Nov Inc

NYSE:NOV

Good day, and welcome to the Q1 2025 NOV Inc. Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Amie D’Ambrosio, Director of Investor Relations. Please go ahead.

Welcome, everyone, to NOV's First Quarter 2025 Earnings Conference Call. With me today are Clay Williams, our Chairman and Chief Executive Officer; Jose Bayardo, our President and Chief Operating Officer; and Rodney Reed, our Senior Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and 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. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the first quarter of 2025, NOV reported revenues of $2.1 billion and a net income of $73 million or $0.19 per fully diluted share. Our use of term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release.

Later in the call, we will host a question-and-answer session. Please limit yourself to 1 question and 1 follow-up to permit more participation.

Now let me turn the call over to Clay.

Thank you, Amie. For the first quarter of 2025, NOV reported net income of $73 million or $0.19 per fully diluted share. Revenue was $2.1 billion and EBITDA was $252 million or 12% of sales, a margin increase of 80 basis points year-on-year. Strong demand for deepwater production equipment and cost reductions enabled our Energy Equipment segment to achieve significant improvement, increasing margins by 430 basis points compared to the first quarter of 2024. Revenues for our shorter cycle segment, Energy Products and Services outperformed the 5% reduction in global drilling activity year-on-year as NOV's high-performance technologies continued to gain share but these were offset by lower sales of drilling-related capital equipment, which drove segment margins lower. Both segments continue to take costs out and their efforts are accelerating in view of the macroeconomic headwinds that are emerging.

Right now, our second quarter looks solid with sequential revenues and EBITDA expected to grow modestly. But we expect things to get tougher after that, perhaps much tougher. The emerging trade war, its effect on the broad economy and OPEC's decision to add barrels to a balanced market will almost certainly lead to lower oilfield activity, LNG demand and natural gas help notwithstanding. Accordingly, we continue to focus on operational efficiencies and careful cost management. Lower commodity prices have North American E&Ps running more downside scenarios, and we believe activity here is most at risk, along with a few other markets like Mexico and Saudi Arabia conventional activity.

On the other hand, so far, we see most international and offshore customers pressing ahead with their strategic plans. These are typically long duration requiring a longer view and projects continue to move forward in places like the Arabian Gulf and Brazil, and in unconventional plays like Saudi Arabia, Jafurah's gas field, in Argentina the Vaca Muerta region areas where NOV technologies play a critical role. NOV is well positioned to weather this latest storm. Our teams have streamlined operations and improved working capital efficiency. We have a solid balance sheet and our cash flow has been strong. We have introduced dozens of new products that demonstrably improve the efficiency, safety and environmental impact of our customers' operations. These products have gained significant share.

Our backlog of capital equipment and projects has grown steadily over the preceding 4 years with margins that have moved up meaningfully. Despite near-term macro challenges NOV is well positioned for the market is going longer term. U.S. shales have been the most extraordinary phenomenon ever witnessed in this industry. It accounted for almost all incremental global production through the past decade adding about 7 million barrels of oil per day and crowding at offshore investments along the way. If North American shale activity slows meaningfully in the second half of the year, it would exhibit high decline rates, just like it did during COVID. Either way, U.S. production will be sooner or later, and in the coming decade, we believe incremental production growth will come from a combination of deepwater and international shales. Both will need technologies and picks and shovels that NOV is uniquely positioned to supply.

I know many of you have questions about the impact of tariffs on our operations. Frankly, we do too as the tariff regimes and trade negotiations evolve and shift daily. In a moment, Jose will provide you more color, but the upshot is that we believe that this will be manageable for NOV and our teams will be able to significantly reduce 80% or more, but probably not fully eliminate the full effect of no tariffs. About half of NOV's manufacturing capacity is in the United States with the remainder spread out in various countries around the world, and we have a lot of options to adjust our supply chains. We are working closely with vendors and customers to mitigate the effects. More importantly, we have terrific supply chain managers who successfully navigated disruption from tariffs in 2017 and, during COVID. They are steely veterans of this kind of thing.

Before Rodney takes you through our first quarter results, let me say thank you to our employees. You did a great job during the first quarter. And I appreciate the way you take care of our customers and each other. We expect business to be more challenging as the year progresses but we will weather this storm. You are part of a strong and critical team that the world's energy infrastructure council. Rodney?

Thank you, Clay. For the first quarter of 2025, NOV's consolidated revenue decreased 2% year-over-year and adjusted EBITDA was $252 million, an increase of 5%. EBITDA margins expanded 80 basis points to 12%, resulting in our 14th straight quarter of year-over-year EBITDA margin improvement. Strong execution, improved pricing on projects in our backlog, growing adoption of our new high-margin technologies and focus on operational efficiency more than offset the impacts of reduced global activity. Higher EBITDA and better working capital efficiency improved our operating cash flow and allowed us to generate positive free cash flow in the first quarter, which is typically a cash consumptive free cash flow quarter.

