, our edge to cloud Max platform condition based monitoring these are all things that improve the efficiency and safety of drilling.
Operations in their most impactful in the offshore because it's a high cost environment and they are most impactful.
<unk> low efficiency land drilling operations, and which is still occurring lots of places outside of North America, which really didn't upgrade the rigs AC rigs and so operators are looking at that they are looking at this as a way to drive better efficiencies drilling programs and looking at these.
Portfolio.
Of technologies that we can bring and they are pulling those through their oilfield service customers. So even though our oilfield service customers are are pledging.
Capital discipline and not spending.
I think operators are going to force the issue historically, they've they've sponsored and promoted new entrants and.
To come in.
With these new technologies.
Pushed on the incumbents to embrace new technologies, and so I think it's a good setup for Adobe for the next several years and that's what I'm excited about.
Excellent.
From a mark margin perspective, obviously margins have been creeping higher certainly a better improved quarter versus versus last with some of those issues kind of.
Unwinding, but as we think about this going forward between your kind of additional cost savings opportunity over the next four quarters. The pricing push that you guys are working towards.
And just kind of building momentum from an order uptake perspective, how do we where do margins, where do you think normalized margins should be on a consolidated basis, and if you kind of bucket it into the different categories that would get you there how do you get there.
Yes, we've made good progress in Q2, I think margins on a consolidated basis up 180 basis points to 11, 7%.
Yes.
Well more screens.
<unk> made good.
Progress quarter, but has a ways to go.
And then rig.
Backed up a bit but.
We think with offshore coming back it will continue to push higher but I think we get into.
I think Jose mentioned low teens by year end and then in 2024 squarely in the mid teens certainly by the end of 2024 is sort of what our outlook calls for.
Great. Thanks for the answers.
You bet. Thanks, Jim.
Thank you and one moment for our next question.
And our next question comes from the line of Stephen <unk> with Stifel. Your line is open. Please go ahead.
Thanks, Good morning, everybody.
Good morning, Steve.
Yes.
I think the first just to follow up on the on the prior question.
When we think about the backlog and obviously theres a lot of different pieces in the backlog over the last year plus.
How is that pricing versus kind of what <unk> been.
Realizing over the last year within.
Within rig tech, especially as it is so what I'm getting at is the margin expansion coming from just better overhead absorption or is it better margin flow through from what's in the backlog.
Yes, Rick.
Yes, we've been let's say margins have been pretty pretty steady and stable. They vary a lot by product category. Some of the products that we sell are more frankly, they're just more competitive than others and so where we have proprietary technology, we can do that.
While we've been interesting.
And we recognized a long time ago, we need to make smart iron not just iron.
So we continue to make are harder so I think <unk> been pretty pretty stable and I think that there is again we are optimistic.
Domestic is demand.
Comes back in the offshore, particularly for capital equipment I think there is good potential for that to to improve.
<unk> has been more challenged.
If you go back a year or two we discussed.
Some challenged projects that we had in completion and production solutions were where we were.
<unk>.
Projects in Asian shipyards, relying on the Asian supply chain and a lot of.
Asian plants in Malaysia, and Indonesia, Theyre all disrupted.
And.
We learned.
And you never get perfect sort of inflation protection in any contract, but as a result of that turmoil in the inflation higher cost that came out of it.
The margins for the low.
For the.
The long term.
The long cycle portion of the caps backlog.
We've got some headwinds and what we've been booking since that are far better margins and so there is a distinct sort of high grading process underway for that for that backlog.
And Thats.
Call it two thirds or so the cap stack, while the other one thats quick turn.
So it doesn't reside in their very long and so we've had the ability to sort of reprice in the inflationary environment that we've been over the last couple of years and so that is that's already I would say that's our rate recovery.
Thanks, and then my.
My other question was around just order flow on the cap side, but particularly on this sort of transition to E. Slinks.
The next year Patterson merger. Thank you guys had some equipment with extra my positive but.
Are you seeing much there I mean, where do you think that that sort of.
Stands right now as people kind of work towards that transition and the impact it has on your products.
Yes, yes, what we hear from our pressure pumping customers is that there.