NOV generated $135 million in cash from operations during the first quarter and $51 million in free cash flow when considering our capital expenditures of $84 million. During the first quarter, we repurchased 5.4 million shares for $81 million and paid $28 million in dividends. Over the last 12 months, we have increased our cash balance by $689 million converted over 100% of our EBITDA to free cash flow and returned $426 million to our shareholders through dividends and share repurchases. As a reminder, through 2024, we returned 41% of our excess free cash flow. Based on our return of capital framework, we expect to pay a supplemental dividend of around $80 million to true up our returns to 50% of our 2024 excess free cash flow. Subject to the approval of our Board of Directors, we expect the timing of the supplemental dividend payment to be in mid-June.

Our first quarter consolidated net income of $73 million or $0.19 per fully diluted share was impacted by lower equity income, unfavorable discrete items to our tax rate and an increase in unallocated corporate cost. During the second quarter of 2025, we expect eliminations and corporate cost to return to a range of $45 million to $55 million and we still expect our full year tax rate to be between 26% and 28% for the year.

Moving on to segment results. Our Energy Products and Services segment generated revenue of $992 million, a 2% decrease compared to the first quarter of 2024 due to lower global activity, partially offset by growing adoption of our new Performance Technologies. EBITDA declined $29 million to $145 million or 14.6% of sales. The higher decrementals were primarily the result of a decline in shorter cycle capital equipment sales that contributed to a less favorable sales mix across our portfolio. As Clay mentioned, our teams continue to execute a number of initiatives to reduce cost and improve operational efficiencies.

For the first quarter, the sales mix for Energy Products and Services was 52% services and rentals, 30% capital equipment and 18% product sales. Services and rentals improved 4% year-over-year due to a full quarter contribution from our artificial lift business and growing market share in our drill bit and downhole tool businesses. Excluding our 2024 acquisitions, revenues from services and rentals were flat, outpacing global drilling activities, which declined 5%. Our high-performance drill bits with our latest cutter technology continued to drive increased market penetration, resulting in revenue growth of over 20% year-over-year in the U.S. against the 6% rig-count decline over the same period.

Our downhole business also continued to gain share with more customers recognizing the benefits of our Series 55 Drilling Motors ERT power sections and the latest generation of our friction reduction tools. Revenue from cross sales decreased 13% compared to the first quarter of 2024. The decline was primarily driven by lower activity in Saudi Arabia and Mexico, partially offset by a solid increase in sales of NOV's TK glass reinforced epoxy aligners in the Middle East.

Turning to capital equipment. Sales decreased 5% year-over-year due to reduced drill pipe and managed pressure drilling equipment sales, partially offset by increased demand for onshore conductor pipe connections and continued strength in demand for composite pipe to build out infrastructure necessary for the development of unconventional resources leased. We also realize mid- to upper single-digit growth in sales of solids control equipment, resulting from the continued market adoption of our Alpha shale shaker. For the second quarter, we expect revenues from our Energy Products and Services segment to be down 5% to 8% compared to the second quarter of 2024 with EBITDA between $140 million and $160 million.

Moving to Energy Equipment segment. Revenue for the first quarter of 2025 was $1.15 billion down 3% from the first quarter of 2024. Despite a slight decline in revenue, EBITDA increased $46 million to $165 million, resulting in a 430 basis point increase in margins or 14.4% of sales, driven by higher margin backlog and continued focus on operational efficiencies. This was the 11th straight quarter of year-over-year margin growth for the MG Equipment segment. Capital equipment sales accounted for 57% of the segment's revenues in the first quarter of 2025 with aftermarket sales and services accounting for the remaining 43%.

Starting with capital equipment. Revenue grew mid-single digits year-over-year, led by growth in drilling equipment and subsea flexible pipe. Bookings for the first quarter were $437 million, an increase of 12% year-over-year. Book-to-bill for the quarter was 80%. Backlog of $4.41 billion increased 12% from the first quarter of 2024, supported by our trailing 12-month book-to-bill of 122%. We continue to have constructive dialogue with customers who have given us line of sight opportunities that could lead to a book-to-bill of around 1 for the year. However, we would not be surprised to see projects pushed to the right, given heightened uncertainty and deteriorating market conditions.

Our subsea flexible pipe business continues to have strong performance. Revenues grew year-over-year in low teens percentage range with significant margin improvement due to strong execution on higher-margin backlog. Backlog for the business at the end of the current quarter has almost doubled since the end of the first quarter of 2024. Our Process Systems business had another strong quarter with revenue growing high single digits year-on-year including the booking of a gas dehydration package for a national oil company in the Middle East. The outer offshore production remains robust with 2025 showing potential to have more awards for FPSOs than 2023 or 2024, which drives demand for process systems, flexible pipe, tour and spread more systems, cranes, chokes and boarding valves and composite solutions.

Revenue for Intervention and Stimulation capital equipment improved high single digits over the first quarter of 2024 led by sales of coiled tubing and wireline equipment, more than offsetting the lower demand for pressure pumping equipment in North America. Internationally, Argentina, Brazil and the Middle East remain bright spots, specifically for our advanced wireline coiled tubing product lines. Revenue from sales of drilling equipment increased in the mid-teens percentage range year-over-year due to increased progress on both land and offshore projects, including initial work on the new build jackup we announced previously. We delivered our 11th new build high-spec land rig in Saudi Arabia during the first quarter. We continue to have discussions with customers for certain capital equipment upgrades, including BOPs, increased hookload capacities and robotics.

Our Marine and Construction business experienced high single-digit decrease in revenue compared to the first quarter of 2024 ccomparedhigher revenue from pipe and cable A vessels did not offset lower activity for wind turbine installation vessels. Given the macroeconomic uncertainty and unclear impact of tariffs, we may see a slowdown in project FIDs pushing the expected shortage of WTIVs out a year. However, we continue to have active dialogue with several customers and still see the potential for up to 2 orders later in the year. The cable light vessel market is continuing to shift strength as we booked an additional inter-array cable equipment package during the first quarter of 2025. Additionally, the multipurpose support vessel market remains healthy, driving additional demand for cranes and deck machinery.

Turning to aftermarket. Revenues declined 11% year-over-year in our drilling equipment business. Aftermarket revenues decreased low double digits year-over-year, driven by lower spare parts bookings in the second half of 2024 compared to the first half of 2024. Spare parts bookings during the first quarter increased 17% sequentially, which is about flat to our average of the prior 4 quarters. Demand for recertifications and upgrades remain solid. We are seeing some delays to recertification projects in the Middle East due to announced suspension of jackups, and we continue to anticipate a small decrease in the number of recertifications year-over-year. However, we expect the average scope of these projects to increase as the rig fleet ages, which should partially offset those declines.

For the second quarter, we expect Energy Equipment segment revenue to be flat to up 1% compared to the second quarter of 2024 with EBITDA in the range of $155 million to $175 million. On a consolidated basis, we expect revenue to be down 1% to 4% compared to the second quarter of 2024 with EBITDA in the range of $250 million to $280 million. Jose?

Thank you, Rodney. NOV had a solid first quarter and continues to execute well in a highly complex environment. As we look forward, we expect geopolitical and macroeconomic uncertainty to remain high near term. While there are conceivable scenarios for which there could be some upside for the industry related to the potential for Iranian, Venezuelan or Russian barrels to come off the market, our outlook is cautious and skewed to the downside. So the obvious question is, what are we doing about it?

As it pertains to tariffs, the situation remains fluid with each of our businesses having different exposures, and we believe some will actually realize improved competitive positioning as a result. I'll highlight 2 representative examples that illustrate the impact tariffs can have on our businesses.

Our downhole tools operation manufactures, rents and sells a wide array of drilling technologies and has a wide base of global suppliers and manufacturing sites. Additionally, the operation has a book of business that is more skewed to North America given the business's emphasis on providing leading-edge technologies that improve drilling efficiencies for extended lateral wells. Based on the tariff regimes that exist today, if we took no action, the business would realize a material reduction to its EBITDA margins. But we have not been sitting idle. In fact, we began taking actions to diversify our supply chains away from higher risk markets beginning back in 2022 by finding new vendors and by pushing some existing suppliers to open manufacturing operations in lower risk countries.

The majority of downhole businesses manufactured parts are sourced from outside the U.S. So the sources of tariff exposures are, one, parts consumed to assemble products for sale and rental in the U.S.; and two, parts that are assembled into finished tools in the U.S. that are then exported for sales into international markets. Most of the businesses in our portfolio have the same types of supply chain exposure, so our playbook is pretty consistent and includes: one, leveraging NOV's substantial U.S. manufacturing footprint to reshore as much content as possible for products destined for U.S. customers; two, utilizing the USMCA to the full extent to also leverage NOV's manufacturing capabilities in Mexico and Canada; three, rerouting manufacturing and assembly operations for products destined for non-North American markets to our international manufacturing plants; four, sourcing raw materials from the U.S. or from lower tariff countries when possible; and five, to the extent we can't yet find suitable alternate suppliers, negotiating discounts with vendors in higher tariff countries to share costs.

It takes substantial time and effort to incorporate new vendors into our supply chain. We must ensure that they meet our quality specifications and remap scheduling to account for what may be longer lead times in shipping distances. In certain areas, we've been able to work with vendors to have them stock inventory in the U.S. prior to tariffs coming to play, giving us a little more time to navigate through the significant changes. Our supply chain and compliance personnel have been working nights and weekends as we navigate through these changes efficiently and effectively for our customers and for our shareholders.

I'd like to extend my sincere gratitude to them for the great work they are doing. We expect the actions that are currently in motion for a downhole business should eliminate more than 2/3 of the currently known tariff costs. We are developing and implementing additional plans to further reduce the exposure. If we're unable to eliminate the higher costs we expect to pass them on to our customers. Near term, we will not be able to outrun the impact of tariffs on shipments that are in transit and there will be unanticipated second order effects, including the inflationary impact and extended lead times caused by all global manufacturers simultaneously trying to rewire their supply chains.

We have already seen some U.S. vendors increase prices for steel and other components that now have reduced competition from foreign sources due to tariffs. Our best estimate is that NOV's consolidated results in the second quarter will include $8 million to $10 million in tariff expense that we may be unable to avoid.

Beyond the second quarter, we estimate the tariff impact net of our mitigation efforts will increase to approximately $15 million per quarter. These estimates assume we are able to pass costs from the second order effects I just described on to our customers. The actions we're taking that I've described so far are defensive but there are areas where we expect to play offense, which brings me to the second example.