Low emissions fleets are the ones that are continuing to work and it's most of the utilization and pricing pressure has been on.
The tier two diesel fleet take kind of the other end of the scale and the expectation is that will continue now I would point out that many of the E U.
Our fleet's a frac fleet.
For contracts as part of the reason that there.
Utilization, but to answer your question Theres a lot of interest in continued adoption of electric technologies and as well direct drive turbine technologies, both of which reduce emissions along with sort of tier four DGB fleets that are driving interest out there so despite that.
Ticked down in orders for it.
Equipment in that area in the second quarter, we're continuing to talk about a few operators.
About these low emission fleets.
And so that could be.
Some upside surprise in the second half of the year and into 2024, but overall I think the whole pressure pumping space continues to.
Reducing emissions. We also hear is that they are being pressed by their E&P customers.
With planned distributions, so I think that will keep arden.
One last comment on this because we haven't product that.
That we introduced in May.
Equipment.
A quarter, which is designed to power.
E frac pump and sort of rather than sort of pull the trigger on a very large capital expenditure on a brand new E. Fully this enables.
Pressure pumper, two step down their greenhouse gas emissions by substituting out higher.
Ryan.
Conventional frac pumps for E Frac pumps, and also benefit from a smaller footprint on a kind of a unit by unit basis.
Hey, Steven.
It's sort of weave into.
Think about a little bit as we mentioned in the prepared remarks that the quoting activity has been has continued to be really strong within the north American marketplace for pressure pumping.
Due to what play comment about but.
But I'd also add that part of it is.
It has been run extremely hard there's still a lot of pent up demand for major overhauls replacements and refurbishments.
Time will tell how this plays out but I'm pretty optimistic that this will pull back that we're seeing.
In North America will be pretty short lived as it relates to demand for the products and services that we sell into that space. Because there is not a lot of there was not a lot of excess capacity now.
Bumpers have a little bit of white space, and a little bit of a pullback, but if we see a tick up in activity in the confidence sort of comes back and I think the orders will start flowing back and pretty quickly even for the DGB fleets in repairs and refurbishments of traditional tier four fleets.
Alright.
David here.
And Michelle next question.
Just one moment.
Our next question and last question will come from the line of Scott Gruber with Citigroup. Your line is open. Please go ahead.
Yes. Good morning, Thanks for squeezing me in.
Scott.
Clay I just wanted to follow up on a comment I think you made earlier did you comment that you thought you could get to a mid teens margin in late 'twenty four important points I'll make sure.
Correct. Yeah. We did we think will be kind of low teens in Q4 this year.
And.
Continuing to push that up in 2024.
Gotcha.
And then Jose.
So we're getting back to a normalized.
Level of working capital.
I think the last target for working capital because of the percent of revenues was around 25% is that the level. We should think about in terms of normalized mid 'twenty one.
Yes, we were 25, 2% Q4.
And it's moved up pretty significantly through the first six months of the year. So we've demonstrated we can land in that mid 20% range, but as Jose pointed out earlier, a lot depends on kind of the future outlooks. So building backlogs and so forth might push it and would you say high 20% range I think the normal range is going to be between.
Mid <unk> and mid to upper Twenty's is where we is where we should be Scott. It was quite as touched on it's going to depend on the market environment and just like the environment that we're in right now yes, it's compounded by the fact that we've seen just sort of the core can get on lease to a certain extent related to supply chain.
But also we would normally be at a slightly less favorable.
So they will just due to the backdrop, what we're anticipating in the fourth quarter. So when we're gearing up for large deliveries you can see that tick up.
But in a more normalized environment you'd be more towards the mid to lower end of that range. So.
I think thats how.
Good way to sort of think about it'll it'll ebb and flow, but we certainly should be in that sort of mid to upper 20% range.
The range in terms of working capital as a percentage of revenue run rate.
Got it provides a good framework I appreciate it.
Thanks Scott.
Thank you and this does conclude our question and answer session and I would like to turn the conference back over to chairman and CEO Clay Williams for any further remarks.
Thank you Michelle Thank you all for joining US this morning, and we look forward to updating you on our third quarter results in October hope everyone has a nice day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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