In our drill pipe business, we've long resisted the temptation to offshore all of our operations and supply chain to low-cost countries because we did not want to risk sacrificing the quality of our premium products. Our drill pipe manufacturing plant in Texas is the largest in the world and produces the highest quality, most technically advanced drill pipe that has enabled super extended lateral and ultra deep water drilling. Our U.S. manufacturing, along with our voestalpine Tubulars joint venture, which we believe provides the highest quality green tubes that we use as raw material allows us to produce the best drill pipe on the planet.

Today, we're the only provider of drill pipe in the U.S. that is not heavily dependent on supplies from China for any portion of our supply chain. If today's tariff regime remains in place, customers will be able to purchase our premium drill pipe, which offers superior technology and quality at prices that are much more competitive. So we're looking forward to having a more even playing field.

We aren't just working to mitigate tariff costs. We're using this as an opportunity to continue making NOV better as a whole. As we reorganize our supply chain, we're driving better coordination across our groups to mitigate tariff impacts and to better leverage NOV's consolidated spending power. We're also pushing even harder on other initiatives to lower costs and become more efficient. We're applying more automation and artificial intelligence technologies in our manufacturing operations as well as employing more traditional methods for driving efficiencies, including, one, eliminating layers within parts of the organization, reducing costs and making the organization more agile; two, consolidating manufacturing operations, which allows us to improve utilization of our assets, increase throughput and reduce overhead; three, pushing more of our back-office processes into shared services; and four, focusing on continuous improvement with more frequent good old-fashioned [ Kaizen ] walk-throughs where we work to debottleneck, optimize and improve processes in our manufacturing operations.

We're focused on getting more efficient every day. The goal is to make sure we can provide our customers with the critical equipment they need at compelling value, while we improve results for our shareholders. To provide that compelling value, cost is only one side of the equation. We're also relentlessly focused on making sure we have the right technology and offerings for our customers. We're in this for the long haul. We positioned the company to weather any storm and to invest in the future regardless of where we are in the cycle.

We don't know exactly how the current geopolitical and macroeconomic issues will play out over the near term but we are confident in and focused on the longer-term outlook and on 3 trends that we believe will drive the industry over the next decade. One, offshore production supplanting U.S. unconventional resources as the dominant incremental source of global oil supply; two, outsized demand for removable gas driving meaningful growth from global unconventional gas resources; and three, the application of modern digital and AI technology is driving additional efficiencies in oilfield operations. These trends will not only drive the business long term, but will also be areas of strength near term regardless of the broader market environment.

We spent a good bit of time on our recent calls talking about our digital solutions and how we're supporting the rapid expansion of activity in international unconventional resources. So today, I want to focus on the offshore. As Clay noted, U.S. unconventional resources have accounted for almost all incremental oil production, but it is plateauing. It has been amazing. And while we aren't ready to call for a peak in U.S. production, don't ever discount what this industry can do, the declining number of remaining Tier 1 drilling locations and firmly entrenched capital discipline should prevent the type of growth we've seen over the past 1.5 decades. Our offshore operator customers share this view, which is giving them the confidence to make significant long-term bets in deepwater offshore projects.

Unlike investments in U.S. shale wells, which can deliver cash flow within a year of making an investment decision of $5 million to $10 million, deepwater developments can cost billions of dollars and typically have minimum investment horizons of 5 to 10 years. Where Deepwater shares a common trait to shales that technological advancements have delivered material improvements in drilling and production efficiencies. These advancements are allowing the industry to push into highly prolific frontiers that were unimaginable to produce from a couple of decades ago.

Today, we're drilling deeper wells and deeper water and harsher conditions with higher pressures through tighter pore pressure windows and we're doing this with amazing efficiencies. Much of what the deepwater industry is developing today has breakevens in the $40 per barrel range, the result of incredible technology and industrialization. It doesn't get the attention it deserves, but deepwater drilling efficiency gains are not dissimilar to those realized in the U.S. land market. High-spec seventh generation rigs are drilling at rates 30% to 40% faster than they were a decade ago, thanks in large part to the equipment and technology that NOV has been delivering. Our control systems, automation, machine learning and AI algorithms and now robotics dramatically improve drilling efficiencies and safety.

Today, we have 22 automation upgrades in process and many other customers are evaluating such upgrades. Our downhole broadband services that utilize wide drill pipe for high-speed data transmission along with our managed pressure drilling equipment allow operators to safely and efficiently navigate through high-risk zones with high poor pressure windows. In these formations, operators are at high risk of unintentionally fracturing zone, resulting in a well control or loss circulation issue or running well economics by not being able to drill a sufficiently long lateral through a pay zone.

Our 20,000 psi blowout preventer, the only equipment of its kind in the market has enabled safe development of the Paleogene in the U.S. Gulf and is driving exploration and similar previously untouchable extremely high-pressure reservoirs in other parts of the world. Even our more basic sounding lifting and handling upgrades for ultra-deepwater drilling have been critical to the industry's success. These upgrades are required to handle the intense stress of pushing or pulling a rotating string of high-spec drill pipe through over 7,000 feet of water and another few miles below the sea floor.

We've been extremely busy helping our customers upgrade hook load capacities up to 1,400 tons, replace cranes with our new ultra heavy lift electric active heave compensation units and replace rotating machinery. All of which allow rigs to efficiently handle heavier pipe strings and drill deeper while leveraging the latest automation capabilities. Operator demand for rigs with upgraded capabilities is high. Utilization of the high-spec, seventh generation rigs is effectively at 100%. So despite the transient white space, our drilling contractor customers are contending with today, not only executing on existing projects, but we're having active dialogues with customers regarding additional upgrades.

Better technology, industrialization and standardization of production-related equipment have also led to improved offshore economics. Here, we've also pioneered new technologies and have established leadership positions in providing gas and liquids processing capabilities, chokes and boarding valves, sophisticated turret mooring systems, deck machinery, subsea flexible pipe and other equipment. We continue to innovate and invest in R&D. And as highlighted in our press release, we were excited to sign an agreement with Petrobras to finish the development of a flexible pipe solution that will address the growing problem of stress corrosion cracking in high CO2 deepwater wells. We previously highlighted that the maximum revenue opportunity to NOV per FPSO is between $100 million and $700 million, depending on the size, scope and working environment of the vessel. Today, we're following 14 potential FPSO opportunities, up to 12 of which could lead to awards for NOV during 2025.

As Rodney mentioned, we could see some project awards slip a bit to the right. However, if we are correct in assuming offshore production will supplant U.S. land as the provider of incremental supply to the global market, given the extremely long time line for deepwater projects, the industry cannot afford to put these projects on a shelf for any extended period. So the outlook related to the offshore and international unconventional resources remains bright as does the central role that the people and technology from NOV bring to the industry to enable safe and efficient operations.

With that, we'll open the call to questions.

[Operator Instructions]. And our first question will come from the line of Jim Rollyson with Raymond James.

This is Connor Jensen in place with Jim. So given the guidance and comments around potentially a weaker second half, how are you thinking about 2025 margins relative to 2024? And the past commentary of looking at up 50 to 150 basis points?

Yes. Connor, this is Rodney. So just to give some color in terms of we're looking at 2025. So you have, obviously, Q1 actuals we've provided some detailed guidance on Q2. So what I'll try to do is kind of walk through the second half compared to the first half of 2025. So as we look at our 2 different segments. Energy Equipment, as you know, is a little bit more backlog-driven business. And as we look at the moving parts there, both in terms of a strong backlog on some of our offshore production processing equipment and our rig aftermarket business, first half to second half for the EE segment overall, would look to be about flat from a revenue perspective.

On the EPS side, we would look to have some growth first half to second half in the ballpark of 3% to 5%. Generally in the second half of the year, we have more product capital equipment sales and also some businesses in there, including our composite pipe for fiberglass business which is still growing primarily from infrastructure build-out in the Middle East. So put those together, that sort of 3% to 5% growth on the EE side.

And then from a consolidated perspective, first half to second half, in the ballpark of 1% to 2% growth, kind of modest growth on the second half of the year. From an overall margin standpoint, to answer to that point, first half to second half, a lot of moving parts here obviously doing the best we can with all the macroeconomic uncertainty, geopolitical risk, tariffs, which we've tried to quantify in Jose's remarks but sort of put those moving pieces together, including some risk factor and margins -- EBITDA margins look to be about flattish kind of first half to second half. So hopefully, that answers your question.

Yes. That is very helpful. And then just one more. I saw international revenues tick down from 65% to 61%, guessing this was just kind of a seasonal pullback, but given the commentary on the international and offshore market. I suspect this portion of the business will continue to grow as a share of the business going forward?

Yes. Connor your processing right. Obviously, there's a good seasonal falloff from Q4 to Q1 that typically is more heavily oriented towards international product shipments and capital equipment deliveries. As we go forward in time, as we're sort of looking at the rest of the year, and we touched on it's very, very fluid. There's a lot of uncertainty. But our expectation is that North America is always the quickest market to respond to any other changes in market conditions that's gotten incrementally worse. Last quarter, we were thinking that the full year North America would be down in the low to mid-single-digit range. That's now likely in the double-digit vicinity.

And then from an international standpoint, we continue to expect international to hold up quite a bit better than North America for the points that you touched on, really good resilience that we expect from increasing activity in unconventional shale and gas resources. And then also continued strength in particularly deepwater offshore activity. So while the outlook for international land has gotten incrementally a little bit worse and we're still feeling pretty good about international overall.

Great, thanks. I'll turn it back.

One moment for our next question. And that will come from the line of Arun Jayaram with JPMorgan Securities.

I wanted to see if you could elaborate thoughts on capital equipment order activity. I think you mentioned that you still see potential to see capital equipment orders of a book-to-bill around 1. Obviously, caveats with some risks just given the macro and tariff impacts. I was wondering if you could maybe elaborate on that commentary as well as it sounds like there is quite a few potential orders on the FPSO side. So maybe you can elaborate on that.

Yes. Arun, is I say. Yes, so I think Rodney did a good job of touching on it in his prepared commentary. So again, just to reiterate, a lot of uncertainty. And in that type of environment, it's not one where people get really excited pulling the trigger on a big capital equipment purchase, but having said that, particularly if you look at the deepwater offshore marketplace, these aren't short-term bets that they're making. They are making massive multiyear investment decisions with very low expected breakeven costs. So the confidence and conviction that we're seeing from our customers on the offshore deepwater market side of the equation continues to be very strong. And so I also talked about FPSO opportunity. Rodney touched about it, touched on it in his commentary as well.

The outlook there still looks very strong. As I mentioned, potentially 12 different FPSOs from which we could receive awards in 2025. I wouldn't be surprised if some of those slipped a little bit, and you talked about some potential for things to push to the right. But I don't think these things are going away. None of our customers are giving any indication that these things are going away. So feel really good about the outlook overall related to the offshore environment.

Obviously, if we look at some other components of our capital equipment business, North America is very challenged, right? So we're not anticipating much, if anything, related to orders for pressure pumping or even really completion-related equipment outside of the occasional replacement part and piece particularly related to pressure control equipment for the North American marketplace. But if we look at international markets, the unconventional resources in the Middle East and in Argentina, those are driving good healthy demand for completion equipment. I think we sold 5 coiled tubing units this last quarter, 4 of which destined for Middle East, unconventional resources, 1 for Latin America. So that demand continues to be strong, still actively engaged with other customers about additional completion equipment for the Middle East, unconventionals and even seeing really good conversations related to potential demand for newbuild land drilling rigs within the Middle East.

So while there certainly have been some challenges with some suspensions of rigs, particularly within Saudi. The high-spec modern rigs that are working, they're recognizing the performance and impact that's having that's really important with unconventional manufacturing type development. So we're talking to multiple customers in the Middle East about new rigs. We'll see how that plays out. But right now, things are looking pretty good.

And then if you go to other ports, of the business. I think Rodney touched on kind of what the dynamics that are happening with offshore wind. Economics for offshore wind still look really good within Western Europe and Asia. But there is a little bit of a reaction related to all the disruption that's taken place from trade developments and uncertainties. So we've tempered our enthusiasm a little bit for the number of development FIDs that will transpire and therefore, we kind of push back that really critical point in time, and we think there will be really unbearable tightness in terms of supply demand for WTIVs. But we're still actively engaged with multiple customers for WTIV vessels this year. We think that, that will still likely translate into a couple of orders potentially in the second half of 2025.

And then also think about the process systems a lot of demand feeding into the FPSOs that I touched on earlier. So really good outlook for capital equipment overall. Again, there will be puts and takes, but generally, things still heading in the right direction.

Great. I have a quick follow-up, Jose and Clay. I wanted to see if you could talk a little bit about NOV's exposure to the flexibles market. Obviously, it's a market that you compete in versus FTI and Baker but how big of a business is that for you? And I wanted to see if you could talk about this agreement with Petrobras because I know one of the holy grails down there is to try to combat some of the stress corrosion in the flexibles. And could this be a needle mover for NOV?

Absolutely. Well, actually, we're really, really pleased with our team that's -- and the creative solution that they've come up to help Petrobras address their stress corrosion cracking problem, the fluids in their sub-Salt Basin down there have a high percentage of CO2, which is pretty tough on steel. And so we've got an approach that's different than our competitors, and we think it's going to be very fruitful for us and for Petrobras.

But yes, this has been a terrific business for us. We've -- as you're aware, we've been working through some more challenged contracts signed several years ago. We've largely got those in the rearview mirror. We've seen really good efficiency improvements, drive higher profitability for that business overall for us. But it's -- in terms of mix, it's in the order of 10% to 15% of our energy equipment revenues and I think it has the potential to grow [indiscernible] is a really, really strong business.

One moment for our next question. And that will come from the line of Scott Gruber with Citigroup.

Yes, good morning. And I appreciate all the tariff color, certainly interesting times. Your tariff mitigation efforts require additional CapEx to ship roofline or invest in fabrication equipment. Normally, I think you'd be looking to trim CapEx in the second half with this backdrop. Is that possible? Or do the mitigation efforts include that?

Hi, Scott, it's Jose. Most of the mitigation plans that we have in motion and additional ones that are planned really do not have a meaningful CapEx component to -- we've got a lot of flexibility in terms of our in terms of our footprint. So it's really about getting things positioned in the right place at the right time and working closely with our vendors to make sure that we are mitigating the cost as best as we can. So it's really a lot of blocking and tackling as I touched on sort of 5 or 6 things that are really common elements in terms of what we're doing with each of our businesses. And again, most of those don't really involve much in the way of CapEx.

Now there's kind of a blurry line between mitigation efforts and ongoing improvements to improve the operational efficiency within our business, which does take some capital investment and automation and robotics and things of that nature within our own operations, but I sort of view that as separate and things that we're going to do anyway regardless of the tariff mitigation.

And to your point, related to kind of environment that we're in, thinking outside of tariff mitigation and cost control. Our CapEx program, you can sort of think of 2 very large buckets for 2025 when we sort of came into the year. One is really the build-out of some expansion opportunities, growth capital opportunities. And these unconventional resources and basins, we're seeing tremendous demand for investments particularly related to midstream infrastructure and driving a lot of demand for our fiberglass business. So we have some localization efforts, we have some additions to manufacturing lines that are underway, and those will continue full speed ahead.

The other part really relates to the build-out of our rental tool fleet associated with this great -- latest generation of tools and technologies that we bring to the market. We're continuing to see really rapid adoption of those tools. So you could see us maybe slow things down a little bit if that appetite slows down later in this year. But at this point in time, we're not seeing that. But certainly, CapEx as we get in the second half of the year, might be skewed a little bit lighter than what we were originally thinking 3 months ago.

Got it. I appreciate all that color. A follow-up on M&A. This economic soft patch is it really manifests -- may shake some opportunities available for NOV. How do you think about the areas that you could target from an M&A perspective. Would you want to beef up more on the production side? Do you look more for expansion into various industrial segments? Are there niche technologies of interest? Just some kind of broader color on M&A. So if you give that the backdrop here is very different from 4 or 5 years ago.

Yes. This is Rodney. Just to give a couple of comps there. So one from an overall product portfolio perspective now, very pleased with our businesses that we have and what their exposure are to end market. So really like where the portfolio is right now. So I don't think we necessarily have to add anything to that.

Second point really around M&A starts with our ability to continue to generate strong cash flow. And we've touched on that in prior quarters in terms of our expectation to continue to generate -- have a 50% free cash flow conversion of EBITDA and still feel good about that throughout the year. So that continues to allow us to have flexibility in our overall capital return program. And we've laid that out before in terms of maintenance CapEx, growth CapEx and return to shareholders with M&A being an element to that, too.

In the current environment, to your point, perhaps it generates some opportunities, but also in a more volatile time period, sometimes it's harder to get deals done. So we're always looking for opportunistic opportunities to deploy capital in high-return environments. And so if we see something out there that's a good fit for us, that's a good value that returns a high return to our shareholders, we'll definitely take a look at it.

Yes, yes. And Scott, as you know, too, we've always been guided by and we're big believers in the need for deals to make a lot of sense industrially. We really need to be a better owner in addition to seeing really good value. It certainly has brought the prices down for everything, including our stock but -- and we continue to look and we've been active in the M&A space here for the past several years. I expect will continue to be, but I'll reiterate what Rodney just said, which is sometimes it's harder in an environment like this getting the other party to the agree.

Got it. I appreciate the color.

One moment for our next question. And that will come from the line of Stephen Gengaro with Stifel.

Two questions. I'll start with and one is you've given a lot of detail on the second half of '25. When we think about the guidance for the second quarter, you are guiding margins up pretty nicely in Energy Products in the second quarter. Can you just talk about the drivers of that?

Yes. So on the EPS side, just to repeat a couple of points there. So revenue down [ 5 to 8% ] and that's really sort of North America activity driven as well as a couple of key international markets and some mix. As it relates to the margin side of things, really, that's also kind of mix related. So we've had a couple of headwinds as it relates to product and capital equipment sales, which generally have sort of a higher fixed cost element to that. And then secondarily on the volume side. So I think those are the main drivers in terms of the delta period-over-period.

Great. And the other question, and this is probably a little hard to answer. I know Jose touched a little bit on this. But when you think about the tariff mitigation efforts and how you sort of try to work to mitigate the impacts. How do you sort of assess investments that may be longer term in nature that are addressing a situation which may be in existence in 3 months? I'm saying like how do you strategically make these decisions and remain flexible when there's fluctuations at the White House and how they're addressing these things?

Yes. That's a great question, Stephen. And then the day we do the best that we can, right? We're -- we pride ourselves on being very nimble and adaptive to changing environments that create challenges but also create opportunities. And the uncertainty does make it different -- does make it difficult to make long-term investment decisions, and that's why we're pretty cautious as it relates to the precise timing on not only exactly what we're doing, but we put ourselves in our customers' shoes and difficult environment, capital investment decisions. There are some things that you know and have great confidence in that with kind of the forces that are at play, there shouldn't be a material impact. So you plow ahead and move forward. There are other things that cause you to rethink, okay, well, should I be building this plant here? Or should I build it somewhere else around the world? Or should I just wait another 3 months to see how the world shakes out?

So these are all very active discussions that we, along with layers of the organization are having on a regular basis, working very closely with our compliance teams and our supply chain folks and our customers to understand what are we going to need in the future? And how are these tariffs and other changes that are taking place in the world going to affect our operations. So it's carefully, thoughtfully is the bottom line answer, but we feel like our teams have done a great job of getting their arms around everything. And as I mentioned, we've got a lot of people that have been working really hard, keeping up with the day-to-day movements of all the changes and potential changes that might occur.

Yes. I'd add too. I think one of the real strengths of NOV coming into this is the diversity of our manufacturing footprint, our supply chains and all that experience that team that Jose just talking about has. I did a lot of hard work and heavy lifting through the First Trump administration when all of the Section 232 and [ 302 ] tariffs came into effect.

Again, during COVID, we have been making a general move to do more near-shoring post COVID but at the end of the day, we're entering this with a pretty good American manufacturing footprint, 52% of our machine tools are here in the United States, a little more than half of our assembly space here in the United States. And so it gives us just a lot of optionality to approach this. And I think that's going to be increasingly important as these tariffs come into effect and are going to be a real benefit to NOV.

One moment for our next question. And that will come from the line of Roger Read with Wells Fargo Securities.

Yes, thanks. Good morning. I was hoping, Clay to get a little more of your view here on the offshore as ultimately where the growth is going to come from and maybe how you think about some of the milestones we should watch for that signal? Is it going to be that companies are hesitant to cut here in the near term? Is it going to be FIDs we just need to watch. I'm just kind of curious, not so much the white space here in '25. But as we look to the back half of this year and forward.

Yes. I -- first of all, I think the economics this is where our customer sells. The economics in the deepwater, in particular are very strong, very competitive vis-a-vis shale, and that's the economic engine behind this. But yes, I think FIDs are going to continue in the deepwater, we've been pleased over the past few years to ramp up in exploration. The number of new basins that have emerged from the Orange Basin in Namibia to continued success in Guyana to the Eastern Mediterranean, the emergence of natural gas is a viable offshore target. All those things are contributing to activity in the offshore. And as we've talked about in prior calls, a lot has been said about the white space and the drilling side of things. But our view is, and our customers view is that has to do with the fact that the FPSO supply chain is sort of catching up with the capability to drill. And I think that's going to continue to work towards a more balanced and higher levels of drilling activity in 2026.

One of our customers made a nice announcement yesterday with respect to new contracts. And so I think we've passed through an extraordinarily unique time when you had sort of 1 style and 1 source of incremental oil for the global supplies effectively supply all of it through the past decade. And of course, I'm talking about U.S. shales. And that is close, we believe, to rolling over. And it's not just us, the EIA says that the U.S. production is going to peak in 2027, we can debate whether it will be earlier or later than that. But I think, generally, the emerging consensus view is U.S. shales are going to roll over here sooner rather than later. And when that happens, I think deepwater is going to emerge as the next source of production. I think our customers get that. And that's why like Jose said, that's why we believe they're going to continue to move forward with these projects. They've got nice discoveries, they've got better technology, this whole level of industrialization that has gone on in the deepwater driving efficiencies. And so that's going to be a great engine for future demand.

If you sort of apply that view to our own financials, we have had great margin progression for our Energy Equipment, up 430 basis points year-over-year. And our EPS business has been more challenged. A lot of it has to do with just exposure to the deepwater. The the engine around margin improvement and top line growth in Energy Equipment really has been around these production technologies there, that we've got better demand for. We're getting better margins for. And I think a real -- they sort of illustrate within our own financial results level of demand that's out there for this, and we see this continuing in spite of some near-term headwinds. So our view continues to be for the long term, very bullish on deepwater.

I appreciate that. I'll turn it back.

One moment for our next question. And that will come from the line of Marc Bianchi with TD Cowen.

I wanted to ask a little bit more on the second half outlook. Clay, you opened the call talking about how second quarter looks solid, but things could get tougher perhaps much tougher. And I look at your EPS guidance for the second half for 3% to 5% growth. I generally think of that business as being a bit more kind of rig count sensitive. So if activities maybe has some risk to the downside in the back half, how confident do you feel in that sort of 3% to 5% growth outlook there?

Yes. Well, first, Marc, let me qualify all of this as saying we're sort of guiding into the unknown, right? So since we had our last call in February, had some pretty rough economic news. We have the sort of emerging tariff trade situation that's come to the floor. We've had OPEC bringing back barrels so incrementally down. And so I want to stress that our guide for the second half is more directional than it is precise.

But yes, I think as I said earlier, I think these larger deepwater sorts of projects are going to be more resilient, more insulated where we're going to see the greatest effect really is around the rig count-driven parts of our business, the quicker turn sort of things that are tied to activity in the second half.

Okay. Well, other question I had was related to cash flow in some of these sort of tariff mitigation efforts that you're doing and just the tariffs in general, my understanding is there's a bit of an upfront cash payment for the tariff and then hopefully, that flows through P&L down the road. But can you just kind of talk to the next couple of quarters, how we should be thinking about cash flow? And if there's anything to be considering related to all this tariff stuff?

Yes. Thanks, Marc, this is Rodney. So as we mentioned, Q1 and as you saw, started out on a good note. Free cash flow, $51 million generally more cash consumptive in the first quarter, and that was driven by good operational results plus year-on-year improvement working capital as a percentage of net working capital as a percent of revenue. As we look in Q2, generally throughout the year, we see some moderate improvement on the net working capital side last year, full year, we were 26.3%. Obviously, as Clay mentioned, a lot of puts and takes out there, but as we look at free cash flow conversion, as I mentioned earlier, still feel confident that would generate convert 50% of our EBITDA into free cash flow. So throughout the year, that will continue to progress in that manner.

Got it. Thanks so much. I'll turn it back.

Thank you. That is all the time we have for our question-and-answer session. I would now like to turn the call back over to Mr. Clay Williams for any closing remarks.

Thank you, Sherry, and thanks to all of you for joining us this morning. We look forward to discussing our second quarter results with you in July, and we wish you all a wonderful day.

This concludes today's program. Thank you all for participating. You may now disconnect.